"In the last ten years or so, we shifted our production lines to places like the Pearl River Delta in order to stay competitive. As manufacturers, we aim at making our products competitive price-wise and in design, in order to retain our market share and attract more market share. We have to be creative, innovate, and at the same time, competitive in price," said Sun, who is Managing Director of his family's housewares exporting company, Kinox.

"...the scope of exporters' services has transcended into more of producer services," Cliff Sun, newly re-elected Chairman of the Hong Kong Exporters' Association

As head of the exporters' association, Sun is herding the group at a time when Hong Kong's trade is on the upswing with January ' 03 figures showing a 24% rise, the fourth straight month of double-digit growth. After turning around to a modest growth of 0.8% in Q2 2002, Hong Kong Gross Domestic Product (GDP) picked up further by 3.3% in real terms in Q3 2002. The recovery was underpinned by robust trade performance, in both merchandise and services exports. In January ' 03, re-exports showed a stunning 30.3% growth over January ' 02, pushing total exports up 26.7% which is said to be the fastest growth rate in nine years.

According to the Hong Kong General Chamber of Commerce, sales to all major markets rose strongly in January 03, resulting in a rare visible trade surplus of $1.8bn, which is just the fourth monthly profit made in trade in the past five years.

"Over the years, since the 90s, we have been shifting our production lines across the border into places like Shenzhen and Dongguan, in the PRD. The process has allowed us to reduce production costs, which is then reflected in our product's selling price. So we became very competitive in our exports. And while we were in the transition, our scope of services were enhanced, from just simply exports to re-exports as well," said Sun.

A lot of creative thinking went into the process. In the 80s, with the shift of factories to Southern China, the manufacturing boom took off and Hong Kong companies excelled in OEM (original equipment manufacturing), mass producing products like garments and footwear for world-renowned brandnames. But brandnames are subject to consumer market forces and when a label sunk, the production lines shut down.

"As exporters, we then started to create a link between our buyers overseas and our manufacturers in the Mainland who are mostly under Hong Kong companies' control. We started to do more than just sourcing for customers. We transcended from OEM to ODM (original design manufacturing). We imported talent and added our own design element to the product. For example, instead of just manufacturing a shoe as ordered by, say, Nike, we started to make prototypes of entirely new models at our factories in the PRD. By this time, we knew our buyers specifications and we would add the design element to produce an original model. We would bring the design to the buyer and then we work closely together, collaborating on the final design," said Sun.

"We've gone way beyond just sourcing. Nowadays, we even invest on tooling or lend the factory the necessary capital to produce a prototype. In other words, we have developed a linkage between buyer and manufacturer by inputting the design capabilities, engineering facilities, and on some occasion, capital investment into tooling, such as if the prototype must be transformed from a computer graphic into product. We make a small production test run and the first batch is then dispatched across the country, say in the US, for marketing and promotion services. Sometimes, in order to get a price point from the maker, we have to finance them in terms of raw materials and equipment. Or, if they are unsuccessful in obtaining a bank loan, for instance, we help them out," explained Sun.

The exporter, he said, who only did export services in the past, now also becomes negotiator and salesman. "He deals with overseas clients by flying out there and saying, I put in this much to get the things you want, I therefore need a commitment. I have saved you the engineering costs and design costs. The relationship between exporter and customer becomes stronger, and the customer makes a commitment not to buy similar products from other sources. The exporter supplies the buyer exclusively. This is what I mean when I say that the scope of the exporters' services has transcended into more of producer services. The Chief Executive mentioned it in his policy address last October when he emphasised that Hong Kong not only provides services but producer services as well," said Sun.

From OEM to ODM, Sun said the next step would be OBM (original brand manufacturing). "They will be coming out with trendy products and putting up huge advertising dollars to have more brand recognition in the market. In order to survive in this highly competitive market, we have to do something ahead of the others. In the ' 90s, which I see as the decade of ODM, the makers would also promote newly created products to buyers. Sometimes the buyer may not accept it in its original form but would modify the product for local and neighbouring markets. Personally, I do see that the influence of Hong Kong companies on the Mainland market as having the best chance for Hong Kong companies' brandnames than any of the overseas brandnames. Given the extensive experience of Hong Kong entrepreneurs in the Mainland market, anyone wishing to launch their product and gain market share in the Mainland may have to collaborate with a Hong Kong company. Not only for their expertise, but their language skills and after 20 or 30 years of experience in the Mainland, Hong Kong companies excel in marketing techniques."

Shipping and transport costs

As an exporter, said Sun, "We do believe everyone has to make a living. Everyone in the business has to make a profit otherwise they couldn't survive. So we are agreeable with freight rates and justifiable charges. Especially now, with fuel prices escalating up to $40 a barrel for crude oil, I do see that shipping lines will have to make adjustments to freight charges to meet the increases in fuel costs."

Sun said exporters are agreeable to third party handling charges as long as these charges are on a reasonable level. "We are shippers. We export and ship merchandise using carriers. So for any of the carriers involved in this trade, if they have increases in their handling costs, we are agreeable to reimbursement through some kind of means. But the reimbursement for these costs should be on a reasonable level so that everyone can make a fair living.

