20 June 2017
2017 Mid-Year Export Assessment: Improving Prospects for the Major Industries
Hong Kong’s export performance during the first four months of 2017 was above expectations against the background of an improved world trade environment. While recuperation was predicted, few could have expected the extent of the recovery. As it turned out, total exports leapt by 9.4%, with an across-the-board improvement among the major product categories. Electronics, the largest export item, provided the biggest contribution to overall growth with a 12.5% jump. Toys climbed by 19.1%, whereas jewellery showed only a marginal 0.2% rise. Although clothing and timepieces still suffered from contraction, the rates of decline in these sectors have narrowed. Barring any severe external shocks, the sales outlook for these products should remain sanguine over the medium term.
Electronics: The Main Driver of Growth
Hong Kong’s electronics exports, on top of a 2.5% increase last year, surged by 12.5% year-on-year in the first four months of 2017 to constitute some 65% of total overseas sales. By and large, this is a consequence of the rapid expansion of the global electronics market. In the developed world, for instance, electronic sales to the US grew by 4%, while exports to the EU and Japan were also up by 8.1% and 10.8% respectively. In this context, exports to the Chinese mainland, comprising mainly electronic inputs for export production, climbed 12.4%. Demand for parts and components from ASEAN, largely required for the processing of intermediate goods for assembly on the mainland, showed a 19.1% hike.
Looking ahead, Hong Kong’s electronics exports should remain strong over the medium term, with the global electronics market expected to remain solid amid a stabilisation of the world trade environment. According to the Buyers’ and Exhibitors’ Survey for the 2017 Hong Kong Electronics Fair (Spring Edition), the overwhelming majority of the surveyed buyers and exhibitors (89% and 87% respectively) expect a sales increase or steady performance in 2017 when compared with last year. To be specific, 38% of buyers expect their sales will increase this year, whereas 52% of exhibitors also anticipate an increase in sales.
In terms of market, North America (54%) and Western Europe (51%) are rated as the most promising traditional markets in 2017, with over half of the respondents marking them as “very promising” or “promising”. On the other hand, the Chinese mainland (57%) is considered as the emerging market with the highest potential, followed by ASEAN (41%), India (30%) and the Middle East (30%).
Product-wise, electronic/electrical accessories and audio-visual products have continued to outperform mobile devices and related accessories as the products seen as having the best growth prospects. This is mainly due to the fact that demand for mobile items has levelled off after years of continuous growth, although the introduction of some new smartphones should provide a temporary lift. For now, certain augmented reality/virtual reality (AR/VR) technologies, which are closely related to audio-visual applications, are proliferating among consumers. Wearable electronic items are also expected to enjoy massive growth, while smart home items are regarded as the major area for further development. As regards lighting, energy-saving apparatus and smart lighting are among the focal points of the industry.
Clothing: Improvement Dragged by Sustained Competition
Following a 14.7% slide last year, Hong Kong’s clothing exports continued to slacken in early 2017 despite an improvement in the world trade environment. Intensified competition from other production bases has continued to weigh on Hong Kong’s clothing export performance, with sales to the US, the EU and Japan, the top three markets that represent about two-thirds of the total, registering year-on-year declines of 7.2%, 12% and 7.3% respectively in the first four months of 2017. Meanwhile, exports to the mainland, Hong Kong’s fourth largest clothing market, also posted a 9.3% decrease. In total, Hong Kong’s clothing exports fell by 9% during January-April 2017.
In most traditional markets, lingering economic uncertainties have made consumers more conservative about spending on imported fashion items. To respond to sustained consumer frugality, clothing traders and retailers have had to consider offers that are competitive not only in price, but design, quality and uniqueness. They have also had to adapt their sales models to catch up with the latest e-commerce tactics, such as limited-time offers, free delivery and returns, and exclusive discounts or promotions for different mobile payment and digital wallet services.
In addition, the trend among fashion buyers to shift to sourcing bases with lower manufacturing costs has further fuelled the shift away from the mainland. Production factors aside, preferential access to mature markets constitutes another major reason behind the relocation of the production of lower-end and mass-market clothing to Asian countries like Vietnam, Cambodia, Myanmar and Bangladesh, thereby undercutting Hong Kong and mainland clothing manufacturers.
Most emerging economies, for their part, have remained largely unassuming. As the leading emerging market for Hong Kong’s fashion exporters and an increasingly important consumer market in its own right, the mainland has failed to yield positive results despite its better-than-expected economic showing in early 2017. Elsewhere, although the overall market share of the emerging economies is comparatively small, demand from ASEAN countries, for example, has shown comparatively milder setbacks so far this year.
