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FAST FASHION STORMING ASIA BANKS

COFFERS AT RECORD LOWS TOURISM LOBBYING

BECOMING PATHOLOGICAL

SHINING BRIGHTLIKE

A DIAMOND

HONG KONG GOLF CLUB

HUBBUB

MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

SOUTH EASTASIA & MYANMAR BRIEFINGS HONG KONG BUSINESS | FEBRUARY 2012 1

FROM THE EDITOR

HONG KONG

BUSINESS Established 1982 Editorial Enquiries: Charlton Media Group 19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166 Publisher & EDITOR-IN-CHIEF Associate Publisher Assistant Editor Art Director

There may only be a handful of people who have been to Myanmar and some may hardly even know what or where it is in the first place, but the country is experiencing a tsunami of cash

Tim Charlton

and expertise in what seems to be the greatest

Louis Shek

investment boom South East Asia has seen in

Jason Oliver

a generation. The roads to Mandalay are not

Jonn Martin Herman

Editorial Assistant

Queenie Chan

Editorial Assistant

Alex Wong

smooth and basic infrastructure is yet to be built but opportunities abound for the savvy businessman. Given the increasing attractiveness of Myanmar to big companies, we bring you a comprehensive

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report on everything you need to know about investing in Myanmar.

louis@hongkongbusiness.hk Laarni Salazar-Navida lanie@charltonmediamail.com

We also went all the way to Leipzig, Germany to give you an exclusive coverage of the Annual Summit Funding Transport organised by the International Transport Forum at the OECD. While airports and railway stations are part of our daily lives, drone ports and evacuated tube transport could become the future of transport. Can you imagine unmanned aerial drones delivering your packages to and from Hong Kong?

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Unbelievable opportunities and innovations unfold right before our eyes.

This issue of Hong Kong Business lets you look into the future of transport, business, and economy so start flipping the pages.

Enjoy the issue!

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HONG KONG BUSINESS | SEPTEMBER 2013 3

CONTENTS

38 ANALYSIS As China slows, will Hong Kong catch the flu?

FIRST 08 Why coffers are alarmingly running low

09 Macau gaming revenue trends up

10 Spencer Ogden, not your typical office space

20 Branson: This is how you should pitch a business idea

33 Tourism lobbying becoming pathological

37 How the sluggish growth of Mainland will badly maim Hong Kong

48 The crucial implications of FATCA

expansion appetite

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 4 HONG KONG BUSINESS | SEPTEMBER 262 Des Voeux Road Central, Hong2013 Kong

42

FEATURE Trains, planes, automobiles and drones

ANALYSIS

OPINION

12 Shine bright like a diamond 14 China Gas Holdings fires up its

28

COUNTRY REPORT Myanmar is ready for some serious businesss

for U.S. Citizens in Hong Kong

36 Mid-range brands storm

Hong Kong’s fashion scene Mid-range fashion retailers are expanding at a faster rate than luxury retailers.

REGULAR 36 Legal briefing: Hong Kong welcomes more employer-un friendly labor changes

50 Numbers

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk

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News from hongkongbusiness.hk Daily news from Hong Kong most read

RESIDENTIAL PROPERTY

Hong Kong reveals 10-year housing strategy According to a report, the housing strategy for the next 10 years will be a supply-led approach with the Government taking a proactive role in the provision of public and subsidised housing.

This was the message from Secretary for Transport & Housing Prof Anthony Cheung after chairing the Long Term Housing Strategy Steering Committee’s 10th meeting.

HR & EDUCATION

6 in 10 Hong Kong employers to go on a hiring spree ‘til October Fifty-nine percent of Hong Kong employers intend to hire staff in the coming three months and 31% plan to hire fresh graduates, according to the jobsDB Q2 2013 Hiring Index.

The average monthly salary they plan to offer to university graduates is $12,778. Among employers who hired fresh graduates in the last three years, about half of them (48%) said the turnover rate of fresh graduates is 50% or above.

MARKETS & INVESTING

Hong Kong’s fund management business hits record HK$12.6 Hong Kong’s fund management business grew 39% in 2012 to HK$12.6 trillion while overseas investors accounted for about HK$8 trillion of assets under management, excluding real estate investment trusts.

The Securities and Futures Commission said this significant growth reflected more active engagement in Hong Kong’s fund management business.

FROM THE BLOG 5 ways to deal with difficult people

BY MEGHA KAUL Doing business in Hong Kong, you’ll realise that we are all connected, somehow, with someone who tries us to the brink of our emotional sanity.

Those who are lucky have had to deal with them on occasion, alright, but without chance of another or regular interaction.

6 HONG KONG BUSINESS | SEPTEMBER 2013

Is tech good for Hong Kong’s work-life balance?

BY JOHN HENDERSON The number of mobile internet devices is set to outnumber humans by the end of this year.

There’ll be more smartphones and internet-connected tablets and monitors than there are people on the planet. The prediction is especially amazing when you think that 3G is just over a decade old.

How Hong Kong travelers can prevent flight-related back pain

BY LAWRENCE LAM The summer months are the busiest for travel in Hong Kong. On average, over 5 million travellers pass through Hong Kong Airport every year in July and August for business, tourism, and studies, among other reasons. Haul flights, will end up some sort of back pain.

FIRST this trend will continue. Moreover, after the squeeze on interbank liquidity in China in late-June, the HKMA subsequently introduced short term RMB liquidity facilities to the local banks, funded by the HKMA’s swap line with the PBOC and its own CNH funds, noted Wong.

Not surprising was the continued decline in mortgages, which declined by 11.3% m/m, reflecting slow property transactions and weaker sentiment. However, outstanding mortgages rose by 0.5% m/m, as new mortgage loans booked more than offset principal repayments.

HK job seekers too ambitious

Hong Kongers are redefining what amount of salary is ‘enough’ and it is much more than Singaporeans demand.

JobsDB’ recent survey found that 42% of SG workers seek positions with salaries between 1,500 to 3,499 SGD, compared to 38% of HK workers who demand a higher salary between 2,449 to 4,899 SGD (or HKD14,929-HKD29,864).

The study also shows that there was a significant increase in respondents from SG searching for roles in the 5,000 to 7,499 SGD salary range, up 7% from last October. 69% of neighbouring Malaysian job seekers however, seek salaries between 400 to 2,000 SGD. From October 2012 to present, the majority of SG job seekers saw a small 3% decrease in the 20 - 24 age bracket; however there has been a 4% increase in the 45 - 49 age bracket, a trend that was mirrored in HK with a smaller 2% rise. This increase across both SG and HK suggests that people are seeking out higher paying job roles to manage approaching retirement.

Interestingly, the survey detected a relative decline in the number of SG respondents seeking roles in accountancy from 11% in October 2012 to 6%. The number of SG job seekers looking for roles in banking and finance has also seen a slight decrease of 1%, while in HK the same sector received a 2% decrease. In HK, education has become the most popular sector for respondents 13% in October 2012 to 12%.

8 HONG KONG BUSINESS | SEPTEMBER 2013

Why coffers are alarmingly running low

I

t has been thirteen years since Hong Kong’s banks have been this low on spare cash to lend.

Not since 2000 has the loan to deposit ratio of the banking system been so high at 72%, a rather worrying trend based on both a rapid pick up in loans and strangely a drop in deposits. The HKMA is turning its attention to the fast growth in loans, especially trade finance (+11.5% m/m), raising its concerns with the banks over credit and funding risks.

Barclays banking analyst Sharnie Wong blamed the deposit decline on liquidity tightness in China, which also resulted in tighter offshore RMB liquidity and some liquidity outflows from Hong Kong on expectations of Fed tapering. Loans for use outside Hong Kong also rose sharply by +3.9% m/m, also mostly China related. This should give regulators some concern that Hong Kong banks are being used to finance China when local banks are unable to lend.

Credit and funding risks The fast growth in loans prompted the HKMA to discuss with the banks over the reasons behind the rise and raised their concerns over credit and funding risks, and to determine if

Not since 2000 has the loan to deposit ratio of the banking system been so high at 72%

Wooing mortgage business Paul Louie, an analyst with Nomura, noted that in a bid to woo new mortgage business in the current thin markets, local banks have continued to roll out new mortgage products.

Standard Chartered and Bank of China both rolled out new fixed rate mortgages in August. Mortgage holders have the option of fixing between 3-10 years at rates between 2.4-3.25%. Beyond the fixed period, the mortgage rates would revert back to prime minus 2.85%.

The proportion of Prime-based mortgages that are priced below 2.25% (effective rate) rose to 42% in June, up from 35% in May, reflecting some pricing competition in June.

Hibor-based mortgages rose to 30% (from 16%) and fixed-rate mortgages declined to 2.1% (from 3.1%). Some banks have offered lower promotional mortgage rates due to weak transaction volumes, but we believe it will unlikely fall substantially lower due to the higher mortgage risk weight requirement property in the last round of cooling measures introduced by the HKMA.

System loan growth by type y/y

Source: CEIC, Barclays Research

FIRST For the same period, VIP gaming revenue grew 10.5%. The share of massmarket gaming revenues thus increased to 32.4% during the first half of 2013 from 26.8% for the full year of 2011.

Macau gaming revenue trends up

O

ne may be tempted to think that Macau’s gaming sector is reeled under the pressure of China’s tighter scrutiny of government officials frequently visiting Macau or making big bets in casino. Not to mention the moderation in China’s economy. On the contrary, the sector reported a 20% YoY growth in July to MOP29.49 bn ($3.69 bn), the third highest monthly revenue since Macau liberalized its gaming sector in early 2000.

According to Moody’s, for the first seven months of the year, gross gaming revenue grew 15.9% year

on year to MOP200.93 bn ($25.12 bn), up from the full-year growth rate of 13.5% for 2012. In late July, Las Vegas Sands and Wynn Resorts, respectively, reported 45.4% year on year growth and 4.9% year on year growth in EBITDA for their operations in Macau in the first six months of the year.

Moody’s senior analyst Kaven Tsang said that the growth in 2013 has been driven by a strong 26.7% year-on-year growth in mass-market gaming revenue the first half of the year. “For the same period, VIP gaming revenue grew 10.5%.

The share of mass-market gaming

revenues thus increased to 32.4% during the first half of 2013 from 26.8% for the full year of 2011. The increased proportion of mass-market gaming, which is less sensitive to economic cycles and the credit availability of junkets, provides more solid support to Macau’s gaming revenues.”

Tsang believes the increased revenue will strengthen the gaming operators’ financial profiles and cash flow to support their planned expansions, mainly in the Cotai area of Macau.

Moving forward, Moody’s expects Macau’s gaming revenues to maintain stable growth of around 15% in the next 6 to 12 months. “Mass-market gaming will remain the growth engine, supported by the increasing numbers and affluence of visitors from mainland China, the major customers for casinos in Macau. The number of mainland visitors, 63% of all visitors to Macau, grew 9.8% year on year during the first half of 2013.

Macau’s gross gaming revenues, 2010 - 2012

Source: Gaming inspection and coordination Bureau, Macao SAR

The Chartist: better days for hong kong banks Tables are likely turning for Hong Kong’s banks. It was only last month when Hang Seng Bank said that they were more concerned about capital outflows and its second-round impacts on the broader economy as the prominent role of central bank liquidity for markets is coming to a transition point. However, as of Barclays’ latest report, they expect better margin performance in 1H13 for the smaller banks, which are more sensitive to funding costs as they have a higher proportion of time deposits. Larger banks that target international or regional corporates will be more exposed to loan pricing competition from foreign banking peers.

Liquidity Stock

Hong Kong Banks - time deposits as % of total, 2012

Sources: Reuters EcoWin, HKMA, Hang Seng Bank

Sources: CEIC, Hong kong Monetary Authority, Barclays Research

HONG KONG BUSINESS | SEPTEMBER 2013 9

FIRST

Cooling rules to stick around

D

on’t expect the Hong Kong property cooling measures to be lifted even if interest rates begin to rise in 2014.

Macquarie analyst David Ng says the defensive argument for HK developers is that they are becoming less and less HK developers. Rental properties account for 47% of their total GAV. Another 21% of their GAVs and 28% of next three years’ operating profits come from non-residential assets such as Hutchison for CKON, HK and China Gas for HEND, New World Department Store and New World Services for NWDL. He adds that HK residential land bank only accounts for 23% of their aggregate GAV, making them less affected by HK residential policy.

China sales growing bigger China is growing more important with CKON and NWDL having large land banks and extensive property development expertise in mainland China. Ng notes their relationships in China are also strong, not just in real estate, but also in other businesses.

He adds that CKON executes most of its China projects through joint ventures with its 50%-owned associate, Hutchison.

OFFICE WATCH:

Work is not all about money

NWDL does so through its 70%-owned subsidiary, New World China. Their gross sales in China are bigger than sales in HK in 2013E. “Asset churn remains key to a revival of investors’ interest in this sector, in our view, even at the expense of a slimmer profit margin.

We expect wide divergence in execution, with CKON and NWDL likely to outperform peers in the near term with more flexible pricing,” says Ng. Both companies have material high margin sales contribution from China, which can offset the less profitable land bank in HK. In the medium term, SHKP has the largest and the most valuable land bank and should be the biggest beneficiary if the market rebounds.

Non-residents now account for 17% of consumption in Hong Kong, twice the ratio in 2001.

Spencer Ogden– not your typical office Few months after announcing its expansion in Singapore, Spencer Ogden, a global energy recruitment firm, is out again to boost its Asian presence with the opening of its office in Hong Kong.

With its signature astro-turf floors and stylish conference rooms, Spencer Ogden Hong Kong aims to offer a therapeutic ambiance to its customers and employees by taking a detour from the traditional grey cubicles. Its features include organic round tables, brick walls, and industrial lighting. To provide a perfect balance between Asian and European concepts, Spencer Ogden Hong Kong’s design team boasts of a Chinese inspired Board Room and a London Private Club room.

10 HONG KONG BUSINESS | SEPTEMBER 2013

HK students are well taught that there is more to a job than simply what you get paid.

In the latest independent talent survey conducted by UNIVERSUM involving 4,365 university students in Hong Kong, “having a friendly work environment” is the most attractive attribute – overtaking “professional training and development” - about a future employer.

When considering what their career goals are, having work/ life balance and being secure or stable in a job continue to top the list, followed by a significant drop (7%) in the importance of having an international career.

Ankita Modi, Country Manager, Universum says, “As the world’s top financial centre - ahead of the U.S., UK and Singapore – and poised to become the world’s biggest financial centre by 2016, Hong Kong is definitely making a stronger presence today than ever.

With the world’s attention on Asia with Hong Kong at its heart, it is no wonder that future talent generally feel a great sense of pride to work in the city upon graduation and gives less emphasis to having an international career or having opportunities for international travel/relocation.”

FIRST

Hong Kongers insecure at work

Shine bright like a diamond

D

e Beers may have intended it to only be a marketing campaign in 1940, but the concept “diamonds are forever” has made women around the world gasp at the thought of owning one, especially that diamond’s scarcity makes it all the more valuable. For women, a diamond signifies romance and love more than glamor but for Hong Kong jewellery brands, it will be the key fundamental growth driver over the next few years as it can generate better margins of 30-60% than gold’s 10-15%.

