Staying on top of the market

Hong Kong needs a clear vision of what constitutes a world supply chain management center, and to improve areas like talent nurturing, ESG disclosure and digitalization, as well as transportation infrastructure and business connectivity. Oswald Chan reports in Hong Kong.

Editor's note: With the onset of Sino-US trade frictions and geopolitical tensions, global trade and supply chain operations have become fragmented. This, in turn, has had far-reaching consequences for Hong Kong's trade and logistics businesses. In the second of a series of articles, we examine how the SAR can make itself a global supply chain management hub under such circumstances.

Amid the rapid pace of reform and opening-up in the past four decades, the Chinese mainland has cemented a comprehensive supply-chain ecosystem, transforming the country into an international manufacturing powerhouse. Globalizing supply chain functions has benefited everyone.

But as trade friction flared between China and the United States in 2018, the "China Plus One" and "1 Plus N" strategies have led to, as Fung Group Chairman Victor Fung Kwok-king puts it, a "total fragmentation of global trade and supply chains". Mainland exporters are doing trade with various countries to do away with the "China country of origin" label and avoid paying punitive tariffs imposed by the US.

"What we are seeing is an exodus and diaspora of mainland manufacturers to Southeast Asia, South Asia and Africa. We see a migration of supply chains out of the mainland. But world manufacturers will still rely on the mainland's upstream supply-chain network," says William Fung Kwok-lun, deputy chairman of Fung Group - a privately held group of companies spanning the entire global supply chain for consumer goods, including trading, logistics, distribution and retail.

The "China Plus One" strategy encourages companies to reduce their supply chain dependency on China to mitigate risks, while the "1 Plus N" plan aims to attain carbon peaking and neutrality by 2030.

But the worst may yet to come. The Joe Biden administration has imposed new tariffs on $18 billion worth of Chinese imports, and there could be potential tariff levies if Donald Trump were to be re-elected as US president. Moody's Analytics predicts that if this happens, it might induce mainland enterprises to speed up shifting their production bases to countries with no or low tariffs.
Fung Kwok-lun, however, is not all that gloomy. "Hong Kong's role in the past, primarily, has been to attract foreign direct investments into the mainland. If more supply chain operations leave the mainland, Hong Kong is the natural place, perfect location and a conduit for mainland companies going out," he tells China Daily.

In its 2024-25 Budget, announced in February, the Hong Kong Special Administrative Region government unveiled plans to make the city a multinational supply chain management hub in consultancy services, trade financing and corporate training.

Fung says the SAR's legal and financial system, low tax regime, language proficiency and trade business professionals allow the city to play a middleman's role in a more sophisticated manner amid the growing complexity of supply chain operations. "The big difference between Hong Kong and Singapore is that the latter has never gone through this phase of manufacturing industry development, while Hong Kong supply chain talents have the opportunity to work with the mainland."

Hong Kong also has a third advantage. "As supply chains become more stretched at the upstream between the mainland and the manufacturing world, Hong Kong's financial infrastructure expertise in trade financing and trade insurance comes into play," Fung says.

The veteran businessman expects the next stage of the exodus to be the relocation of production bases to countries and regions engaged in the Belt and Road Initiative. "The technology and infrastructure built up under the initiative have brought apparent benefits to the mainland," he says.

Promoting transformation
To succeed as a global supply chain management pivot, Hong Kong must have a clear position and improve ways of nurturing talent, environmental, social and governance disclosure, as well as upgrading digitalization, transportation infrastructure and business connectivity, instead of just touting its traditional strengths in trade financing and insurance, as well as professional services, according to supply chain and business experts.

Lee Hau-leung - a Thoma professor of operations, information and technology at the Stanford Graduate School of Business in the US - says Hong Kong should play three offensive roles in supply chain management by being the architect center that enables multinationals to proactively coordinate in various stages of production.

"With the rise of the 'China Plus N' strategy, more companies are shifting their production bases to other countries. Mainland exporters have to consider how to manage multiple production factories with different characteristics, as supply chain management will be more complex due to multiple production stages," Lee says.

The scholar urges Hong Kong to strengthen its management and sourcing expertise and provide trade financing solutions as the mainland lacks the expertise in these fields.

Hong Kong can also make itself a knowledge transfer center in supply chain management by leveraging the knowledge accumulated over decades to help mainland midsize enterprises develop new supply chain management models. "In the past, the simple adaption strategy in supply chain management is simply relocating manufacturing plants to those locations with the lowest production costs. Nowadays, the adaption strategy is more complex as it has to maintain cost efficiency and align interests with multiple parties," he says.
According to Lee, there are also multiple layers of information distortion in the production process, leading to excessive inventory investment, poor customer service, lost revenue, misguided capacity plans, ineffective transportation, and missed production schedules in the supply chain process. "Hong Kong can play a centralization role by providing more transparency, visibility and authentic information.

