China Trade – US government survey

 

US- survey-1Here is a survey report by the US Government on how US companies using Hong Kong as a platform in China trade. The report is about 3 years old, but the situation unchanged.

 

 

Why Hong Kong as a Business Platform? A Survey of US Companies in the Pearl River Delta

 

 

Summary

This survey confirms that Hong Kong is a crucial business platform for the US companies with operations in the Pearl River Delta (PRD), with more than seventy percent of the respondents acquiring Hong Kong services either directly or through other group member companies. In addition, it reveals that the respondents regard support from their Hong Kong-based regional headquarters or offices as the most popular service acquired from Hong Kong.

 

The US is among the most significant foreign investors on the Chinese mainland, accounting for almost nine percent of China’s utilized foreign direct investment as at the end of 2002. Many US companies have regarded Hong Kong as pivotal in channelling their China investment, in addition to sourcing China-made products and coordinating their PRD operations. That said, PRD-based US companies place high regard to Hong Kong’s legal system, its tax regime, unfettered capital flows, sophisticated banking and financial services, and superb logistics and transportation with infrastructure linkage to the PRD. In fact, around half of the respondents rely on Hong Kong for financial control, accounting and auditing, banking and financial services, and transportation and logistics.

 

The principal activities of the respondents lie in marketing and sales, followed by manufacturing. As the PRD turns progressively sophisticated and affluent, it clearly becomes a booming market for US services providers to explore. Further, China’s emergence to be the “global factory” in light consumer goods has also attracted many US companies to the PRD for making use of its low-cost production structure. In this context, top reasons for setting up PRD operations include opportunities in the PRD, better services to PRD-based US companies, lower production cost, and proximity to Hong Kong.

 

In many ways, the respondents consider Hong Kong’s business advantages and services standards far superior to those that can otherwise be sought from other mainland cities. Yet, there is the view that Hong Kong has higher operation costs, and its appeal as a business hub would increase if operational costs were reduced, and boundary crossing enhanced.

 

Around ninety-five percent of the respondents are positive about their PRD businesses over the next five years. Given the strong business links between the PRD and Hong Kong, any quickening in business activities of PRD-based US operations will likely be translated into greater trade and investment opportunities, as well as an increase in demand for Hong Kong services.

 

Survey Background and Objectives

Growing US Business Ties With China

The US moved to grant Permanent Normal Trade Relations (PNTR) status to China in October 2000 in its course of ensuring better prospects of US access to the Chinese market while facilitating China’s acquisition of WTO membership. As China became a full WTO member in December 2001, the annual US practice of renewing China’s NTR status came to an eventual end. With China now implementing in earnest a plethora of market opening and reform measures, compatible with China’s commitments outlined in its WTO accession protocol, substantial business opportunities are being unfolded for US companies targeting the China market in addition to investing, sourcing and producing on the mainland.

 

The US is among the most significant foreign investors on the Chinese mainland. The United Nations Conference on Trade and Development (UNCTAD), in its World Investment Report for 2002, noted that overseas investors have become more confident in investing in China following its WTO accession, and many multinational corporations, including those from the US, have regarded China as their first choice in overseas investment.

 

By the end of 2002, China had approved a cumulative total of 424,196 foreign investment projects, with actual utilized foreign direct investment (FDI) amounting to US$448 billion, of which 8.9% was due to the US (US$39.9 billion). In 2002 alone, actual US direct investment of US$5.4 billion accounted for about 10% of the FDI that China received. On the other hand, of the US$4.4 billion of US FDI earmarked for China in 2001, 12.6% went to Guangdong.

 

Outside the NATFA region, China is the second largest trading partner of the US after Japan and a top source of US imports. In 2002, bilateral trade between the US and China amounted to US$147.3 billion, a 27% increase over 2000.

 

Hong Kong as a Business Platform for US Companies

Hong Kong has played a crucial role for which overseas companies efficiently source and produce in the PRD. Well before China’s WTO accession in 2001, Hong Kong had been pivotal for overseas companies trading with and investing on the mainland, especially overseeing or coordinating their PRD operations. To many US companies, Hong Kong is a risk manager that can ensure quality, a guardhouse of just-in-time delivery, and a platform to facilitate business transaction and investment.