While upstream players benefit from the scarcity of diamonds, Nomura analyst Tanuj Shori notes that the diamond value chain also gives premium to branded downstream players – the retailers.

Jewellery companies reveal that the price difference could be multi-fold between a branded diamond and an unbranded one, even given the similar quality. For example, a Tiffany diamond of similar quality may sell ~30% more expensive than Chow Tai Fook; and Cartier could be even more expensive.

Less glittery weddings in China Though diamond consumption is still under-penetrated in China and Hong Kong, Asia is predicted to have higher quality demand and a higher average value purchase than in US and Europe. Shinto-style wedding ceremonies in Japan shine ever so brightly with 8 in 10 brides now getting diamond engagement rings but China’s around 30% level reflects its under-penetration and the high

12 HONG KONG BUSINESS | SEPTEMBER 2013

potential.

Chow Tai Fook, Chow Sang Sang, and Luk Fook are aiming to tap the under penetrated Chinese market and they reveal long-term plans to move their brand positioning and product mix upward towards the high-end segment of the market.

Being the biggest player in terms of sales in the Hong Kong and China market, Chow Tai Fook already holds several auction events every year where many products priced over HKD1mn are sold.

Shori reckons this should help CTF access more high-net-worth individuals and develop a competitive edge over the other two players.

“However, given the current gold price and HK brands’ product mix with high exposure to gold products, we believe the expansion towards the high-end segment would take time for these companies,” he adds.

Tiffany diamond of similar quality may sell ~30% more expensive than Chow Tai Fook; and Cartier could be even more expensive.

Nomura Europe expects Asia to come close to eclipsing the US diamond jewellery demand toward the end of the decade

Source: WWW Diamond Forecasts Ltd. Nomura Eu team estimates

Hong Kongers may be needing some time to boost their confidence at work and get over feeling insecure. According to recent study by Randstad, 85% of HK employees believe employers do not provide job security. Furthermore, 41% of respondents are willing to exchange a part of their salary in order to secure their position as compared to 26% last year.

The vast majority of HK employees, or 89%, said that when seeking a suitable job in the HKSAR, they found experience is far more important than education. The Randstad study found that more than two out of three respondents said young people aged 25 or below had the greatest difficulty in finding a suitable job.

In the older age brackets, nearly 9 out of 10 (elt that older people – over 55 years of age – had difficulty in finding a suitable job. Also, 80% said this age group would often accept jobs below their level of education.

Brien Keegan, Director of Randstad Hong Kong, said, “Hong Kong employees are saying increasingly that job security is far more important than salary and their perception is that Hong Kong employers just do not offer this at the moment.

This is further supported by respondents saying that they are willing to exchange a part of their salary if this would secure their positions.”

“Based on these and other results, employers still have a lot to do in convincing the public at large that they offer the most attractive destination for job seekers.”

HONG KONG BUSINESS | SEPTEMBER 2013 13

FIRST The Analysts’ call

Will an aggressive CNG/ LNG expansion pay off?

Macquarie – Serena Li

China Gas Holdings fires up its expansion appetite

T

he firm plans to blow up the size of its CNG/LNG vehicle fuel business in what is seen as a big, but likely winning, bet.

China Gas Holdings surprised most of the market with better-thanexpected results for the financial year (FY) 2013, with net profit jumping 85% year-on-year to HK$1.76bn on the back of lower finance costs and

building more than 200 stations per annum will not be a problem for the firm “given more than 100 stations’ licenses have been granted since 1 April 2013 and tens of stations have started construction.”

But there is a risk that vehicle demand could lag for a couple of years before the refuelling stations reach normal utilization, warns Goldman Sachs analyst Frank He, which could darken the company’s short-term earnings Its LPG division made a horizon. minor loss of HK$13.5m due to an Coupled with its aggressive CNG/LNG rollout, China Gas increase in operating costs.

Holdings is focusing more on its higher-margin downstream higher earnings contributions from LPG distribution business while associates. downsizing the upstream LPG But most analysts believe that the business, reckons Nomura’s Lam. best is yet to come for China Gas CIMB analyst Keith Li explains that Holdings, as it plots an ambitious the company is doing so to curtail the growth roadmap. The company costs from its upstream business. announced that within two years, or “Its LPG division made a minor by the end of FY 2015, it will have loss of HK$13.5m due to an increase increased its network of compressed in operating costs. LPG retailing natural gas and liquefied natural gas businesses are making money but (CNG/LNG) refuelling stations to the LPG terminals and storage 600, or around a 263% rise from its assets are running at losses due to current 165 stations. low utilisation. China Gas will try Analysts view the strategy to sell these loss-making assets or positively for its profit potential collaborate with petrochemical and feasibility. CIMB analyst Keith companies to maximise the Li notes the high 20% net margin utilisation.” By disposing its underfor CNG stations as compared to utilized midstream facilities, China 10% for natural gas sales. Nomura Gas Holdings will improve its analyst Joseph Lam reckons that margins.

14 HONG KONG BUSINESS | SEPTEMBER 2013

China Gas will aggressively expand CNG/LNG business in FY14/15. Currently, the company has 170 CNG/LNG stations. Management targets to add ~200 refuelling stations each year to 370/600 stations by FY14/15 and raise the CNG/LNG volume proportion from current 8% to 13-15% in the next two years.

We are positive on the company’s strategy to leverage the fast growing CNG/LNG market given the CNG/LNG business’s higher dollar margin at ~RMB1.0–1.5/cm vs city gas projects of ~RMB0.6–0.8/cm.

Citi – Timothy Lam

We upgrade China Gas to Buy from Neutral and raise our DCF-based target price to HK$9.00, as we see the company maintaining strong natural gas volume growth driven by a ramp in CNG stations, along with its plans to reduce LPG wholesale exposure, could lead to an upward re-rating.

The company raised its FY14 guidance to 8.5 bn m3 (from 8bn m3) and expects to see 1.3 million new connections and to add 200 CNG stations in FY14. For FY15, the company expects 10bn m3 gas sales, 1.3m new connections, and completion of a total of 600 CNG stations.

China Gas expects CNG stations to see demand from non-public vehicles, which will be more certain as more provinces relax NG usage guidelines.

Goldman Sachs – Frank He

China Gas intends to increase the number of CNG stations from 165 in FY13 to 370 in FY14 and 600 in FY15. Management budgets HK$1bn capex for CNG stations in FY14.

While we view the aggressive CNG station rollout plan as a long-term positive, we think it may take two years for the company to develop vehicle demand in order for the stations to reach normal utilization.

We raise our EPS estimates 12-14% for FY14-16E, mainly to factor in higher gas sales volume growth and profits on associate projects.

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OPINION

Tim hamlett

What all the hubbub about Hong Kong Golf Club really means

T

hose cynical observers of the Hong Kong scene who supposed that our government was incurably enslaved to the interests of business are going to have some difficulty with this: it is reported that the government is contemplating the replacement of the Hong Kong Golf Club with a small new town.

The cynical observers will say – and time may prove them right – that this is all talk. The government is no more likely to confiscate the site of the Golf Club than that of the Hong Kong Club.

Still it is interesting that the climate of opinion has changed so much in recent years. Many public comments supported the idea that it was unacceptable to drive farmers off their plots for housing purposes while a rich people’s playground remained unexploited.

The Golf Club also got some backwash from the ongoing complaint that private clubs often ignore provisions in their leases (which are usually on extremely generous terms) requiring them to make their facilities available to non-members. I do not know if the Golf Club is one of the offenders, but nobody was giving it the benefit of the doubt.

As tends to happen when the interests of business are threatened, most of the response was not public. I do not doubt that spokesmen and supporters of the club were vigorously lobbying sympathetic officials. Generally they did so in private.

The arguments which did surface were not terribly convincing.

Golf, it was suggested, was a popular and healthy pursuit which should be encouraged. Well I don’t know. Habitual golfers seem to alternate between happiness and despair. Hitler, I was once told, was clearly a golfer. He had shot himself in a bunker. Apparently this is an urge often felt.

Besides the bipolar aspects, the game seems to be gradually shedding all pretensions to exercise. When I dabbled in the game a long time ago it fitted the traditional description: a long walk spoiled.

One walked. Unless fragile or disgustingly rich, one carried one’s own clubs, or pulled them on a two-wheeled cart. The professionals had caddies to carry their bags, but they still did the walk.

This is not the way the game is played these days by amateurs. I spent a couple of days on a mainland golf course and the way it goes up there is like this. Two golfers share a golf cart. They have a caddy each, who rides on the back of the cart with the clubs. When they reach a point where a shot is required the cart stops next to it, and the relevant caddy dismounts with her bag of clubs (the caddies are young ladies chosen with an eye to beauty) and waits for the intrepid golfer to announce his choice.

She hands him the selected club. He uses it and hands it back.

Everyone concerned resumes their seat on the golf cart. The players get about as much exercise as they would from a game of darts.

Another defence of the course was that it was the venue for the Hong Kong Open, an annual golf fest which the writer did not hesitate to describe as “historic”. This idea did not seem promising. A lot of people would not be particularly disappointed if the Hong Kong Open never happened again. Historic it 16 HONG KONG BUSINESS | SEPTEMBER 2013

tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism

may be. It does not attract the sort of public affection and nostalgia which attach themselves to other local landmarks like the Star Ferry Pier or Donald Tsang.

There was an attempt at the economic argument. The Open, if not the Club, attracted lots of visitors and put Hong Kong on the map.

On the other hand we all know that those of the visitors who are already famous golfers have to be paid vast sums to induce them to attend.

Anyway this was all rather predictable and not very interesting. A more stimulating argument came from the person who complained that businessmen needed golf courses because many of them liked to do deals over golf.

This seemed to me to be the sort of thinking that gets businessmen a bad name. Deals are I am sure done in many different places. Some dealmakers prefer Turkish baths, some like to be round the snooker table, some like karaoke establishments where they can enjoy the ministrations of ladies who c could have qualified to become caddies on mainland golf courses. But whether the dickering takes place in a church or a brothel it is not generally believed that the facilities should be provided at public expense.

The cost of doing the deal is part of the overhead. Businessmen who are generally critical of government interference or participation in their affairs cannot suddenly turn round and ask for multiple hectares to be devoted to the provision of deal-making venues. This is, or would be, a subsidy. It is clearly unfair that those whose deal-making requires 18 holes of potential housing plots should be subsidized while those whose requirements are more modest get no help.

Gold may be, by comparison with some of the alternatives, righteous and even cheap. I do not know which establishment is now catering for what we might call the Club Volvo market, but I imagine their green fees are quite steep. Alleviating this problem is difficult, though. Are we to subsidise the whole club, in the hope that the going rate for champagne in female company will be thereby depressed?

Will it be a hole-in-one?

LOCAL INDUSTRY BRIEFING: RETAIL

Mid-range brands storm Hong Kong’s fashion scene Mid-range fashion retailers are expanding at a faster rate than luxury retailers.

C

entral may be overrun by luxury brands but the next era of retailing in Hong Kong may well belong to the mid-range brands, a hitherto overlooked segment of the retail scene.

There are already some strong signs that Hong Kong, being the main destination for mainland shoppers, is the first city for new international fashion brands looking to establish a foothold in Asia.

In 2012, Hong Kong ranked no.

1 for new retailer entries with 51 entrants, almost double of that in Singapore’s 27 and Tokyo’s 24. Midrange fashion retailers are expanding at a faster rate, accounting for 21% of new entries in HK in 2012.

Mr. Joe Lin, Executive Director at CBRE, noted that in terms of new entrants by sector, while luxury and business retailers continued to 18 HONG KONG BUSINESS | SEPTEMBER 2013

“In 2012 Hong Kong ranked no. 1 for new retailer entries with 51 entrants.”

account for the highest percentage of new entries to Hong Kong at 23%, mid-range fashion retailers are expanding at a faster rate.

“If you add together the number of new entrant specialist clothing, value and denim retailers, the total number significantly exceeded that of new entrant luxury retailers,” Lin noted According to CBRE figures, at an Asia Pacific level, luxury and business fashion retailers also accounted for the largest number of new market entries in 2012 (26%).

However, with the most of these groups already having a firm presence in established cities, many are turning their focus towards opening new stores in emerging locations. In overall terms, their portion of new openings is shrinking as other sectors such as mid-range fashion (18%) expand at a faster rate.

Aggressive American retailers American retailers were expanding most aggressively with 70 chains, followed by the Japanese with 36.

According to Helen Mak, senior director of retail services at Colliers International Hong Kong, the slowdown in the luxury market could be attributed to a couple of reasons including cautious sentiment over the state of the global economy. But Mak said that we also ought to notice that more and more customers from China are travelling to Europe to shop for luxury products.

“They wanted to visit the headquarters of these products that offer them a better shopping experience and have a larger collection of what’s limited and luxury premium.”

Mak also added that high rental costs in Hong Kong are driving retailers to expand network to other locations such as China. “We do not really own this so-called luxury retail market.

They are all from overseas. Retailers in HK that have been here for the last 10 years operating are getting ready to get in to the China market. There’s limited supplies of retail space in HK and the rents are really high – in fact

LOCAL INDUSTRY BRIEFING: RETAIL HK has the highest rent in the world.

International brands have realised that they have to seriously build up their network in the next 10-20 years because China is very different to HK,” she said.

Mak added that the outlook for the mid-range market on the other hand is very positive as we look forward to the completion of the infrastructure that will link HK and China in the next 10 years. “We will have easier access from Guangdong to HK. Chinese will more likely regard HK as a preferred destination. They can spend a day or two shopping. They would probably look for mid-range products because they don’t have a duty, so they could enjoy at least a 20% discount compared with the price in China.” Mak also anticipates the number of middle class families in China double double in the next 10-20 years.

Mak nonetheless said that midrange brands will face the typical problem of finding a good location.

“We don’t have a new supply at all in the next 5 years in core areas or key shopping district, which makes it a real challenge for new international brands to find locations. Most international brands would like to find huge rooms but HK can only offer a thousand square feet. You would be lucky to find 3,000-4,000 square feet but they are really small, compared with the US or UK.” Leasing activity According to Cushman & Wakefield Executive Director for Retail Michele Woo, retail leasing activity was slightly more subdued in the second quarter of 2013, notably from high-end and luxury brands, apart from local staple watch and jewellery retailers such as Chow Tai Fook and Luk Fook. These brands, she said, continue to increase their footprint in both prime and secondary locations to mostly capture tourist spending, but have slightly shifted their strategy to target the mass market- they are offering new jewelry collections to boost sales as the sales of high-ticket items wane due to China’s crackdown on officials’ lavish gift-giving.

Woo said that more stable sales growth this year and high tourism volume is encouraging penetration

among a growing range of brands.

Mid to high-end fashion and accessory brands, along with cosmetic retailers, are accounting for a growing presence in traditional retail catchments, she added.

