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Pearly gateway

By Lachlan Colquhoun

Once a door into China, Hong Kong is increasingly the door through which Pearl River Delta businesses come out to meet the world.

Hong Kong has always had a uniquely successful business model, but changes in China over the past 20 years have brought a major transformation in the dynamic.

Where the territory was traditionally the door through which business could enter China, it is also now the door through which China comes to the world. Simon Galpin, the director general of investment promotion at government agency Invest Hong Kong (Invest HK), says the economy has adapted and found new ways to grow as the access to China has brought fresh opportunities.

Galpin, who is expected to take up a new role with the Bahrain Economic Development Board this month, says two-way trade, investment and tourism flows, driven by the growing megacity of the Pearl River Delta, are creating a surge in new investment and Hong Kong has become a magnet for entrepreneurs.

“Hong Kong has always had that advantage of proximity to China,” he says. “But now, you don’t have to necessarily go into China from Hong Kong to engage with the economy.

“Today, Hong Kong is the exit door for mainland businesses and tourists, so if you set yourself up in Hong Kong and wait for them here, they will come to you.”

InvestHK seeks to attract foreign companies to Hong Kong, and this year Galpin says the organisation is on track to post record numbers.

“Driving this are the big changes going on in the immediate hinterland to Hong Kong, the Pearl River Delta,” he says. “It has evolved into what could be considered the world’s biggest megacity. If you take the area which goes from the border with Shenzen up to Guangzhou and down to Zuhai, and if you compare that with a nation state, it’s got a bigger population than the UK, exports more than Italy and has a GDP bigger than Indonesia or Turkey. And yet it’s pretty compact, smaller than Ireland or Panama.

“So, for a lot of smaller companies just beginning to do business with China, setting up in Hong Kong offers a great starting point.”

Two chances
The nature of the Hong Kong opportunity today is two-fold, says Galpin. “First, it is a business to consumer opportunity, and that stems from the fact that we have a really high concentration of wealthy individuals in Hong Kong and a growing number of visitor arrivals, so that means there is an opportunity for companies with products and services this wealthy target group may want to buy.

“If you start in Hong Kong that wealth market segment will come to you.” The second opportunity comes out of China itself.

“Many mainland companies use Hong Kong as their platform to go global, and almost 60% of China’s outbound investment is actually structured through Hong Kong,” says Galpin. “This means that business service providers such as law and accounting firms, consulting and even design firms can partner with those companies and assist them in Hong Kong.”

Statistics underline the two-way nature of the flows. For the first time in 2014, Hong Kong was ranked second globally in foreign direct investment (FDI) inflows, but also second in global FDI outflows, according to Government of Hong Kong figures.

Where US$103b was invested into Hong Kong, US$143b was invested by Hong Kong companies in subsidiaries around the world.

“That is quite a lot for an economy of seven million people,” says Galpin. Another major change in Hong Kong has been the emergence of a “start-up” scene, with accelerator and incubator programmes sprouting up across the territory and across a number of industry sectors.

Growth of start-ups
It may be coming late to start-up culture, but Hong Kong has significant momentum and rapid growth. Research in August by InvestHK polled operators of 40 co-working, incubator and accelerator locations and found that a total of 1,558 start-ups were registered at their premises, up 46% – or by 439 startups – in one year.

These start-ups employed 3,721 staff – up by 56% – and had 4,353 work stations, 60% more than in August 2014. Of the start-up founders, 50% were local Hong Kongers, 43% were from mainland China and Taiwan, with 7% from the rest of the world.

Many major local companies are involved with the start-up scene and are fostering co-working spaces or accelerators for start-ups developing new technologies which they may use in their businesses.

Global bank Standard Chartered, for example, has joined with technology giant Baidu to sponsor SuperCharger, a FinTech accelerator programme. Another regional financial player, Singapore’s DBS, has also invested in Hong Kong’s start-up scene and supports a 5,000-square-foot coworking space in the Wan Chai area, assigning DBS staff members as mentors.

The space is home to companies such as Tofupay, a service that aims to make online transactions cheaper and easier for merchants in the region, and it has a bigger population than the UK, exports more than Italy and has a GDP bigger than Indonesia or Turkey.

