Mainland China factories manufacture most of Hong Kong's exports

Electronics manufacturing has been a mainstay of Hong Kong's thriving economy for decades.

Harkening back to the 1970s, this thriving sector accounted for 50 percent of Hong Kong's total exports in 2007, according to the Hong Kong Trade and Development Council (HKTDC).

And despite the growing competition from China and other low-cost manufacturing regions in the Asia Pacific region, HKTDC's latest statistics show that Hong Kong was rated as the world's second largest exporter of calculators, radios, telephone sets, sound recording apparatus, computer parts and video recording/reproducing apparatus as recently as 2005.

Now this sector is facing dire times as the effects of the global economic slowdown are starting to be felt in the form of significantly slower sales.

This waning of consumer confidence has already claimed three major electronics retailers in the US: Circuit City and Tweeter filed for bankruptcy in November and Best Buy revised its 2009 earnings per share forecast sharply downwards, from a range of $3.25 to $3.40 to $2.30 to $2.90.

All three companies attributed their turn in fortunes to a buying slump, which Best Buy's COO Brian Dunn described as the most difficult time for consumers the retailer has seen in its 42-year history. "People are making dramatic changes in how much they spend, and we're not immune from those forces," he said in a recent statement.

The effects of this demand slump are also being felt by electronics manufacturers and businesses in Asia.

"The economic slowdown has impacted us significantly, with business down about 50 percent period on period," said KC Yeung, sales manager for Actionmedia Display Co. Ltd, a firm that specialises in selling LCDs.

"Beside falling demand we are also concerned by the fact that overseas buyers don’t know when they will start buying again. Everything has stopped without there being an idea of when the market will shift, and we don’t know how long we need to wait."

This downward spiral is being seen right across the electronics sector, not only in Hong Kong but in China too.

On Time Express Ltd, a Hong Kong-based freight forwarder with offices throughout the Asia-Pacific region, has noted a significant decline in goods being shipped to developed markets since the onset of the economic decline.

"Overall if you look at the industry we've seen a 25 to 30 percent decline in freight to the US," said Hardy Haenisch, managing director of On Time Express.

The globalised nature of the financial crisis is also a factor adding to manufacturers' woes, according to Professor Chan Kei Bui, chairperson and senior managing director of Surface Mount Technologies Ltd, and who also chairs the Hong Kong Electronics Industries Association Ltd. "Traditionally companies shift their exports to more promising markets when one goes bad, but this is not an option now with Europe and other markets are also suffering from the effects of the slowdown," said Chan.

"Their currencies have dropped 20 to 30 percent and they can't afford to import and so people are putting off shipments."

On Time Express also noted this decline in total freight to Europe, though said it was to a lesser extent than in the US, with the United Kingdom and Spain among the worst hit.

This trend had been seen by Actionmedia.

"Europe has been very bad for business, and they are pretty much in the same situation as the US, with few new orders at very low target prices, and customers are asking for lenient credit terms. The Middle East is still buying, but in reduced volumes," said Yeung.

Chan was also quick to shoot down any hopes that the market may have of manufacturers shifting their focus to domestic sales in China, where demand is expect to be robust given the country's growing middle class, their disposable income and positive GDP numbers (estimated at 8 percent in 2009).

"Selling domestic is theoretically good, but in practice it is not easy," said Chan. "Firstly most companies are export-orientated. In order to focus on the domestic market they have to overcome a lot of tax and regulatory issues, which takes time. Secondly, China is not an easy market. What you have been making for export may not be fit for the China market. Plus, the domestic price is much lower."

As a final nail in the coffin, Chan also noted that manufactures are suffering from the lack of liquidity in the market, with companies unable to access credit lines to make up for the short fall in sales.

This is not limited to cash and standard debt facilities either.

"Everyone right now is focusing on collections, and tightening their credit controls and improving their cash flow, and freight forwarders are no different," said Haenisch. "Companies are being asked to settle their bills on all fronts and this is putting real pressure on cash flow, especially among small and medium businesses."

So it is all doom and gloom? The answer from Yeung, Chan and Haenisch is a bitter 'yes', at least for the next two years.

Chan predicts that this downturn will be a significant driver of consolidation in Asia's manufacturing centres, as better run companies ride out the crisis while less well-run competitors go under. Ultimately he cautions companies need to employ a number of strategies to help weather the rough patch.

"First and foremost watch your cash flow, and talk to your bank. Make sure they support you. Then talk to your customers and make sure they don't disappear. After that talk to your suppliers and staff. Finally, get good help. You will need it to combat the storm," said Chan.

"This is a war of attrition. Those who can outlast the turmoil are the ones who will be laughing in the end."