"However, we have found time and again, that there is non-transparency in particular on Terminal Handling Charges which the carriers said is charged by the container terminal operators. Exporting from Hong Kong, we pay the highest terminal handling price in the world and so far, there has been no transparency on why it has to be so high! Such as how the structure of THC is made up. We have always voiced our strong opinions on this. We are agreeable to a high THC if it can be clearly visualized. In Hong Kong, (terminals) are 'almost' a monopoly. I say 'almost' because out of the nine container terminals, the same group owns 7 or 8.

"Then there is the case of the truckers who carry our cargo from the factory to the dock. The truckers have been very reasonable, in their charges and services. We pay the trucker a fee for carrying our goods from the point of dispatch to the dock. What we find unreasonable is the non-transparent fees that follow the shipment-mainly the terminal handling charge and the mid-stream operators' fee. The mid-stream operators are basically also composed of companies that are under the same major group as the terminal operators.

"We shippers have no business dealing with mid-stream operators who are charging truckers $35 per container. The truckers are instructed to bring our cargo from our point of dispatch to the terminal. The terminal operator then loads it on the ship. The business contract is between the truckers and the shippers; and, on the other hand, between the mid-stream operator and the shipping line. Now what the mid-stream operators are doing is charging the $35 fee from the trucker. Mid-stream operators accept the containers at the gate and load it by crane on to the ship. Exporters have an agreement with the shipping line - we ship FOB-Hong Kong so we pay a fee which includes the terminal handling charge, to have our cargo taken from the point of discharge by the trucker and put on the boat. Then the shipping line brings it to, say, the West Coast. The shipping line pays the terminal operator to bring the cargo from the truck to the vessel. That is the contract between the carrier and the mid-stream operator. Now, the mid-stream operator, instead of raising the costs of the contract with the liners, have instead turned to the trucker and asked them to pay $35 and to claim it back from the shipper. It is totally unreasonable; as a shipper I have no business dealing with the mid-stream operator as my contract is only with the shipping line! I book the vessel that will carry my container of goods and I will pay the terminal handling charge. But the mid-stream operator not only imposes a fee on their customers, i.e., the shipping line, but on the supplier as well, which is us, the shippers!"

Sun said that the people in the shipping industry have argued that it should be the Hong Kong Government that should deal with the high cost of THC and the unreasonable demands of the mid-stream operators because, after all, the situation springs from the very high cost of land premiums involved in the auctioning of land to build the container terminals. The operators who have to run the container terminals have to get their investment back and they get no subsidies. But Sun said the situation is also going to affect the long-term prospects of the Hong Kong shipping industry. "We have to pay close attention at the competition from neighbouring ports when we assess the future of the Hong Kong shipping industry. The competition is rising and, although it is not threatening yet, the potential is there. Yantian, Shekou and further away, ports like Ningbo-all these container terminals are increasing their handling capacity because their throughput has increased. Yantian, for example, had a 50% increment in throughput in 2002 against 2001--it may not be threatening yet since the 2001 throughput is only 4.3mn TEUs and over 7mn in 2002. Compared to Hong Kong, this was relatively small as Hong Kong handled 19mn TEUs in 2002. We are still substantially higher but you can see the threat will come up soon."

Sun said that shipping through Hong Kong is still infinitely favourable than using the Mainland ports, for Hong Kong port's 24-hour service, the efficiency and reliability. "Shipping through Yantian is purely on a cost basis. If we have to pay $2,000 more per container if we shipped through Yantian, why would we do so when the service in Hong Kong is better? However, the quality of service in Yantian is not yet up to Hong Kong standards. But you do see that they are improving. So ultimately when Yantian improves its efficiency, quality of the service, reliability and the THC gap is still so high, then I see a lot of exporters being attracted by the facilities in Yantian or in Shenzhen, particularly if they have to pay a much higher terminal handling charge, and the additional mid-stream operating fee."

Economic integration

The closer integration of Hong Kong and the PRD would result in more ease of communications, transportation, and would improve the economy of the entire PRD region which Hong Kong leads. Sun said,?"I have met regularly with the Shenzhen Municipal Government and the Mayor, in my capacity as Chinese People's Political Consultative Conference, Shenzhen Standing Committee member, as well as of the Shenzhen CPCPP. I head the HK team. (He is also Hon. Chairman & Deputy Vice-Chairman of Shenzhen Overseas Chinese General Chamber of Commerce, Vice-Chairman Shenzhen Foreign Investors Association, Permanent Hon. Chairman of the commerce society of Pinghu Town, Honorary Citizen of Shenzhen City, PRC; CPPCC Ningbo Committee Member.) We have decided that collaboration between Hong Kong and Shenzhen is a must. If the economy of Hong Kong goes down, it would affect Shenzhen drastically. However, Hong Kong is not doing too badly and trade-wise we're ok. Manufacturers who have relocated facilities in the PRD are doing alright."