 

While the US is China’s second largest trading partner (after Japan) and a very important export market, a good deal of US-China bilateral trade is actually managed by Hong Kong. As the most important entrepot for the Chinese mainland, Hong Kong is estimated to handle about 30% of the mainland’s foreign trade. In 2002, Hong Kong’s re-exports of mainland-origin to the US amounted to US$34 billion, while US goods re-exported through Hong Kong to the mainland stood at US$6.2 billion.

 

On the other hand, the PRD offers not only a low-cost and highly efficient production base, but also a growing, affluent consumer market. The business environment of the PRD is further enhanced by its proximity to Hong Kong, which acts as a commercial and financial centre that radiates its services coverage to the Chinese mainland.

 

Evidently, many US companies in the PRD, whether with Hong Kong as their regional headquarters or not, rely on Hong Kong for its comprehensive range of supportive services and business infrastructure in arranging their mainland sourcing, production and marketing activities. To tap the looming business opportunities on the Chinese mainland post-WTO entry, the PRD in particular, many US companies will continue to take advantage of the symbiotic benefits that both Hong Kong and the PRD can offer.

 

The US is the third largest overseas investor in Hong Kong, following the Chinese mainland and the Netherlands, when tax haven economies like British Virgin Island and Bermuda are excluded. In fact, the US has surpassed Japan to have the highest number of regional headquarters in Hong Kong. As of 1 June 2002, there were 233 US companies using Hong Kong as their regional headquarters, accounting for one-fourth of the regional headquarters in Hong Kong. Moreover, 437 US regional offices were present in Hong Kong as of 1 June 2002, second only to Japan.

 

Survey Objectives

In order to better understand Hong Kong’s role as a business platform dealing with the Chinese mainland, the Hong Kong Trade Development Council (TDC) embarked on some questionnaire surveys on US companies with PRD operations. The objectives were to garner their views on Hong Kong as a trade and service platform, the form of connection with Hong Kong, and identify the main reasons as well as the extent to which they employ the services provided by Hong Kong.

 

Why Set up Operations in the PRD?

According to the survey, over half of the respondents (51%) considered marketing and sales as their principal business activities in the PRD. Manufacturing and quality control were the next two major forms of business operations, as reported respectively by 35% and 22% of the respondents. Another 20% of the respondents regarded business professional services as their principal activities.

 

US- survey-2

 

Business opportunities in the PRD’s domestic market was regarded as the most crucial reason to set up operations in the region, as indicated by 59% of the respondents, followed by better services to PRD-based US customers, as 31% of the respondents concurred. Such indications are apparently consistent with the earlier findings that consultancy, business and professional services were among the major business lines of the respondents’ parent companies, and that sales and marketing were their principal activities in the PRD.

 

China is increasingly recognised to be the “global factory” for making consumer goods, and the PRD is one key production base on the mainland renowned for its low-cost, skilled labour, and clusters of industries specialized in supplying raw materials, parts and components and accessories. Therefore, seeking lower production costs was instrumental for 24% of the respondents in setting up their PRD operations. The availability of raw materials and other manufacturing inputs was another motivation, given that 24% of the respondents’ parent companies were engaged in manufacturing/trading of raw materials, parts and components.

 

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Therefore, with the exclusion of the single most popular factor of opportunities in the PRD’s domestic market, proximity to Hong Kong was ranked high among the top considerations in setting up businesses in the PRD, as another 22% of the respondents indicated. Other factors such as incentives from PRD governments, greater openness and better infrastructure of the PRD relative to other mainland regions (with responses around the 10% vicinity), were comparatively less important.

 

Hong Kong Services Acquired by Respondents

Proximity to Hong Kong allows PRD-based US operations to have greater latitude, compared with companies in other mainland regions, to derive support from Hong Kong, a commercial hub, which serves the region with an assortment of business and professional services. Against this background, 71% of the respondents revealed that they were using Hong Kong services to support their PRD operations, either directly or through other members of the group.