“In recent months, two new Korean cosmetic brands opened their first stores along prime streets in Causeway Bay and Mongkok, while local retailer SaSa also leased another prime location in Causeway Bay. Topshop opened its flagship store on Queen’s Road Central during the quarter, adding to the influx of new fast-fashion brands in Hong Kong. The Italian lingerie brand Intimissimi will soon open a small flagship boutique along Queen’s Road Central.”

Having noted these trends, Woo said that there have been slightly fewer new openings and there is a trend of slightly rising vacancy in the market, most notably in secondary locations. The retailers in these locations, she said, are generally nonluxury and they have been highly susceptible to high rental increases in recent months, with many having to close down.

“New tenants are showing a growing reluctance to pay high rents, keeping vacancy elevated. The growing trend of non-luxury brand expansion in the overall market will likely continue and it’s these retailers who have a lower cap on rental expenses to operate profitably.”

The HUB In late August an invitation only tradeshow called The HUB brought together 100 exhibitors and 3,000 visitors to see which international niche brands could expand into Asia. The event was the brainchild of Richard Hobbs and Peter Caplowe who saw the need for a B2B event specifically for mid-range fashion brands and buyers.

When asked to comment on the overwhelming response to the exhibition, Hobbs remarked, “Every international fashion brand has its sights set on Asia because, put simply, Asia is the most lucrative new market on the planet.

It’s pretty clear that any brand anywhere in the world that’s doing its homework wants to sell

“Mid-range brands will face the typical problem of finding a good location.”

more into Asia and the best way to reach the continent’s emerging markets is through Hong Kong.” He concluded, “The HUB’s positioning in Hong Kong is not coincidental.

Its geographical position in the heart of Asia and reputation as an international city makes it the ideal gateway for fashion brands to catwalk into China and beyond.”

Hobbs is no stranger to the fashion industry, being the owner and operator of several premium denim and sportswear labels, with over 24 years’ of experience in the region.

His partner, Peter Caplowe, brought Japanese denim brand, Evisu, into the international luxury denim arena. In its first year, The HUB was modelled on successful shows such as Bread and Butter in Berlin and Project in NYC/Las Vegas.

Examples of internationally recognized fashion brands at The HUB seeking to launch or increase their businesses in Asia include Barbour, John Smedley, Joanna Ho, Private White VC, Nigel Hall, Neuw Denim, Take 5, Studio D’Artisan and Samurai.

New market entries by retail sector to Hong Kong

Source: CBRE Asia Pacific Research

HONG KONG BUSINESS | SEPTEMBER 2013 19

OPINION

richard branson

This is how you should pitch a business idea

W “While my approach was unorthodox, it did the trick.”

20 HONG KONG BUSINESS | SEPTEMBER 2013

hen you’re preparing to tell investors about your idea for a business, people are going to tell you to prepare an elevator pitch, the standard summary selling a business idea in a minute or less.

But there are many more locations and situations in which you may encounter a potential investor – anyone from a business leader in the industry to a family member — and you’ll need to be able to convince that person that your business will be gamechanging. Why limit yourself or your imagination to elevators? You need to think of it as your anywhere pitch.

Over the past few months entrepreneurs have pitched their ideas to me in two far more interesting settings than elevators. One was while riding a bicycle in South Africa. Some of the Virgin team and I were in the country in March for the Cape Argus Pick n Pay Cycle Ride, which is 109 km long. I hadn’t been on a bicycle since I was a boy, so we had decided to use my last-minute training ride to raise money for the Branson Centre for Entrepreneurship South Africa, a nonprofit that provides assistance and training to new entrepreneurs, and for the JAG Foundation, which tackles community problems through sport. We agreed to listen to some quick pitches from the participants during that Ride With Richard.

Sixty people signed up to ride and pitch their ideas to myself, Josh Bayliss, who is CEO of the Virgin Group, and Tracey Webster, who is the new CEO of the Branson

Centre South Africa. The entrepreneurs had to think on their feet and make their ideas stand out from the rest of riders in our peloton. The novelty factor kept everyone laughing, the huffing and puffing helped people to keep their pitches succinct, and the exercise got everyone’s brains into gear - we heard some good initial ideas and built on them together. And we all completed the entire race the following day, so that practice was very helpful.

Then in May, I listened to some enthusiastic pitches during an AirAsia flight on which I was working as a stewardess. Some passengers passed proposals forward and I invited those who’d handed me the most attention-grabbing ones to tell me about their ideas. One woman had even worn a beard to ensure that she caught my eye. It was a pretty surreal experience, but several people shared excellent pitches and I was able to point a few of them in the right direction.

The magic trick One of the most unusual pitches I ever gave involved a magic trick. Back when we were working on starting up Virgin Atlantic, I met with Airbus, hoping to buy a plane. As a new business, we desperately needed a big discount, and I told them that if they sold their plane to us and our airline became successful, which it surely would, they’d receive much more business in the long term. However, Airbus would not agree to the price we could afford.I knew that their executives had

probably heard pitches like mine before, so I decided to make mine stand out.

As we sat down for lunch, I asked the executives: “Do you think that there is any chance that your CEO could be hypnotized?”Absolutely not,” they replied. I said to the CEO, Jean Pierson: “If I can hypnotize you in five minutes, will you give us the $2 million dollar discount?”

He and they all agreed and we shook hands.

Hypnotism About three minutes later I asked what time it was.

Pierson glanced down at his wrist and discovered that his watch was gone. He looked worried. I then looked at my wrist, where there were now two watches. The executives believed that I had hypnotized Pierson and he had handed me his watch, rather than simply being nimble enough to pocket his watch when we shook hands!Airbus gave us the discount as promised, which was critical in getting Virgin Atlantic off the ground. While my approach was unorthodox, it did the trick.

Whatever your idea is, follow these simple steps: Explain how your new business will make a difference, but do it in an entertaining fashion.

Show off your expertise in a personable way, highlight your experience and your team’s strengths, and ground your idea with simple, realistic messages. Do not use jargon. Most importantly, pitch quickly. You never know – the person you are pitching may have an elevator to catch.

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REGIONAL ECONOMY BRIEFING

Southeast Asia’s economic roadmap to 2020 DBS Economist Eugene Leow predicts the combined size of the Thai, Indonesian and Philippine economies to reach USD 2.4trn by 2020.

S

outheast Asia is fast becoming a third growth force in emerging Asia, next to China and India. In particular, the TIP economies – Thailand, Indonesia and the Philippines – are increasingly garnering investor attention. The three countries have a combined population of around 400mn, but a GDP of only USD 1.5trn.

They argue that that optimism in the TIP economies is justified, as GDP growth is expected to be elevated relative to the past decade. By 2020, the size of the TIP economies is projected to reach USD2.4trn (in constant 2012 US dollars), implying a USD1trn odd increase in demand over just eight years. Accordingly, the size of the middle class (defined as the 22 HONG KONG BUSINESS | SEPTEMBER 2013

“Indonesia remains the most important of the TIP economies and is expected to contribute the bulk of economic growth over the next eight years. ”

number of motor vehicle owners) is expected to soar to nearly 200mn by 2020, from 80mn in 2012.

The most important economy In absolute terms, Indonesia remains the most important of the TIP economies and is expected to contribute the bulk of economic growth over the next eight years.

Demand is expected to increase by USD 600bn between now and 2020, an increase of 62%. Thailand and the Philippines provide additional demand amounting to USD 182bn (up by 50% compared to 2012) and USD 158bn (up by 63% compared to 2012) respectively.

Similarly, Indonesia is projected to add the largest number of middle

class members to its population (85mn), followed by Thailand (18mn) and the Philippines (15mn). In terms of living standards (USD per capita GDP in 2012 prices), all three economies will experience significant improvements in the coming years, but Thailand should maintain a sizable lead over both Indonesia and the Philippines. Indonesia is projected to pull away from the Philippines over our forecast horizon.

DBS estimates are based on differing stages of economic development, government growth strategies, demographics and potential economic constraints.

Thailand will rely heavily on public infrastructure spending and is positioning itself to take advantage of economic growth in the greater Mekong region. An aging demographic profile and a stretched banking sector present the key challenges.

In Indonesia, commodity prices are unlikely to boost GDP in the coming 2-3years as much they have in the past 2-3. This has negative implications for the budget, external accounts and banking system liquidity. The next few years will be critical as Indonesia reaps the full benefits from its demographic dividends and attempts to transition the economy from commodities to secondary industries.

For the Philippines, it is easy to remember the many false dawns over the last few decades. But the current turnaround holds much promise even as the country needs to attract real investment instead of just portfolio flows. Generating jobs and utilizing human capital effectively will remain the key challenge. On the plus side, risks on the fiscal and external front appear low.

Indonesia: Moving beyond commodities Indonesia was one of the worst hit during the Asian Financial Crisis (AFC) of 1997/98 and living standards only recovered to pre-AFC levels in 2004 after several years of political turmoil. The economic situation began to turn for the better in 2007/08 when growth in the global economy led to sharp increases in commodity prices in the subsequent

REGIONAL ECONOMY BRIEFING years. Barring the global financial crisis in 2009 and the price slump over the past year, commodity prices have stayed elevated relative to early 2000s levels, and this has sparked the first wave of investment into resourcerelated industries. In the post-Global Financial Crisis (GFC) years, low interest rates in the developed economies allowed Indonesia to bring domestic interest rates to record lows, facilitating this period of accelerated capital accumulation. Unsurprisingly, a large proportion of investment is allocated into primary industries. In 2011 and 2012, almost 25% of foreign direct investment (FDI, data from BKPM) went into the primary sector.

Comparatively, during the period from 2005 to 2009, that number was only 5%.

Less rapid price gains The era of rapid primary sector investment is closing. With China heading into a more moderate pace of GDP growth, commodity price gains are likely to be less rapid even if the global economy rebounds. Notably, as China’s growth pace noticeably slowed in the last few quarters, commodity prices also embarked on a downtrend. This has implications for investment and GDP growth.

As Indonesia transits into secondary and tertiary sector investment-led growth, it will be challenging in the next few years to offset the drag from lackluster commodity prices. In the four quarters ending 1Q13, secondary sector investment rose by 80% compared to the same period a year ago, outpacing the 25% registered for primary sector investment.

In particular, investment in the pharmaceuticals/chemicals, metal/ machines/electronics and motor vehicles/ transport equipment segments have been gathering pace. The secondary sector will be dominant in driving investment in the coming years for two reasons.

First, costs are still relatively low in Indonesia compared to its peers in the region and will prove attractive to manufacturers. Notably, China’s comparative advantage as a manufacturing hub has been eroding as its currency strengthens and wages continue to push higher. To deal with

rising costs, multinationals will be looking to diversify their factories into other countries and Indonesia should be a major beneficiary.

Secondly, the rise of the middleclass has been rapid and businesses will be looking to satisfy the higher spending power. We estimate that the size of the middle class was around 40mn in 2010 and has risen to around 46mn in 2012. This figure is projected to reach 131mn by 2020 and represents a tripling of the middle class population in just ten years on the back of favorable demographics and the spread of investment into the less developed areas.

Regional diversification To put things into perspective, investment outside Java rose by nearly 3x between 2009 to 2012. Put another way, investment per person in the other regions have closed the gap with Java (the most populous island in Indonesia) in the most recent two years. Regional diversification in investment limits saturation in Jakarta and facilitates productivity improvements across the archipelago.

The resulting wage increases and the spread of wealth across Indonesia will be necessary to maintain the rapid increase of the middleclass.

As an additional tailwind, Indonesia is reaping the full benefits of its demographic dividend with its dependency ratio falling to 0.53 by 2020, compared to 0.55 currently.

A rising proportion of the working class population and moderating population expansion will continue to be supportive of per capita income

“In 2012, Thailand was the largest auto manufacturer in Southeast Asia and ranked 15th in the world.”

growth. The current account deficit is a key constraint on economic growth.

Structurally, the deterioration in the current account is to be expected after several years of investment-led growth.

Thailand: Revitalizing infrastructure Thailand is the most developed amongst the TIP economies having already embarked on a period of high single digit/low double digit growth in the late 1980s and early 1990s.

During that period, living standards in Thailand pulled sharply ahead of both Indonesia and the Philippines thanks to high investment and favorable demographic dynamics.

The Asian financial crisis in 1997/98 and the military coup in 2005 dampened investor sentiment and growth rates. However, Thailand managed to carve out a niche in manufacturing, especially in autos and electronics. In 2012, Thailand was the largest auto manufacturer in Southeast Asia and ranked 15th in the world. It is the world’s largest

TH, ID, PH: Size of middle class

Source: DBS Group Research

HONG KONG BUSINESS | SEPTEMBER 2013 23

REGIONAL ECONOMY BRIEFING hard disk drive manufacturer and has significant production capabilities in household durables such as refrigerators and air conditioners as well.

In the coming years, Thailand will face increasing challenges to its dominant position in autos and electronics production as other economies catch up. Labor costs are relatively high and have been exacerbated by the cumulative 150% rise in minimum wages over the past two years. Facing competition and costs pressures, industries must move up the value chain and raise productivity.

Meanwhile, the government has unveiled a long-term infrastructure construction plan to facilitate the industrial shift to higher value-added output. Thailand should maintain its higher per-capita income through to 2020 despite a lower level of GDP growth compared to the other TIP economies. Notably, while population growth is not going to add any tailwind to the economy, low birth rates actually help in pushing up GDP per capita.

The government takes the lead The good news is that public investment is about to be revitalized after many years of stagnation. Since falling off sharply post the Asian financial crisis of 1997/98, real

government investment has gone nowhere, while private investment has risen more than twofold since 2000.

Under the THB 2.2trn (17% of GDP) infrastructure investment plan, THB 1.5trn will be allocated to land transport projects. These include high-speed railways (scheduled 20122020) linking all the key districts in the country and a mass rapid transit master plan (scheduled 2010-2029) for the Bangkok Metropolitan Region. Other areas of concentration in the infrastructure investment plan include ports, airports and utilities. The spending schedule for the infrastructure projects has been outlined by the government, with some 70% of budgeted THB 2.2trn to be disbursed by 2016. If implemented, the infrastructure plan will add an average of 1.6 percentage points to GDP growth annually for the next eight years.

The scenario above is relatively optimistic. To complete the analysis and make it more realistic, spillover effects and constraints should be considered. Three questions / constraints present themselves.

First, can the government afford to take on THB 2.2trn worth of direct/ indirect debt? The short answer is yes. Government debt levels are still low, with debt-to-GDP amounting to 44%. Debt levels should not greatly

The spending schedule for the infrastructure projects has been outlined by the government, with some 70% of budgeted THB 2.2trn to be disbursed by 2016.

exceed 50% of GDP even in 2020.

Second, can the labor force supply a sustained increase in demand for construction workers? Possibly, but the current workforce is already stretched with the unemployment rate below 1%. Gauging the construction labor requirement from the planned infrastructure spending, we estimate that 300- 400k of additional construction workers will be needed. Currently, there are around 2.8mn construction workers and total unemployment stands at about 0.25mn. Thus, even if all the unemployed become construction workers, a large shortfall would still exist. This could be overcome by bringing in foreign workers but this is more difficult than it sounds. Wage pressures are still likely to mount given tight labor conditions.

