SOSC005 Hong Kong Creative Industries

& Cross-Border Production

CHEN, Y.C. Assistant Professor

Division of Social Science

ycchen@ust.hk

Overview

I. Spatial Division of Labor in Pearl River Delta

II. Creative Industry: Craft-based manufacturing IIa. Watch Industry

III. Cross-Border Production: Jewelry Industry IIIa. The Dark Side

I. Spatial Division of Labor in

Pearl River Delta

The Location of PRD

The important of PRD　 PRD % of

Guangdong

Province

PRD% of Chinese

Mainland

Land area 23.20% 0.40%

Registered population (2002)

30.90% 1.80%

Census population (2000)

47.80% 3.20%

GDP (2002) 80.00% 9.00%

Total trade (2002) 95.00% 33.80%

Exports (2002) 94.20% 34.30%

Imports (2002) 95.90% 33.30%

Foreign direct investment (2002)

88.60% 22%

Spatial Division of Labor ( 空間分工 )

Hong Kong: center of management, information, coordination, finance and professional services

China: center of manufacturing site

“Triangle manufacturing”

Triangle Manufacturing

U.S. Buyers place their orders with Hong Kong trading firms or OEM firms, who in turn shift some or all of the requested production to offshore processing factories in low-wage countries such as China.

These offshore factories in China are wholly owned subsidiaries of Hong Kong manufacturers, joint-venture partners or independent overseas contractors.

The finished goods are shipped directly to buyers in the U.S..

Triangle ManufacturingHong Kong (OEM firms or

Traders)

China (processing

factory)

U.S. Buyers

OEM firms

Guangdong’s Locational Advantages (1)

Cost Comparison of labor compensation in 2003

(US$/hour):

China India Thailand Korea Japan US Germany

0.80 1.12 1.96 9.99 20.68 21.86 30.60

Industry Cluster ( 產業集群 ) Concentration of complete up-stream and dow

n-stream industry chain Example: Dongguan

PC computer industry All necessary materials and accessories can b

e delivered within half an hour Production time shortened, overall competitive

ness increased

Guangdong’s Locational Advantages (2)

Quality of semi-skilled workers on the rise Experience accumulated since the opening up

of the Mainland market more than 20 years ago 20 million well-trained workers in the Province Strengthen training in hi-tech areas to meet the

needs of industry upgrade

Guangdong’s Locational Advantages (3)

Close to Hong Kong Rapid industrialization through capital and

technology transfer from Hong Kong. Around 70% of Guangdong’s products are

exported to other places through Hong Kong

Guangdong’s Locational Advantages (4)

Hong Kong Locational Advantages (1)

Credibility Rule of law, respect for contract

Institutionalization Well-established legal and professional

systems, procedures and rules

Market-oriented Market economy Government does not participate in or interfere

with market operations

Hong Kong Locational Advantages (2)

International Financial Centre Comprehensive financial system Freedom in foreign exchange

International Logistics Centre Advanced logistics facilities Robust growth in air and sea transport

Hong Kong Locational Advantages (3)

Information Centre Free flow of information Internet hub

Trade Networks More than half a decade’s experience in

trade Free trade

Hong Kong Locational Advantages (4)

“Democracy” HK government faces serious p

olitical crisis after July 1 mass demonstration (71 遊行 ) (500 thousands) against “basic law article 23” in 2003.

Beijing government supported Mr. Tung administration by passing the CEPA, hoping that the economic benefits will rescue the political crisis.

II. Creative Industry: Craft-based

manufacturing

What is Creative Industry?

“Industries which have their origin in individual creativity, skill and talent and which have a potential for wealth and job creation through the generation and exploitation or intellectual property”. -- www.culture.gov.uk

“Advertising, architecture, the art and antiques market, crafts, design, designer fashion, film and video, interactive leisure software, music, the performing arts, publishing, software and computer services, television and radio”. – www.culture.gov.hk

Creative Industries make / produce content.

The Value Chain

Even though the definition of creative industry focuses on “service industry” but it applies well in “craft-based manufacturing”, such as watch and jewelry industry.

