SCED's speech at Hong Kong Festival 2012: ASEAN - Hong Kong Business Forum in Singapore
Following is the speech "Global and Regional Supply Chains - the Complementary Roles of Hong Kong and Singapore in the Development of the East Asia Market" by the Secretary for Commerce and Economic Development, Mr Gregory So, at the Hong Kong Festival 2012: ASEAN - Hong Kong Business Forum in Singapore today (October 31):
Distinguished guests, ladies and gentlemen,
I am very pleased to join today's ASEAN - Hong Kong Business Forum, organised by our Economic and Trade Office in Singapore. Also, my heartfelt thanks to our speakers and panellists from Hong Kong, Singapore and the region attending this Forum.
My task this afternoon - a daunting one at that - is to speak about supply chains to you, the real experts who run your business along supply chains every day. No doubt, our distinguished speakers and panellists will share with you their invaluable experience and insights based on practical experience in the field. My job is to talk about the role of the government as a facilitator for doing business and developing supply chains. I will talk about how this role has evolved, the current state of play and the possibilities for future development.
Evolution of global and regional supply chains
For centuries, people bought and sold close to home in their villages. Early forms of transportation meant that trade barely crossed borders, not to mention continents and oceans. Industrialisation in the past two centuries not only gave rise to mass production, it also brought the means to carry products far and fast. Today, highways, railways, bridges, ports, airports and all manner of infrastructure support the transportation needs of people and their goods and services. With improvements in transportation, doors to cross-border commerce were opened - from the Silk Road to the Suez Canal, from Marco Polo to Sir Stamford Raffles, from the British East India Company to Walmart. Goods from the West were sold to the Far East, and vice versa. Supply chains developed, expanded and broadened far and wide, becoming global.
Traditionally, the development of supply chains focused on the very last part of the supply chains, where finished goods were transported to their destination markets. Production was done along assembly lines in factories in individual economies. Only in recent decades has the production part of the supply chains moved to, and prospered in, our region. It started with Japan, then the Four Asian Tigers, and now the entire region, giving rise to the term "Factory Asia". In this evolution of supply chains, many factors were at play, and governments have been playing a major facilitating role in shaping the development.
Government's role as a facilitator for trade and supply chains
Government regulations across a wide spectrum of issues affect trade and development of supply chains, such as tariffs, services restrictions, investment policy, mobility of business people, product standards, certification and licensing requirements, intellectual property rights, e-commerce, and so on. These are all factors which business people have to take into account when competing, innovating, seizing opportunities, overcoming challenges in meeting customer demands, and hopefully, making profits.
To business people, managing supply chains is not just about sourcing parts and components, putting them together and shipping the final products to customers. A lot of factors come into the equation before making a decision on the components of a particular supply chain. After all, the costs of setting up and running a facility are of top concern to business. Government investment policies are therefore an important consideration.
Investment policy is one main driver behind the expansion of supply chains. Different governments may adopt different investment and services policies, although the common goal is to attract investment, boost the economy and improve the well-being of our people. Many economies in our region have established special incentive programmes such as export processing zones to attract foreign investments. Others may take on programmes such as high technology and science parks, special finance zones, logistics centres, and so on.
Good infrastructural support is another indispensable element in the development of supply chains. This often requires governments to make significant public investments that eventually pay back over time by supporting economic development. From our own experience, Hong Kong makes every effort to minimise barriers to trade, while at the same time directing effort and resources to infrastructural development. On top of adding physical links, such as bridges, railways and even airport expansion, we adopt new technology to facilitate the movement of goods and people across borders.
Technology that helps build stronger physical infrastructure provides the arteries for supply chains and expands their reach and resilience. The giant leap into the Information Age in the past two decades has brought designers and customers, and everyone in between, much closer together. In the cyber-world, we can reach out to almost any buyer and seller around the globe with just a few clicks on our computer. E-commerce provides the platform for globalised competition that redefines the modern business environment. As the bedrock of e-commerce, digital infrastructure often determines the growth of supply chains.
Information and communications technology (ICT) takes productivity to a much higher level. Design drawings can be passed around instantly, production control executed remotely, production progress monitored and feedback provided round the clock, payment secured and settled electronically, so on and so forth. The reliability and efficiency that comes with the use of ICT greatly increases productivity that was beyond imagination just a generation ago.
