Toy manufacturers in Hong Kong are paying far more attention to quality and have cut costs by modernising their factories

A recent HSBC survey of 500 SMEs in Hong Kong found   that close to seven out of 10 respondents (68 percent) were unaffected by the US slowdown. Only 32 percent said they had been affected: of those, 44 percent said they were seeing fewer or smaller-volume orders from US buyers.

The resilience in Hong Kong SMEs was also demonstrated by another HSBC survey conducted in the second quarter of 2008, which covered over 3,000 SMEs in 10 Asia Pacific countries and territories. The regional survey showed that over half (55 percent) of Hong Kong SMEs expect buoyant economic conditions to continue and they are optimistic about trade prospects with China, the region and the rest of the world, particularly growth in trade with China.

How has Hong Kong’s small- business sector managed to be so resilient? It could be because they’ve seen tough times before and learned from it. In the last 10 years, these businesses have been through the Asian financial crisis, the global downturn after the dotcom crash and 9/11 in 2001 and SARS in 2003. The weakest companies shut their doors; the strongest learned that flexibility is key to survival.

More light was shed when the bank conducted focus groups with its SME customers to find out why the US slowdown was not their top concern. Generally, they already have a number of strategies in place to cope with the situation. For example, many businesses have been diversifying their markets in recent years to avoid overdependence on the US. Some are moving into Eastern Europe and Southeast Asia.

The HSBC survey also confirms that Hong Kong’s SMEs have increasingly diversified into cross-border markets, with mainland China and the rest of Asia becoming as significant as domestic Hong Kong. In terms of cross-border destinations, 59 percent believe the Mainland to be of strategic importance, followed by the rest of Asia at 36 percent and the US at under 30 percent.

This foresight of diversification is in fact shared by many of the Bank’s  clients. One of them, Mr Ho, who manufactures high-end knitwear, told me that in 1993, after 10 years in business, found as much as 60 percent of his orders were coming in from the US. He observed that buying orders from the US usually demanded big quantities of basic-style items and buyers bargained hard on pricing.

He therefore began looking for new customers and new markets to spread business risk and for better profit margins. Today, his order book is much more global: 60 percent of orders are coming in from about 10 countries in Europe, 10 to 15 percent from Australia and 20 percent from the US.

Another client, Mr Yuen, who runs a trading firm of premium electronic goods, is also broadening his client base and upgrading his products. Yuen used to have 90 percent of the buying orders from US clients, but now he has 20 percent orders from European countries and about 10 percent from Japan.

Apart from diversifying their markets, many Hong Kong SMEs have also learned that they need to broaden their product mix or move up the value chain to widen profit margins. For instance, Ho is gradually moving to higher-end, fashionable knitwear and away from basics, while Yuen is working on designing innovative products to attract a wider and more sophisticated customer base.

Burning issues
While small business owners seem to have developed good coping mechanisms on one end of the supply chain – the buyer end – they are not without challenges on the supplier end.

SME customers are telling the Bank that their top concern today is rising cost of production. RMB appreciation, increases in raw material costs and increased costs related to the new labour law in China are putting pressure on their expenses. These are costs that they cannot control, and they are cautious about business growth this year.

For Hong Kong companies with staff in China, they are also limiting overtime hours because the new labour law has taken away some of the flexibility to hire and lay off workers.

For manufacturers and traders, being more selective in the orders they accept is one way to manage costs. Many are saying they are letting go of fine margin business to focus on better margin orders. Some are not signing long-term contracts with suppliers and are limiting their supply stocks. Some companies also ask for payment in euros where possible. Furthermore, many SMEs are engaging banks to help them manage trade risk.

Farming out production
Subcontracting part of the production process has been another trend among Hong Kong’s small businesses for flexibility and cost control. When US buyers began to move to “just-in-time” ordering in the last few years to mitigate the risk of overstocking and to save on warehousing costs, many Hong Kong exporting companies, instead of receiving big seasonal orders, saw a more steady flow of smaller quantity orders. To mitigate the business risk of over-employing manufacturing staff, some suppliers began sub-contracting excess production to mainland companies.

Resilience and optimism
Is there a magic formula for Hong Kong SME’s resilience? While knitwear manufacturer Mr Ho’s answer “by working hard” may not offer any surprise, it has every truth in it. He said he devotes a lot of time in his work. He reads many books and tries to learn about other cultures because such knowledge helps him explore more business opportunities. He also makes efforts to meet his clients face-to-face in their own countries to understand their backgrounds because he has to make sure that he gets paid.

I believe Mr Ho is typical of Hong Kong’s small business owners who are diligent, practical and have nimble minds.

Hong Kong has 270,000 small businesses and they represent considerable collective economic might. Their hard work and flexibility bodes well for the local economy as a whole.

Contributed by Nixon Chan, Senior Executive, Commercial Banking, The Hongkong and Shanghai Banking Corporation Ltd