SuperFluid, a Kenyan start-up offering a financial management app and analytics platform that helps businesses mine consumer data. In a telling convergence of Hong Kong’s old and new, Swire Properties – a company which has its origins back in the earliest days of British settlement – has its own programme, known as Blueprint.

Michelle Buultjens from Blueprint explains the idea came from two of Swire Properties’ management trainees who were participating in a digital task force set up by the firm. “We were looking at ways that Swire could participate in a broader ecosystem and bring more innovation into our company, and we understood that co-working spaces were prevalent in other entrepreneurial cities,” says Buultjens.

“We also understood that rental levels are a major barrier in Hong Kong, and that office space is something that Swire Properties has plenty of in a town where space is at a premium.”

At an office building in the Tai Koo district on Hong Kong Island, one floor comprises the co-working space, where 140 entrepreneurs pay a token HK$2,000 per month for their places, while upstairs Blueprint fosters an accelerator project.

One of the advantages to being in the accelerator programme is free flights with Cathay Pacific, one of the Swire Group’s major companies.

“Internally our co-working space hit capacity after three months, and right now we have 20 start-ups on the waitlist actively looking for space,” says Buultjens. “And the accelerator programme has had fantastic outcomes. We are into our second batch and after the first batch finished with approximately US$1.5m in investment.”

Unlike some accelerators, where the hosting company can take equity in the start-ups, Swire does not provide any capital but does develop companies which it believes can provide technology to its diverse range of businesses.

Instead of investing itself, Swire works with angel networks and private equity to foster introductions for investing, but its own role is in developing companies which can become its suppliers, with technologies which drives further innovation.

“From our first batch of start-ups we have moved to procurement with three or four, from an app to market spaces for pop-up retail to a software inspection tool for construction sites which does away with paper and clipboard.

“And we’ve also hired at least 20 people from the co-working space and the accelerator, so it’s given us access to a new talent pool as well.”

Internationalisation
The Blueprint demographic consists, says Buultjens, of around 50% Hong Kong residents, with the other 50% split between returning Hong Kong people who have been educated abroad and foreigners drawn to Hong Kong.

A major momentum driving the start-up culture is access to China, for a number of factors.

“There is a huge angel investor and private equity network in China which the start-ups can tap into,” she says.

“And of course there’s Shenzen as a manufacturing centre. Start-ups can very easily access the manufacturers across the border to check on the success of your prototype, and that makes speed to market one of the major advantages of Hong Kong.”

At InvestHK, Simon Galpin agrees that the emerging “ecosystem” is highly international.

“Of the companies we deal with, around 50% of the founders are entrepreneurs who come from outside Hong Kong,” he says. “The start-ups we are most excited about are the ones which, although they are starting small, have a global perspective and global aspirations from day one.

“Because they are technology focused, they are scalable and probably one of the fastest growing areas is in what is called the ‘internet of things’.”

Start-ups servicing the financial industry, the so-called fintechs, are also prevalent. The Hong Kong Government has set up a steering group to ensure the territory can develop its advantage as a major hub, and enhance the already dominant financial sector.

“This is on the back of Hong Kong’s role as China’s international financial centre, and the offshore RMB foreign exchange business,” says Galpin. “And we have three major fintech incubators here sponsored by DBS, Standard Chartered and Accenture, and we do think there’s a lot of potential here.”

So, fears of Hong Kong’s eclipse after the historic 1997 handover have been unfounded. Instead, the territory has found new ways to thrive, adapting its traditional talent for entrepreneurship to add new dimensions to its unique business model.

At InvestHK, the agency is engaging with record numbers of foreign businesses. In the first half of 2015, it assisted a record 260 mainland Chinese and overseas companies to set up or expand their businesses in Hong Kong, up by 17% on the same period last year. Galpin says this means an expected 2,624 new jobs in an economy which continues to offer fresh opportunities to its residents, and to the world.• For more on doing business in Asia, see p40 where Andrew Parker FCA argues Australian business needs to “grow up” and start taking Asia seriously.

Lachlan Colquhoun is a journalist based in Hong Kong.

This article was originally published in the February 2016 edition of acuity.