Hong Kong’s reindustrialization strategy, announced in 2016, commits over US$12.9 billion to a data center, an advanced manufacturing center, applied research, platforms for medical technology and other ambitious projects. However, policy gaps remain to be filled, reports Oswald Chan from Hong Kong.

Hong Kong’s financial-services and property-growth model widens income and wealth disparities. That is socially divisive, and unsustainable. The pandemic shutdowns have hollowed out retail, small and midsize businesses, and employment. Can Hong Kong regain momentum via the Third Transformation — from services to Industry 4.0?

The city’s First Transformation (from primary trade to manufacturing), in the 1960s, and the Second Transformation (from manufacturing to services), in the 1990s, were led by entrepreneurs and the global financial community. Hong Kong’s industrial base migrated to the Chinese mainland for cheap land and labor. Financial services for the export trade and investment market anchored in Hong Kong because of the city’s commercial efficiency and trusted legal framework.

This paradigm shift to Industry 4.0 should not miss the urgent global focus on the fourth wave of environmental sustainability. The special administrative region needs an overarching strategy that drives both. The “externalities” of economic activity can be rectified using the same smart technologies. Good governance includes responsibility for greenhouse gases, air and water pollution, waste handling, and protection of forests and wildlife.

Industry 4.0

Reindustrialization aims to integrate smart production with digital communications technology for real-time 24/7 productivity, innovation, and new business models. It breaks the reliance on cheap labor. Plugging gaps in the government’s patchwork reindustrialization strategy requires critical review and deft coordination.

The SAR’s growth pillars need to diversify beyond financial services and real estate. It may trigger a multiplier effect on jobs with upward mobility for young people. Hong Kong needs to catch up with other advanced economies through digitalization, the internet of things, and new business models. The program targets the pharmaceutical, healthcare, biomedical, and advanced machinery sectors.

Germany, the world’s precision-engineering powerhouse, pioneered the Industry 4.0 transformation in 2011. This manufacturing quantum-leap integrates AI, big data analytics, robotics, blockchain technology, industrial IoT, and rapid prototyping. China, Italy, Japan, Singapore, South Korea, the United Kingdom and the United States followed with similar initiatives.

Minimal impact?

Despite embracing the reindustrialization concept since 2016, the economic payoffs are not yet visible. The contribution of the innovation and technology industry grew from the static rate of 0.7 percent in the previous nine years to 0.8 percent of GDP in 2018. The research and development ratio increased slightly, to 0.86 percent of GDP in 2018 from 0.72 percent in 2008, according to the Legislative Council Secretariat Research Office report of July 2020.

The R&D expenditures to GDP ratio increased to 0.92 percent in 2019, per Census and Statistics Department data. In the 2017 Policy Address, the Hong Kong government pledged to increase the total R&D expenditures by local public and private sectors to about HK$45 billion ($5.8 billion) a year, representing 1.5 percent of GDP by 2022.

The Federation of Hong Kong Industries argued that the actual economic contribution by the manufacturing sector in Hong Kong is underestimated. Its interim research report released in January projects the output contributed by the Hong Kong manufacturers on the mainland as roughly HK$500 billion in 2018, equivalent to about 17.6 percent of Hong Kong’s GDP that year.

Richard Wong Yue-chim, a professor of economics at HKU Business School, and the provost and deputy vice-chancellor of the University of Hong Kong, said producer services accounted for 47.5 percent of the total output value of the services industry, based on 2015 GDP figures.

The government’s statistical tabulation of the industrial sector is unable to reflect the end-to-end economic contributions of Hong Kong manufacturers throughout the supply chain, within and outside Hong Kong.

In the city, the aggregate value added by many producer services such as design, R&D, operations management, brand management, quality control, trading and logistics, after-sales services, and other functions, fall under the industrial classification of “service industry.” All of these are part and parcel of the ongoing traditional manufacturing economy.

This tepid reindustrialization of Hong Kong is attributed to the lack of clarity in concept and direction, limp downstream R&D commercialization, and the shortage of AI programmers and data analytics talent. The limited domestic market of 7.5 million people also cannot fully support commercialization of digital innovation, in which significant consumer scale may be required, to be economically viable.

Holistic transformation

The first step to 4.0 technology transformation needs to be mandated and led by the government. Individual manufacturers cannot nudge their competitors to a common data-sharing platform. Together with academia and international advisers, the government should develop standards for interoperability, security, accuracy, latency, and communications protocols, to enable seamless data flows.

As a major institutional buyer of computerized systems, it is in the government’s own procurement interest to set clear benchmarks, and thereby demonstrate the value of Industry 4.0 standards to itself, the private sector, vendors, and producers.

“Without a measurement benchmark and adequate product trials, it is difficult for the Hong Kong government to purchase homemade technology products and services, hindering reindustrialization. When there is no feedback, the government cannot get the input to refine the measures,” said Tsang Kim-fung, associate professor at the Electrical Engineering Department of City University of Hong Kong.

In Tsang’s view, the government should formulate a composite benchmark to measure the depth and breadth of technology application in different industries. He suggested the administration issue a white paper, and consult academia, businesses, and professionals to construct the measurement matrix for different sectors.