With technology advancing so quickly, the need to keep up with new developments is all the more important to remain competitive. This is not just the case for businesses, but also for governments. It is for government to provide an enabling environment, including appropriate policy regimes that promote commerce and trade, so that physical and digital infrastructure could keep pace with the advances.
Both hardware and software are important in improving supply chain performance. Apart from investment and new technology, human resources and know-how are important elements in supply chains. Services supporting commerce and trade are also instrumental to the full integration and seamless operation of supply chains. The availability of skilled labour is essential to supply chain operations. Here, government policies can make a real difference. For instance, improvement in education and training enables sophistication and specialisation to take place more readily. It secures a place in the supply chain in a highly competitive market.
So far, I have underlined the significant role which governments play in facilitating the development of supply chains. This is not a one-way street; it is an interactive and dynamic process. Supply chains have also transformed government policies in certain areas. Indeed, domestic reforms sometimes bring about an even bigger impact. China is a case in point following more than 30 years of opening up and reform. There are many other cases in our region. Such reforms have unleashed the huge potential for productivity and profoundly changed the landscape of global and regional supply chains.
Where are we now?
By attracting investment, providing essential infrastructure, revitalising the labour force and introducing domestic reforms, government policies and regulations have stimulated dynamic growth of supply chains. This in turn has driven economic growth. Different economies have found niches in different industries and different parts of the production cycle. Specialisation of individual economies or individual localities within an economy has emerged. We also see vertical integration with suppliers and customers, by market forces or through government intervention. All this can shape the supply chains in the region. They now span borders and take root in economies on the basis of comparative advantages. Perhaps it is a misnomer to refer to supply chains, because they now look more like complex supply webs.
In this evolution of supply chains, Hong Kong and Singapore have taken centre stage. Emerging from their manufacturing base, Hong Kong and Singapore are now hubs for outsourcing and offshoring within the global production networks. Many of our companies have moved individual links of the supply chains they manage to other places in the region, while the major decision-making and co-ordination remains at the headquarters, global or regional, in Hong Kong and Singapore. In 2010, Hong Kong earned about HK$233 billion from offshore trade, up by 19 per cent compared with 2009. It constituted 28 per cent of the value of total exports of services of Hong Kong in that year.
Besides outsourcing and offshoring, trading companies in Hong Kong and Singapore match buyers and sellers. Full teams of other companies in Hong Kong or Singapore provide all sorts of essential services to support the headquarters' operations and the operations of subsidiaries all over the region.
While government plays a pivotal role in facilitating the development of supply chains, I must emphasise that governments don't have a magic wand with which to deal with all matters related to supply chains. Technological advances and innovation, coupled with the increasing scale and complexity of supply chains, means that efforts of individual governments alone can only address issues in their respective economies, which may form different segments in a supply chain.
It is sometimes said that a chain is only as strong as its weakest link; this goes for supply chains too. Time and again we see how disruption in one part of the supply chain can affect the rest. This underlines how economies are tightly bound together by supply chains and how interdependent they are in terms of trade and economic prospects. There is clear merit for governments to co-operate to ensure their policies do support cross-border supply chains and ensure a smooth flow of goods through the supply chains. In our region, collaboration takes place in many forms, including inter-governmental co-operation, international fora and free trade agreements.
Inter-governmental co-operation can facilitate movement of goods and services. In 2005, Hong Kong Customs implemented, with the General Administration of Customs of the Mainland of China, the Unified Road Cargo Manifest. The initiative saves the manifest completion time, improves accuracy in road cargo manifests, and, above all, facilitates cross-boundary trade. We also launched the Hong Kong Authorised Economic Operator Programme in April this year, in accordance with the requirements under the World Customs Organisation SAFE Framework of Standards to Secure and Facilitate Global Trade.
Other governments have undertaken a lot of similar initiatives with the goal of facilitating movement of goods and people. We can learn from each other, and there is a wide range of issues in which collaboration between governments will make a supply chain more efficient.
* World Trade Organization
International fora provide good opportunities for governments to exchange information on their trade policies and ideas for collaboration. The World Trade Organization (WTO) is an important forum for this purpose. The reduction in trade barriers upon successive rounds of multilateral trade negotiations, especially the previous Uruguay Round, led to gradual expansion in world trade and in the market size for all products. That also opened up new opportunities for sourcing materials and breaking up the manufacturing processes on the basis of costs.