Third, some crowding out of private sector investment seems likely. As a more developed economy, Thailand’s loan-to-GDP ratio and

TH, ID, PH: GDP per capita

Source: DBS Group Research

ID, TH, PH: GDP reaches USD 2.4 trn by 2020

Source: DBS Group Research

24 HONG KONG BUSINESS | SEPTEMBER 2013

REGIONAL ECONOMY BRIEFING loan-to-deposit ratio are both close to 100%. This implies less room for the financial sector to extend credit (absent of course, foreign funding and a current account deficit). The extent to which foreigners are willing to finance such a deficit at current interest rates is an open question.

Philippines: Attracting investment The Philippines had the highest living standard (GDP per capita in PPP constant USD terms) amongst the TIP economies in the early 1980s. But the economy stagnated due to a prolonged period of poor administration and political instability. Consequently, the Philippines failed to participate in the Asian boom in the early 1990s and dropped below Thailand in 1985 and subsequently Indonesia in 1991.

Living standards have been essentially unchanged for the past 30 years. But that is set to change.

Conditions have fallen into place for the Philippines to re-emerge as an investment destination of choice. Economic growth is robust; indeed it is the highest in Southeast Asia. Reforms on the fiscal front are starting to pay off and this has led both Fitch and S&P to raise the Philippines’ sovereign rating to investment grade this year. Balance of payments dynamics remain strong, with the current account staying firmly in surplus. Inflation expectations are anchored and monetary policy is accommodative.

Investor perception of the Philippines has changed and this has been reflected in the surge of the stock index, low government bond yields and compressed credit default swap spreads. In terms of economic development, the Philippines is several years behind Indonesia and is only in the nascent stages of investment-led growth.

However, the template for the Philippines is going to be different to the path Indonesia embarked on several years ago. Over the past five years, Indonesia relied heavily on commodity-related investment to kick start growth and that was only possible because commodity prices were favorable. In contrast, the Philippines opted to take a more

service-oriented route as its mining industry remains mired in difficulty.

Utilizing human capital The Philippines has a highly educated workforce with a good command of English compared to its peers in the same development group. Gross secondary school enrollment stands at 84%, compared to 79% and 75% in Thailand and Indonesia respectively.

Moreover, tertiary school enrollment stands at 28%, higher than Indonesia (22%), but lagging Thailand (48%).

The Philippines has not managed to fully utilize the amount of human capital at its disposal despite success in selected sectors. Over the past few years, growth in services exports has been striking.

Momentum has been building and an increasing number of multinational companies have been transferring BPO-related jobs to the Philippines to take advantage of low labor costs and government incentives. In 2012, the Philippines generated USD13bn worth of revenues in the BPO sector and provided employment for close to 800,000 individuals.

Tourism is another bright spot.

Under the National Development Plan (NTDP) of 2010-2016, PHP 266bn worth of investment in tourism-related sectors is targeted.

The private sector is expected to provide PHP 192bn while the government is expected to contribute

The Philippines had the highest living standard (GDP per capita in PPP constant USD terms) amongst the TIP economies in the early 1980s.

PHP 74bn. In the three years ending 2012, close to PHP 30bn has been invested in tourism and medical tourism related projects. To be sure, the investment numbers still seem to be on the low side but some early signs of success can already be seen.

Persistent shortage of jobs However, services growth alone cannot push down the unemployment rate with roughly 1.2mn people entering the workforce annually. Notably, the persistent shortage of jobs explains why around 10% of the population works overseas. For job creation to proceed at a faster pace, development of the manufacturing sector will be needed.

Liberalization of foreign ownership rules can be the catalyst for a surge in secondary sector investment. There have been some encouraging signs.

Approved FDI into the manufacturing sector each year from 2010-2012 amounted to three times the average from 2002-2009. In 2012, there were also clear improvements in the transport & storage and information & communication segments. The government has taken the lead in facilitating investment growth via the private-public partnership projects (PPP) launched in 2010. While progress was slow in the initial phases, things were notched up in recent quarters. Six projects are in the bidding phase while two projects have already been awarded.

PEOPLE PROFILE

Jones Lang LaSalle COO Gavin Morgan shares the secret to motivated employees Morgan uses a potent combination of integrity, collaboration and corporate social responsibility to keep his 4,000-strong staff driven. that their direct reports have the key objectives of what our organization expects from them. Direct reports give input whether these objectives are realistic and achievable, and also what they want to do to achieve their goals.

We make sure that the people in our business are achieving their targets and are making progress that will lead to their career growth within the organization. We make sure that we have regular touch points to make sure that people are on track.

Gavin Morgan COO and Head of Leasing Jones Lang LaSalle HKB: What are your key business philosophies in managing an international firm like Jones Lang LaSalle?

Gavin: We are considered to be an organization that puts ethics ahead of everything that we do. It is always extremely important for us to be seen as an organization that always acts with integrity. In terms of running the business on a dayto-day basis, we have ambitious aspirations to continue to grow our business in Hong Kong.

I think what makes Jones Lang LaSalle unique in this industry is the approach that we take—the teamwork and cross-selling, and how we ensure that we have a strong collaborative network within the organization. We also have a culture that rewards talent and performance, high professional standards, and strong ethical behaviour.

HKB: What specific projects and activities do you use to motivate your employees and boost staff morale?

Gavin: In terms of boosting staff morale, we try to make sure that everybody in the organization has a manager. Every manager works with their direct reports to ensure

HKB: Can you tell us more about the company song you produced?

Gavin: The lyrics and the tune to the song reflect that ethical culture and the spark of teamwork and collaboration that we have in the firm. It is part of the things we do to make people see that Jones Lang LaSalle is a good place to develop a career. We also host a lot of functions in the organization.

Every two weeks we run an event called Tea Time Express where we provide food and beverages and where all of our employees have the opportunity to mingle and get to know one another. It not only promotes good relations between the employees within the organization, but it also enables people to connect easier within our firm to make client referrals. It is a softer side of the organization but it contributes to our business growth as well.

HKB: What corporate social responsibility or CSR initiatives can we expect from Jones Lang LaSalle in the next half of 2013?

Gavin: Well, we try to engage in a number of different levels. One of the most important things that we have done is our commitment to the environment. We were the first real estate organization in Hong Kong to achieve a platinum lead rating for our office setup. We advise on a day-to-day basis on one of the world’s biggest consumers of energy which is real estate, so we feel that it is extremely important that we are involved and doing

everything that we can to take the most responsible position possible.

We also have a close association with groups in Hong Kong like Feeding Hong Kong, which is a not-for-profit organization in the city that collects food and distributes it to the needy and the hungry.

Basically, our staff will get together for an evening with Feeding Hong Kong and collect from shops that would otherwise throw out stillgood food and make sure that it is centrally distributed to the needy in Hong Kong.

It is important for us as an organization that is operating in Hong Kong to be making a contribution to the charitable community. We feel that it is our responsibility to do something for the community here as well.

HKB: What would you like our readers in Hong Kong Business Magazine to know about Jones Lang LaSalle?

Gavin: I think it is important for us to be positioned as the most professional ethical company in our sector in Hong Kong. We believe in becoming an employer of choice in Hong Kong because as we spend a lot of time and effort and invest a lot of money in helping people in Jones Lang LaSalle develop their careers, it becomes more than a job, it is a career. All of our employees have a career path and understanding of how they can develop their career within the organization.

We have been in business in Hong Kong for 40 years and our business is very much a local business. We try to leverage our international platform to the benefit of our local clients, and it is most important for us to be seen as part of the fabric of the business community in Hong Kong.

We are a close company and we It is always have great plans and expectations extremely of how much more we can develop important for us and grow our business. We hope to be seen as an to do that with more good recruits organization that and by developing more great always acts with careers in the organization along the way. integrity.

HONG KONG BUSINESS | SEPTEMBER 2013 27

COUNTRY REPORT: MYANMAR

Myanmar is ready for some serious business

The roads to Mandalay may not be smooth, but a tsunami of cash and expertise is about to transform Myanmar.

I

t has been less than two years since the US and EU lifted sanctions on Myanmar, but already the country is experiencing the greatest investment boom South East Asia has seen in a generation. The latest sign that the country is truly open for business was the commitment of Qatar telecom to invest US$15 billion over the next two years to roll out a mobile telecoms network.

And it also has a competitor who will likely invest a similar amount. All of which will propel Myanmar from the country with the lowest direct FDI in the Association of Southeast Asian Nations (ASEAN) to one of the highest. This tsunami of cash and expertise is set to transform a country that was once the heart of the British Empire. The roads to Mandalay are not smooth, and basic infrastructure is yet to be built. For the savvy busi-

28 HONG KONG BUSINESS | SEPTEMBER 2013

“In terms of foreign investment Myanmar is still near bottom of the league tables, raking in just US$1 billion for 2012.”

nessman, those are opportunities. But where should he start?

Myanmar’s GDP is expected to to grow more than 6% over the next two years. The country is rich in natural resources, including large natural gas reserves, and has extensive agricultural potential, particularly in rice production. Growth is expected to be bolstered by the EU’s reinstatement of preferential access for Myanmar’s exports and the US’ suspension of its ban on imports from Myanmar. DBS analyst Tan Ai Teng notes that a lot of changes are on the horizon. Two large gas fields, Shwe and Zawtika, are expected to come onstream in FY2013, more than doubling gas production and raising exports to the PRC and Thailand. Higher gas exports, greater access to international markets, and faster economic growth in key markets such as the PRC will support

growth in exports. Visitor arrivals are likely to post further large gains. There is a long way to climb up when you are near the bottom.

Foreign investment In terms of foreign investment, Myanmar is still near bottom of the league tables, bringing in just US$1 billion in 2012, compared to US$2.4 billion for the Philippines and US$111 billion for the 6 largest in the ASEAN. Singapore alone got the biggest chunk of US$56.7 billion, followed

by Indonesia with US$19.9 billion, Malaysia with US$10 billion, Thailand with US$8.6 billion, and Vietnam with US$8.3 billion. So far, China is the largest investor in Myanmar, accounting for nearly half of the current investment commitments.

Key exports are natural gas, agricultural products, gems and jewellery as well as timber and garments, but perhaps one of the most geo-sensitive exports is rice. It is a little known fact of history that Myanmar was once the biggest rice exporter in the world under British colonial rule. Located at the foothills of the Himalayas, the country is blessed with an abundance of fresh mineral-rich water flowing

COUNTRY REPORT: MYANMAR down to feed its vast rice fields. But decades of isolation and military rule have seen the industry dwindled and starved of capital to revitalise the farms. Despite this, Myanmar is still the world’s seventh largest producer of rice, farming almost the same amount as Thailand and twice as much as the Philippines, with only half as many mouths to feed. Rice exporting to Japan is about to begin after a 45-year break, and all that is needed to ramp up production is modern agricultural machinery and better technology.

Indeed, the Myanmar Agribusiness Public Corporation Ltd (MAPCO) is collaborating with Japanese conglomerate Mitsui to form a JV to set up four rice-milling and processing plants. According to the US Department of Agriculture, Myanmar’s total rice exports last year stood at 600k tons, making it the world’s tenth largest supplier.

The government hopes to raise exports to 5m tons within five years.

This would put Myanmar in the league of its neighbours - Vietnam (7.4m) and Thailand (8m)– according to economists at DBS. In time they could again top the world’s largest rice exporters’ league table, making them a very important part of the Asian food security chain.

Political will Political changes on the ground that have led to a lifting of sanctions and the opening up of Myanmar. Since taking office in March 2011, President Thein Sein and key ministers in Myanmar have reformed laws, taken steps to liberalise the tightly controlled state economy, signed ceasefire agreements with the majority of the ethnic groups, enhanced freedom of expression by scrapping press censorship, and allowing circulation of privatelyowned newspapers in Burma for the first time in almost 50 years.

Politically, the military-turned-civilian government has continued to release more political prisoners. Notably, the military-dominated power has allowed opposition parties to hold seats in Parliament.

To implement a clean government and flush out corruption, the President has also formed a nine-member anti-graft team and overhauled his administration early this year, resulting in six high-ranking officials were forced to retire due to mismanage-

ment or corruption, while 40 others were transferred to other ministries.

The authority further probed and put the former Minister of Posts and Telecommunications under house arrest while investigating more than 50 officials over possible links to high-level corruption in a proposed nationwide telecommunications network that is currently in a bidding process.

China vs Japan Japan stands out as the most eager party buying into Myanmar’s growth prospects. The Japanese government not only waived US$3.36bn in bilateral debt, its overseas development bank -Japan Bank of International Co-operation ( JBIC) - also provided nearly US$1bn of bridging loan to cover an outstanding debt to the World Bank and the Asian Development Bank so that the latter could resume lending. In addition, Japan announced an extra US$220m in soft loans for infrastructure and human resources development, which is the first of such lending in 26 years.

But for now it is still near neighbours China and Thailand who have invested the most in Myanmar. China is Myanmar’s largest investor and its second largest foreign creditor, followed by Thailand. Together, these two countries have invested US$25bn out of Myanmar’s official total cumulative foreign investment of US$42bn for 2012. The Chinese have mainly invested in energy/natural resources and infrastructure development projects such as Nay Pyi Daw airport.

“The government hopes to raise exports to 5m tons within five years.”

Now, they are also targeting Myanmar’s underdeveloped infrastructure and construction sectors as well as manufacturing due to availability of cheap labour.

Thailand’s investments are mostly in oil and gas, through PTT Exploration and Production (PTTEP), the overseas arm of state-owned PTT. PTTEP operates the Zawtika gas project in the gulf of Mottama, while also being a partner in the Yetagun and Yadana offshore gas projects.

Foreigners welcome November 2, 2012 will go down as an important date in Myanmar’s history.

No one was shot, no one was elected.

But nevertheless a new foreign investment law was passed which makes Myanmar one of the most pro-investment countries in ASEAN. Under the new law, any investments can be up to 100% foreign-owned. Foreigners have the choice to either set up shop on

Monthly tourist arrivals

Sources: CEIC, Standard Chartered Research

HONG KONG BUSINESS | SEPTEMBER 2013 29

COUNTRY REPORT: MYANMAR their own or establish joint ventures with local firms or government agencies where they are free to agree on the ratio of foreign to/local capital.

To promote foreign investment, the new law has extended the tax grace period from three to five years and permits repatriation of funds/profits after tax at market exchange rates.

And although Myanmar still prohibits foreign ownership of land, foreigners can now lease land for as long as 70 years, up from 40, giving them a degree of long-term security.

The country is yet to pass laws to kickstart its condominium law but when it does it should allow for full foreign ownership of condominiums.

In banking, the country still has a long way to go. ATMs were only introduced in 2012, a shock for many international visitors who had expected to find cash points dotted around the city.

There are still no foreign banks in the country, but it is expected that JVs for foreign banks will eventually be followed by wholly owned subsidiaries and then full branches.

But perhaps the biggest challenge facing Myanmar is the sheer reality of

“The current airport can only handle 3 million passengers a year, but is being upgraded to handle 6 million by 2015.”

