Hong Kong and China: worth the risk?

U.S.-based associations undaunted by the Asian economic crisis and optimistic about Hong Kong and China are assisting with members' market-penetration efforts in this unpredictable but potential-packed region.

"A Chinese New York" is how Hong Kong can be described, not only for its hustle and bustle but for the aggressive business spirit and dynamic financial environment that characterize this Manhattan-like region of China. Just as on Wall Street, one feels anything can happen in Hong Kong.

That quality is three-part. As illustrated dramatically during the past year, anything can happen in terms of Hong Kong's financial stability. At the same time, many profit-seekers seem to think that they can make anything happen there. And when describing the Hong Kong culture, it's common for local leaders to indicate that Hong Kong is synonymous with can do. Indeed, when officials talk about the many locals poised to help outsiders achieve prosperity in Hong Kong, the leaders tout what they consider a widespread can-do attitude there: an eagerness combined with an ability to make anything happen, no matter what the circumstances or goal.

Of course, the circumstances in Hong Kong have been particularly challenging as of late because of the Asian economic crisis that began in the spring of 1997. By this past May, when this article was being developed, the crisis was continuing and the Asian stock markets, after achieving some stability, fell hard again, hitting their lowest levels in months. Even if some stock markets, including that of Hong Kong, rebound, analysts predict that the overall Asian upheaval will not end soon and that the impact will continue rippling throughout the region and to its trading partners around the world.

Acknowledging in a February presentation at the Hong Kong stock exchange that "the recovery in the region will be slow and drawn out - even for Hong Kong," Ian Perkin, chief economist with the Hong Kong General Chamber of Commerce, went on to say that "Hong Kong is better placed than most in the region to recover." He cited two reasons: "number one, because of our internal financial strength - our economic fundamentals; and number two, because of our relationship with China - the economy of China is still continuing to grow at around 8 percent annually" - an estimate that Perkin confirmed in May.

Despite Hong Kong's potential for economic gain from this relationship, concerns grew out of Hong Kong's conversion in July 1997 from a British colony to a special administrative region of China.

Just what, if any, long-term difficulties does the switch to Chinese rule pose to outside organizations involved in Hong Kong? And how will their activities in Hong Kong and China be affected by the economic crisis? Several association executives with members invested in this region, plus other professionals and officials linked to the area, offer their perspectives.

Problems? Or potential opportunities?

"In the midst of crisis is opportunity," says Alan Ratner, a Richmond, Virginia-based senior executive with Simsmetal, Ltd., an international corporation headquartered in Sydney, Australia. The jolted financial markets have made Simsmetal more cautious, he says, but the crisis hasn't shaken the interest in Asia on the part of this company, which has offices in China and has exported to, and shipped through, Hong Kong for decades. "We're continuing to use Hong Kong as one of our gateways in the region," says Rather, a member of the Institute of Scrap Recycling Industries, Washington, D.C. And he points out to organizations not yet invested in Asia that "getting involved in this area might be considerably more expensive after its fortunes turn around."

The objective of supporting members' goals in Hong Kong and China "remains firmly intact, despite the Asian currency crisis," asserts William P. Farrell, president and chief executive officer of the 1,100-member American Hardware Manufacturers Association (AHMA), Schaumburg, Illinois. The same holds true with the Washington, D.C.-based American Consulting Engineers Council, according to Tom Kern, director of business affairs for ACEC and executive director of its research and management foundation. ACEC, which represents 5,600 firms, has been engaged for some time in various efforts aimed at helping U.S. engineering companies win design contracts throughout Asia. Kern reports that the association has been analyzing the effects of the economic downturn in the region, but has decided to continue market-entry activities there. "We are in this for the long haul," he explains.

Farrell concurs: "Unlike Europe and North America, which are mature or rapidly maturing world regions, Hong Kong and China combined represent a huge, largely untapped market [Hong Kong population: 6.6 million; China population: 1.2 billion]. Accessing both, but especially China, are long-term projects. It is important to get established early in the cycle, because once the consumer segment emerges in China - and it seems inevitable that it will become a global force to be reckoned with - those who are already doing business there will clearly have the edge."

