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Speech by Mr K C Kwong, Secretary for Information Technology and Broadcasting at Symposium on Applied Research and Development: Enhancing Global Competitiveness in the Next Millennium "Electronic Commerce in Hong Kong - A Threat or Opportunity?"

08 October, 1999

Professor Chung, Dr Lee, distinguished guests, ladies and gentlemen,

Thank you for inviting me to speak today at the Symposium on Applied Research and Development: Enhancing Global Competitiveness in the Next Millennium. As we stride towards the new millennium, I would like to take this opportunity to share with you some of my thoughts on the development of electronic commerce in the Information Age, whether this development presents to us a threat or an opportunity, and how the Government seeks to provide a favourable environment for electronic commerce to thrive and flourish in Hong Kong.

A couple of months ago, I read an article in the Fortune magazine (August 16, 1999 issue) about how Home Depot, the leader in the US's home improvement market which has more than 800 outlets all over the State, reacted to the setting up of web sites by some of its major suppliers, such as Rubbermain.com, Whirlpool.com and so on, for direct marketing of their products and services to end users. According to the article, Home Depot, was in a state of panic about this new trend, and had sent letters to all its suppliers to express its concern, and to implicitly remind them that Home Depot had the right not to further carry on business with suppliers who could also be its potential competitors.

Home Depot's panic is, as I understand, to a large extent attributable to the threat of disintermediation brought along by the wave of electronic commerce. The rapid development of electronic commerce has been spurred by the exponential growth in the use of the Internet, and is transforming the way in which business is conducted. With the global reach and round-the-clock availability of the Internet, electronic commerce enables businesses to cross geographical barriers and time zones with ease. Thus, businesses can now reach their potential customers in virtually every corner of the world at any time. By leveraging on the latest advances in information technology, telecommunications and multi-media content creation, electronic commerce has become the key to enhance corporate competitiveness. It enables business to become more adaptive and responsive to changes in market conditions, allows them to develop market globally and more effectively, facilitates their targeting of customers on a localised or even individualised basis, and helps them to improve their management of the entire value chain. This means that direct purchases from suppliers or direct marketing of products and services to end customers is now a lot easier and simpler through electronic commerce over the Internet. The conventional middlemen like Home Depot are right to feel threatened as they are likely to be bypassed if they stuck to their traditional ways of doing business. But if we can adapt to the new business environment created by electronic commerce, we will be able not only to improve our efficiency, but also find new and innovative ways to provide value-added and customer-based services.

Let us first look at the issue from the global perspective. Internet users worldwide has grown from 40 million in 1996 to more than 100 million in 1997, and are expected to increase further to 150 million within this year. Internet traffic doubles every 100 days. According to industry estimates, the total value of business conducted over the Internet will increase from US$200 billion in 1998 to US$1 trillion per year by 2002/3, representing a growth rate 40 times that of the global GDP. The potential market that electronic commerce can tap in cyberspace is thus enormous.

Many companies, most notably those in the USA, are quick to respond to the development in electronic commerce. Their proactive approach have helped them to establish an advantageous position in cyberspace to capture the new business opportunities. Thus, Yahoo!, Amazon.com, eBay and the like have emerged from practically nothing to become well known household names in a matter of a few years. By serving an increasingly populous on-line customer base, these companies are growing at phenomenal rates through the adoption of electronic commerce. Take Amazon.com as an example. A virtual bookstore started in 1996, the company had a modest beginning with sales of only US$16 million in the first year of operation. However, by 1998, its sales burgeoned to US$610 million, representing a 38-fold increase in only three years. And the company is now branching off into the supply of other products and services as well.

Opportunities in electronic commerce are by no means limited to the setting up of virtual shops in cyberspace or the provision of content over the Internet. This new mode of business operation can also be usefully adopted by conventional enterprises.

Pitney Bowes, the world's largest manufacturer of postage meters, a line of business which hardly anyone would associate with the development in cyberspace, has been using Internet technology to improve its supply chain management. Specifically, it has established a web-based electronic data interchange system with its key suppliers. Through the system, it manages to update its suppliers on the company's forecast demand so that raw materials and parts are ordered only when it needs them, thereby its minimising on-hand inventory. Take also the example of Boeing. A couple of years back, the company put its spare part business on the Internet. With the same number of data entry staff, Boeing processed 20% more shipments in 1997 than it did in 1996. In addition, there were fewer phone calls to customer service representatives - a reduction of about 600 calls every day. This has resulted in considerable savings in staff costs and other resources. Another notable case is Federal Express, a major courier that handles over 300,000 pieces of packages per day in over 200 countries. It started using the Internet for managing its delivery service since 1994. It is now renowned for its on-line tracking service which allows customers to track the status of their delivery orders at any time through the company's web site. The company currently also operates 16 call centres in the US to answer customers' phone calls. If not for the on-line tracking service, the company estimates that it would have to operate at least 10 more call centres to handle the additional workload. So, there are plenty of opportunities even for conventional companies to re-establish or improve their competitiveness by properly managing the value chain and providing new value-added services to customers, through the use of electronic commerce.

Let us now turn to the local scene and look at what the situation is like in Hong Kong? How does Hong Kong fare amidst this global development in electronic commerce? Where do we stand?

