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China’s “Going Out” Initiatives: Professional Services Demand in Bohai video

Introduction

For three years in a row, China has been the world’s third largest source of outward foreign direct investment (FDI). Mainland enterprises have been actively “going out” in recent years to seek out brands, technology or other resources needed to boost competitiveness as part of their transformation and upgrading process. When it comes to supporting the overseas investments of mainland enterprises, Hong Kong offers a number of advantages, including capital flow, international communication resources and professional services of an international standard.

A recent HKTDC survey of enterprises in the Bohai Rim region indicates that mainland enterprises have a keen demand for professional services. Their particular requirements include product research and development (R&D), branding and promotion strategies, marketing, finance, law, accounting and business consulting. Many of them are also looking for foreign partners to help them further develop the Chinese and overseas markets. Meanwhile, most of the enterprises surveyed (60%) said they were interested in identifying related services and partners within Hong Kong. This is in keeping with the findings of similar HKTDC surveys conducted in the Pearl River Delta (PRD) and the Yangtze River Delta (YRD) over the previous two years. These clearly indicate that Hong Kong is the preferred service platform for supporting the “going out” activities of mainland enterprises.

Photo: HK is the preferred service platform for the overseas investments of mainland enterprises (1)
Hong Kong is the preferred service platform for the overseas investments of mainland enterprises (1)
Photo: HK is the preferred service platform for the overseas investments of mainland enterprises (1)
Hong Kong is the preferred service platform for the overseas investments of mainland enterprises (1)
Photo: HK is the preferred service platform for the overseas investments of mainland enterprises (2)
Hong Kong is the preferred service platform for the overseas investments of mainland enterprises (2)
Photo: HK is the preferred service platform for the overseas investments of mainland enterprises (2)
Hong Kong is the preferred service platform for the overseas investments of mainland enterprises (2)

 

China: the World’s Third Largest Source of Outward FDI

The outbound investment activities associated with Chinese enterprises’ “going out” initiatives have been increasing. According to the latest figures from the United Nations Conference on Trade and Development (UNCTAD), China’s total outward FDI rose from around US$101 billion (US$107.8 billion according to the Ministry of Commerce) in 2013 to an estimated US$116 billion[1] in 2014, making China the world’s third largest source of outward FDI for three years in a row.

It is worth noting that many mainland enterprises prefer Hong Kong as their “going out” service platform when investing overseas and looking for foreign partners. In 2013, the total value of mainland outward investments carried out through Hong Kong reached US$62.8 billion, accounting for 58.3% of the total. As at the 2013 year-end, cumulatively, the mainland’s outward investment carried out through Hong Kong was US$377.1 billion, or 57.1% of the cumulative total[2]. This development is directly driving Hong Kong’s outward investment activities to the extent that, in 2014, Hong Kong overtook Japan to become the world’s second largest source of outward FDI, with a total investment value of around US$142.7 billion[3].

Chart: China’s Outward FDI Flows
Chart: China’s Outward FDI Flows
Chart: Major Sources of Global FDI Outflows, 2014
Chart: Major Sources of Global FDI Outflows, 2014

Coastal Regions at the Forefront of the “Going Out” Initiative

In China’s coastal regions, including the YRD, PRD and Bohai Rim, many more cities and economic zones have opened up since the early years. With the rapid development of the Chinese economy, more and more mainland enterprises are looking for investment and co-operation opportunities in foreign countries as a way to expand their business. Against this background, Guangdong province (PRD); Shandong province and Beijing (Bohai Rim); Jiangsu province and Shanghai (YRD) have also become major sources of China’s outward FDI, including those in non-financial sectors.

Table: Major Provinces Cities in China’s Outward FDI
Table: Major Provinces Cities in China’s Outward FDI

Hong Kong: the Preferred Service Platform for Mainland Overseas Investments

In May 2015, HKTDC Research conducted a questionnaire survey at the SmartHK fair held in Jinan, the provincial seat of Shandong province. The purpose was to further understand mainland enterprises’ intent when seeking business partners and the level of demand for professional services in their upgrading and transformation and “going out” activities. This survey followed the ones conducted by the HKTDC in the PRD and the YRD over the last two years[4].

