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July 1, 2012 marks the 15th anniversary of Hong Kong becoming a Special Administrative Region of the People’s Republic of China. So how is the ‘One Country, Two Systems’ concept playing out in the 21st century? Most importantly, what opportunities does the region offer for New Zealand’s exporters?
Glenn Baker went to ‘Asia’s World City’ for some answers.
Nothing quite prepares you for Hong Kong. Perched on the doorstep of the world’s second largest economy it has long been a fusion of Eastern and Western cultures, largely thanks to 150 years of British rule.
Arriving late at night after being treated to Cathay Pacific’s superb Business Class service, the first thing I notice on the journey into the city are the spectacular high-rise buildings, lit-up like a theme-park Fantasyland. Viewed from an orbiting satellite, I’m sure Hong Kong outshines other Asian megacities at night.
Throughout its history Hong Kong has been a strategically important trading centre. It’s importance has certainly not diminished under the “One Country, Two Systems” regime put in place when Hong Kong was handed over to mainland China by the British in 1997 – a symbiotic regime that allows Hong Kong to control all aspects of its governance, with the exception of foreign affairs and defence.
But clearly, and this became increasingly obvious during my five day stay, Hong Kong’s economy has remained remarkably resilient during mainland China’s incredible growth spurt of the past decade. And again much of this is due to its strategic location.
Take a look on a map – Hong Kong is part of the Pearl River Delta (PRD), an area that encompasses the nine municipalities of Guangdong Province and Macau and is home to the mainland’s wealthiest consumers and highest spenders. You can see them spending up large and tax-free on Gucci handbags and other luxury goods in Hong Kong’s shopping malls every weekend (along with other basics such as infant formula, wine, honey and health supplements).
The PRD also happens to be one of China’s most dynamic manufacturing and production centres and, not surprisingly, Hong Kong is the largest investor – accounting for 62 percent of Guangdong’s total utilised foreign direct investment (FDI), most of which is directed to the PRD.
The construction of the Hong Kong-Zhuhai-Macao Bridge, which will link Hong Kong to the west bank of the Pearl River, has finally been given the green light and is expected to open up significantly more economic benefits for the whole region.
Hong Kong, despite its small population (seven million) and land area, has become an economic over-achiever and is a significant market in its own right. It is a city in a constant state of reinvention – a region that has transformed itself from a manufacturing centre to a service-based economy. It is the world’s tenth-largest trading economy with more than 90 percent of GDP coming from the services sector. It is also an international financial centre, and in 2011 for the first time, topped the World Economic Forum’s Financial Development Index – overtaking the US and the UK.
For many Chinese companies, Hong Kong is the ideal place to set up an office in order to access international markets. It’s administrators work hard to make the region attractive for business – this is why Hong Kong was recently rated the world’s freest economy for a 17th straight year in a ranking by the US-based Heritage Foundation.
Hong Kong is literally in the right place at the right time, and for New Zealand exporters there are numerous compelling reasons why they should consider not just the Hong Kong market, but accessing the wider mainland China market through this regional hub. Some have tried and failed – others have experienced outstanding success. I was fortunate enough to catch up with Peter Francis, regional manager-security for Gallagher Group during my visit (story later) to learn of their inspiring export journey on the mainland over the past decade.
Here’s the situation
Included in my itinerary for the week was a visit to the three-day Hong Kong Trade Development Council World SME Expo which was primarily a showcase of business opportunities within the wider Asian region. I had wondered if any Kiwi businesses had gone to the trouble of exhibiting at the impressive Hong Kong Convention and Exhibition Centre, but I quickly discovered, sadly, that none had. I learnt this from David Whitwam, chairman of the New Zealand Chamber of Commerce in Hong Kong, who was in charge of a small stand at the expo to promote the Chamber’s annual Connectionz publication – a glossy magazine that shares the stories of Kiwi exporters active in the Hong Kong and China region. He also co-heads Mace Consulting, an advisory firm that facilitates capital raising for New Zealand companies out of the Hong Kong-China market. “Normally, on a corporate to corporate basis, we approach businesses that are already in a similar market and have a strategic need for an investment,” he explains.
Whitwam says they work for up to five Kiwi clients a year. Some don’t fly because “they’re not suitable to be invested in. They may not be ready, the product may be wrong or they may not have the ability to scale up fast enough.
“One of the issues with China is that if you send a container of product this week and they like it, they’ll want two containers the following week, and four the week after – so Kiwi exporters must have the ability to be sustainable.”
Whitwam was gracious enough with his time to brief me on the situation in Hong Kong as he sees it first-hand. He is one of an estimated 3000 expat Kiwis in Hong Kong, having first moved there 18 years ago. He believes Hong Kong does a great job selling its services and benefits to influential business people around the world, and extracting best practice from those who visit the region.