Echoing the sentiments of all these opportunity-seizing executives is Jasper Becker, the Beijing, China, bureau chief for the South China Morning Post, a leading English-language newspaper in Hong Kong. He observes "people coming in and starting up companies for cheap" - people taking advantage of the fact that "markets are very low and prices are low."

Handover a hindrance? Or a blip on the business screen?

"Business as usual" is the resounding response from association executives and officials of Hong Kong asked about any impact from its handover to Chinese rule. Leading up to this event, U.S. organizations were eager to find out exactly what China had in store for its new special administrative region and how the country's plans would affect existing and future financial dealings between Hong Kong and outside partners. A main question was whether China would stick to the "one country-two systems" standard that it promised to apply. One intent of the standard was to preserve the former colony's capitalist system, guaranteeing Hong Kong, for 50 years, autonomy in all economic areas.

Outsiders weren't the only ones concerned - so were many locals. But perhaps what has prevailed over angst thus far is the kind of optimism expressed by a businessman who The Washington Post profiled last year in the days leading up to the conversion. In that article, Michael J. Green, a third-generation Hong Konger who chairs Arnhold and Co., stated that he was not leaving Hong Kong, because he had "a firm belief that things will be better after the handover. There are thousands of cities in China," he said. "They don't want to mess this one up."

Many subsequent news reports and analyses have warned of just such a mess, not only in terms of financial setbacks for Hong Kong but also governmental and sociological problems. Reflective of the concerns was a June 29,1997, article in The Washington Post in which foreign service reporter Keith Richburg wrote, "Never before has an unabashedly capitalist, politically open society been absorbed peacefully into an avowedly communist state that rigidly controls personal freedom."

Still, more-positive voices have also been heard. Several association executives, commenting three months ago, expressed optimism. All had concerns, and some executives were on their guard, proceeding more cautiously with efforts; but none was discontinuing efforts under way to assist the many association members still interested in doing business with Hong Kong.

"I think many U.S. companies are taking a wait-and-see approach to ensure that Hong Kong's traditional embrace of international firms remains intact," observes Farrell. "It's too early to assess how last summer's handover in Hong Kong will affect AHMA member interests."

"Not concerned" about the Hong Kong handover are the members of the Sydney-based Australian Society of Association Executives (AuSAE) (membership 950), according to its immediate past chair, Steve Bowman, who serves as executive director of the Australian Institute of Banking and Finance (AIBF) (membership 13,500), Melbourne. "If anything, [the conversion] has probably made it a bit easier to understand what's happening in China," he says. "Whereas before people may have thought, 'How am I going to get access to China?' now they immediately think of Hong Kong." That's important, Bowman points out, to both AuSAE and AIBF - each has members invested or interested in the mainland.

"My sense is that even though it's changed over to Chinese sovereignty, Hong Kong is still Hong Kong," says Jim Wills, executive secretary of the 2,558-member Academy of International Business and a professor of marketing and faculty director at the University of Hawaii at Manoa's College of Business Administration, both in Honolulu.

Inside observer. The South China Morning Post's Becker agrees. "I don t think the handover has affected things one way or the other," he says. "I think some people were a bit nervous about it, but I don't think that at the end of the day it will have made very much difference to anyone."

Becker notes that "the changes so far have been sort of slow and incremental and mainly an attempt to reverse the changes to the political system that started in the last five years under British rule, but no one has found any cause for alarm. . . . Some people were worried about the decline or the vulnerability of the legal system here after the withdrawal of the British, but [Hong Kong] still has the best legal system, the best-run economy and administration, and the best transport of any place in Asia, really.