In the current survey, a total of 330 valid questionnaires were received from mainland enterprises (covering only traders, manufacturers and services providers), among which more than 90% were from Beijing, Shandong and elsewhere in the Bohai Rim region. The opinions of these 330 enterprises on transformation and upgrading and on “going out” are set forth as follows[5]:

•  Upgrade R&D capabilities and develop own brands

Nearly all respondents (96%) indicated that they had actually increased investment or would consider doing so in order to raise competitiveness and upgrade over the next one to three years. The most important area for investment by these Bohai Rim enterprises was in the upgrade of their product design and R&D capabilities (45% of respondents), followed by the development and promotion of their own brands (34%). This preference order is comparable to the YRD survey results, whereas PRD enterprises gave top priority to development and promotion of own brands, followed by upgrading product design and technical capabilities.

In addition, the respondents indicated they would invest to upgrade their production technology level (29%) and raise the level of production automation (24%). Some indicated that they would increase investment to comply with green production and environmental requirements (22%), in the use of Internet of Things (IoT) and radio frequency identification (RFID) technology to enhance logistics management capabilities for materials and products (21%), as well as to strengthen product quality control management (21%).

Chart: Intention of Investing in Transformation and Upgrading
Chart: Intention of Investing in Transformation and Upgrading
Chart: Areas where Mainland Enterprises will Increase Investment
Chart: Areas where Mainland Enterprises will Increase Investment

n = 329 (Multiple answers were allowed)
Figures in brackets are from the PRD and YRD survey findings in 2013 and 2014 respectively
#  Mainland enterprises which will increase investment (or consider doing so) in order to raise competitiveness over the next one to three years
*  Such as complying with EU WEEE/RoHS environmental directives and meeting ISO 14000 environmental management system certification requirements
**  Including increasing investment in technologies such as IoT and RFID to strengthen logistics management in materials and products

Source: HKTDC survey

•  Emphasis on developing China and overseas markets

Most of the Bohai Rim enterprises surveyed said they would consider or had begun adjusting their business and operating strategies and had made appropriate investments (97%). The main strategy for 61% of the respondents was to further develop their domestic markets, while 29% and 20% of the respondents said they would develop the mature markets and emerging markets overseas respectively. While Bohai Rim enterprises seem to focus more on domestic markets, as with their counterparts in the YRD, the strategy of their PRD counterparts is to consider both domestic and overseas markets. Moreover, some Bohai Rim companies have chosen to develop new series of products related to their current business (26%). Some said they would develop different type of new businesses, as well as related upstream (parts and components, raw materials) or downstream (retailing) businesses, accounting for 17% and 15% of the surveyed companies respectively.

Chart: Intentions of Adjusting Business and Operating Strategies
Chart: Intentions of Adjusting Business and Operating Strategies
Chart: Areas where Mainland Enterprises will Adjust Business and Operating Strategies
Chart: Areas where Mainland Enterprises will Adjust Business and Operating Strategies

n = 328 (Multiple answers were allowed)
Figures in brackets are from the PRD and YRD survey results in 2013 and 2014 respectively
#  Mainland enterprises which will adjust or invest in business and operating strategies (or will consider doing so) over the next one to three years
*  Including expanding into related upstream (parts and components, raw materials) or downstream (retailing) businesses

Source: HKTDC survey

•  Service demands of Bohai Rim enterprises

The Bohai Rim respondents said they needed to seek external services support to promote transformation and upgrading and to further their business development. The most sought after services included product development and design (55%), brand design and promotion strategies (46%) and marketing strategies for developing new business and new markets (43%). These demands are similar to those of their counterparts in the YRD and PRD, indicating that, irrespective of the direction of their transformation and upgrading or the focus of their business strategies, all mainland enterprises surveyed have a need for similar professional services.

Other external services sought by Bohai Rim enterprises include: banking, financing and project evaluation and other financial services (42%); legal, accounting, due diligence and other professional services (39%); business consulting, corporate management and training (38%); energy conservation, emission reduction and environmental technology (33%); quality management, inspection and testing, production technology (27%); and warehousing and logistics management of materials and products (25%). Among those respondents that have such service needs, more than 60% said they would use the services provided by Hong Kong or overseas suppliers.