* Asia-Pacific Economic Co-operation
Asia-Pacific Economic Co-operation (APEC) is a premier forum for major economies in the region to promote trade and economic collaboration. APEC accounts for 44 per cent of global trade, and intra-APEC trade accounts for 67 per cent of APEC's total merchandise trade. Business facilitation has been one of APEC's pillars of work since its establishment in 1989. No wonder supply chain issues are at the top of APEC's agenda for business facilitation.
Hong Kong and Singapore are not only active members of APEC, we also have a common interest in taking forward the "Supply Chain Connectivity Initiative" in APEC. This aims to achieve an APEC-wide 10 per cent improvement in supply chain performance by 2015. On top of this, APEC also established the goal of an APEC-wide improvement of 25 per cent by 2015 in five key areas of doing business, namely starting a business, dealing with permits, getting credit, trading across borders, and enforcing contracts. Improvement in these areas will further facilitate the operation of supply chains in the APEC region.
I hope that the work undertaken in APEC can continue to help other member economies build capacity in supply chain issues, facilitate their engagement in supply chains, and ensure smooth movement along supply chains across our region.
Free trade agreements
In the past decade, preferential free trade agreements (FTAs) between trading partners provided additional impetus to supply chain development. Ongoing new initiatives of FTAs are being deliberated or negotiated between economies in our region.
* Association of Southeast Asian Nations (ASEAN)
When we look at supply chains in our region, we appreciate the significant contributions by ASEAN. I understand that ASEAN has been looking at supply chain issues for some years. The implementation of the ASEAN Free Trade Area, especially trade liberalisation and facilitating measures between ASEAN members, fuels the development of supply chains amongst them. ASEAN members are stepping up joint efforts to address impediments to supply chain operations. As a member of ASEAN, Singapore has benefited from such development. The realisation of the ASEAN Economic Community by 2015 will be a major milestone of economic integration of ASEAN members.
* Mainland and Hong Kong Closer Economic Partnership Arrangement
Hong Kong has a great advantage being right on the doorstep of Mainland China with its gigantic production engine. The Mainland has been our largest trading partner since 1985. Hong Kong has also been the largest single investor in the Mainland since the start of its economic reform. In 2003, we signed the Mainland and Hong Kong Closer Economic Partnership Arrangement, or CEPA. Since then, nine Supplements to CEPA have helped to further liberalise and promote trade, in particular trade in services, between Hong Kong and the Mainland. CEPA also provides a new economic platform for Hong Kong to further develop its business relations with the Mainland on a long-term basis. Through CEPA, Hong Kong companies can provide better, and more, service to supply chains on the Mainland.
In addition to CEPA, Hong Kong signed a Closer Economic Partnership Agreement with New Zealand in 2010, followed by an FTA with the European Free Trade Association in 2011 and, recently, the FTA with Chile.
The implementation of the China-ASEAN Free Trade Agreement is another important recent development in relation to trade in our region. This Agreement brings down barriers and lowers costs to trade between China and ASEAN. We saw strong and steady growth in trade between China and ASEAN in the past few years and we are expecting such growth to continue.
Complementary roles of Hong Kong and Singapore in the region
Let me turn to the complementary roles of Hong Kong and Singapore in global and regional supply chains. Hong Kong and Singapore are both among the world's leading trade and logistics hubs. We both follow the common law legal system and adopt internationally recognised codes of practices in business and commerce. We both have efficient infrastructure, well-trained and highly qualified workforces and clean and efficient governments, and we promote free trade.
In fact, we not only promote free trade; Hong Kong and Singapore are also determined to practise free trade. We both know that as small externally oriented economies with few natural resources, free trade under a rules-based trading system is the best way to secure our prosperity. That is why both places strive to facilitate trade and business as far as possible. We are highly competitive among international indicators including economic freedom and business-friendliness. Fortunately for both cities, we thrive on competition.
The close historical, economic and cultural links between Hong Kong and the Mainland, and similarly those of Singapore with ASEAN, are likely to offer one another vast potential in expanding access to each other's huge hinterland. As trade and logistics hubs, Hong Kong and Singapore serve their respective hinterlands with highly sophisticated services incidental to the seamless operation of supply chains. The Mainland accounts for 48 per cent of Hong Kong's total trade, and ASEAN 27 per cent of Singapore's. Of the bilateral Mainland-ASEAN trade in intermediate goods, comprising largely industrial supplies, capital goods, parts and components, about one in seven were conducted in re-exports through Hong Kong in 2011.