"Hong Kong's role in the region is still unchallenged," he continues. "Hong Kong still is very much the main gateway to China. People fear that in the very long term this [will come] under threat, but certainly for the next 5 or 10 years, no one is particularly worried about this,"

Hong Kong promoters. This type of assessment is music to the ears of officials who work to develop outside interest in Hong Kong. Christopher Jackson, director-general of the Hong Kong Economic and Trade Office in Washington, D.C., explains why he sees Hong Kong as "very well placed as a stepping stone into China. . . . Hong Kong businesses are heavily invested in China. Something like 50,000 Hong Kong managers are actually working in China, and something like 5 million people in China are employed by Hong Kong money. Hong Kong has got a lot of people now who are very familiar with doing business in China, whether it's manufacturing or trade."

Victor Fung, who chairs the locally based Hong Kong Trade Development Council, adds this observation about the relationship between the mainland and its new special administrative region: In Hong Kong now, "all the systems are the same as before," he says, "however, there's actually been a fairly important change of mental attitude. We no longer look at ourselves as an enclave, sort of slightly isolated from China; we now see ourselves very much a part of China's much bigger destiny."

For example, Fung notes, while Hong Kong is the world's eighth-largest trading entity, it has been concentrating most of its trade in a narrow range of products: garments, toys, watches, and electronics. Since the transition, he says, "people are broadening their sights to say, 'Hong Kong can actually participate in a very wide range of products - not just those.'"

Fung emphasizes the value to China of Hong Kong's global information and commercial networks and its status as a major regional financial center. The mainland is eager to use these assets to build international business, he says.

Hong Kong Tourist Association Executive Director Amy Chan encourages associations to participate in this process by supporting member interest in her region. She points out, "Hong Kong is the window to China, not only for China to look out to the world, but for the world to look through into China."

Working within mainland China: what to watch

Outside businesses benefiting from access to the Chinese market are paying a price - the uneasiness that accompanies the many uncertainties that persist in the mainland, despite its encouraging announcements of planned or implemented economic and governmental reforms.

The reform plans were outlined by President Jiang Zemin of the People's Republic of China on October 31, 1997, in a speech in New York City before the U.S.-China Business Council and the China Chamber of Commerce, both based in Washington, D.C. During his speech, the president said that by the middle of the next century, our modernization program will have been fulfilled by and large and China will become a prosperous, strong, democratic, and culturally advanced socialist country." He also stated, "We will further improve [our] foreign-related legal system, earnestly protect the rights and interests of foreign-funded enterprises according to law, grant them national treatment, enhance the transparency of the trade regime, and protect intellectual property rights, so as to create better conditions for foreign economic cooperation and trade and foreign investment in China."

Six months later, Richard Brecher, vice president of the U.S.-China Business Council, which serves 300 U.S. corporate members, highlighted what he considers a major improvement thus far in China: a recent reinstatement of the tax and duty exemptions for capital equipment imported for foreign investment projects. Investors had enjoyed these exemptions for many years until they were repealed in 1997. "As a result," Brecher says, "we saw a downturn in the growth of new foreign direct investment flows into China, and the Chinese responded by reimplementing the exemptions."

This flip-flop reform underscores a main concern of Brecher's: "Things that we take for granted in the United States that are sort of fundamental to basic business planning can't be taken for granted in China, where substantial tax policies could be enacted out of the blue that would dramatically affect the profitability of an operation.

"China is a place of great potential," Brecher continues, "and some firms are doing very, very well there. But it is important to underscore the point that it is a difficult operating environment. It has a relatively opaque administrative system in which it is difficult to understand the rules of the game, and those rules are subject to sudden change almost in an arbitrary manner. So we are hoping over time to see greater transparency in the management of the economic system, as well as improved commercial policies."

Brecher cites general market access as a major ongoing concern for both foreign investors who are manufacturing products in China for sale there and U.S. exporters trying to sell into the market. High tariffs and other trade barriers are issues that are currently being addressed in World Trade Organization (WTO) negotiations focused on whether China should be allowed to join.

When interviewed for this article, Brecher commented on the then-up-coming June U.S.-China summit in Beijing. Speaking on behalf of the U.S.-China Business Council, he said, "We hope the commercial issues will play a prominent role in that summit, both in terms of policy as well as commercial deals. In terms of policy, we are very focused on WTO. We see it as a major policy objective of the United States to bring China into WTO and bind them to the rules of WTO. That would be our most effective way of gaining market access - applying the basic principles of WTO to commercial activity in China."