Myanmar FDI

Sources: Myanmar Investment Commission

Office supply in Yangon relative to the region

Sources: Colliers, CBRE, Savills, Cushman & Wakefield, Silk Road Mgt

30 HONG KONG BUSINESS | SEPTEMBER 2013

its capital city which would be as instantly recognisable to George Orwell when he wrote the Burmese Days in 1934 as it would be to a visitor today.

Floating the Myanmar kyat was another important reform that was implemented on April 2, 2012.

Money ready The government replaced an “overvalued” peg (compared with informal market levels) with a managed float.

Before the reform, the Myanmar kyat (MMK) was officially pegged at 8.51 against Special Drawing Rights (SDRs), and it varied around 6.406.45 against the US dollar (USD) over 2004-11.

However, besides the official exchange rate, there were several unofficial exchange rates in the informal market, and the spread between the official and informal exchange rates varied significantly (to illustrate, informal USD-MMK was quoted at around 830 when the official rate was only about 6.40).

Since the decision to unify the multiple exchange rates and introduce a more market-determined rate, the spread between the official reference rate and the informal market rates has narrowed considerably, to 1-3%.

Standard Chartered analyst Edward Lee notes that Myanmar’s FX regime can be classified as a managed float, similar to China’s.

Before the decision to unify the exchange rates, the official exchange rate was used mainly to allocate foreign currency from export earnings to import payments, and for fiscal accounting. This use, combined with complex FX restrictions, forced the private sector to rely on an informal market to obtain foreign currency via multiple exchange rates. A study by the IMF suggests that the informal market exchange rate for the MMK was, on average, 19% overvalued in FY10/11 (year ending March 2011) and 40% in FY11/12.

Modern trappings The huge influx of visitors and and the reduction of car import taxes have led to congested roads and overburdened infrastructure. There are plans to move the CBD and some government buildings out of the city and construction will soon begin on an outer green belt with four new towns surrounding

Yangon’s CBD within a 10- to 15-kilometre radius. Visitor numbers are sky rocketing since the lifting of sanctions and are now on track to surpass 1 million in 2013, putting Myanmar on the way to matching the Philippines, which lured 4.27 million in 2012, by the end of the decade.

The current airport can only handle 3 million passengers a year, but is being upgraded to handle 6 million by 2015. There are also plans for a second airport 80 km away from Yangon with a capacity of 12 million, which should be ready by 2016. Getting tourists into the country is one thing, but finding them somewhere nice to stay is another. Unlike in Field of Dreams, the visitors are coming, but the hotels have not been built.

There are currently only 2,500 international standard hotel rooms in Yangon, according to property consultant Jones Lang LaSalle, of 8,000 rooms in total. This translates to a maximum of 912,500 room nights against 1 million tourist arrivals last year. As a result, hotel room rates in Yangon have more than tripled to US$250-300 from US$80 in 2011.

There are another 6,000 hotel rooms that may be more suitable to independent travellers or backpackers on the hippy trail, but that is not going to help grow the economy. Myanmar’s tourist arrivals are expected to grow by 30% in 2013 to 1.3 million, rising to 2m by 2015.

Mad men There is now a rush on to build as many hotels as possible in Myanmar with international brands scrambling to plant their flags. Hilton will open their first 300-room hotel in Yangon in 2014, while French hotel chain Accor is in talks to partner with Max Myanmar to open a Novotel Hotel in Yangon, notes DBS. In total, Jones Lang LaSalle estimates that international hotel supply in Yangon will triple to around 6,242 rooms by 2015. Even then, the supply situation is likely to still remain tight, providing room for hoteliers to raise room rates progressively.

Based on tourist arrivals of 6.5m to Vietnam and 3.5m to Cambodia, market watchers expect ample room for tourism growth in Myanmar since it is also a country rich in cultural heritage, not unlike its Indochina

COUNTRY REPORT: MYANMAR neighbours.

No room at the office Perhaps the biggest challenge to foreign investment is the lack of offices. There was not a single new office completed from 1997 and 2010, so there is an acute shortage of office space with merely 62,000 sqm of office space in Yangon.

Apart between 2 modern office towers, Sakura Tower and Centrepoint Towers, most office units date back to the British colonial period. Rents have skyrocketed from US$20-US$45/ sqm six months ago to US$80/sqm. Some market watchers believe rents could even go beyond US$150/sqm as the more stable political situation and continued opening up to do to keep up of the economy lead to more new company formations, estimates DBS. Residential has a lot of catching to do to keep up with population growth. The real estate market, particularly in Yangon, was buoyant in 2012 due to continued tight supply on the back of growing demand.

Apartments/ condominiums remain the mainstay accommodation due to affordable pricing. For a city of 5 million, there is a massive supply shortage. A total of 1,070 units of condominiums were added in 2011, followed by 1,100 units in 2012.

Demand is reportedly highest in the mid-to-high income sector in good locations. Based on approximately 2% p.a. population growth in Yangon, and a household size of 4.87, the city would need at least 25k new homes each year. However, only about 1500 units are expected to be delivered in 2013 and just slightly more in 2014.

The scramble to ‘get into’ Myanmar has seen industrial property prices also shoot up, so much so that in many cases they are now more expensive than neighbouring Vietnam or Cambodia.

DBS reports that prices of land in Yangon’s key industrial areas including Shwe Than Lwin, Hlaing Tharyar, East Dagon and Dagon Seikkan have increased dramatically in recent months due to high demand. To keep land prices in check, the government has developed several special economic zones (SEZ) including Thilawa and Dawei. International agencies like the Japan International Cooperation

Agency (JICA) have granted aid packages including Yen 17bn for infrastructure projects, Yen 20bn for the development of infrastructure for the Thilawa Special Economic Zone and Yen 29bn for infrastructure for power supply in Yangon and for upgrading the Kyangin cement plant.

Oil boom Perhaps the biggest investor interest in Myanmar will be in its oil and gas industries. The country exported its first barrel of oil way back in 1853, but the industry was nationalised in 1962 and predictable oil production and exploration collapsed. By 2007, foreign companies were involved in 16 onshore blocks and many more offshore blocks. Today, Myanmar’s oil output remains small. The scale of oil reserves is difficult to predict because of very limited exploration.

However, high interest in recent oil blocks highlights strong hopes among oil and gas majors of rich finds in Myanmar. Official data shows that Myanmar exported US$3.5bn worth of gas, mainly to neighbouring

“There was not a single new office completed between 1997 and 2010, so there is an acute shortage of office space with merely 62,000sqm of office space in Yangon.”

Thailand, in FY12 compared with US$2.5bn a year ago and US$2.4bn in 2008-2009. Currently, the country produces around 19,600 barrels of crude oil and 1.475 billion cubic feet of natural gas each day. With 18 onshore blocks up for bid, the pre-qualification list indicated more interest from Western oil majors. Last year, Myanmar awarded nine onshore blocks to foreign companies.

Port o’ call Both Singapore and Hong Kong will also have a keen interest in who gets to develop and control Myanmar’s ports. Hong Kong’s Financial Secretary Donald John Tsang visited the Burmese ports in July, a sign that the city’s port operators would like to get involved. Currently 90% of all port shipping goes through Yangon, but with 2,800 km of coastline there are other opportunities. These could pose a threat to Singapore if shipping can bypass the Malacca straits.

KPMG managing partner Yasuhude Fujii reckons Myanmar has the potential to become an alterna HONG KONG BUSINESS | SEPTEMBER 2013 31

COUNTRY REPORT: MYANMAR tive international trade route to Asia, bypassing the longer route through the Straits of Malacca. The development of its ports could see Myanmar becoming a regional trade and transport hub.

“The Bay of Bengal is already home to some of the biggest ports in the world –Chittagong in Bangladesh and Chennai in India, a good indicator of the strong potential of the location,” he says. Myanmar currently has 9 ports along the western and southeastern coast of the country, namely: Yangon, Sittwe, Kyaukphyu, Thandwe, Pathein, Mawlamyine, Dawei, Myeik, and Kawthaung. In addition, Myanmar International Terminals Thilawa (MITT) is a private multi-purpose container terminal owned and operated by Hutchinson Port Holdings.

However, with the exception of the country’s principal port in Yangon, the rest are reportedly small coastal ports with limited port handling capabilities.

Deep water ports are currently being jointly developed at the southern city of Dawei (in association with Thailand) and Kyaukphyu in the north (in association with China).

Other recent activities in the ports sector include interests in developing ports in Thilawa and Sittwe. The government has also identified sites in Kalegauk and Bokpyin for the development of ports. Under the new Foreign Investment Law, construction of warehousing facilities at ports can only be carried out in a joint venture with Myanmar nationals. Construction of ports will be allowed only after an environmental and social impact study has been successfully completed.

Iron roosters Railways are also in as delapidated state as could be imagined, The railway sector in Myanmar is currently a monopoly operated by state-owned Myanmar Railways. The rail network has grown considerably over the last twenty years, expanding by almost 78% between 1988 and 2010, with the focus on providing transport services and connectivity to remote areas of the country.

According to ADB’s initial assessment of the railway sector, the rail network is in poor condition and investment in basic infrastructure, 32 HONG KONG BUSINESS | SEPTEMBER 2013

“The rail network has expanded considerably over the last twenty years, expanding by almost 78% between 1988 and 2010.”

such as track renewal, replacement of sleepers, and upgrading of signalling and communications systems, has been inadequate.

Travel between Yangon and Nay Pyi Taw takes 5 hours by road and almost 9 hours by rail. With approximately 70% of Myanmar’s population currently living in rural areas, there is growing demand to develop efficient transportation networks between the rural hinterland and the urban centres - Yangon and Mandalay.

This will also tie in with the government’s goal of equitable development between the various regions in the country and the development of rural-city connectivity. There are also

existing plans under the SingaporeKunming Rail Link (SKRL) project to build a high-speed railway to connect Kunming, in Southwest China, with mainland Southeast Asia. The project is a priority agenda under the ASEAN transport cooperation and three routes, going through Vietnam, Lao PDR and Myanmar respectively, have been planned for the rail link. When completed, the SKRL project will become part of the 14,080 km TransAsian Railway network across Europe and Asia. Under the new Foreign Investment Law, foreign investment in construction of railways can only be effected through a joint venture with a Myanmar national.

OPINION

Hemlock

Tourism lobbying becoming pathological

by hemlock www.biglychee.com Email: hemlock@hellokitty.com

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ong Kong General Chamber of Commerce CEO Shirley Yuen bemoans shortfalls of labour in food/beverage, retail and other sectors. The cause, she says, is the rise in tourism numbers from 16.6mn in 2002 to 48.6mn last year – in other words, the influx of Mainland shoppers. She echoes Federation of HK Industries boss Stanley Lau, who recently complained that “Nowadays you can pay HK$40 an hour and you still cannot find a dishwasher.”

Both in these South China Morning Post items, take care to moan about shortages of higherpaid workers: Lau mentions deficits of doctors and nurses, and Yuen (who calls all scarce workers ‘skilled’) of ‘professionals and associate professionals’, which means doctors and nurses, I bet. The truth is that, like our friendJack ‘100mntourists-a-year’ So, they want to cram yet more and more visitors into the Big Lychee’s teeming streets.

In theory, most HKGCC and FHKI members should have little interest in seeing Hong Kong’s economy become increasingly distorted by the crush of Mainland shoppers; wealth-creating businesses, their clients and their employees all suffer from the physical overload and rising rents. In practice, both seem to bow to what Mao referred to as “Our enemies … the warlords, the bureaucrats, the comprador class, the big landlord class and the reactionary section of the intelligentsia attached to them…” Well, give or take warlords, at least.

Perhaps we can put it down to the men in suits/ self-identity/Bronze Bauhinia Star/shoe-shining/ lemming effect: along with all your peers, you don’t argue against the property cartel’s interests if you crave establishment acceptance and appointment to a government advisory board.

Another possible reason organizations like the HKGCC and FHKI are being co-opted by the property-retail nexus is that government land (and now tourism) policies have been almost compelling Hong Kong businesses with spare capital to get into real estate. The returns are so much higher than from other possible investments that you’d be stupid not to do it; family firms that stuck to non-property core activities in the last decade are kicking themselves.

The mindlessness of Shirley Yuen’s arguments reflects the selfishness and greed of the tourism lobby (which may be desperate to pack the Mainlanders in over the next few years before

Beijing pulls the plug on the party by cutting taxes on luxury goods).

It also reflects the mindset of our policymakers. Shirley Yuen is a former civil servant who joined the HKGCC when ex-CE Donald Tsang’s bureaucrat-property-cartel power-base was at its hubristic peak – with all its self-serving, economically illiterate obsessions about hubs and infrastructure projects.

With the property/retail lobby intent on pouring its lucrative quart after quart into our communal pint pot, we can only hope that a bigger, possibly final, backlash against the parasitical tourism industry draws nearer. A neat idea appears in the SCMP’s letters page (‘High luxury goods tax will lower rents’). Green Sense is one of the few NGOs that dare to question the sacred status of the hotel/retail trades (apparently, the phrase to use when pointing out that the city is bursting at the seams is ‘carrying capacity’). The fact that Shirley Yuen and Stanley Lau plead so desperately to import cheap retail staff suggests that officials have already expressed doubts. There must come a point where a few respectable, suit-wearing, non-noodle-shop businesses – the sort government might listen to – will beg to differ with the orchestrated pleading to stuff the streets with infinite shoppers. Failing all of which, as we have seen from incidents like the GreatDolce and Gabbana Uprising of 2012, the noodle-eating-on-trains YouTube clip and anti-locust gatherings at Sheung Shui, there’s always the next, bigger, and better, outburst when nerves snap.

Could tourism be spiraling down?

HONG KONG BUSINESS | SEPTEMBER 2013 33

Rick Truscott Director - Generation, CLP Power Hong Kong 34 HONG KONG BUSINESS | SEPTEMBER 2013

CEO INTERVIEW

CLP Power strives to be more eco-friendly, reduces over 80% of primary emissions Power sector is no longer the major source of pollution in Hong Kong in 2011 and CLP is claiming some glory for this development.

A

ccording to the 2011 Emissions Inventory released recently by the Environmental Protection Department of HKSAR Government, the power sector is no longer HK’s major air pollution source.

Emissions from road transport and navigation are now the largest sources. In an interview with Hong Kong Business, CLP Power HK Director - Generation, Rick Truscott said that the company’s emissions reduction efforts have positively contributed to improving HK’s air quality. He noted that CLP has established a strategic climate change policy about 10 years ago. It has taken measures such as bringing in zero-emissions nuclear power and natural gas fired power generation.

Additionally, it has taken measures to minimize emissions of coal-fired power generation. These include the installation of electrostatic precipitators to remove particulates, initiated the use of ultra-low sulphur coal, and retrofitted its largest coal –generating units with large-scale desulphurisation and nitrogen oxide reduction equipment. Truscott boasts that the results have been significant where over 80% of CLP’s primary emissions

“A diversified energy mix is definitely critical in maintaining a reliable, clean and reasonably priced electricity supply to our customers.“ were reduced over the last 20 years in spite of increasing electricity production. Read on and find out more about its latest projects.

