Snapshot: the production, sourcing and trading patterns of Hong Kong manufacturers
28 June 2013
The Pearl River Delta (PRD) remains the major production, outsourcing and sourcing1 base for Hong Kong companies, according to research by the HKTDC. This is despite a noticeable manufacturing push into other regions, chiefly other Guangdong areas outside of the PRD. Companies are increasingly sourcing locally and tending to look in those regions that are home to their existing manufacturing facilities. The trends affecting manufacturing, outsourcing and sourcing on the Chinese mainland will inevitably affect the trade flows of goods and also the relevant offshore trade trends for Hong Kong companies.
Increasing challenges in the PRD
Most Hong Kong companies, especially those with production activities concentrated in the PRD region, have found it increasingly difficult to operate on the Chinese mainland over recent years. Their problems largely stem from higher labour and raw material costs, the problems of labour shortages and government initiatives aimed at upgrading the industrial structure of Guangdong and its supply chains.
These challenges have seen PRD operators look to improve their competitiveness through product innovation or by upgrading their manufacturing processes. A number have even considered relocating to different parts of the province or to other lower-cost Mainland regions. The HKTDC Offshore Trade Survey 20122 provides an update as to the latest situation, as well as an overview of the manufacturing, sourcing and trading challenges facing Hong Kong companies on the Mainland.
PRD remains the major production base
Among the survey respondents, 1,122 companies had their own production facilities outside of Hong Kong. Of these companies, 95 per cent had facilities on the Mainland while five per cent had a manufacturing capability elsewhere in Asia. A very small percentage manufactured outside of Asia, while a number of companies had plants in more than one location.
A further 1,538 responding companies had contracted out production in 2012, with 97 per cent of it going to factories on the Chinese mainland. Among the 1,538, 9.3 per cent also indicated that their manufacturing processes were either wholly or partly outsourced to factories elsewhere in Asia. The discrepancy between the two percentages is down to the fact that a number of companies used a combination of Mainland, other Asian and non-Asian outsourcing facilities. Most prominent among these non-China/non-Hong Kong destinations were Vietnam, the Philippines, Thailand and Malaysia.
Most of the chosen Mainland production and outsourcing activities were concentrated in the PRD. In 2012, 67.6 per cent of those companies with Mainland production facilities had established them in the PRD. A further 25.4% had their own production facilities in other Guangdong areas outside of the PRD. Among those choosing to locate their facilities outside of Guangdong, most Hong Kong companies’ facilities (9.3%) were located in the Yangtze River Delta (YRD) region. When it comes to outsourcing, most Hong Kong companies (65.7 per cent) opted for facilities in the PRD. A further 45.9 per cent used Guangdong factories based outside of the PRD, while 27.6 per cent opted for the YRD.
Clearly production and outsourcing activities on the Chinese mainland have extended beyond the PRD and into a number of other areas, particularly non-PRD locations within Guangdong. A comparison of 2012 figures with those from 2009, shows that the PRD’s share of Hong Kong-related production has fallen from 71.3 per cent to 67.6 per cent. The same comparison in terms of outsourcing shows the share has decreased from 73.2 per cent to 65.7 per cent.
Most of the companies surveyed expect to increase or maintain their production scale over the next three years. Overall, some 80 per cent of companies with their own production facilities in the PRD or in other Guangdong areas expect to increase or maintain their existing production scale over the next three years.
The share is slightly higher – at about 85 per cent – for those businesses with manufacturing facilities elsewhere on the Chinese mainland. The share is also higher for those with an existing production base in other parts of Asia. However, this figure is based on a much smaller number of respondents compared to those with production facilities on the Chinese mainland and, therefore, may be less representative.
The majority of the companies also expects to increase or maintain their existing outsourcing commitment over the next three years. Among those which currently contract out their manufacturing processes to factories in the PRD, 85 per cent expect to increase or maintain their existing scale over the next three years. The share is marginally higher in other regions of the Chinese mainland. While admittedly representing a considerably smaller number of respondents, the percentage of companies looking to increase or maintain their existing outsourcing activities in non-China/Hong Kong Asia is even higher. This is especially true in Vietnam, with 41 per cent of companies using outsourced facilities in the country expecting to expand over the next three years, with 52 per cent expecting no (or very little) change to their existing level of activity over the same period.
Over the next three years, 6.7 per cent of surveyed companies plan to establish new factories, while 12.2 per cent of respondents plan to contract out new jobs. With regard to locations, the PRD (36.2 per cent) remains the most popular choice for production, followed by other Guangdong areas outside (19.8 per cent) and Cambodia, Myanmar and Bangladesh (15.5 per cent). In terms of outsourcing, the preferred locations over the next three years are the PRD (44.8 per cent), other Guangdong areas (28.1 per cent) and the Bohai region (18.7 per cent).
Product innovation successes
The latest survey confirms that there is no large-scale relocation of manufacturing facilities taking place and that the PRD remains the major production and outsourcing centre for Hong Kong companies, despite some signs of expansion into other regions. As part of the Chinese government’s commitment to Guangdong’s industrial development, PRD manufacturing facilities were expected to commit to business transformation and technological upgrades. In light of this, respondents were asked to rate the success (with a score from 1 to 5) of this government initiative over the past five years.
