- US-China trade war is forcing some Hong Kong businesses to relocate part of their manufacturing operations back to the city to avoid American tariffs
- Hong Kong companies are starting to develop their own brands and use the ‘Made in Hong Kong’ label to adapt to changing global supply chain
Arthur Lee Kam-hung, a Hong Kong-born engineer and businessman, finds it hard to hide from the crossfire of two competing superpowers, fearing that a prolonged trade war between the United States and China could undermine the future of the city's electronics industry.
Despite the apparent progress in Washington last week, the interim trade agreement reached between Washington and Beijing leaves in place existing tariffs, with a comprehensive deal that would resolve the trade conflict nowhere on the horizon. US President Donald Trump has announced four batches of tariffs since July last year, pushing many Chinese companies to relocate their manufacturing bases into Southeast Asia.
Others, like Lee, have opted to return to Hong Kong, for practical reasons including the city's skilled labour force and world-class logistics. And by creating manufacturing capacity in Hong Kong, businesses can be sure they can avoid US tariffs that would apply to their production on the mainland.
Lee's company is planning to shift the manufacture of high-end products used in 5G base stations and autonomous vehicles to Tsuen Wan in the New Territories district of the semi-autonomous city.
Our company is in the business of technology and not politics. We don't want to be choosing one market over the otherArthur Lee Kam-hung
"Our company is in the business of technology and not politics. We don't want to be choosing one market over the other," said Lee, who is the CEO of Hong Kong X'tals. "So by setting up a factory in Hong Kong, we hope to clearly show that we are politically neutral."
The company's traditional business of manufacturing quartz crystals used in electronic components and related machinery will continue at a plant in Huizhou, southeast China.
But by establishing dual manufacturing bases in Hong Kong and China, Lee said he was lowering labour costs with automation and increased production volumes while maintaining product quality.
Lee also pointed to the confidence he had in the integrity of research and design talent in Hong Kong after his company lost HK$17 million (US$2 million) from intellectual theft at his Chinese factory.
Hong Kong's exports have grown rapidly in the past two decades thanks to China's fast economic growth and the tightening of the city's relationship with the mainland.
Most of the city's exports are re-exports " goods that mainland companies sell to Hong Kong affiliates at near cost prices that are then shipped abroad at higher prices. This strategy allows profits to be recorded in the city at a friendly 16.5 per cent corporate tax rate.
Nineteen per cent of Hong Kong re-exports to the US are made up of telecommunication products, 18 per cent jewellery and goldsmiths' wares, while electrical machinery and electrical parts comprise 17 per cent and clothing 12 per cent.
"Hong Kong seems to be a springboard for mainland China's exports into the US," said Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis. "Its role has so far served different stakeholders well, but this might change due to the growing risks of a new cold war, this time between the US and China."
Latest data from the Hong Kong Census and Statistics Department showed that the number of Hong Kong residents who had worked in the mainland, mainly due to employment reasons, doubled from 122,300 in 1995 to a peak of 244,000 in 2004 before decreasing to 175,100 in 2010.
Hong Kong seems to be a springboard for mainland China's exports into the US. Its role has so far served different stakeholders well, but this might change due to the growing risks of a new cold war, this time between the US and ChinaAlicia Garcia-Herrero
US tariffs on Chinese goods could affect up to 98 per cent of Hong Kong's 2018 re-exports from China to America, according to Louis Chan, assistant principal economist at the Hong Kong Trade Development Council.
"So this means many Hong Kong companies are starting to develop their own brands and to use the 'Made in Hong Kong' brand under the changing global supply chain," Chan said. "As a backup plan, they could consider selling smaller trial orders to see whether (these) products are well received or not."
Danny Yick Ka-lei, vice-president of electronics manufacturer Computime, said his company wanted to move up the supply chain and start manufacturing original designs under their own trade name.
Yick said he was investigating overseas partnerships with companies in Malaysia, Thailand, Vietnam and Philippines. His goal was to move 30 per cent of his electronics production out of China.
"If we relocate, we will relocate (permanently) because you are never able to predict Mr Trump," Yick said, when asked if he would change his mind if the US and China went ahead and agreed on a trade deal. "You don't want to put all your eggs in one basket."
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