Chart: Have Considered or Already Using Services from Other Companies
Chart: Have Considered or Already Using Services from Other Companies

n = 330 (Multiple answers were allowed)
Figures in brackets are from the findings of the PRD survey in 2013 and those of the YRD survey in 2014
#  Mainland enterprises that want to obtain services from Hong Kong or overseas companies in the next one to three years in order to carry out transformation and upgrading
*  Including related banking, financing, project valuation and other financial services
**  Including due diligence and intellectual property services

Source: HKTDC survey

•  Seeking overseas business partners

In addition to seeking outside services support, 88% of the Bohai Rim respondents said they would be “going out” to seek business partners. They are particularly interested in co-operating with foreign brands (45%). Although this interest is somewhat lower than the YRD survey result (50%), it is higher than that found in the PRD survey (37%). The reason is similar to that for YRD enterprises: Bohai Rim enterprises are more concerned with raising their product design and technology R&D capabilities in order to develop the mainland market. They hope to introduce foreign brands and their design, technology and other advantages through different forms of co-operation to jointly explore the booming Chinese market.

Meanwhile, 25% of the Bohai Rim respondents said they wanted to expand overseas/mainland sales networks through equity investment in foreign companies. Some 23% said they hoped to make greenfield/start-up investments to set up sales networks or obtain raw materials. A further 17% said they hoped to carry out technology co-operation with overseas institutions in R&D, production and environmental protection. Only a small percentage said, through “going out”, they wanted to strengthen their sourcing of foreign high-tech equipment, raw materials and key components and parts, and to acquire foreign brands.

Chart: Intention of “Going Out” to Seek Business Partners
Chart: Intention of “Going Out” to Seek Business Partners
Chart: Business Activities Involving Seeking Overseas Partners
Chart: Business Activities Involving Seeking Overseas Partners

n = 323 (Multiple answers were allowed)
Figures in brackets are from the findings of the PRD survey in 2013 and those of the YRD survey in 2014
#  Mainland enterprises that are interested in or have already gone overseas to seek business partners or carry out related business activities
@  Including expanding sales networks in overseas/mainland markets
*  Including making greenfield/start-up investment, setting up sales networks or securing raw materials supplies overseas
**  Including technological co-operation in R&D, production and environmental protection
***  Including sourcing of raw materials and key parts and components
~  Including business activities related to trademarks and licensing
~~  Including acquiring/obtaining technologies related to R&D, production and environmental protection (including activities related to patents and licensing)

Source: HKTDC survey

•  Hong Kong as preferred service platform

When it comes to seeking the above services, looking for foreign business partners and carrying out related commercial activities, 60% of the enterprises surveyed showed interest in going to Hong Kong. This percentage is slightly lower than the 65% from the PRD survey, but is higher than the 56% from the YRD one. This indicates that although the Bohai Rim region is quite a distance from Hong Kong, its demand for professional services pertaining to overseas investments is strong and it has a good impression of Hong Kong services. Aside from Hong Kong, Bohai Rim enterprises are also interested in going to the US (32%), Germany (24%), Taiwan (18%), Singapore (17%) and Japan (14%) to seek services and business partners.

Chart: Preferred Destinations for Seeking Services and Business Partners
Chart: Preferred Destinations for Seeking Services and Business Partners

n = 330 (Multiple answers were allowed)
Figures in brackets are from the findings of the PRD survey in 2013 and those of the YRD survey in 2014

Source: HKTDC survey

 


[1]  Source: World Investment Report 2015, UNCTAD

[2]  Source: Statistical Bulletin on China’s Outward Foreign Direct Investment 2013

[3]  UNCTAD figures

[4]  For the study points and findings of the surveys conducted in the PRD and the YRD, please refer to the HKTDC’s Guangdong: Hong Kong service opportunities amid China’s “going out” strategy released in December 2013 and to Jiangsu/YRD: Hong Kong Service Opportunities Amid China’s “Going Out” Initiative released in September 2014.

[5]  Organised by the HKTDC, “SmartHK, Jinan” was held at the Jinan International Convention and Exhibition Centre during 27-28 May 2015. There, HKTDC Research conducted a questionnaire survey specifically on the participants for the “Transformation and Upgrading” CEO Forum and four other sessions of the “Going Out” seminar series. A total of 553 completed questionnaires were collected, of which 330 were valid ones filled out by mainland enterprises (including traders, manufacturers and services providers).

Content provided by Picture: Wing Chu
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