With the goal of improving research and practices in supply chain management, the Hong Kong University of Science and Technology teamed up with Fung Group to set up the HKUST Li & Fung Supply Chain Institute last month to help the city become a multinational supply chain management center.

"The institute will carry out research by trying to understand the pain points of mainland medium-sized enterprises when they 'go out'. It will try to evaluate whether it has overestimated, underestimated or missed some problems so it can provide on-the-ground knowledge in supply chain management," says institute director Li Qing.

The institute can also establish an office offering "one-stop" services in advancing supply chain management knowledge, providing related data and insights, and developing industry talents. It also plans to propose to the SAR government ways of boosting the city's role in supply chain management this year.

Supply chain professionals agree that the high land and labor costs, as well as the talent shortage, are the key hurdles impeding Hong Kong bid to be a world supply chain management hub.

Ernest Lee Chun-ho, an audit and assurance partner at Deloitte China, says one of the major challenges for Hong Kong as a multinational supply chain management center is the dearth of talent in innovation and technology, logistics management, data science and crisis management in the past few years.

"Companies should collaborate with universities and professional bodies to upskill their existing workforce, while the government should attract related talents by providing streamlined tax incentive policies given to either employers or professionals," he says. "Professionals want a clear and good career path to build up their supply chain management careers in Hong Kong."
The Deloitte China partner contends that since Hong Kong has the advantage of obtaining data from both the mainland and overseas, the SAR government should ensure a free flow of data to enable professional-service providers to obtain data for consultancy services concerning supply chain functions. The SAR government should develop systems to strengthen data-driven decision-making and make use of big data to improve supply chain management. It should also ensure that data is protected because any leakage could create significant risks for companies in the industry.

Aligning ESG standards
Whether a logistics operation ecosystem is green and smart is also important in executing supply chain management functions.

Hong Kong's ESG (environmental, social, governance) standards are expected to be aligned with those set up by the International Sustainability Standards Board. Lee says Hong Kong should consider helping companies align their reporting with ESG standards adopted in other parts of the world on top of those set up by the ISSB.

"Multinational companies located in their home countries may have to follow their own ESG reporting standards. What is important for Hong Kong as an international supply chain center is that the government should think of how to support companies in adopting various standards," Lee says.

Cheung Wai-man, a professor at the Chinese University of Hong Kong's Department of Decisions, Operations and Technology, says Hong Kong should help local small and midsize logistics players embrace ESG disclosures in their operations.

"The administration should provide a timeline for ESG integration for the logistics industry. It should first study the perception gap in ESG matters between SME logistics players and multinational logistics groups, and then try to understand the current gap between overseas clients' ESG demands and the capability of our logistics players in fulfilling ESG requirements," he suggests.
The government ought to adopt certain benchmarks to ensure that logistics players have achieved a certain level of ESG disclosures, Cheung says.
Technology investment in the logistics industry is also vital since companies may face technological challenges as supply chain management covers many upstream and downstream companies. Lee proposes programs to incentivize companies to embrace ESG reporting and digitalization in supply chain management. "Hong Kong's logistics industry can deal with labor shortages and high operating costs by investing more in logistics technologies, such as automation and unmanned driving technologies," Cheung suggests.
For Hong Kong to thrive as a supply chain management hub, it should continue maintaining its top-notch transportation infrastructure as this is important for multinationals in deciding whether or not to use Hong Kong as their base for managing supply chain functions.

Cheung emphasizes that Hong Kong must embrace the multimodal transportation hub model that consists of road transport, sea freight and air cargo business. "Cargo owners of those time-sensitive goods value the flexibility of logistics services that Hong Kong can offer. It cannot do that if the city does not have an efficient multimodal transportation network."
To succeed as a supply chain management center, Hong Kong must keep its strong external investment and trade links with the world.

"If Hong Kong can be admitted to the Regional Comprehensive Economic Partnership this year, it can be better integrated with RCEP countries in the flow of goods, services, investments, information and talents, and can have a common set of rules or even lower tariffs to promote better integration with the region which is a key element of being an international supply chain," Lee says. "Accession to RCEP, in particular, might help some multinational companies in Hong Kong with an export-orientated approach."

In Cheung's view, mainland companies may expand businesses with BRI participating countries and regions, the Association of Southeast Asian Nations, the Middle East, South America and Africa, and Hong Kong can promote its supply chain management functions to mainland clients operating in those regions.

Since the mainland has developed new high-quality environmental industries like photovoltaics, electric-car manufacturing, and solar and wind electrical energy generation, Hong Kong has the potential to become the supply chain management hub for these mainland industries aiming to expand abroad.
"If Hong Kong professionals can help mainland enterprises do business with various countries and coach foreign companies in conducting business on the mainland, that would be Hong Kong's role," Cheung says.

Contact the writer at oswald@chinadailyhk.com