Check your expectations. AHMA's Farrell tacks on additional difficulties to deal with if interested in China, although they haven't stopped his association and its members in this market: "The biggest challenge to doing business in China right now is the rather intimidating learning curve," he says. "The culture; the language; the distance; the embryonic infrastructure of roads, communications, and things we take for granted can be discouraging, especially for many U.S. firms that are used to 'doing deals' over lunch or by phone. When you add an unfamiliar distribution system, unfamiliar procurement practices, political and governmental bureaucracies, and a consumer market that - at least as we know it - is virtually nonexistent today, you can begin to see why [working in China] requires much patience and perseverance.

"I would underscore the need to be realistic about expectations," Farrell adds. "An oft-heard comment from U.S. hardware manufacturers with experience in China is that it will take longer and cost more money to get established than initially projected. After all, the 6,000-kilometer Great Wall of China took hundreds of years to complete, so U.S. firms need to make an adjustment to their notorious short-term focus."

In addition to not expecting things in China to be like things "back home," outside businesses also shouldn't expect China to be the same as Hong Kong, says Wills, of the Academy of International Business. Equally, he points out, "it's a big mistake to come to Hong Kong and say, 'Oh, I have been to China.'" With as much progress as China is making, Wills says, an outsider still must adjust to a lower level of development.

All of this effort, Wills emphasizes, is worth it. "You've got to make a China play if you're going to be a global organization," he insists. "If you don't, in 20 years you're going to be missing a third of the world's population, and many of the people in this population segment already have significant buying power."

Asia-access activities

ACEC's Kern reports some of the ways in which his association has been assisting engineering firms in making a play in Hong Kong, China, and other parts of the region that are now concentrating strongly on infrastructure development.

* Working through its research and management foundation, ACEC has won agreements with the Overseas Private Investment Corporation and the United States Agency for International Development's U.S.-Asia Environmental Partnership to promote U.S. engineering services in Hong Kong and several Asian countries (not including mainland China).

* The association has set up an office in Manila to serve members involved throughout Asia and to liaise with U.S. government agency offices there. This office stays in touch primarily with the Trade Development Agency and the Commerce Department to keep informed of new projects that would be of interest to ACEC members. In addition, this office tracks private-sector opportunities.

* To help U.S. firms partner with local companies on projects, ACEC has begun developing relationships with its engineering association counterparts in Asia.

* ACEC has put together a handbook on Asia that answers the 12 most common questions U.S. engineers have about doing business there.

* Not to be left out of cyberspace, the association has developed a Web site that is instrumental in generating and disseminating leads about Asian projects. ACEC has also put a directory of members online, which serves as a valuable international promotion device for each firm.

According to Farrell, a key component of AHMA's strategy to boost members' hardware-marketing efforts in Asia is being part of industry trade shows there. The association conducted its U.S.A. Hardware Pavilion in Hong Kong last year at IBEX, the International Building and Construction Exhibition. The event provided insights into the Asian marketplace, Farrell says, and enabled his members to eye the competition and gauge consumer demand for their products.

"We also sponsor industry research on international markets," Farrell notes, "and conduct educational seminars that focus on global issues" - U.S. based events to which AHMA is attracting Asian retailers, wholesalers, agents, and importers.

Risks worth weathering

Despite the ongoing Asian financial crisis and the other concerns related to the evolving business environment of Hong Kong and China, for the most part, executives of associations with members already involved in this region size up the current challenges as ones worth weathering. Farrell points out that this is a positive stance to take. "U.S. companies that hang in there and demonstrate their resolve and patience during this downturn," he says, "send an intangible message about their commitment."

Farrell was reminded of this during a recent conversation with an executive in Japan. "He told me that staying the course during the tough times is like visiting a sick friend in the hospital: When he recovers, he'll remember and appreciate the fact that you were there."