Regarding sales prospects, as consumer confidence strengthens amid a continued economic recovery in major traditional markets, Hong Kong’s clothing exports to the developed world are likely to see some improvement. Furthermore, demand from reviving emerging markets should provide renewed business opportunities for Hong Kong’s apparel sector, as long as the capital market volatilities and energy price movements do not derail economic growth.
Product-wise, when spending on fashion and accessories resumes, consumers are likely to stick to basic, practical items. In terms of category, male fashion and children wear will continue to be the major growth drivers in the clothing market. Parents are usually more willing to spend on their children’s well-being, while men are becoming more fashion conscious and emerging as regular online clothing buyers.
As for sourcing and production, the trend of supply chain repositioning between China and other Asian clothing suppliers will continue to change global clothing trade logistics, regardless of the withdrawal of the US from the Trans-Pacific Partnership (TPP). Meanwhile, the preference among clothing companies from traditional markets to turn to local manufacturers and sources in response to favourable government incentives or more diverse and demanding e-commerce fulfillment needs, such as shorter lead time and more flexible returns and refund policies, will also likely remain a drag on Hong Kong’s clothing exports in the years ahead.
Toys: A Strong Rebound of Electronic and Video Games
In the first four months of 2017, Hong Kong’s toy exports surged by 19.1% compared with the same period in the previous year. Traditional toys and games – including dolls, construction sets and wheeled toys, a group representing 51% of all Hong Kong’s toy exports – slumped by 18.5%, but exports of electronic and video games, taking up the remaining share of over 49%, saw a big jump of 130.3%. Sales to all major markets recorded growth of varying degrees. The EU, Hong Kong’s largest toy buyer, posted a remarkable 63.8% increase. Exports to the US, the Chinese mainland and Japan, the next largest markets, grew by 6%, 30.8% and 20.5% respectively.
Even with this solid sales performance, it should be noted that the export statistics do not fully reflect the size of Hong Kong’s toy business. According to an HKTDC survey, at least 69% of Hong Kong’s toy companies manufacture their products in the mainland’s Guangdong province. Traditional toys usually handled by Hong Kong companies are bulky items that are mostly shipped directly from Guangdong to overseas markets. Electronic and video games, on the other hand, are higher-value items that are usually shipped via Hong Kong to overseas markets by air. These shipments, which are more volatile and subject to the product cycle of video-game consoles, may be recorded as re-exports through Hong Kong.
Looking forward, sales of traditional playthings should steadily pick up on the back of improving economic conditions, supported by a number of product trends. First, there is a sustained interest in licensed toys featuring characters from blockbuster movies. Upcoming cases in point include Transformers: The Last Knight, Despicable Me 3, Cars 3 and Spider-Man: Homecoming. Second, spending on educational toys, notably Science, Technology, Engineering and Math (STEM) toys that reinforce learning, as well as time-tested favourites that help enhance children’s creativity, decision-making ability and social skills, such as construction sets and board games, should continue to rise. Third, toy sales to adults, such as model trains and action figures, are increasing due in part to the pressure of modern living and rise of fan culture.
More importantly, Augmented Reality and Virtual Reality (AR/VR) applications on traditional toys are increasingly popular as the market increasingly appreciates the sophistication of connecting physical toys with mobile devices and accepts a higher price tag on these products. To a certain extent, however, the video-game market will be disrupted by these new technologies and revised business models, although sales of video consoles have regained some momentum on entering 2017, exemplified by the solid demand for Nintendo Switch.
All in all, traditional markets, which are somewhat saturated, should witness stable demand in the medium term. Compared with mature markets, the business prospects for many emerging markets appear more promising. Particularly in China, relaxation of the one-child policy and rising consumer willingness to purchase higher quality playthings are major stimulants to toy sales over the longer stretch.
In both developed and emerging markets, toy safety remains a major concern. In addition to meeting regulatory requirements, Hong Kong toy manufacturers are advised to focus on the quality and design of their products in order to ensure they can command premium prices. They are further advised to explore new distribution channels, particularly selling on electronic trading platforms. Parents now increasingly buy toys online as this allows for greater price comparison and increased consumer interaction.