So what insight can Whitwam offer New Zealand exporters on, first, doing business in the Hong Kong market?
“Hong Kong is similar to New Zealand in terms of commercial infrastructure. You still have an English common law system, international reporting standards, legislated IP protection,
and establishing a company here is very easy.
“It’s important to take and heed advice from people who’ve already ‘been here and done it’. I’ve seen so many retail companies for example, even New Zealanders, who’ve opened shops in the wrong mall or on the wrong floor of a mall because they haven’t done their homework.”
Hong Kong retail is all about clusters of products he says, adding that there is one street that sells only goldfish!
When focusing on Hong Kong as a market it’s wise to “consider what it can do for you,” says Whitwam, “rather than what can you do for Hong Kong.”
The low corporate (profits) and personal tax rates, and non-existence of certain taxes such as GST, FBT, tax on interest or dividends, provide further incentive for people to base themselves in Hong Kong, he adds.
His advice for wannabe exporters?
“Start with an air ticket! Don’t come for a day or two, like the politicians. Get a hotel room for a week or a fortnight. Sniff the air and wear out some shoe leather. Have someone local to show you around – someone who understands the New Zealand psyche, can be objective and will point you in the right direction.”
Whitwam has facilitated and escorted visiting Waikato MBA students to factories in Zhuhai, near Macau, one of which is chaired by an ex-pat Kiwi and makes 12 billion plastic bottles a year for Coca Cola. They visited three factories based on three different business models, were briefed by the relevant CEOs and received a first-hand grounding on how to do business in China.
“This is just one example of how it can be done,” says Whitwam, adding that even if after spending some time in Hong Kong a New Zealand company decides that it doesn’t want to be in this market, it’s still money well spent.
“Better than not doing your groundwork, and ending up wasting a fortune.”
Feasibility trips to Hong Kong and China should come out of staff training or market development budgets, he says. “It’s wrong to spend your marketing budget first before you’ve spent money allocated for upskilling your people and your research.”
Whitwam uses Comvita as an example of a smart approach to the Hong Kong-China market – first establishing a local agency and training local people, then buying that agency and allowing staff to have local shareholding. “Now they have around 250 stores in China, mostly store-in-store.”
He reminds me that in 2012 under the China-New Zealand FTA many tariffs on imported products to China will drop to zero, including most food products. “This gives New Zealand a real advantage, albeit a short one, over virtually every other country.”
And in a market where Kiwi exporters are competing directly against imports from the world’s other major trading nations, that’s worth having.
But there is a sense of frustration that emerges through Whitwam’s time with me. He’d like to see a lot more effort made by New Zealand’s business support agencies in developing further trade in the Hong Kong region across the board, and not just to assist the so-called ‘winners’.
We finish our chat with his hot sector tip for 2012 and beyond. “In 2012 there will be a shortfall of some 90,000 tertiary seats for students in Hong Kong. If I was a New Zealand university, I would be camping up here right now. There’s real opportunity here.”
Securing China
The first thing I notice about Peter Francis as I shake his hand in the lobby of my hotel in Wan Chai is his height. He’s tall for a Westerner, which makes him particularly noticeable in Hong Kong and, in fact, most of Asia. Francis is also well versed on China – his earliest memory is cycling around Beijing some 25 years ago arranging visas for the Trans-Siberian railway.
Now Asia-Middle East regional manager-security for Hamilton-based Gallagher Group, today he’s helping oversee the company’s impressive growth in China’s premium, high-level security system market from the company’s new regional office in Hong Kong.
Gallagher is an iconic New Zealand company founded in 1938, now specialising in total security system solutions, from standalone perimeter security through to state-of-the-art software controlled, business-connected security solutions. Its China customer base includes government-controlled sites, utility companies, airports, universities, military installations and major infrastructure.
Gallagher Security is not exactly a newcomer to the market, having had a presence in China for more than ten years. “Our original business model involved a China-based distributor, but we changed that model five years ago after listening to NZTE and other successful companies in China and seeing how the country was changing,” says Francis. “We kept that one original distributor, split the region into three and brought on new channel partners or system integrators with multiple branches. Now it’s an extensive network, and of course, being China, everything is very much relationship-based.
“Today it’s about how we can compliment and win business with each other. It’s about business advantage and it’s straight to the point.”
Francis says Gallagher Security focused on the main centres of Beijing, Shanghai, Guangzhou and Shenzhen to maximise potential growth, with “local people working locally – people that had immediate networks, many of whom had been associated with the initial distributor.