The findings would seem to show that PRD companies are more effective when it comes to improving their products – with average scores of above 3 out of 5 – than in upgrading their manufacturing processes. On average, companies said they have been more successful in producing better-quality products (3.16) and improving product design and pursuing innovation (3.16) in the past five years. Companies, however, saw themselves as less successful at developing hi-tech products, rating themselves, on average, just 2.74 over the past five years.
Local sourcing on the rise
Another trend of note is the increase in local sourcing. As it stands, manufacturers can now locally source the majority of the raw materials, parts and components for their finished products. This has meant that the industry is less reliant on imported materials, benefitting from greater access to comprehensive domestic production supply chains in general.
Respondents with their own Chinese mainland production facilities were asked to estimate their ratio of local sourcing (versus imported materials) for their manufacturing activities in 2009, 2012 and 2015. The result showed the share of local sourcing increased from 70.2 per cent in 2009 to 75.2 per cent in 2012. By 2015, the figure is predicted to be 77.6 per cent. Several industries, notably precious jewellery, electronics, and processed food and beverages, however, have a relatively low share of local sourcing when compared to other sectors.
Sourcing in close proximity to manufacturing facilities
Hong Kong companies with a production base on the Chinese mainland have increasingly sourced domestically. The chart below compares the concentration of manufacturing and sourcing activities on the Chinese mainland, with the figures broken down by region and industry. Across almost all industries, the pattern of manufacturing and sourcing is strikingly similar. Almost with no exception, companies tend to source in the regions where their manufacturing activities take place. This, of course, reduces the cost and delivery times of raw materials, parts and a whole range of components.
The chart also shows the regions in which different products are manufactured. The production and sourcing of precious jewellery, electronics, watches and clocks, and toys, for instance, is all highly concentrated in the PRD and other Guangdong areas. Houseware, lighting, stationery, paper products, packaging material, giftware, décor and imitation jewellery, by comparison, have a much wider production base. In the cases of processed food and beverages, the production and sourcing sites are widely distributed and, largely, outside of the PRD.
The choice of transport mode
There is an understandably strong correlation between various product types and the selection of transportation mode. High value items, such as precious jewellery, watches and clocks, are largely flown from the Chinese mainland to overseas markets. A significant share of electronics, clothing and textiles, travel goods and handbags is also shipped by air, an indication of the high value, time-sensitive and fashionable nature of many of these products.
There is also an undesirable correlation between the point of manufacture and the choice of ports for exporting products of China-origin. While the production of precious jewellery, electronics, watches and clocks is highly concentrated in the PRD and other Guangdong areas, these products are mostly shipped through seaports in Hong Kong and Shenzhen. In those product sectors with a far more diverse production base, including houseware, lighting, stationery, paper products, packaging material, giftware, décor and imitation jewellery, Shanghai and Ningbo are the Chinese ports of choice. When it comes to processed food and beverages, with production largely scattered far from the PRD, port usage is evenly distributed among Shenzhen, Shanghai, Ningbo and Qingdao. Household electrical appliances, largely bulk merchandise of a lower value, are mostly shipped via ports in Shenzhen.
Notably, certain products are shipped by air through Hong Kong International Airport, from the Chinese mainland to overseas markets, more often than the others. These products include precious jewellery, watches, clocks, travel goods, handbags, clothing and textiles, and electronics. Again, this is largely due to the high-value, lightweight, fashionable and time-sensitive status of these products.
The way forward
China is developing into an ever more sophisticated production base. Companies in various light industries are increasingly sourcing locally, implying that the Mainland’s supply chains are now well-developed. Regional specialisations have also become distinct, with the production of precious jewellery, for example, highly concentrated in Guangdong, while processed food and beverages are manufactured across a far wider area. The trend is likely to continue in line with the government’s aim of a balanced development across all regions.
The manufacturing, outsourcing and sourcing trends on the Chinese mainland will undoubtedly have a pronounced impact on the trade flows of goods. Whether or not target goods are shipped through ports in Hong Kong, for instance, will decisively affect offshore trade and influence the development of Hong Kong’s trading and logistics industry. Overall, it is expected that Hong Kong companies’ offshore trade activities will continue to grow at a much faster rate than re-exports over the medium term, with clear product distinctions becoming ever more apparent between the onshore and offshore sectors.
1 Refers to sourcing of industrial inputs
2 The HKTDC Offshore Trade Survey 2012 was conducted in the first quarter of 2013, with a total of 2,686 valid responses.
- Computer & Peripherals
- Electronics & Electrical Appliances
- Food & Beverages
- Furniture & Furnishings
- Garments, Textiles & Accessories
- Gifts & Premiums
- Handbags & Travel Goods
- Household Products
- Lighting Products
- Stationery & Office Equipment
- Toys & Games
- Watches & Clocks
- Mainland China
- Mainland China
- Hong Kong