Watches and Clocks: Hybrid Smartwatches with Big Growth Potential
After a drop of 10.8% last year, Hong Kong’s watches and clocks exports recorded a smaller 7.7% year-on-year decline during the first four months of 2017. Exports to China, Hong Kong’s largest market, edged up by 0.3%. In contrast, exports to the US, the second largest market, fell by 5.8%. In the meantime, other major markets, including Switzerland, the EU, ASEAN and Japan, also displayed decreases of varying extents.
Over the medium term, a more stable external environment will likely lend some support to Hong Kong timepiece exports. Despite this sales will still be constrained by the sluggish demand for luxury watches due to unabated economic uncertainties. While less expensive items should fare better, smartwatches, especially hybrid smartwatches with analogue displays like their traditional counterparts, will likely become the new growth medium for timepieces. Although hybrid smartwatches, which are generally less pricey than other smartwatches, are usually equipped with relatively basic functions, features like fitness tracking and smart notifications are still available by connecting with smartphones.
With respect to market prospects, the ongoing improvement in the US economy is likely to stimulate the sales of timepieces. Demand for less pricey items, in particular, is expected to hold up well owing to the stickiness of value-for-money products. But while sales of fashion watches will largely be favourable, Hong Kong exports of such items may be increasingly affected by the rising popularity of smartwatches, which are expected to evolve to look more like traditional trendy watches.
Compared with their counterparts in the US, EU shoppers are more timid, given the continued economic headwinds they face, despite a mild revival. The sales outlook for mid-ranged items is therefore likely to be brighter. As a fairly mature market, the EU is characterised by a penchant for watches with fashionable and elegant designs. In light of this, demand for vintage looks and fashionable watches at reasonable prices is expected to remain constant.
In Asia, the mainland market is likely to become more positive as the government continue to encourage consumption. Given stable economic growth and rising incomes, demand for Hong Kong’s mid-range watch brands is likely to remain firm. However, hampered by the Chinese government’s continued anti-graft campaign, demand for luxury watches may remain slow. For their part, exports to ASEAN are also expected to improve across the remainder of 2017 and beyond, given an improving economic outlook over the next couple of years.
Jewellery: Stabilising Prices of Raw Materials
Hong Kong's jewellery exports saw a marginal growth of 0.2% during January-April 2017 compared with the same period last year. The performance of the top three markets – the US, the EU and Switzerland, which together account for more than 60% of Hong Kong's total jewellery exports – was uneven. While exports to the US and the EU fell by 6.5% and 10.1% respectively, sales to Switzerland, a traditional distribution hub for jewellery, witnessed a 56% jump.
In view of the modest growth of the world economy, sales to these developed economies are expected to grow steadily for the rest of this year and next, although demand for high-end items will still be capped by diehard consumer conservatism. For more accessible items that feature good design, quality and craftsmanship, demand will be increasingly robust as consumer purchasing power recovers. A more noticeable improvement is expected in the US market, while demand from European countries, albeit strengthening, is likely to be curbed due to the mild pace of the EU’s economic recovery.
In emerging markets, demand for jewellery is also expected to strengthen. China’s more stable economy, coupled with structural reforms crafted to support consumption, should whet an appetite for jewellery in the medium term, although sales of luxury items will be dampened by the government’s continued anti-corruption drive. In the meantime, the stabilisation of oil and commodity prices should augur well for the economic outlook of resource-rich countries. These developments should not only brighten the prospects of stronger Hong Kong jewellery exports to emerging markets, but also developed markets, where retail sales might benefit from a gradual increase in tourism.
With an expected steady improvement of the business environment, the Buyers and Exhibitors’ Survey for the 2017 Hong Kong International Jewellery Show indicates stronger confidence across all major markets. International buyers see India and the Chinese mainland as the most promising markets for the current year. Meanwhile, buyers’ sourcing plans this year indicate an expansion in terms of budget, unit price and quantity. As far as market segment is concerned, trendy fashion jewellery has the biggest potential this year, followed by jewellery for weddings and special occasions, and precious jewellery.
On the supply side, prices of precious metals and stones should remain steady in line with the stabilisation of oil and commodity prices, which should be good news for Hong Kong exporters as it removes an element of uncertainty caused by the fluctuating price of raw materials. Even for consumers, such stabilisation may also lessen the fear of a continued fall in jewellery prices, possibly eradicating a disincentive to renewed purchases. Competition from the mainland and other countries, India and Thailand in particular, remains keen, Hong Kong suppliers are therefore advised to explore new markets, focus on craftsmanship, adjust product designs, increase product variety and provide better services to stay competitive.