1. With power generation under your supervision, how did you maintain a diversified mix of nuclear, natural gas and coal so as to avoid over-reliance on any one source?

A diversified energy mix is definitely critical in maintaining a reliable, clean and reasonably priced electricity supply to our customers, 80% of Hong Kong’s population. In years past, electricity demand grew significantly and it was relatively easy to establish a diverse portfolio to manage the various risks. In the early 1990s, we were able to add nuclear power, hydro power and natural gas at our Black Point combined cycle facility due to the significant demand growth in HK at that time.

In the future, we will strive for diversity by establishing different gas sources. We will source gas from potentially three different sources including offshore gas fields in the South China sea, a new gas pipeline from the mainland and then finally from liquefied natural gas facilities in the Pearl River Delta area.

2. What was the major progress of Second West-East

Gas Pipeline project since its approval in 2012?

With the depletion of Yacheng gas field which is currently the sole source of gas supply of CLP, we have secured additional gas sources. Among the three, the Second West-East Gas Pipeline (WEPII) is the earliest available source. The WEPII is actually a gas supply system with around 9,000 km of pipeline which includes a main branch line of about 5,000 km from Turkmenistan through China to HK. The different gas properties and geographic location have required significant new infrastructure - a gas compression station at Dachan Island in Shenzhen and a 20 km undersea pipeline connecting Dachan Island and the Black Point Power Station (BPPS); a new gas receiving station at BPPS to prepare and process the new gas for our gas turbines; and modification of power station plant equipment in order to use the new gas and ensure the long-term operability of the generation units, because of the different properties of the new gas.

Construction of the 20km subsea pipeline and the new gas receiving station have been completed. Modifications to the eight gas-fired generation units are scheduled for completion 3Q of 2013. The WEPII gas has completed its tests and is being used to generate electricity on a regular basis at BPPS 3. How is the Project going to benefit your consumers?

The project allows the people to first of all enjoy the environmental benefits with increased gas-fired generation as well as ensuring that fuel diversity is maintained. As the technological options in HK are reduced in the future, the best way to maintain fuel diversity is by sourcing gas from different geographical locations.

The new gas will replace the depleting Yacheng gas field and supplement additional future gas sources to enable CLP to sustain gas-fired power generation and to meet emissions targets set by the government for 2015 and 2017, while maintaining a reliable electricity supply.

4. Can you share some of the challenges in running your power stations?

We currently operates three power stations in Hong Kong, namely the coal-fired Castle Peak Power Station (CPPS), gas-firedBPPS and the oil-fired Penny’s Bay Power Station. Nuclear power is imported from the Guangdong Daya Bay Nuclear Power Station in China.In the short term, the biggest challenge is to ensure smooth operation with new gas from WEPII to maintain a reliable power supply. In the longer run, we are facing the challenges of meeting tighter regulatory requirements on power plants’ emissions that require substantial increase of gas usage which inevitably puts pressure on electricity tariff.

HONG KONG BUSINESS | SEPTEMBER 2013 35

legal briefing

Hong Kong welcomes more employer-unfriendly labor changes New statutory minimum wage will benefit over 200,000 employes but will leave employers wailing over increased cost.

I

n an aim to make Hong Kong a little more “employee-friendly”, the city’s statutory minimum hourly wage rate was increased effective 1 May 2013 by 7.1% to $30 per hour. Experts note that the first increase since the statutory minimum wage was introduced in 2011 is set to benefit about 223,100 workers in the city but will certainly hurt employers over increased cost. Employers are also warned over proposed two significant changes to employment law in Hong Kong which are likely to lead to increased difficulties and costs if passed.

Who are to benefit from the adjusted statutory minimum wage?

Hogan Lovells partner Allan Leung said that the ordinance covers all employees, except livein domestic helpers, student interns, and work experience students during a period of exempt student employment.

What are required of the employers?

Leung said that the method of calculation and the key requirements of the Ordinance will not change but starting May 1, employers must keep records of the total number of hours worked by employees whose net wages in any wage period are less than $12,300 or an increase of HK$800 from the previous minimum.

Where an employee is ordinarily receiving on average more than $12,300 per month, Leung said that the exclusion of paid unworked time - e.g. paid rest days, paid annual leave, etc - may reduce the employee’s “net wages” to less than $12,300, so that the record keeping requirement under the Ordinance will apply.

What’s the penalty for employers not complying with the new rule?

Leung explained that if the wages paid in a wage period are less than the statutory minimum wage, the employee is entitled to be paid the differential. Failure to pay the statutory minimum wage, he said, renders an employer liable to a fine of HK$350,000 and imprisonment for 3 years.

How will the increase affect employers?

According to Nicholas Chan, a partner at Squire Sanders, since the introduction of the Statutory Minimum Wage, average wages in the Hong Kong retail industry have increased by 13% and concerns have been expressed that another increase in the minimum wage is likely to push wages up further, possibly by as much as 10%.

36 HONG KONG BUSINESS | SEPTEMBER 2013

Allan Leung

Gareth Thomas

Nicholas Chan

What are other proposed changes to employment law that could hurt employers?

Gareth Thomas, partner at Herbert Smith Freehills first mentioned of proposed changes that will make it more difficult for employers to dismiss an employee without having a recognised good reason. Under the existing provisions, Thomas explained that if an employee is found by the Labour Tribunal to have been unreasonably dismissed, the Labour Tribunal may either make an order for terminal payments or make an order for reinstatement/re-engagement but only if the employer consents. The proposed change, he said, envisages that, in a situation where the Labour Tribunal considers that reinstatement/re-engagement of the employee is appropriate, it will be able to make a compulsory order for reinstatement/re-engagement without securing the consent of the employer. In the event of non-compliance with the order, the employer, he added, will be ordered to pay a further sum of three times the employee’s monthly wages, capped at HK$50,000.

The second change, Thomas said, will significantly increase the cost of terminating a long-serving employee’s contract.

“Another increase in the minimum wage is likely to push wages up further, possibly by as much as 10%.”

According to Thomas, currently when an employer makes either a severance or long-service payments, it has the right to offset the amount of such severance/long-service payment by the amount it has contributed throughout the employee’s employment to that employee’s Mandatory Provident Fund (MPF).

This can be done by either reducing the amount of the severance/long-service payment by the amount of employer MPF contribution or by paying the full amount of the severance/long-service payment and then applying to the MPF provider for reimbursement of the employer’s contributions from the employee’s MPF fund. Thomas said that this invariably means that employees often walk away with little or no severance/long-service payment despite years of service.

According to Thomas, the change currently being debated would mean that this offset mechanism would be abolished and employees would be entitled to receive their full severance/long-service entitlement as well as their MPF fund in full.

ECONOMICs

Ian Perkin

How the sluggish growth of Mainland will badly maim Hong Kong

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t is not so long ago that Western economists (Western analysts themselves and Chinese analysts working for Western investment banks) tended to under-react to Mainland growth figures.

The general view was that as long as the powers in Beijing forecast Gross Domestic Product (GDP) growth in the 8-to-10 per cent range and those figures were met or bettered all was well with the world.

Certainly, some analysts sometimes questioned the numbers and checked them against things like trends in electricity consumption or growth in individual provinces, but this was mostly just sideshow.

Now, with growth on the Mainland easing, however, a period of over-reaction has set in with analysts wringing their hands over changes of a couple on tenths of a per cent in China’s growth forecasts or outcomes.

There is no doubting the seriousness of a slow down in the world’s second largest economy to overall world growth. China is now way too big a player in global trade and investment to be treated as peripheral to the whole.

The change in attitude has been particularly marked this year with Mainland growth down to a 7.7 per cent annual rate in the first quarter of the year and 7.5 per cent in the second (announced on July 15).

But these numbers should come as no surprise, despite the 10 per cent average annual growth rate on the Mainland in recent years.

From the reports to the National People’s Congress late last year through to the leadership changeover in Beijing the Mainland authorities have stuck with a growth rate forecast of 7.5 per cent for 2013.

That is still readily achievable, but even if there is some slippage to 7 percent growth (as some officials have flirted with in informal discussions) how much does it matter?

Far more important to the Mainland and the global economy is how successfully China can “rebalance” its economy away from infrastructure investment and exports to domestic consumption and services.

What is beyond doubt is that if China’s growth continues to ease in the months ahead the Beijing leadership can expect ever more global scrutiny of its economic policies and outcomes.

The leadership has shown it can easily deal with world applause and adulation for its economic expansion; the question is how it will deal with global doubts and criticism.

For Hong Kong, in the short term, the easing of growth in the Mainland will make maintaining

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Budget outcome: 2 months to May 2013 ($HK millions)

its own growth and prosperity tougher. Just how much will be apparent on August 16 when its own second quarter GDP numbers are issued by the SAR administration.

In the longer term, however, the Hong Kong SAR, as an integral part of the Mainland, can only gain from a successful “rebalancing” of the Mainland economy to a greater emphasis on domestic consumption of goods and services.

Hong Kong’s budget outcome

Win, win…

While the C Y Leung administration is trying to dampen the property market at the retail end (sale prices of flats), it is still reaping the benefits of a hot property market at the wholesale end (land releases) with increased land premium revenue.

Latest budgetary figures from the government for the two months to the end of May show the budget still in surplus to the tune of $5.5 billion (see accompanying table) – all due to greater land premium revenues in April.

This is highly unusual in the opening months of a new financial year with the administration’s tax revenues weighted towards the end of the year when salary and profit taxes normally flow in.

The budget will doubtless slip back into deficit in the middle months of the year as spending continues apace and revenues ease off, but land premium revenues have given the administration and overwhelmingly positive start to the year.

Meanwhile, the government has indicated the tax measures undertaken to cool the residential property market – principally aimed at non-resident purchases – have begun to bite.

In an answer to a Legco question on the subject, Transport and Housing Secretary Anthony Cheung said non-resident purchases had fallen.

Inland Revenue Department (IRD) figures showed that purchases of residential property by non-local individuals and companies (local and non-local) plunged to a monthly average of 249 cases, or 4.6 per cent of total transactions, in the first five months of 2013.

HONG KONG BUSINESS | SEPTEMBER 2013 37

analysis: CHINA SLOWDOWN

As China slows, will Hong Kong catch the flu?

China is in a new slower growth phase, and how this will play out and affect Hong Kong and the rest of Asia requires a new understanding of economics, argues DBS Economist David Carbon.

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long-standing theme of DBS Research has been that the US simply doesn’t matter that much anymore to Asia’s growth fortunes. That Asia itself, after 45-50 years of rapid growth, has become large enough to generate its own domestic demand and thus to drive its own growth.

That wasn’t an easy sell back in 2006, before the collapse of Bear Stearns and Lehman Brothers and the onset of the Global Financial Crisis.

Back then, most believed that Asia was living off the US consumer and that if she ever died, Asia would too.

But the four years following the crisis showed this not to be true. Between June 2008 and June 2012, the US, Europe and Japan grew not one iota.

Asia, meanwhile, grew by 32 percent.

Almost 8% per year. Almost what it had done over the previous ten years.

But after the biggest crisis in 100 38 HONG KONG BUSINESS | SEPTEMBER 2013

That Asia itself, after 45-50 years of rapid growth, has become large enough to generate its own domestic demand and thus to drive its own growth.

years. And with no help from the G3.

Talk about a ‘coming out’. We called it “The immaculate recovery” – the growth that came from nowhere. Of course it didn’t come from nowhere.

Most of it came from China. How much? Put it this way: in those four years that the US, JP and EZ went nowhere, Asia ‘added’ an entire Germany, right here in Asia. China accounted for 70% of that addition.

This immediately begs the question – as it did for many way back before the Global Financial Crisis – if China is now the driver of Asian global growth, isn’t it the new risk as well?

Our answer all along has been: absolutely – new drivers, new risks. If you used to keep two eyes on the US, one and a half of them should now be trained on Asia/China.

Risk becomes reality?

In the past 18 months, that fact has

come home to roost. China has slowed considerably. Double digit growth as late as 1Q10 dropped to 9.5% in 2010 and 2011 and further to 7.6%, on average, since early-2012.

Many have wondered about the risk of a ‘hard landing’ – an event that would, by definition, have severe repercussions across the region.

The good news is a hard landing seems ever more unlikely as time goes by. Not only has growth run at 7.6% for 5 consecutive quarters, but much of the slowdown has been intentionally engineered, as the new leadership clears the decks and overhauls the engines for the next growth phase. The bad news is most of the slowdown seems likely to be permanent. The ‘next’ growth phase was made necessary precisely because the old one had run out of steam.

And growth phases run progressively slower as countries mature. It’s one

analysis: CHINA SLOWDOWN Even at today’s knocked-down 7.5% growth pace, China ‘adds’ an entire Korea to its economy every 2 years.

of the facts of life for any developing economy.

The government has set a 7.5% growth target for the next five years and the new leadership (that took control in early-2013) seems perfectly pleased with the 7.6% growth that has prevailed since mid-2012. Just last week, as markets and media fretted whether growth might be getting ‘too’ slow, the government ordered 1400 companies in 19 industries to cut capacity expansion plans to make way for other (not necessarily new) industries being opened up to private investment and competition.

The focus is firmly on reform and restructuring, not short-term cyclical growth fuelled by fiscal and monetary stimulus.

In past years, 5-year growth targets could easily be dismissed as lower bounds that most provinces would surpass by a third or more.

That seems less likely now. New drivers means new risks. China has slowed significantly and, for the most part, it’s permanent . Were reform / restructuring to occur seamlessly, growth could probably return to 8.5%-9% for several years without much difficulty. But seamless restructuring is an oxymoron. Most of the time, long term gains imply short-term pain. Meanwhile, China’s economy continues to mature. Both factors suggest that growth of 7.5%8% is likely to be the norm going forward.

What it means for Asia How will China’s slower growth affect the rest of Asia? Perhaps less than

one might think. This is because any country’s growth potential is more of a supply side issue than a demand side issue. Korea, for example, might max out at a 4% rate of GDP growth, given its population growth, technological level, productivity growth, resources and so on. More demand from China, or anywhere, might give Korea a temporary / cyclical boost but it can’t raise Korea’s growth above 4% for very long.

Conversely, less demand from China shouldn’t lower Korea’s potential either. This is important to keep in mind when one considers what a slower China means for the region.

The medium-term impact is likely to be far less than the short-term impact.

In the short-run, though, a slower China means a slower Asia. How could it not? Even at today’s knockeddown 7.5% growth pace, China ‘adds’ an entire Korea to its economy every 2 years. It adds a Singapore every 5 months. Okay, Singapore’s small. So consider this fact instead: last year, the growth in just China’s investment was one-third more than all the GDP growth in all the other Asia-10 countries combined! Changes in this kind of demand growth have to have an impact on the region and they already are.

A structural slowdown The main reason a hard landing has always seemed unlikely to us is that China’s slowdown has in large part been intentionally engineered by the authorities. Why would the authorities want slower growth? It’s not so much that they want it – no

one does – it’s a matter of accepting the inevitable. Economies slow as they mature. When you’re young and importing loads of technology and knowledge from abroad, productivity grows rapidly. If you don’t charge much for your output, GDP does too.