“We required a progressive system integrator that could properly manage installations, training and support and look at recurring revenue streams – an important part of our business.
“We spend up to 15 percent on R&D, and need to maximise the return on this investment. We have regular software releases to take our customers forward, and our software and hardware features backwards compatibility so that we don’t leave our customers behind”
The service side of the business tends to be different in China, adds Francis. It’s less proactive than some countries and, more often than not, customers only make contact if there’s a problem.
He also believes that being a New Zealand company, rather than a big US corporate, is a definite advantage in the Chinese market. There is also the matter of tariffs being reduced under the FTA regime which will increasingly favour New Zealand companies in years to come.
“Gallagher’s advantage in this highly competitive sector is its ability to specialise in strategic markets,” says Francis. “We’ve got good case studies and a lot of reference sites. And we’ve created our core software to meet the specific needs of market segments – for example, the mining and resources sector where health and safety regulation and response is increasingly important.
“Risk management and security management can be quite emotional. It’s important you get it right, so people can be confident in the system. Having a track record when you go into emerging markets, as we still are, is very important,” says Francis.
He adds that, in a market sector where, in China particularly, the focus can often be on the short-term, Gallagher Security stands out as a supplier that considers the long-term. “Many of our Asian customers have been with us for more than 12 years.”
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With around ten percent compounding growth over the past three to four years and a significantly enlarged customer base, Francis tells me Gallagher Security is in a strong expansion phase, which requires recruiting more local people. “This is a relationship-based business and we have business and technical managers who work very closely together.”
Setting up a regional base in Hong Kong was a smart strategic decision fully supported by the company, says Francis. It’s a place that lends itself to free and open business; it’s a major pathway into the mainland; communication, translation and interpretation services in both Cantonese and Mandarin are easily accessible; and there’s the close proximity to southern China. Prior to our meeting, Francis had just stepped off a train from Guangzhou. The journey took just 90 minutes.
“Hong Kong has political and economic advantages. It’s a hub for China and wider Asia and I can see it becoming even more strategic for mainland China in terms of currency and transaction.
“Hong Kong welcomes new businesses. InvestHK, for example has been very supportive. They set up an early network that enabled me to accelerate the process of establishing a business entity here and grow a team.”
Generally business happens much faster in Hong Kong, explains Francis. “That means you have to be more alert and responsive and you consequently become more reactive.” The days are long, he says, negotiations are often conducted over meals, and business is not without its challenges. Forecasting sales is hard, confidentiality is paramount, and deals can swing at the last minute, necessitating further bargaining.
Looking ahead, Francis can see nothing but opportunity and growth for Gallagher Security.
“With our new partner companies, we’re particularly expecting considerable growth in China’s new cities. There are two cities the size of Chicago being built every year in China, and massive new infrastructure.”
He says New Zealand exporters coming to this market need to look at every possible support network and assistance they can, including collaboration opportunities with other exporters. And sales will only come if they’re prepared to make a long term commitment. “You can’t just dip in and out and expect to win a big project, it just doesn’t work like that.”
As for advice to other Kiwi business people coming to Hong Kong to access China, he says it’s a matter of having the right attitude. “You’ve got to want to be here. Be willing to change. Yes it is crowded, noisy, demanding and certainly tests your patience and reserve. But there’s a lot more business here than you first realise – and that’s one of the advantages of having an in-market team. They’re much more aware of opportunities.”
Making connections
My busy HKTDC schedule meant that I wasn’t able to catch up with Sharon-May McCrostie, New Zealand trade commissioner for Hong Kong and Macau, until Saturday, the day I was due to fly back. McCrostie’s four-year posting expired in February 2012, so I was keen to get her perspective on the market opportunities in both Hong Kong and China.
We meet at the Hong Kong Airport Express Station. I’m grateful for her valuable weekend time, and surprised to learn that the Fuel Espresso cafรฉ where we sit down to chat is New Zealand-owned. Downstairs there is one of the busiest Comvita stores in all of Asia. I didn’t write down the foot-traffic numbers – it’s mind-boggling.
McCrostie tells me Fuel Espresso has been extremely successful with its two outlets, but is a little publicity-shy for fear of giving away too many secrets. I’m beginning to realise just how competitive certain market niches can be in this city.
Success is all about finding niches away from the mainstream brands, explains McCrostie.
“There’re niches here for very high-end quality products. Consumers, particularly the high-income earners, are relatively sophisticated, Western in their outlook and prepared to pay for quality.”
Success is about the right location too, especially with retailing, she says, echoing Whitwarm’s comments. F&P Appliances has a store in Causeway Bay, for example, which has one of the highest foot-traffic counts in the world. That’s important when you consider how expensive rental space is in Hong Kong.