Content Creator

Creates IdeaHolds IPRs

Technology Driven Ideas

Content Producers

Develops CopyrightsPackages IPRs

Programming Content

Content Distributors

Distributes Copyrights Markets/Brands IPRs

Distribution Platform

Consumer

Tickets, magazines, books, CD, Video, DVD, Radio, TV

Net, WAP/3G

Organization Characteristics of Hong Kong craft-based manufacturing firms

Mostly small-and-medium enterprise (SMEs) with less than 50 employees.

Family owned Finance through personal networks instead of

banks. Labor intensive assembly Extensive subcontract system Highly flexible (flexible production)

Flexible Production

Labor-intensive production system is flexible because producers can quickly organize a labor force in short notice.

Elaborate subcontracting system facilitates the rapid production of a wide variety of products with minimal personal capital investment

Subcontracting system act as a buffers when market shift unexpectedly. (share risk)

Take small orders (batch production instead of mass production), short delivery time,

Technological Upgrading

The competition from other developing countries (China, India, Thailand) have forced HK firms to upgrade their product to compete on high-ends market.

In reaction to shorter product cycles, CAD, CAM and RP* technology are commonly used.

3D design and related IT technologies ERP (Enterprise Resource Planning) is used to

manage supply chain more efficiently. ( 供應鏈管理 ) *RP: Rapid Prototyping

Front Shop, Back Factory ( 前店後廠 ) “Front Shop, Back Factory” has been used to

describe the integration between Hong Kong and Pearl River Delta.

With the relocation of Hong Kong’s manufacturing sector (low end) to PRD, firms in Hong Kong could focus on high valued added activities such as marketing, financing, and R&D.

It could facilitate the transformation from OEM to ODM and OBM more rapidly.

From OEM to ODM and OBM

OEM : Original Equipment Manufacturing refers to the subcontracting system in which foreign firms provide specification of a product. Local (OEM) firms produce it and foreign buyers sell them using their own brand.

Buyers and OEM firms usually cooperate where buyers provide: Selection of capital equipment Training of managers, engineers and technicians Advice on production, financing and

management

ODM, OBM

ODM: ‘Original Design Manufacturing’ refers to local firm carries out some or all the product design (as well as production) tasks according to the general design supplied by the MNCs.

OBM: ‘Original Brand Manufacturing’ refers to design and produce using own brand.

The risk of shifting to OBM is losing the HK firms might lose their existing OEM contract because foreign buyers do not trust a firm that do both OEM and OBM. (create competition)

IIa. Watch Industry

Watch Industry Profile

Manufacturing (sep 2004)

No. of establishments 231

Employment 1,805

Gross Output HK$1,671 million (203)

HK Watch Industry Import & Export (2004)

Export from Hong Kong

Share

European Union (25)

23%

USA 22%

Chinese 13%

Switzerland 7%

Export from H.K.

Share

Domestic exports

2%

Re-export 98%

Of Chinese Mainland

(52%)

Total 100%

HK watch industry took off in the 50s

1950s: Hong Kong watch makers made watch accessories such as cases, bands, and dials.

1960s: Watch makers rapidly progressed to assembling mechanical watches (with imported movements ( 表芯 ) from Japan and Switzerland).

Clocks were produced with locally produced movements and parts.

The increasing competition in the 1970s.

1970s – with diode technology, HK watch assemblers moved into light-emitting digital (LED) display watches. LED was replaced by liquid crystal display (LC

D) watched in late 1970s. Many HK assemblers entered production, com

petition rose. Japanese watch production increase at the sa

me time, further fueled the competition and drove down the prices.

Quartz Analog shift in the 1980s

In early 1980s, digital watch accounted for 60% of the value of the total output; Quartz analog watch made up only 8%. The rest is mechanical watch.

By 1984, quartz analog and digital watches each accounted for 43%. By 1989, quartz analog doubled, while digitals fell to 6.6%.

Due to the flexibility in Hong Kong watch industry, the rapid transformation was possible.

Innovation in the 1990s

1990s: Hong Kong watchmakers continue to be innovative in design of parts, cases, bands, and accessories. They were sold to major watch producing countries such as Japan, Switzerland, and the U.S..

Firms began to use CAD/CAM for design and manufacturing of more complex watch cases and bands.

Firms began to do watch movement-assembly in order to break away from dependence on movement firms in Japan and Switzerland.