But as wages and incomes rise, and as countries move ever closer to the edge of existing technological capability, the ability to make big jumps fades.

Productivity and GDP growth slow.

It’s the economic facts of life for any developing country: a high income US or Japan cannot grow as fast as a Vietnam or a China, even when they are doing all the right things.

Postpone the inevitable That doesn’t mean you accept ‘older age’ gracefully. On the contrary, if you want to keep growth as fast as it can possibly be, it means you tear down the walls, gut the rot and restructure the beams. You figure out what the country one rung above you on the technological ladder is doing and you try to do it better and cheaper.

You try to take his cake – and quickly – because the guy one rung below you is trying to take yours. It’s not graceful and it’s not optional – it’s move up or move out. Plainly, fiscal and monetary policies cannot gut the rot and restructure the beams. They can postpone the inevitable but in the meantime productivity growth and potential GDP continue to fall, not rise. This is why the authorities have refrained from offering short-term stimulus: it’s counterproductive when the economy needs an overhaul.

For the past 15 years, China has pursued a growth model centered largely on exports and investment, situated mainly along the Eastern seaboard. But wages have risen,

China exports vs Hong Kong exports

Source: Hang Seng, Bloomberg

HONG KONG BUSINESS | SEPTEMBER 2013 39

analysis: CHINA SLOWDOWN Locals’ retail spending and the Hang Seng index tracked well

Source: Hang Seng, Bloomberg

productivity growth has fallen, much of the investment was wasteful / inefficient and Eastern coastal areas have become heavily polluted. The new leadership believes that change is needed and the sooner the better.

What sort of change?

China’s To Do list of structural changes is wide and deep. On the macro side, key changes to the real economy include raising the importance of consumption as a driver of GDP and lowering the importance of exports and investment. Changes on the financial side include interest rate and currency liberalization, globalizing the renminbi and opening the capital account (which a globalized RMB requires). Other chores include writing down bad debts in the financial sector, raising supervision of so-called shadow banks and reforming the tax code. These are all big changes that won’t be accomplished easily or without risk.

Changes of a more microeconomic / efficiency nature include reducing the importance of stateowned enterprises (SOEs) in the economy and pension and healthcare reform. China’s push to urbanize the population – aimed at raising the productivity of social investment – will be the biggest in history if it succeeds. From a sectoral perspective, capacity is to be cut in steel and other metals, concrete and paper in order to make way for more investment in airports, urban transport, shipping and energy. In June, the government announced that banks could henceforth be established with private capital.

40 HONG KONG BUSINESS | SEPTEMBER 2013

It’s a long list of changes and one sees immediately why the authorities have no interest in pumping up the ‘old’ economy with short-term fiscal and monetary stimulus when there’s so much work to be done on the ‘new’ one.

Who’s vulnerable in Asia?

Who in Asia is vulnerable to the changes underway in China?

Everyone – from joined-at-thehip Hong Kong to increasingly integrated Taiwan; from high- tech Korea to financial center Singapore, to the electronics and commodities producing countries of Thailand, Malaysia and Indonesia – all will feel the changes. We take a brief look at two important areas here: trade and tourism.

Asia’s exports to China have soared over the past 10-12 years and, as we now know, China’s wasn’t just flipping them off to the ‘developed world; it was the final destination for most of them. As mentioned, every 7 quarters, China puts a new Korea on the map – and the final demand for that certainly isn’t coming out of the US or Europe or Japan.

But new drivers means new risks.

Asia-8 exports to China have slowed sharply over the past two years and the impact isn’t shared equally. Some 28% of Taiwan’s exports go directly to China and, after Hong Kong, it is the country most impacted on the trade front. Korea isn’t far behind with a quarter of its exports headed for China, more than double the share of a decade ago. Japan’s exposure to China has tripled since 2000, with nearly a fifth of its exports now headed there. Thailand, Malaysia,

“Asia’s exports to China have soared over the past 10-12 years and, as we now know, China’s wasn’t just flipping them off to the ‘developed world.”

Singapore and Indonesia are relatively less exposed, with 12%-13% of total exports headed for China. India’s links remain low, with only 5% of its exports headed for China. Similar shares prevail for the US and Europe.

Tourism Higher incomes have led to a boom in Chinese tourism abroad, raising revenues throughout Asia. Here too, slower growth will have an impact.

Who in Asia gets hit the hardest?

After Hong Kong (which must come first), Thailand and Taiwan seem likely to be impacted the most.

Taiwan, because most (35%) of its tourists come from China and Thailand, because tourism is relatively more important to its economy.

Next come Singapore and Korea, with broadly similar exposures.

Malaysia gains much from tourism (7% direct contribution to GDP) but it’s not a popular destination for mainland Chinese and the impact of a slower China on tourism revenues is relatively low.

Ditto for Indonesia, the Philippines and especially India. A note of caution or, rather, reassurance is due here.

China’s incomes are still going up and tourism is too. As our analysis of Thailand shows, falling growth in China hasn’t stopped a surge in tourist arrivals there from the mainland.

analysis: CHINA SLOWDOWN China’s slowdown exerts immediate negative impact on Hong Kong’s trade. More than 40% of Hong Kong’s domestic exports and 50% of re-exports go to China respectively.

Hence, the correlation between Hong Kong’s and China’s total exports is very strong. Year-to-date, the merchandise trade deficit has widened by 11.6% YoY.

HK consumption takes a hit China’s slowdown is also hitting Hong Kong consumption. At a time when external trade is faltering and investment is falling, private consumption (accounting for more than 60% of GDP) is the only pillar of growth left standing. In 1Q13, private consumption grew a staggering 7.0%, up from 2.8% in 4Q12 and well above the ten-year trend growth of 4.5%.

In May, HKMA’s chief warned about rampant consumer spending and potential risk of overheating in the economy. But the economy looks anything but overheating now.

For a while after the new Chinese leadership took helm, consumers and investors were hopeful that Beijing will inject some vigor into the economy – be it monetary and fiscal stimulus. None of these materialized.

Instead, China’s leaders took a hard line on wasteful extravagance, added more controls on the property market and allowed the credit crunch to spook markets and banks.

The credit crunch affirmed the leadership’s determination to press ahead with structural reform. This episode essentially confirms China’s slowdown and caused equity markets tumbling. Since mid-May, the Hang Seng Index has fallen more than 9%.

Negative wealth effects stemming from the equity market correction have impacted private consumption.

The Hang Seng Index peaked in January. Then, an index of consumer confidence compiled by the Chinese University of Hong Kong fell in 1Q13.

Finally, the growth of actual locals’ retail spending fell noticeably in May. The trend is expected to continue as China’s growth slows further.

Meanwhile, euphoria in the property market has worn off this year. Property prices are down 1.4% from the peak in March 2013 after rounds of government intervention.

As special taxes discourage investment from foreigners, the share of mainland Chinese buyers has dropped to just 5.0% in 1Q13 from 10.7% in 1Q12. In the luxury market, the share plunged to 11.1% in 1Q13 from 33.1% in 1Q12. As the Chinese economy slows further, we expect even less mainlander participation.

Nevertheless, it is unlikely to trigger a property market collapse. After all, the various stamp duties introduced by the government has already dampened investors’ interests and property speculation is not rampant.

In fact, property prices need not actually fall to erode consumer sentiment. Right now, residential property prices are still up 5.3% from year-end 2012, but the outlook is clouded by China’s slowdown and more flats launched by developers in 2H. Moreover, residential property transactions have fallen 32.7% YoY in 1H13. Hong Kong people often gauge the health of the economy by the state of the property market, not GDP growth. The “feel good” factor has gone for both home owners and non-home owners, and this is feeding back negatively on locals’ consumption. That said, Hong Kong’s unemployment rate (May: 3.3% sa) is still sufficiently low to prevent a sharp decline in spending. The impact of China’s slowdown on locals’ consumption is expected to be mild.

Expect lower tourist spending and retail sales growth The slowdown in China that began last year did not make much of an impact on tourist arrivals. The growth of Chinese tourist arrivals was quite steady since mid-2012. While tourist numbers held up, tourist spending did not. When China’s GDP dipped to 7.4% in 3Q12, retail sales growth of popular tourist items in Hong Kong dropped to 2.2% versus 11.1% in 2Q, faring much worse than locals’ retail spending, which dropped to 7.5% from 10.0% in 2Q. As worries about China’ growth return, it is likely that tourist spending will disappoint again. In April, falling gold prices sent mainland tourists on a shopping spree for the precious metal, masking underlying weakness in spending power. Headline retail sales values rose 20.7% that month,

“More than 40% of Hong Kong’s domestic exports and 50% of re-exports go to China respectively.“

up from 9.8% in March. This did not last. In May, retail sales values retreated to 12.9%. In the coming quarter, we project only high singledigit growth for retail sales values to reflect weaker tourist and locals’ spending.

Labor market to remain tight The unemployment rate does not rise so easily. Since July 2011, the seasonally- adjusted unemployment rate has consistently stayed at or below 3.5%. This is despite: 1) GDP growth has fallen to an average of 2.2% over 3Q11-1Q13 from an average 6.1% over 4Q09-2Q11; 2) Residential property transactions shrank more than 30% YoY in 1H13; 3) Retail sales value growth had once fallen to single-dig- its in 2H12.

From a demand-side perspective, the resilience is due to the fact that the unemployment rate lags actual economic activity. For instance, retail sales regained double-digit growth in 1Q13 after dipping in 2H12. Because the slowdown was just a blip, it did not spark massive layoffs in the retail sector. Besides, people who did lose their jobs were able to find jobs soon after.

Real global GDP

Source: Hang Seng, Bloomberg

Asia - dependence on China as export destination

Source: Hang Seng, Bloomberg

HONG KONG BUSINESS | SEPTEMBER 2013 41

FEATURE: Future Transport

Trains, planes, automobiles and drones

This year’s Annual Summit on Funding Transport tackled emerging issues of securing long-term funding for transport networks and the growing appeal of public-private partnerships. By Roxanne Primo Uy

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irports and railway stations are part of our daily lives, but drone ports and evacuated tube transport could become the future of transport, and they will radically reshape the way we think of cities. The future of transport, as well as the innovative solutions and funding that will be needed, were the subject of the recent Annual Summit on Funding Transport organised by the International Transport Forum at the OECD held in Leipzig, Germany.

A staggering $11 trillion will be needed to invest in basic infrastructure by 2030 to meet the expected rise in demand for transport for both people and goods. With the current infrastructure only able to accommodate a 50% increase in demand, the challenge is financing the transport gap, considering that both private and public entities are struggling with their own shrinking budgets due to the financial crisis. According to Hans Michael Kloth, Head of Communications from the International Transport Forum at the OECD, this year’s Summit saw 1,000 participants from 76 countries, including 50

42 HONG KONG BUSINESS | SEPTEMBER 2013

“More than 60 bi-lateral meetings took place between countries during the Summit.”

ministers and vice ministers. “I’d like to highlight that more than 60 bilateral meetings took place between countries during the Summit. Also, 5 bi-lateral transport agreements were signed between countries on the fringe of the Summit. We have not had this before, and to me that is a clear sign that the Leipzig Summit has really established itself as the event that transport ministers and other decision makers see as the place to be, in order to understand global trends and to learn about how others approach the strategic problems facing transport,” Kloth added.

The attending ministers noted that transport infrastructure is much more than asphalt, concrete or steel; it is the backbone of national economies, providing connections for people and goods, access to jobs and services, and enabling trade and economic growth.

“With investment in transport infrastructure a long-term venture, robust, credible funding solutions that support trade, economic growth and environmental and social sustainability are urgently needed,” they

added.

Drones for transport Perhaps the most interesting innovation highlighted at the summit was the rise of drones for transport, and the need to develop drone ports across countries. Drone ports would be smaller than airports and located in transport parks and closer to distribution centres, and could go a long way to reducing trucks on the roads and alleviating transport logjams.

One firm investing in drone transport is Matternet, a company that fields a network of Unmanned Aerial Vehicles to ferry heavy packages between destinations, that came about from the need to deliver materials in areas with poor road infrastructure.

Andreas Raptopoulus, co-founder and CEO at Matternet, said 1 billion people or roughly one in seven people in the world currently have no access to all-season roads. Its army of automated aerial drones reaches these relatively remote areas that trucks and trains have difficulty accessing. The key technological feat in Matternet’s case is its use of flying

FEATURE: Future Transport drones to solve the freight problems faced by a large portion of the world, from isolated villages in the developing world to congested cities in the developed world.

The transport innovation shown

by Matternet is not only technological, but also organizational in how the company is able to provide the service in an economical and consistently reliable way to customers.

Matternet drones are less expensive to operate, such that delivering a 2 kilogram package over 10 kilometers only adds up to around 24 cents, inclusive of vehicle, battery, station and energy costs. Reliability is also ensured since the AUVs are guided by a global positioning system.

AUVs can also land easily on stations installed on rooftops and home backyards. Matternet also provides a critical function during times of crisis since its AUVs may be fielded to deliver essential medicines and first-response supplies to disasterstruck locations that other traditional transportation methods may find impossible to reach.

Assessing transport investments One of the sessions discussed the different ways to assess transport investments. The panelists argued that a good investment is made when the timeliness and impact of a decision are carefully considered. They also noted that while the economic crisis has forced leaders to view transport policy through the lens of short-term economic stimulus, transport policy and investments are still, inevitably, long-term. “Transport investments have a very long life. The decisions you make today will be with you for a long time,” said Tyrrell Duncan, Director, Transport and Communications Division, East Asia at Asian Development Bank. However, he notes that the criteria for choosing these investments are not perfect.

One tool that is commonly used to support decisions on funding transport projects is the cost-benefit analysis. It is grounded in modelling and in basic traffic data, allowing for coherent and realistic assessments. However, results derived from cost-benefit analysis depend on the benefits of travel time savings. These in turn are driven by estimates of demand, which often are too optimistic.

This tool, therefore, does not provide

adequate information to decision makers in order to measure how a transport investment contributes to economic growth.

So what are the more effective criteria countries can use for selecting transport investments? Recognising that transport has multiple purposes and multiple effects, the challenge is to get the best balance between maximizing the positives and minimizing the negatives. Duncan noted that economic performance is one thing decision makers must begin with as it is very important that these large investments produce good results.

Unfortunately, one of the positives of transport that is very difficult to estimate is the socio-dynamic effects on the future economy. “Academically, the literature doesn’t have good examples of reliable ways of estimating that part. Ten to twenty years later, when the effects are seen, it’s awfully hard to separate what was due to the transport investment and what was due to so many other things that happened,” he added. Duncan enumerated these socio-dynamic aspects of transport investments: environmental effects, which include effects on global climate change and carbon dioxide emissions; the social aspects; affordability; and preventing deaths from accidents.

Given these socio-dynamic consid-

Hans Michael Kloth Head of Communications, ITF, OECD

Tyrell Duncan Director, Transport and Communications Division, ADB

“The key technological feat in Matternet’s case is its use of flying drones to solve the freight problems faced by a huge chunk of the world.”

erations, the question often asked is: How can leaders incorporate into the traditional cost-benefit analysis all the other dimensions which are not so easy to monetize? Is there some form of multi-criteria assessment that tries to internalize as many of the costs as possible? These tools, Duncan notes, are still lacking. “When decisions are being made, it can be understood that no project will be perfect. A project may be more sustainable in some dimensions than in other dimensions.