The Kiwi company with arguably the highest level of brand equity is Comvita, says McCrostie, which has nine standalone stores in Hong Kong alone with around 70 point-of-sale promotional specialists. “You need large numbers of sales professionals because you’re competing with so many brands here.” (Comvita also has some 380 stores in Mainland China, both branded and concession counter.)
Of course the barriers to market entry are minimal, thanks to the Closer Economic Partnership Agreement in place between Hong Kong and New Zealand. That means zero tariffs on pretty much everything except spirits.
“Generally it’s a lot easier to gain access to this market than a lot of others. It’s a good entry point for smaller companies that are looking to export to this part of the world,” says McCrostie. “The lesson therein though is that it’s one thing to get your products in, but you must also invest in supporting the product to drive sales.”
Kiwi companies underestimate both the opportunities in Hong Kong and the amount of preparation required, she adds. “Whilst it’s a relatively easy market to get into, it’s still a very competitive one. You need to understand where your product fits and what the best channel to market is.”
McCrostie says there is an innate trust behind “the New Zealand brand” in Hong Kong when it comes to products such as food, health supplements and skincare, and there are a lot of opportunities to get New Zealand-packaged products into supermarkets. Pitango (organic soups) is one great example. “In supermarkets here you’ll probably find more New Zealand products than anywhere else in Asia, apart from Singapore. And that’s largely due to consolidation models in place with the two main supermarket chains in Hong Kong.
“At a consumer level, New Zealand food and beverage and wine has a good presence here. New Zealand is the second-largest supplier of white wine, behind France, and tenth overall in the wine category. Hong Kong is a mature market compared to China, but the growth has been steady.”
That growth is expected to continue, now that the levies have come off.
“Hong Kong as an export destination is dropping in the rankings,” McCrostie informs me. “But that’s a ‘good news’ story – it’s evidence that the New Zealand-China FTA is succeeding. Product that would have traditionally made its way to China through Hong Kong is now finding a direct route. This gives New Zealand companies more control of the value chain to their customers and helps them better position their products with their distributors.”
Describing Hong Kong as “still the Centre of Asia” and “a connector”, McCrostie believes future export opportunities will be around high-value food and beverage products, dairy products, and both red and white wine. Exporters should be aware of the prestige factor in the market – the perception being that if the price is higher, the product must be better. So pricing is important, and companies should not undervalue their premium products.
Utilising the many international trade shows to connect with buyers can be a successful strategy for Kiwi exporters too. McCrostie says the HKTDC stages more than 30 shows per year and it’s important to pick the right one.
NZTE supports a number of shows that can potentially open doors for Kiwi exporters. Cosmoprof (cosmetics), Natural Products Expo Asia and Asia Fruit Logistica are past examples.
“We will put our resources around those shows that have the most potential and where there’s a critical mass of export companies we can get behind,” says McCrostie.
Progress report
On the eve of her departure back to New Zealand, McCrostie is pleased with the progress made in Hong Kong during her tenure. Working with the five offices in mainland China, NZTE in Hong Kong has an active portfolio of some 30 New Zealand exporters and works with a number of partners such as large distributor company Dah Chong Hong Holdings to leverage pathways into China.
Thanks to some vital introductions and promotional work there’ve been some tangible outcomes for the NZTE team, such as the relationship developed with supermarket chain Park ‘n Shop which has resulted in some major New Zealand brands making it onto the shelves.
“It can be some years before you get tangible outcomes,” says McCrostie. “A lot of our work is around foundation building. It’s about watching the market, setting strategies, organising introductions. The work is ongoing, the results don’t happen overnight.”
And once products have made it on the shelves, the work doesn’t stop, she says. A lot of thought has to go on marketing to ensure that sales keep happening. Social media marketing is one area in particular that they’ve been helping clients with.
I check my watch–an hour has flown by. To finish our chat, I ask McCrostie if she has any final advice for exporters looking to enter the market here.
“Be professional and be prepared to move fast,” she replies. “The criticism we hear time and time again about New Zealanders is that we’re not responsive enough. We love our lifestyle and can be hard to get hold of out of normal business hours.
“Persevere, because there are a lot of people looking to do business in this market. Front up, do your homework, know what your offering, your solution, is. These are business fundamentals I know, but still vitally important.”
Glenn Baker is editor of Exporter magazine. His trip to Hong Kong was generously sponsored by the Hong Kong Trade Development Council (www.hktdc.com).
He travelled with the assistance of Cathay Pacific Airways, which flies non-stop from Auckland to Hong Kong at least once a day. With sister airline, Dragonair, Cathay Pacific flies to 15 destinations in China.
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