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This article originally appeared in HongKongEcho 85 - PEARL RIVER DELTA: Move on up

 


From a cluster of rival manufacturing cities to specialisation and regional integration. Ben Simpfendorfer, Founder & CEO of Silk Road Associates, tells us why things can only get better for the Pearl River Delta.

 

HongKongEcho: If we go back as far as the Handover, where has the PRD region come from?

Ben Simpfendorfer: The Pearl River Delta (PRD) has always been a major manufacturing hub. This is largely a function of Hong Kong’s rising costs and the relocation of manufacturing across the border, especially following Deng Xiaoping’s ‘Southern Tour’ and his intent to spur a flagging economy through foreign investment and strong manufacturing growth. So the 1990s was a period of growing production and exports. Yet, it wasn’t really until China’s World Trade Organization entry in 2001 that the PRD started to boom. This was the period during which the majority of factories were established and the region enjoyed an extended period of, not just double digit growth, but 20-30% growth, which only started to tail off shortly before the global crisis.

The Handover, by contrast, had very little impact on the PRD, largely because it was all about politics. It was the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) in 2003 that was all about economics. This was an effort by the Chinese government, as a result of SARS, to boost the local economy. Until that time the mainland government had very wisely decided to ignore business as they didn’t want to rattle the cages of investors and scare the business community into thinking that the Handover would result in a much poorer business environment.

In reality CEPA offered much less than people expected, for a variety of reasons, and it certainly did not do much to boost the local economy or business integration. But what it did was say, to the Chinese provinces and cities, that you can go to Hong Kong to talk deals. It’s OK to do that now. But, at the end of the day it’s always been more about market forces. If anything, politics has been holding back integration. There’s a case to argue that the regions should be more integrated than they are today, but for a variety of reasons, most importantly politics, there’s perhaps less integration than would be ideal.

 

HKE: Taking a further step back, has Southern China always flourished as an economic hub?

BS: Southern China has always flourished as an economic hub. If you go back hundreds of years, the large number of Chinese emigrants always left from ports in Southern China. The region itself has always been very important in terms of China’s trade. As for Hong Kong, well, it’s an artificial construction. It was always Guangzhou that was more important for trading.

 

HKE: You spoke about factories tailing off, are we seeing a change in terms of the importance of manufacturing? Will we still be having this same conversation about factories in 20 years?

BS: Factories will always be important, but the types of factories are changing. You’re seeing a switch from low cost production of household goods, textiles and so forth and towards high value-added goods, particularly telecommunications products. Manufacturing remains; it’s just changing in nature. Shenzhen, as an example, is emerging as a technological hub, largely because of the hardware that is produced there. But what it’s not doing is moving exclusively into services as you might expect other cities to do. It’s certainly not following in Hong Kong’s footsteps. Of course, you’re seeing the growth of services in terms of the emergence of the financial sector along with increased consumer spending on activities such as staycation resorts, multiplexes and spas. But Shenzhen is not a duplicate of Hong Kong. It’s finding a very different trajectory.

 

HKE: I was in Shenzhen last week and there was very little talk of competition with Hong Kong. Yet, here in Hong Kong, we often talk about Shenzhen as a competitor. Is that changing?

BS: To give some context: pre-WTO, China was in fierce competition with the world. Post-WTO, Chinese manufacturers remained in competition with the rest of the world, but as China captured a large share of the global market for a variety of products, it found that it was in competition with itself. What happened at that point is that the PRD began to realise it was in competition with the Yangtze River Delta. And increasingly within the PRD itself the focus has been on cities competing with each other.

When the global financial crisis hit, there was then a growing recognition that perhaps export manufacturing was not the only way to go, or that at least you need to move up the value-added chain. Only certain cities could do that. Today, Shenzhen has a remarkable advantage in so far that it primarily produces high value-added goods. So it doesn’t face the same competition that it did in the past. But it still views itself as being mainly in competition with other manufacturing cities, rather than Hong Kong.

 

HKE: Can we say the same for other PRD cities?

BS: Ten years ago, most PRD cities produced a similar portfolio of products, such as clothing, household goods, and toys, among other products. That’s now changing. But only certain cities are able to attract the kind of companies that can move up the value chain. For example, Shenzhen has attracted the type of Information and Communication Technology (ICT) companies that would have never gone to Dongguan or Zhongshan.

Foshan is another city that has been successful in attracting value-added industry or very large home grown multinationals. This is quite striking because most people wouldn’t even recognise the name and yet the city is home to some world-class emerging Chinese multinationals. Unlike Dongguan, the city has managed to move on from producing low-cost goods and benefits from better city-level planning.

In Western and Northern Guangzhou you’re starting to see more staycation and resort facilities as part of the service sector. Again, that opens up opportunities for Hong Kong companies, as they do leisure services very well. So there are lots of new opportunities. It’s this kind of city specialisation that we’re seeing now which is really exciting because it’s healthy and sustainable. Not every city can have an ICT industry, for example.

 

HKE: Is it right for Hong Kong to feel a little insecure about its position and how much it can benefit?

BS: Hong Kong obsesses about its loss of competitiveness, particularly against Shanghai. Shanghai and Shenzhen obsess less, largely because they have a much larger hinterland and are still maturing economies. I think Shenzhen realises it will never be a financial hub in the same way that Hong Kong is. But the same time it enjoys a robust supply chain hub that Hong Kong will never have – it feels far less threatened in that respect. In short, Shenzhen will overtake Hong Kong in many areas.

Hong Kong shouldn’t feel insecure. Hong Kong can continue to grow even as it shrinks in its share of overall activity in the PRD. Shenzhen will be bigger – there’s no doubt about that. It will have business districts that likely eclipse Central in scale and that is a good thing; it’s nothing to feel insecure about. Hong Kong will benefit as a result of that because it has qualities that the PRD will never compete with it for, such as being an international banking and legal hub. It won’t lose that business. The very fact that the number of Chinese companies and professionals working in Hong Kong is constantly growing means that it will also remain very competitive.

Hong Kong nationals though might still feel insecure. Many might understandably ask, ‘but what does this all mean to me? What Hong Kong will I live in 20 years from now? Will there be opportunities for me? As a Hong Kong business owner, will I be able to afford rents on Hong Kong Island? As a Hong Kong graduate, will I be able to get a job and compete with the best and brightest of mainland students?’ Hong Kong individuals may have reasons to feel insecure about their future, but the city – as a business opportunity – can only get better from here.

 

HKE: Why is there so much attention on the PRD now – and why the recent change of name to the ‘Greater Bay Area’?

BS: The PRD is an idea that never got traction. Maybe it’s because the branding is not compelling, or maybe because it’s now a 20-30 year old idea. Also, it was always associated with low cost manufacturing. So the ‘Greater Bay Area’ is most important as an effort to rebrand. It replaces what was never a particularly appealing name, and it resonates with the idea of the Bay Area in San Francisco as well as of ideas of technology, speed and being international.

Similarly, there were always questions about whether Hong Kong was part of the PRD. There’s no official definition, but people often talk about Hong Kong and the PRD. Clearly with the Greater Bay Area, Hong Kong is more naturally positioned within the region. So as a piece of rebranding I think it’s great. It simply legitimises the fact that the most exciting changes today are all happening around Foshan, Guangzhou, Shenzhen and Hong Kong. It’s a nice piece of branding to help push integration. In reality whether it does or not, it’s not yet clear. 

 


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