Hong Kong Highlights

Here's a snapshot list of Hong Kong characteristics of appeal to associations that are planning major meetings or seeking a gateway to China.

* Currency. Hong Kong's currency is linked to the U.S. dollar, and this link facilitates transactions and promotes economic stability. (As this article went to press, the peg of 7.8 Hong Kong dollars to each U.S. dollar still held, despite calls from critics to reset the peg. Officials see the established link as critical to Hong Kong's financial recovery.)

* Shipping. According to the Hong Kong Tourist Association (HKTA), Hong Kong has the world's busiest container port in terms of throughput, and the harbor there is one of the world's busiest ports.

* Transportation. A US$21 billion infrastructure development program is under way, reports HKTA. At its center lies a new international airport on the island of Chek Lap Kok that is to replace the inner-city airport at Kai Tak (at press rime, the new airport was due to open in July). On opening, the airport will be able to handle 35 million passengers per year; this capacity will be expanded in stages to ultimately serve 87 million. A network of highways, bridges, and tunnels is being built to link the airport to urban Hong Kong and, eventually, to China.

* Meeting facilities. The many facilities include hotels ranging from modest to deluxe, a stadium, a coliseum, and two convention and exhibition centers. The Hong Kong Convention and Exhibition Centre is the newsmaker, with the 1997 opening of its state-of-the-art extension,just in time to host the Hong Kong handover ceremony.

* Cultural attractions. Every conference planner knows that the off-hours activities can be just as important to meeting attendees as the time they spend in sessions. Fascinating sightseeing, world-famous shopping opportunities, and an intriguing culture make a trip to Hong Kong a unique and enjoyable experience.

* Connection to China. Despite the concerns that people may have about Hong Kong's new status as a special administrative region of China, no one disputes the fact that this stronger link between the two can assist outsiders in entering the Chinese market. "The Hong Kong connection," says Jim Wills, of the Academy of International Business, "is the way to get the proper introduction to the mainland. You just don't do cold calling in China." He advises working with your Hong Kong counterparts not only to gain access to the appropriate mainland contacts but also to make the right impression when you do so. Your Hong Kong counterparts, adds Victor Fung, of the Hong Kong Trade Development Council, "have privileged access to the mainland - its opportunities, markets, and resources. We are the natural point of contact between them and you."

Hong Kong and China at a Glance

The following information is from the Hong Kong Trade Development Council's Web site (www.tdc.org.hk), which, when accessed on July 1, included statistics last updated on June 4.

* Population: Hong Kong, 6.6 million; China, 1.2 billion.

* Gross domestic product (GDP): Hong Kong's GDP for the first quarter of 1998 declined approximately 2 percent, down from 2.7 percent in the last quarter of 1997 and 5 percent in 1996. China's GDP grew 7.2 percent in the first quarter of 1998, down from 8.8 percent in 1997, and is targeted to rise to 8 percent for all of 1998.

* Trade status: Hong Kong is the world's 8th largest trading economy; China is 10th. China's top three trading partners are Japan, Hong Kong, and the United States. In 1997, 16 percent of China's trade was with Hong Kong. If reexports to and from the Chinese mainland are included, about 40 percent of the mainland's foreign trade was handled via Hong Kong.

Resources

Organizations and government offices

In China:

* American Chamber of Commerce in Beijing. Phone: (011) (86) (1) 500-5566, ext. 2271. Fax: (011) (86) (1) 501-8273.

In Hong Kong:

* American Chamber of Commerce in Hong Kong. Phone: (011) (852) 2526-0165. Fax: (011) (852) 2810-1289. E-mail: [e-mail].

* China-Hong Kong Economic and Trade Association. Phone: (011) (852) 2723-6223. Fax: (011) (852) 2722-6705.

* Chinese General Chamber of Commerce. Phone: (011) (852) 2525-6385. Fax: (011) (852) 2845-2610.