But at least, people need to make these choices, avoiding things that will be really adverse on one dimension and trying to make sure that it can be sustainable across all dimensions.”

Singapore: leader in sustainable transport So how is Singapore doing in terms

Investment in road and rail infrastructure as a share of GDP (average 2000-2010)

Source: International Transport Forum at the OECD

Andreas Raptopoulus Co-founder and CEO, Matternet

Media Travel Programme participants with Wilhelm Noldeke, Jan Schleifer and Hans Michael Kloth HONG KONG BUSINESS | SEPTEMBER 2013 43

FEATURE: Future Transport

of making these sustainable transport decisions? Duncan reveals that Singapore is one of the world’s leaders in this area.

“I think there are many transport experts from around the world pointing to Singapore as a place that has considered the different options and has come up with a wide array of different transport options that people can choose from by using leading technologies. And the results are clear: the air is clean and transportation is convenient. So, we think that Singapore is a leader.”

He adds that Singapore has done tremendously well in considering methods of demand management through pricing. “That type of method is something that we are often talking with our developing member countries about but it’s something we should still find ways for politicians to carry out. Politicians are very reluctant to tell the population that they will increase prices. Managing demand by using prices is part of a big challenge ahead,” he said.

Another notable argument during the session is that environmental sustainability and economic development should be taken as complementary, not opposite, forces. Glen Weisbrod, President, Economic Development Research Group in USA, said it is wrong to say there is a trade-off between the two.

Public-private partnerships Public-private partnerships (PPPs) 44 HONG KONG BUSINESS | SEPTEMBER 2013

have become an instrument for countries to avoid delays in transport infrastructure construction due to lack of funding. While major transport infrastructure decisions are all political, a PPP is required to bridge short-term political imperatives and long-term investment priorities.

Gershon Cohen, Managing Director and Fund Principal, Infrastructure Funds at Scottish Widows Investment Partnerships (SWIP), UK, notes that PPP is a form of government procurement and is a pioneer in the creation and whole life management of strategically important infrastructure projects.

PPPs, according to Cohen, are faced with the challenge of renewing and upgrading existing networks and putting in some form of distribution networks. But the question still lingers: Why is the contribution of PPPs in the developing world having limited impact?

Alberto Gonzales-Lalueza, Business Development Projects Director at Cintra in Spain, believes PPPs fail because of inflated predictions, and nonsensical behaviours of the government. “Most projects in trouble turn out not to address a real need for mobility and are based on poor costbenefit assessment.”

Jose Luis Irigoyen, Director, Transport, Water, Information and Communications Technologies Department at the World Bank, said PPPs have been a tool to enhance government options and reduce financial

“Public-private partnerships (PPPs) have become an instrument for countries to avoid delays in transport infrastructure construction because of lack of funding.”

gaps. “There is a US$3-4 trillion gap in the developing world between the capacity for public investment and investment needed for growth.

PPPs so far account for only10% of investment and five countries account for 50% of the total. This will have to grow,” he adds.

According to the panelists, the fiscal and economic crises make it counterproductive to use PPPs as a way to keep expenditure off the balance sheet.

Though some projects may be more suited to PPPs than others, for example because demand forecasting risk is relatively low or because there is a potential for major cost savings through engineering innovation, even the most difficult risks can be managed effectively in a PPP if the project design and the PPP contract are spot-on.

Investment in inland transport infrastructure by region from 1995-2010 (as a percentage of GDP, at current prices and exchange rates)

Source: International Transport Forum at the OECD

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Fujitsu Hong Kong For inquiry: 852-2827-5780 http://hk.fujitsu.com

HONG KONG BUSINESS | SEPTEMBER 2013 45

ANALYSIS: LOGISTICS

The trouble with Asia’s logistic logjam Demand for logistic facilities to get physical products delivered increased as Asia’s retail sales volume is expected to overtake the West’s.

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sia is poised for an e-commerce boom but sharp growth is outstripping the region’s logistics capabilities, warn experts.

Experts are seeing global economic power shifting to Asia and the formerly ‘emerging’ countries surpassing the West in terms of e-commerce in the next decade with global business to customer (B2C) e-commerce sales in 2012 growing 21.1% to top US$1 trillion for the first time ever, according to digital and e-commerce research firm eMarketer. This figure is expected to further increase by 18.3% in 2013 to US$1.298 trillion, with Asia Pacific consumers forecasted to buy up to US$433 billion, surpassing the expected volume of US$409 billion from North America. Already, Asia Pacific’s e-commerce sales were recorded at US$332 billion compared

46 HONG KONG BUSINESS | SEPTEMBER 2013

“Will Asia be able to keep pace with the strong demand amid a lack of investmentgrade assets?”

with the US’ contribution of US$364 billion in 2012.

The total retail sales volume in Asia increased by 12% year-on-year during 2012 and according to Economic Intelligence Unit’s projections, China a is set to overtake the US for the first time ever as the country with the world’s highest volume of sales during 2013.

Demand for logistics facilities to get these physical products delivered from retailers and wholesalers to companies and private individuals is estimated to see equally strong growth. According to Colliers International, the region’s industrial output, as a proxy for the general demand for logistics warehouses, grew at a compound annual growth rate or CAGR of 10.4% between 2009 and 2012 even amid external shocks.

Interestingly, its current growth momentum is faster than during the

pre-crisis period after Asia benefited greatly from China’s entry into the World Trade Organization in 2001.

But will Asia be able to keep pace with the strong demand amid a lack of available investment-grade assets?

Demand for modern logistics According to Colliers International, there has always been a lack of supply of good-quality logistics warehouses with high physical specifications and management support by third-party logistics (3PL) operators in Asia.

For many years, Colliers said that so-called logistics warehouses have been dominated by local players, and the widely varying standards of service quality they have offered has resulted in very different rental and occupancy performance. The research firm noted , however, that demand for top-quality logistics warehouses managed by trustworthy 3PLs is actually expanding, due to the growing requirements of principals engaged in the entire supply chain management process, notwithstanding the challenges posed by the global economic slowdown.

The same concern was pointed out by a recent Transport Intelligence study. Cathy Roberson, senior analyst

ANALYSIS: LOGISTICS and lead author of the study, said that there is limited, if any, access to international logistics providers permitted in domestic markets for example, UPS and FedEx were only granted limited licences to operate in China in 2012.

“Domestic providers do not necessarily have the capital to invest in major network overhauls and new start-ups are entering the market to fill gaps in the e-commerce supply chain. This has led to a high level of fragmentation and disjointed service capabilities. Furthermore, retailers have taken it upon themselves to develop their own logistics networks to overcome the shortfall in suitable domestic transport solutions. For example, Alibaba, Flipkart and Rakuten have all incorporated logistics as part of their individual corporate strategies.”

According to Roberson, in China and India, for example, warehouses have historically served merely as storage facilities. The increase in e-commerce, she said, has resulted in demand not only for more warehouses, but also for facilities that are automated and integrated into retailers’ websites and storefronts with capabilities such as pick and pack. She added that these facilities need to be located in more convenient locations as many consumers expect same-day or next-day delivery.

Logistics solutions Retailers in Asia are constantly searching for sophisticated solutions for managing sales and transporting goods across continents. According to CEVA Executive Vice President for Business Development for Asia Pacific Elaine Low, in ‘last mile’ logistics, visibility and control are two of the key challenges that online retailers may face. Complexity arises, she said, when there are multiple markets, products and systems. One critical way to reduce complexity is to have a standardized e-commerce or e-fulfilment platform which is scalable.

“As companies introduce more brands, more product lines or move into new geographies, they need to guarantee continuity and reliability not only in the shopping experience but right through to the last mile

delivery. It’s incredibly hard to achieve this when there are separate e-fulfilment platforms in different markets. The service, the packaging, presentation and turnaround time for delivery needs to be consistent. With a standardized and scalable solution in place, systems and processes can be easily replicated as new product lines are added or new geographies are set up. Reliability is what matters in online retail,” said Low, adding that companies need to have flexibility and agility in their supply chain management to ensure seamless operation for their last mile logistics.

Network optimization Low said that for some of the bigger multinational companies, network optimization becomes critical to reduce costs and increase efficiency, from pre-manufacturing right down to last mile delivery to the final destination.“Multiple Warehouse management systems (WMS) make it hard to scale one’s e-fulfilment worldwide in a cost efficient way.

Whereas standard solutions operate off the same platform and use the same operating processes. This is where CEVA’s e-fulfilment solution – a modular and flexible solution can be implemented faster and at lower cost.”

Low added that in CEVA’s case, it deploys one standard, CEVA Matrix WMS, for warehouse management which claims to give customers greater visibility of their end-consumer demographics, sales and returns, and more effective management of their inventories.

Zalora, which bills itself as Asia’s fastest-growing online fashion and beauty retailer, shares that there are two critical challenges they are facing when it comes to logistics.

One is the need to provide flexibility to customers and the other is the capability to serve remote areas of Southeast Asia and to offer the same quality of service that it offers in the capital cities.

On flexibility, Michele Ferrario, Regional Managing Director, Zalora Southeast Asia, said that the company works with its 3PL partners to be as flexible as possible and to accommodate customers’ unique delivery requests. In most capital

“Warehouses have historically served merely as storage facilities.“

cities, they have decided to work on launching their own delivery fleet. “In Singapore we have taken our customer-centric approach even further by recently launching a partnership with 7-Eleven which allows our customers to pay and pick their order up at a 7-Eleven of their choice: this offers our customers, who are mostly busy professionals who might not be at home to receive their parcel, a more convenient, 24-hour alternative to collect their order.”

On the capability of serving remote areas, Ferrario said that the company is now working with multiple 3PLs in the region. Patrick Linden, Co-Founder & Chief Executive Officer of independent commerce site Deals.com.sg shared that each of its three businesses – Daily deals, e-Commerce store, and Food delivery –each presents its own unique logistical challenges. However,many issues can be avoided with proper planning.

“For instance, we run a ‘just in time’ delivery structure at our warehouse, and coupled with its location at the very heart of Singapore, this makes dispatching very quick. Fundamentally, however, we have a strong internal system that allows us to schedule deliveries and take in stock, sometimes just 24 hours before deliveries are scheduled.

Our focus has always been on functionality, without the need for multiple systems integration. This is especially important since we work with several local delivery companies in addition to our own delivery team to manage deliveries that range from ‘within 48 hours’ to ‘7 days’. This setup helps us cope with variable volumes and as a system, has a fail-safe built right in – we never rely on a single channel.”

Asia logistics/industrial rentals (by key markets)

Sources: Colliers HONG KONG BUSINESS | SEPTEMBER 2013 47

OPINION

SCOTT D. MICHEL

The crucial implications of FATCA for U.S. Citizens in Hong Kong

What’s the real deal with foreigners, anyway?

O

n July 10, 2013, the Hong Kong Legislative Council moved to enable Hong Kong to enter into standalone Tax Information Exchange Agreements and, more importantly for U.S. persons who have financial accounts there, to sign an “intergovernmental agreement” (IGA) with the U.S. for implementation of the Foreign Account Tax Compliance Act (FATCA).

It is expected that the U.S. and Hong Kong will agree on an IGA, and that financial institutions in Hong Kong will begin to comply with FATCA’s due diligence and automatic disclosure provisions next year.

The implications are profound for any U.S. citizen, green card holder or tax resident who has non-U.S. financial accounts or other financial assets, such as life insurance, retirement plans and the like.

FATCA will require banks and other entities to ascertain which clients are subject to the U.S. tax system, to ask them to sign a W-9 form making their account transparent to the IRS and a waiver of domestic bank secrecy or confidentiality rules, and to begin in 2014 to share data with the IRS regarding their assets.

To the extent affected Americans have not complied with U.S. tax rules, they should consider their options in order to try to spare them from the most extreme enforcement measures available to the IRS. Automatic Information Exchange Comes to Central. The towering skyscraper financial firms in Central hold trillions of dollars in funds

48 HONG KONG BUSINESS | SEPTEMBER 2013

BY SCOTT D. MICHEL President Caplin & Drysdale

among millions of account holders and offer wealth and trust management services, insurance and annuity products, retirement plans, and the like. Many clients of these entities have a U.S. passport or green card. Nearly all of these entities must now comply with FATCA. FATCA is arguably the most significant component of the ongoing efforts by the U.S. government to pursue Americans with unreported foreign assets. For the last five years, the U.S. has broken Swiss bank secrecy and penetrated other jurisdictions where bank confidentiality was taken for granted.

It accomplished these objectives through many mechanisms -- criminal and civil inquiries, heightened information exchange, and information obtained from voluntary disclosures or whistleblowers.

But FATCA has the most widespread impact.

It applies worldwide to every financial institution and other businesses in the financial services sector, to the extent these entities receive any payments from U.S. sources, either on their own behalf or acting as an intermediary.

Though technically complex, FATCA’s regime is, at one level, quite simple – it is compels disclosure on pain of 30% withholding on U.S.-source investment income and U.S.-source proceeds from the certain asset sales.

FATCA reaches U.S. citizens or residents and entities, such as a corporation or a partnership, in which a U.S. person owns more than a 10% interest. Beyond the obvious, the reportable accounts include those held in trusts, insurance policies, retirement and stock option plans, and other related foreign structures.

FATCA began as a contractual regime, where banks and other entities would enter into a “FATCA Agreement” with the IRS. While that may still occur, increasingly, various countries are signing IGAs with the U.S., providing either for reporting to the local government and in turn the IRS, or direct reporting to the IRS. Many Hong Kong residents have strong U.S. connections, and are either U.S. citizens, or green card holders to enable easy visits to America either to be with family members or pursue business and commercial interests. Such persons face a myriad of U.S. reporting requirements such as eporting and payment of tax on worldwide income, including investment income earned on financial accounts located outside the U.S.

numbers

Three in ten Singaporeans splurge on designer products And five in ten Singaporean consumers say commercials increase their preference of the brand and eventually affect their decision to buy the product.

Percent who strongly/somewhat agree

I collect nformation before shopping

I shop around before purchasing

I have preferred brands before buying

I sample first before buying

I trust products recommended by professionals

I buy because of others’ influence

I plan for the future

Nielsen Global Survey of Consumer Shopping Behavior, Q3 2012

I am willing to pay more for designer products than for others with the same functions

I like to buy products of famous brands

Commercials will increase my preference for the brand

The product image created by commercials will affect my decision to buy the product

% of respondents who strongly/somewhat agree

% of respondents who strongly/somewhat agree

% of respondents who strongly/somewhat agree

% of respondents who strongly/somewhat agree

For more information contact: Ipsos, Tim Hill (tim.hill@ipsos.com) and Nicolas Bijuk (Nicolas.Bijuk@ipsos.com); Nielsen, Ellen Cuijpers (Ellen.Cuijpers@nielsen.com) 50 HONG KONG BUSINESS | SEPTEMBER 2013