Winnie Tang Shuk-ming, an adjunct professor at HKU’s Faculty of Engineering, Faculty of Social Sciences and Faculty of Architecture, suggested the government specify criteria to track reindustrialization, such as efficiency gains in labor reduction, productivity, resource allocation, capital expenditures, and ultimately, return on investment.

FHKI Chairman Daniel Yip Chung-yin said the government needs to review manufacturing-related economic activities in the official statistics to isolate “producer services” from the rest, and collect data on offshore industrial activities. “This will unleash the true impact of manufacturing in Hong Kong and lay a foundation for setting strategies and long-term performance indicators for reindustrialization over time,” he said.

Applied research

The second major push needs Hong Kong to revamp its R&D commercialization for downstream processes. The think tank Our Hong Kong Foundation in its November report said universities in Hong Kong must strengthen knowledge transfer, in additon to teaching and research. Knowledge transfer is the key to unlocking the “treasures” in universities for the innovation and technology ecosystem.

The report said SAR universities are lagging behind Oxford, Harvard, Stanford, and the Massachusetts Institute of Technology, across a range of knowledge transfer indicators, like the number of patents granted, the cumulative number of spinoff companies, the total income from intellectual property rights, and the portion of IP income invested in research.

In Hong Kong, the University Grants Committee focuses mainly on academic impact by the number of papers published, in evaluating university performance. Applied research results and technology transfer are not part of the assessment mechanism to rate professors. “We need to expand the criteria in assessing university performance and to properly recognize the contributions of scholars who participate in applied research,” HKU Adjunct Professor Tang said.

The third initiative to ramp up Reindustrialization 4.0 is to ensure a steady pipeline of science and technology talent trained for the next level of integrated digital breakthroughs in pharmaceutical, healthcare, biomedicine and advanced machinery design. These digital integrators, AI and big-data programmers are needed in large numbers to drive the wave across industries in the knowledge economy.

The HKU Business School and the Hong Kong Institute of Economics and Business Strategy joint report of January revealed that the Hong Kong SAR is trailing in human-capital investment in higher education. University education is narrowed to elites rather than to optimize human capital. The percentage of postgraduate students, particularly at the doctoral level, remains low.

The report urged the administration to double human capital investment within five years. Measures suggested include raising the GDP share of public expenditures on education to 5 percent, increasing the number of UGC-funded places, boosting the GDP share of public expenditures on R&D to 2 percent, doubling doctoral degree places, as well as issuing education bonds as a long- term funding source.

Tang Heiwai, a professor of economics at the HKU Business School and HIEBS associate director, suggested the Hong Kong government consider providing incentives to attract new economy companies to set up affiliates in the city. “Such policies to attract foreign companies will increase local demand for technology manpower. That can effectively enhance the science, technology and research environment in the medium run,” he said.

Tang also recommended the government relax the annual intake of doctoral students for universities in Hong Kong, and consider expanding existing talent-admission programs, such as the Technology Talent Admission Scheme, to increase the supply and quality of scientists and researchers at local universities.

The FHKI is prompting the administration to mull measures to financially reward R&D professionals from commercialization, and permit more university employees to engage in knowledge transfer activities. The federation says the administration should allocate more resources to designated funds in new industrial research, to stimulate innovation in applied technology, and consider establishing universities of applied science, funded by the UGC, to accelerate downstream R&D commercialization.

Bay Area and ASEAN links 

Finally, the reindustrialization initiative should factor in the regional hubs of the Guangdong-Hong Kong-Macao Greater Bay Area and the Association of Southeast Asian Nations for supply-chain integration and bigger market access.

Home to over 650 million people, the ASEAN bloc was China’s top trading partner in the first half of 2020, surpassing major players like the US and the European Union. The Bay Area, comprising Hong Kong, Macao and nine cities in Guangdong province, is a city cluster integrating 72 million people with a combined GDP of $1.7 trillion.

“ASEAN is a potential export market for Hong Kong’s technology products as they need the smart-city expertise to help solve problems of traffic, housing, security, and employment that come with booming economies,” Winnie Tang said.

The FHKI’s Yip said Hong Kong technology vendors should tap these two regions as target markets. “The required technology standards for products shipped to the US and European markets may be the same for the Chinese mainland and ASEAN, but manufacturers should note the differences in product design preference of these market blocs.”

The FHKI urged the Hong Kong government to facilitate local manufacturers exploring the new markets of the Bay Area and ASEAN countries. The industry business chamber suggested Hong Kong and other 10 cities in the Bay Area should reciprocally recognize product safety standards and testing benchmarks, as well as certification. Tsang of City University of Hong Kong suggested coherent cross-border technology standards to promote technology products and services originating in the Bay Area.

Authorities in the city cluster should study cross-border data sharing in-depth. The Hong Kong government should facilitate the integration of local manufacturers with the mainland’s major e-commerce platforms. The FHKI urges more promotion of the quality and reliability of the “Made in Hong Kong” brand. It wants the government to link local SMEs with overseas business platforms.

Beyond a market, the Bay Area is also a collaboration platform. Manufacturing capacity in the nine cities of Guangdong province can complement the high-end upstream research of Hong Kong. Hong Kong can work with Guangzhou and Shenzhen to form an ecosystem of “front-end research, back-end production”, with Hong Kong focusing on R&D and global distribution of final products.

Contact the writer at oswald@chinadailyhk.com