 

Among the respondents that were using Hong Kong services, 57% relied on support from their regional headquarters/offices in Hong Kong. Other crucial services acquired from Hong Kong include financial control, accounting and auditing (54%) and banking/financial services (54%), followed by transportation & logistics (43%) and import-export services (43%).

 

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Reasons for Using Hong Kong in Support of PRD Operations

Respondents placed considerable importance on such institutional strengths of Hong Kong as free flows of capital (51%) and a transparent legal system (49%). These two popular factors, together with the banking and financial system (49%) and geographical location, are elements underpinning Hong Kong’s role as a regional financial centre, which serves not only companies in Southern China, but also the whole of the mainland.

 

Additionally, around 30-40% of respondents pointed to their reliance on Hong Kong’s tax regime, free flows of information, efficient transport infrastructure, availability of professional and business services, physical infrastructure and linkage with the PRD, in support of their PRD operations.

 

On the other hand, the respondents noted they are facing a host of challenges operating in their PRD. Top two challenges were the task of coping with mainland government rules (49%) and protection of intellectual property rights (45%). With marketing and sales being their principal activities in the PRD, around 30% of the respondents cited difficulty in market penetration and getting paid as the next two challenges.

 

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Conclusions

This survey reveals that US companies in the PRD are connected with Hong Kong by virtue of merchandise and services trade, and joint ventures. It further confirms that Hong Kong is a crucial business platform for these PRD-based US operations, with 71% of the respondents acquiring Hong Kong services, either directly or through other members of the group.

 

The most popular service support that the US companies in the PRD can draw from Hong Kong comes from their regional headquarters/offices (57%). Furthermore, many of them are dependent on Hong Kong for providing financial control, accounting and auditing (54%), banking and financial services (54%), transportation and logistics (43%) as well as import-export services (43%). They expressed strong confidence in the institutional framework of Hong Kong, placing high regard to its transparent legal system, unfettered capital flows, and a simple and low tax regime. Additionally, they appreciate the many other advantages that Hong Kong offers, such as sophisticated banking services and liquid financial markets, and superb logistics and transportation with infrastructure linkage to the PRD.

 

Increasingly, the PRD has become a more sophisticated and affluent market ripe for US services providers to explore. Additionally, China’s ascendance to be the “global factory” for light consumer goods has attracted many US companies to the PRD for making full use of its low-cost production structure. Against this background, the respondents’ most common business activities lie in marketing and sales (51%), followed by manufacturing (35%). Accordingly the respondents’ top reason for setting up operations in the PRD is the business opportunities in the PRD’s domestic market (59%), where they focus a fair share of their attention on the US companies there (31%), while 24% ascribe the move to the PRD to the advantage of a low-cost production base.

 

Nevertheless, the respondents face a host of challenges while operating in the PRD, and top challenges are the task of government rule compliance and protection of their intellectual property rights. While opportunities in the PRD’s domestic market is a major motivation for setting up operations in the PRD, the respondents pointed to the difficulty of effective market penetration and troubles in getting pad.

 

Hong Kong’s business prowess and advantages are well recognised by the respondents, who invariably regard Hong Kong’s legal, tax, banking and financial systems, as well as quality of services and products, as commanding a far superior standard to those of the mainland cities. Nevertheless, there is a common view that operation costs in Hong Kong are higher, and that the appeal of Hong Kong as a business hub would increase if operational costs were reduced, and boundary crossing enhanced.

 

The respondents are quite positive about business prospects in the PRD over the next five years, with respectively 37% and 57% of the respondents anticipating rapid and moderation expansion. Accordingly, close to 20% of the respondents intend to expand their business operations in the PRD, while exploring business potential in other regions of the Chinese mainland. Given the strong business links between the PRD and Hong Kong, it can be expected that the anticipated quickening in business activities of US companies in the PRD will be translated into additional trade and investment opportunities, as well as an increase in demand for Hong Kong services.