Industry Profiles --- Introduction

Industry Background

The wealth of Hong Kong stands on a firm foundation lay down by industry and trade. But today, only trade remains a growing business, while much of manufacturing has relocated out of Hong Kong on the lookout for lower-cost land and labour. It seems that Hong Kong has entered a "post-industrial" stage in which services prosper and prevail over industry. Statistics also report that the heyday of Hong Kong's industry has gone. In 1980, manufacturing represented 23.6% of Hong Kong's gross domestic product (GDP), but 21 years later, its share dropped to merely 5.2%. In contrast, the services sector had a hold of 67.3% in 1980, and the figure climbed to 86.5% in 2001.

To conclude that industry is of little relevance to the Hong Kong economy is however mistaken. No doubt production within Hong Kong has fallen, as Hong Kong industrialists opt to relocate manufacturing to low-cost places. They, however, remain active in Hong Kong, operating their Hong Kong offices as trading companies and headquarters of business, thus classified as services providers for statistical purposes. They mastermind and control the entire production process from their headquarters in Hong Kong. Such an arrangement not only allows Hong Kong companies to make the most of location advantages and division of labour, but their business activities have also stimulated a huge demand for intermediate services.

The relocation of Hong Kong's industry, therefore, should be more appropriately viewed as an expansion of Hong Kong's industrial enclave and helpful to upgrading its services content. Had Hong Kong's industry chosen not to relocate manufacturing outside the territory, the cap in local capacity would have hampered its cost-competitiveness and future development. Hong Kong's total trade would not have reaped a 15-fold increase over the past 23 years (1980-2002). In turn, the earnings from industry and trade would not have fed into the domestic economy, and propelled the growth of the services sector.

To study the contribution of industry (including offshore production) and trade to the Hong Kong economy. A main focus is on their linkages with other business sectors. It is followed by an assessment of issues that will likely have a bearing on the medium-term prospects of industry and trade. This appraisal will help Hong Kong companies to position their business focus and prepare for future challenges.

Toy Industry

Hong Kong produces a wide range of toys with particular strength in plastic toys, including dolls, doll houses and other accessories, action figures, construction sets, toy guns, make believe toys and gimmicks such as beauty kits and doctor's kits. Other major categories are electronic toys and games, radio/remote controlled toys, battery-operated toys and metal toys. Taken together with re-exports, Hong Kong is the world's largest toy exporter.

Hong Kong is famous for producing high-quality toys, and a large share of industry revenues is derived from contract manufacturing for overseas manufacturers and license holders. Production on the Chinese mainland has enhanced the price competitiveness of Hong Kong exports. Hong Kong's role is shifting towards quality control, management, marketing, product design and production planning.

Competition has remained keen, especially from indigenous Chinese enterprises in open items. Orders received are getting smaller in terms of lot size while shorter delivery lead-time is generally required. Merging activities of overseas toy companies may further raise their bargaining power in sourcing, thus depressing toy makers' profit margins. Product safety and ethical sourcing are increasingly a concern among overseas buyers.

Computer and video game interactive entertainment is expected to continue to be a major growth area, while technology allows the development of "smart toys". With the popularity of the cyber world, linking toys with the Internet is another new development. The trend of mass customisation gives the toys and customers a sense of uniqueness.

Hong Kong toy makers produce a wide range of items, including dolls, doll houses and other accessories, action figures, construction sets, toy guns, make believe toys (toy versions of adult "objects", e.g., kitchen implements, vacuum cleaners, etc.) and gimmicks such as beauty kits and doctor's kits. Other major categories are electronic toys and games, radio/remote controlled toys, battery-operated toys and metal toys.

The latest official statistics showed that the gross output of the toy industry reached HK$ 467 million in 2001. There were a total of 175 manufacturing establishments hiring 809 workers as at September 2002. Most of these establishments are small and medium enterprises (SMEs), usually employing less than 100 workers in Hong Kong.

To reduce operation costs and stay competitive, the majority of Hong Kong toy makers have set up production facilities offshore, mainly on the Chinese mainland. In the wake of this relocation trend, many toy companies in Hong Kong have been reclassified as import-export establishments, thus contributing to the apparent decline in the number of toy makers locating in Hong Kong. At the end of 2001, there were 4,801 import-export establishments hiring 31,795 workers.

On the other hand, Hong Kong's role is shifting towards quality control, management, marketing, product design, prototype manufacturing and production management. This skew towards higher value-added activities is helping Hong Kong toy makers to sharpen their competitive edge, while expanding production capacity through relocation. Hong Kong companies are renowned for their compliance in safety standards, regulations and code of practices, enabling them to secure OEM orders from overseas industry giants, including Mattel, Hasbro, Disney, Bandai and Tomy, which advocate ethical sourcing practices.

Production on the Chinese mainland has been facilitated by an efficient network of supporting industries and services. This has greatly enhanced the competitiveness of Hong Kong toys in terms of productivity, quality, reliability and delivery. Building on their base in plastic moulded toys, Hong Kong toy manufacturers have added production skills from the clothing industry, the electronics industry and the metal goods industry.

The toy industry has employed a wide range of manufacturing technologies; computer aided design and manufacturing systems (CAD/CAM) are commonly used. Many manufacturers have also earned the International Organisation for Standardisation (ISO) 9000 certification.

Yet competition has remained keen, especially from indigenous Chinese enterprises in open items. The rapid expansion of production capacity on the mainland by Hong Kong manufacturers also put much downward pressure on prices and profit margins. Orders received are smaller in lot size while shorter delivery lead-time is generally required.

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