Low-end watches assembly moved to PRD.

Quantity and Variety of products

Quantity: Hong Kong surpass Japan to became the second largest watch producer (after Swiss) in the early 1990s.

Variety in finished products. analogue to digital watches, metal to plastic watches, fashion to classic watches, standard to jewelry watches, novelty to sport watches.

Variety in parts and component: assembled movements, cases, watch straps, dials and parts for watch cases and bands.

III.

Cross-border Production:

the Jewelry Industry

Hong Kong Jewelry Industry

Hong Kong's jewelry industry is dominated by the precious jewelry sector.

Combined with re-exports, Hong Kong is the leading exporter of imitation jewelry and the second largest exporter of precious jewelry in the world.

Small stones fashion jewelry, pure gold items and jade are most popular.

Jewelry production focus on medium-to high-priced products.

HK Jewelry Industry Profile

Manufacturing (Sep 2004)

No. of Establishments 561

Precious jewelry 493 88%

Imitation jewelry 68

Employment 4259

Precious jewelry 4086 96%

Imitation jewelry 173

Gross Output HK$ 4,798 million (2003)97% (Precious Jewelry)

HK Jewelry Import & Export (Jan 2005)

Export from Hong Kong

Share

USA 49.4%

European Union

25.6%

United Kingdom

7.0%

Germany 5.7%

Import to Hong Kong

Share

China 41.3% (re-

export)

European Union

18.6%

U.S.A. 15.9%

Italy 11.6%

PRD – Jewelry Processing Base

PRD becomes HK’s largest jewelry processing base ( 加工基地 ). Hong Kong jewelry makers moved to the area to find low cost and skillful craftsmen. More labor intensive cutting ( 切割 ) and poli

shing ( 打磨 ) are done in China (also in India).

The more skillful part such as forming, moulding, die-casting and assembling are often done in Hong Kong.

Panyu : the jewelry center ( 珠寶谷 ) Panyu District ( 番禺 ) of Guangzhou City has

more than 200 Hong Kong jewelry processing factories Employ more than 50,000 workers. Process 100 tons of gold and platinum yearly;

US$600 million in total production value; Export volume is US$800 million 95% of the jewelry on HK market is processed

here

CEPA – duty free access for HK jewelry to China

Under CEPA that came into effect on 1 Jan 2004, a total of 16 tariff headings related to Jewelry made in Hong Kong are not duty-free.

However, it required a lot of process (forming and assembling) to be done in Hong Kong in order to qualify.

Ideally, foreign jewelry firms (like the Italian firm) might take this advantage to invest in Hong Kong in order to take advantage of CEPA … i.e. export to China.

All in all, CEPA is a positive measurement, but its effect might take some times to realize.

IIIa. The Dark Side

Occupational Diseases

To save cost, many jewelry processing factories do not have enough protection for the workers against occupational hazard .

For example, polishing process ( 打磨 ) creates a lot of hazardous dust. Workers should be given warni

ng and knowledge regarding the risk

Workers should be given enough protection to prevent occupational disease

惠州力奇 (Lucky Gem) 廠外觀 ( 攝於 2004 年 8月 )

Source:

www.luckygerms.info

Testimonial from a silicosis victim ( 矽肺病患 )

“He learned how to cut and sand semiprecious stones like opal, topaz and malachite into hearts, stars, pearls, and diamond shapes that are strung together to make rings, bracelets and necklaces.

Mr. Hu sat shoulder to shoulder with other cutters and polishers in confined workshops. Often working 12- and even 18-hours days, they generated clouds of dust that hung in the air even when windows were wide open and the fans were set to high.”

Source: JOSEPH KAHN “Making Trinkets in China, and a Deadly Dust” New York Times, June 18, 2003 A silicosis victim holding

his own lung’s X’ray

Victims protest

Since the owners of various jewelry processing factories deny compensation to the victims, Hong Kong labor organizers helped the victims demand for compensation.

For more information about the protests: http://www.inmediahk.net/public/artic

le?item_id=11375&group_id=16 http://www.inmediahk.net/public/artic

le?item_id=18320&group_id=16 在灣仔會展中心的”國際珠寶展”前示威 1 Mar 2005

Victim protested inside the Lucky Gem office in H.K.