Hong Kong and Singapore serve naturally as the nodes to connect their respective huge hinterlands, namely, Mainland China and ASEAN. Here we can clearly see a strong complementary role between Hong Kong and Singapore in the regional as well as in the global supply chain. The scope for co-operation between Hong Kong and Singapore in exploring and expanding business opportunities is large, leveraging on the growth potential in the Mainland of China and ASEAN.
According to latest statistics, Hong Kong and Singapore are already each other's fifth largest partner in merchandise trade and sixth largest partner in services trade. Closer economic co-operation between Hong Kong and Singapore will bring greater synergies in trade to both parties. Banking, insurance, logistics, design, marketing, legal and many other business-related services and professional services must come in timely stages of the process. Service providers in Hong Kong and Singapore have accumulated rich experience in working with their customers in the respective bases over the years. Their clientele and network are precious assets that naturally attract partnership with each other when opportunities arise.
Future development and opportunities ahead
Building on our region's success in supply chain operations, we should not lose sight of new challenges and opportunities looming large on the horizon.
* Upgrading of manufacturing
One ongoing development is the upgrading of manufacturing in the region. Manufacturers in the region are moving up the value chain. Many of them are no longer satisfied with being original equipment manufacturers. Some started to sell products of their own brands to the domestic markets, then went regional or even global. More are planning to do just that. This generates new demand for supporting services to supply chains. Service providers of Hong Kong and Singapore can hopefully grasp these opportunities.
* Further liberalisation of trade and services
The Mainland market will be further opened up for Hong Kong services suppliers, with a view to basically achieving, through CEPA, full liberalisation of trade in services between the Mainland and Hong Kong before the end of China's 12th Five-Year Plan period, in 2015. This provides enormous business opportunities for service suppliers in Hong Kong, as well as foreign investors established in Hong Kong, including Singaporean investors and those from other ASEAN member countries.
* Development of domestic markets
Perhaps the bigger challenge lies in the development of domestic markets in our region. The recent economic crisis has sapped demand in Europe and the United States. Businesses and investors have turned to Asia for future growth opportunities. There is widely recognised potential in increasing domestic consumptions in our region, which, when it materialises, will bring significant flows of goods and new business avenues for Hong Kong and Singapore companies to explore.
We will not overlook the market potential of Mainland China, where expanding domestic demand as well as the upgrading and restructuring of industries are emphasised in the 12th Five-Year Plan. To tap these opportunities, Hong Kong launched the HK$1 billion Dedicated Fund on Branding, Upgrading and Domestic Sales in June 2012. The so-called BUD Fund assists Hong Kong companies in enhancing their competitiveness and facilitating their business development in the Mainland market, through developing brands, upgrading and restructuring their business operations and promoting domestic sales. We see strong incentives for Hong Kong and Singaporean companies to join hands to access the domestic markets in our region.
* Hong Kong's accession to China-ASEAN FTA
Hong Kong has never spared any effort to promote trade and investment with ASEAN. Hong Kong is a key trading and logistics hub in East Asia, serving as an important platform for trade and investment between ASEAN and the Mainland of China. Hong Kong's participation in the China-ASEAN FTA will, no doubt, create positive synergies and grow a bigger economic pie, benefiting all the parties concerned. As I mentioned earlier, Hong Kong and Singapore are the nodes to connect the two hinterlands of Mainland China and ASEAN. The expansion of supply chains between ASEAN and China offer ample opportunities for service providers in Hong Kong and Singapore to collaborate. We firmly believe that as trade grows, it will open up a lot of room for supply chains to expand within our region as well as to the rest of the world.
I appeal to you for support from the business community for Hong Kong to join the China-ASEAN FTA. I look forward to ASEAN agreeing to formally start negotiations with Hong Kong for us to join the FTA at the earliest opportunity.
The exciting development of supply chains in our region over the past two decades has been phenomenal. I cannot stress more the relentless efforts made by individual companies and workers in adapting to the ruthless global competition and in building the colossal network of supply chains that run so smoothly and efficiently. I hope I have given you some background from the Hong Kong Government's viewpoint. This Forum provides a great opportunity for participants from Hong Kong and Singapore to exchange knowledge and ideas and get prepared to seize future opportunities. I hope you all enjoy a very fruitful ASEAN - Hong Kong Business Forum.
Thank you very much.
Wednesday, October 31, 2012