* Hong Kong Convention and Incentive Travel Bureau (of the Hong Kong Tourist Association). Phone: (011) (852)2807-6543. Fax: (011) (852) 2806 - 0303. Web site:www.hkta.org.Chicago office: phone [phone];fax [phone].

* Hong Kong General Chamber of Commerce. Phone: (011) (852) 25299229. Fax: (011) (852) 2527-9843.

* Hong Kong Trade Development Council. Phone: (011) (852) 2584-4333. Fax: (011) (852) 2824-0249. E-mail: [e-mail]. Web site: www.tdc.org.hk.

In Washington, D.C.:

* China Chamber of Commerce. Phone: [phone]. Fax: [phone].

* Hong Kong Economic and Trade Office. Phone: [phone]. Fax: [phone]. New York City office: phone [phone]; fax [phone]. San Francisco office: phone [phone]; fax [phone]; Web site at www.hongkong.org.

* U.S.-China Business Council. Phone [phone]. Fax: [phone]. Web site:www.uschina.org.

* U.S. Department of Commerce. Phone: (800) USA-TRADE. Web site: www.stat-usa.gov/BEN/databases.html.

Publications and articles

* The Asian Wall Street Journal. For a sample copy and subscription information: phone [phone]; fax [phone]; Web site at www.dowjones.com/awsjweekly.

* "Asia's New Competitive Game," by Peter J. Williamson, Harvard Business Review, September-October 1997. For reprint and subscription information: phone [phone]; fax [phone]; Web site at www.hbsp.harvard.edu/frames/groups/hbr/menu.html.

* "Global Investing: All Eyes on China," a special report in the April 30, 1998, edition of The Wall Street Journal. View a copy of this report at wsj.com; or order a copy by mailing a $4.00 check payable to Dow Jones & Company to this address: Global Investing, Dow Jones & Company, Attn: Anita Deragon, 84 Second Ave., Chicopee, MA 01020.

* South China Morning Post. Web site:www.scmp.com.

RELATED ARTICLE: Is Travel a Bargain?

A general belief among the Asia-bound is that, because of the financial crisis, prices there must be much lower this year than last. Seems like everyone heard last winter about Hong Kong-based Cathay Pacific airlines' $999 "Super Offer," which included two round-trip tickets to the city and a five-night hotel stay. With the many variables that feed into airline, hotel, and other travel-related rates, however, thorough research is advised before coming to any conclusions about how much a particular trip to or meeting in Hong Kong or China will cost. Meanwhile, several professionals offer their views on how far the tourism industry there will go to cut the losses that it has experienced recently.

According to Maureen Pickell, manager of meeting and incentive sales in the Washington, D.C., office of Northwest Airlines, airline companies in general are cautious about lowering fares to Hong Kong because, despite the crisis, business travel is still strong. Because tourists are more likely to consider price above all else when considering a location, she says, airline companies are offering short-term deals on leisure travel to Hong Kong. Such deals don't usually work for association meeting planners, who plan well into the future for their events, but Pickell says that airlines are always open to negotiate.

Kim Canavan Jones, executive director of the International Minority Affairs Cooperative, Silver Spring, Maryland, has been monitoring Hong Kong rates for lodging and catering services, and she says the rates are "incredibly low. "Jones, who is considering holding a meeting in Hong Kong, believes that now is the time to "get in and take advantage of cost savings" that can be applied to future events.

The senior vice president of meetings and member services for the Alexandria, Virginia-based American Society of Travel Agents, Chris Vranas, agrees. "While Hong Kong is still more expensive than it was five years ago," he says, "the rates are coming down because of the financial crisis. Hotels are worried about filling rooms."

The Hong Kong Tourist Association's Amy Chan describes the travel and lodging industry there as "very keen for business. Because we have a very big supply of hotel rooms," she says, "we have to be very competitive in order to attract business groups." Emphasizing that "it's the quality of service that goes along with the discount packages that makes Hong Kong an even better value," Chan calls this destination "a bargain for conference organizers."

Gerry Romano, CAE, is a senior editor of ASSOCIATION MANAGEMENT.