The Loh down on Hong Kong's forgotten sector

Christine Loh, former legislator, talks about Hong KongÆs forgotten sector û light manufacturing. Companies in this sector are small, good, and largely invisible.

FA: Why did you start paying attention to the manufacturing sector in Hong Kong?

Christine Loh: There has been so much gloom surrounding Hong Kong for so long that every one forgets that Hong Kong companies are the leading lights, by global standards even, in several manufacturing sectors. I wanted to draw attention to Hong Kong's strength in this sector, and to counter the notion that Hong Kong is wholly built on a bubble economy.

You don't believe the growth of the last ten years has been a bubble, and therefore by definition, non-sustainable?

That's exactly the sentiment I wanted to counter! There was a bubble, of course, but it was confined to the property sector. The extent to which Hong Kong companies control production capacity in a number of light industrial products where we are world leaders leaves a quite different picture. I recently wrote a report on the subject for CLSA and a number of Hong Kong manufacturers contacted me to express their delight that I was telling their story û that industry is not a gonner, it's not dead.

But what about the issue of how much these companies, which have transited for the most part to China, actually benefit Hong Kong?

I think they benefit Hong Kong terrifically. Hong Kong manufacturing companies moved across the border. But over the last 15 years they have gone up in value û they no longer produce lower end stuff. Hong Kong's moved up the value chain, and is leaving the lower end stuff to China. If you look at the leader companies in those 15 products where Hong Kong is a world leader, they are doing brand building and adding higher value. Look at Giordano, Esprit and Esquel etc. Esquel is totally private, totally private owned and the largest garment manufacturer in the world û but no one's ever heard of them. They are already producing for all the top brand names. In their pursuit of quality, they are growing cotton in China's Xinjiang so they can control the quality of the cotton they then change into garments.

Traditionally, Hong Kong companies seem to find it difficult to build a strong brand. They may be good at manufacturing, but they rarely seem to be the at the higher value part of the chain û sellers of branded goods.

But look at (up-market clothing retailer) Esprit. Esprit is a Hong Kong company, but it's built a worldwide brand, its design takes place in Germany, it controls world wide marketing and production. Giordano is targeting the cheaper end of the retail clothing market. But what they have in common is that these companies are now contracting out to other people the æsticking together' part. They are outsourcing to the cheapest places to make the actual product, while they themselves are heavily involved in downstream activities, such as marketing, branding and transportation. Esprit is now going into different markets. They have already moved in Germany and Japan as well as China.

Yet it's strange that you're mentioning companies involved in textiles û an area in which Hong Kong has been involved for decades if not centuries.

But the clothing companies I just mentioned are not simply making the stuff any more û they are branding their own produce. And in the light industries they are concentrating on state of the art manufacturing techniques and management skills. We are now embedding higher value techniques into an evergreen industry.

Adapting to the same hollowing out process that happened in the US in the 1970s?

Exactly, US companies are now doing the brand building and the design. And Hong Kong companies are increasingly doing the actual design for their customers. So they are moving up the value chain. But nobody wants to talk about these improvements because it's simply not glamorous enough. Policy makers are hurting these companies, because they keep denying that Hong Kong is a manufacturing powerhouse, in its own way. They'd rather put money into glamour projects like IT and bio-tech. For example, many of my manufacturing contacts complain that even in this period of high unemployment, new graduates don't want to work for them.

Do you believe China is acting like an engine for Hong Kong? Or do you think that like the companies you just mentioned, there are actually focusing on more lucrative developed markets?

Well, companies can adjust the value of their brands. If in China they have heard of the brand, they would be willing to pay somewhat less for a slightly less-good product. So it's good strategy to move West to build a brand in the most prestigious markets and then move into China. And Western markets are more predictable in the early stages of expansion, so you can always transplant those techniques in less predictable environments like China. One problem about China is that while it's easy to invest in a warehouse, it's not that easy from a legal and financing point of view to buy up a whole company, which Hong Kong companies can do in the West if they are in expansion mode.

I detect a slight contradiction in what you're saying, in that the markets in Hong Kong are dominated by property and China-related companies, not manufacturing. If those companies are so good, where are they?

One factor is some of the really good companies that are bigger than many of the small caps want to stay private. There is a price in listing. If they are growing, profitable and well capitalized, why go public?

Because it enables faster growth!

But they may not want that. In return, you have to reveal a lot about your company, give up control etc. And in terms of generating economic vitality you don't have to be public. These companies are by and large family owned, started by visionary entrepreneurs, and they're not asset flippers, they're builders. And they are quite cautious. These companies are not hankering to list.

So they want to stay small? They don't want outside shareholders and professional managers?

Many of them have plenty of MBAs running their companies. They might well list one day, but that's not a priority today.

What about the net effect of the impact of these companies on Hong Kong? Since they are taxed in China and profits get reinvested there, does Hong Kong actually benefit?

That's the enclave mentality speaking! Nobody would raise that point in London or New York. It's very important for Hong Kong to go beyond that. What you can see, is that when Hong Kong asset prices are going up, a lot of cash pours back into Hong Kong and gets invested in Hong Kong.

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