We have a world-class telecommunications infrastructure in Hong Kong - a pre-requisite for sustained growth in electronic commerce. We have over 130 Internet service providers. We have also witnessed a fast development in on-line business. The number of Internet users has now exceeded 1 million and is fast growing. During the past 12 months, local Internet usage almost doubled and the number of Internet users making purchases on-line increased by 50%. Industry estimate suggests that the total value of products and services transacted over the Internet in Hong Kong will increase from US$60 million in 1998 to US$1.3 billion in 2002, and to US$2.4 billion in 2003.

The significant growth of Internet use and electronic commerce in our hinterland, the Mainland of China, is equally impressive. The number of Internet users there has almost doubled from about 2 million last year to some 4 million now. According to recent industry estimate, the Mainland's electronic commerce turnover will leap from a minuscule US$ 8.1 million in 1998 to US$3.8 billion per year by 2003. With the increasingly close ties between the Mainland and Hong Kong, and the affinity in language and culture between the two places, businesses in Hong Kong should be well positioned to capitalise on the opportunities in the Mainland market by taking advantage of the development of electronic commerce.

The conclusion from the above trends, statistics and estimates is clear : the potential market that electronic commerce can generate in cyberspace is enormous and there is a great potential for growth. There is little doubt that electronic commerce will be the engine for future economic growth. And businesses risk obsolescence if they ignore this.

Moreover, since new developments in the world of electronic commerce take place at a phenomenal pace, not only do we have to react and grasp the opportunity offered by electronic commerce, we have to do it quickly, or else we will lose out in the race. Consider the case of Dell Computers, a global computer supplier. It was one of the first major companies to embrace to electronic commerce. In mid-1996, Dell began selling its products through the Internet. It's on-line business quickly rose from US$1 million a week then to US$14 million a day now. Being the first to establish itself in cyberspace has allowed Dell to become the world leader in that market, and other computer manufacturers are still trying to catch up with it now.

The Government of the Hong Kong Special Administrative Region fully recognises the importance of electronic commerce in driving our future economic growth. And we have a firm and committed policy to provide a favourable environment for electronic commerce to thrive and flourish in Hong Kong.

We understand that one of the most important concerns over the conduct of transactions through the Internet is security. To enhance public confidence in electronic transactions, we will provide a safe and secure environment for the conduct of electronic commerce through a local public key infrastructure supported by the establishment of certification authorities. With the use of digital signature and public/private key mechanism, we will be able to establish the identity of the parties to an electronic transaction, authenticate the electronic messages transmitted, guarantee the integrity and confidentiality of the messages exchanged and ensure that the transactions made with these messages cannot be repudiated. Government will take the lead in the establishment of a public certification authority through the Hongkong Post. The department has already awarded the contract for the supply of the public key infrastructure system and is aiming to offer public certification services to both businesses and individuals by the end of this year.

We will also develop a clear legal framework to enhance certainty in the conduct of electronic transactions. We have introduced an Electronic Transactions Bill into the Legislative Council in July 1999. The Bill seeks to give electronic records and digital signatures used in electronic transactions the same legal status as that of their paper-based counterparts. The Bill will also seek to establish a framework which will promote and facilitate the establishment and operation of certification authorities in Hong Kong.

To further encourage the public to engage in electronic commerce, Government will become a leading participant in electronic transactions through the launching of the Electronic Service Delivery (ESD) Scheme. Under the Scheme, we will provide Government services to the public over the Internet and through other electronic means via an open and common information infrastructure. The services will be provided in a citizen-centric and seamless manner and the services will be available 24 hours a day, 7 days a week. Our aim is not only to provide more efficient and better quality services to the community, but also to encourage the community to accept electronic commerce as an integral part of their daily lives. Furthermore, the open and common information infrastructure to be developed for the Scheme will be made available to businesses for the conduct of electronic commerce in the private sector. We believe that the ESD Scheme will serve to pump-prime the development of electronic commerce in Hong Kong. We will award the contract for the ESD Scheme within October, so that the first phase of the Scheme can be launched in the latter half of 2000.

We will also continue to work with various trade and industry support bodies and professional organisations to stage various promotional and publicity programmes to enhance public awareness of the importance of electronic commerce. Activities which have been launched so far include a seminar series on electronic commerce with each seminar targeting a specific service sector, roving exhibitions on the ESD Scheme at MTR stations and shopping malls, mobile exhibition of our electronic commerce initiatives in various districts through the "e-community ambassador", a converted 40-feet container vehicle equipped with various IT facilities, production of Announcements of Public Interest for broadcast on television and radio, distribution of information kits on electronic commerce and CD-ROM on ESD simulations, and the introduction of the "Universal Free Electronic Mail Service Scheme" which is aimed at encouraging the use of electronic communication in all walks of life in the community.

All these are part of our efforts in promoting electronic commerce, and you can look forward to the Government further stepping up its efforts in this important area in the year ahead.

I see the development of electronic commerce as offering a clear opportunity to us, and not a threat. Adoption of electronic commerce is vital and essential, and is the only way forward for us to drive the growth of our economy. However, Government's action alone will not be enough. We need the full support and participation of the community, businesses and academia. I therefore urge you all to work hand in hand with the Government to ensure that, together, we in Hong Kong can take full advantage of what the development of electronic commerce can bring.

Thank you.