Presentation by Mr. Joshua Law at the Association of Chartered Certified Accountants' (ACCA) International Small Business Round Table on 22 March 2001
"Facing the Future the Changing World of Small Business"
Mr. Sun, distinguished guests, ladies and gentlemen,
Pleased to have been invited to ACCA's 1st International Small Business Roundtable and to share with such distinguished guests my thoughts on this very interesting topic.
2. Professor Chittenden has already enlightened us [on the challenges and changes that SMEs worldwide are facing and how SMEs should cope with these changes in order to survive and sustain.
3. I would like to focus on the situation in Hong Kong. And to share with you what I perceive to be the major challenges that SMEs in Hong Kong are facing, and what the HKSAR Government has been doing and plans to do in order to help our SMEs to cope with these challenges.
SMEs in Hong Kong
4. First of all, what do we mean by SMEs here in HK? We define SMEs as enterprises that employ less than 100 persons in the manufacturing industries and those that employ less than 50 persons in the non-manufacturing sectors.
5. As at September 2000, there are about 300,000 SMEs in Hong Kong - 98% of the business establishments in Hong Kong and employ about 60% of the private sector employees.
6. Like other economies, SMEs are the backbone of HK's economies and are renowned for their flexibility, creativity, innovativeness and agility.
7. But what are the problems faced by our SMEs? Because of their small size, SMEs in Hong Kong also face the difficulties that are commonly faced by SMEs elsewhere. Namely,
- lack of financial
resources to expand business and resist economic adversity;
- shortage in manpower;
- weak in corporate
culture and management; and
- a lack of awareness on changes that are taking places around them as well as the need for enhancing their capabilities as a means to remaining competitive.
8. SMEs are also more vulnerable in coping with the changing economic scene. Just take a look at the past few years.
9. The financial turmoil that swiped across East Asia some two years ago had shaken up our enterprises, big and small.
10. It has worsened the financial conditions of many SMEs in Hong Kong, as businesses decreased drastically; banks cut credit lines and called back loans as a result of liquidity crunch in the banking sector; asset values plummeted; and bad debts became commonplace in the market. Many SMEs had to close, and even more had to struggle very hard in order to survive, through restructuring of business and loans. Many that survived have taken considerable time to turn around, as Hong Kong's economy started to recover in early 2000.
11. As we gradually ride out of the financial storm, we see Hong Kong's SMEs facing a new set of opportunities and challenges. So what are these opportunities and challenges? Where do they come from?
Opportunities and challenges faced by SMEs in Hong'Kong
12. Like SMEs in other economies, SMEs in Hong Kong are facing the challenges arising from the increasing globalisation of the world economy and the advent of the knowledge-based society. In a nutshell, these challenges include:
- keener competition
that comes not only from local competitors but also big and small companies
all over the world, as a result of easier and greater access to new
markets and new customers through information technology such as internet
and e-commerce; and
- growing demands from more sophisticated customers. They look for more competitive pricing, more efficient delivery of goods and services, more professional and more value-added services. With greater and more direct access to market information through the internet and e-commerce, individuals become more informed customers.
13. Besides, SMEs in Hong Kong at present are also facing another major challenge when Mainland China joins the WTO. Mainland China's accession into WTO would mean the opening up of a huge market which is both an opportunity as well as challenge to our SMEs.
14. Hong Kong's SMEs have the natural advantage of being the early mover into the Mainland market and stand an edge over foreign competitors due to our common language, shared culture and better knowledge of the people and the market. That said, these attributes do not guarantee a smooth sailing of Hong Kong enterprises in the Mainland market.
15. The long term strength and sustainability of our SMEs depend on our ability to act and react quickly in the rapidly developing economy, constant drive and initiative in exploring market opportunities and most important of all, our ability to secure strategic business partnership with both enterprises in the Mainland and overseas.
16. It is therefore very important for our SMEs to be aware of the changes that are taking place around them and their impact, and equip themselves with new skills and the right mindset with a view to enhancing their capabilities of coping with these challenges as well as embracing the opportunities that will arise as a result of these changes.
17. This is not just a question of how our SMEs should live up to these challenges but more importantly, how soon and how ready they can do it.
Government's support measures
18. Like other economies, Hong Kong Government attaches great importance to the development of SMEs and have over the past few years been actively supporting SMEs.
19. However, unlike many economies, our fundamental belief remains that we do not pick winners or subsidise losers. Nor do we provide direct subsidies to individual SMEs.
20. Rather, our SME support policy is to provide the necessary infrastructural support that is conducive to the development and growth of SMEs in the long term. We do this by providing a wide range of support services and programme to SMEs in the areas of business start-up, information access, human resources development, financing, market access, productivity enhancement and infrastructural facilities, through various government departments such as the Trade and Industry Department and industry support organizations, such as the Trade Development Council, Hong Kong Productivity Council and Vocational Training Council.
21. Having said that, we will, at times of special needs and under specific circumstances, take special and extraordinary measures. One such example is the setting up of the Special Finance Scheme (the Scheme) for the SMEs from August 1998 to April 2000.
22. The Scheme was one of the special measures taken to alleviate the SME cash flow problems due to a liquidity crunch caused by the Asian financial crisis. Under the Scheme, the Hong Kong Government acted as the guarantor for SMEs loans approved by lending institutions.
23. The maximum amount of guarantee an SME could obtain from the Scheme was about US$256,000 (HK$2 million) or 70% of the loan facility, whichever was the less. The maximum guarantee period was two years. As the Scheme was of an interim nature and the economy had been improving since early 2000, the Government had already ceased accepting new applications under the Scheme since April 2000.
24. The Scheme has helped 9 912 SMEs to obtain loans with a cumulative amount of US$1.17 billion (HK$9.16 billion), of which US$ 0.74 billion (HK$5.81 billion) were guaranteed by the Government.
25. Building on the policy of maximum support and minimum intervention, we have taken forward our policy in support of SMEs. The Chief Executive has announced in his Policy Address last October Government's intention to help SMEs to solve different problems at different stages of their development, with a view to helping SMEs "to start a new business", "build a new business" and "expand a business". He has also asked the Small and Medium Enterprises Committee (SMEC), an advisory body that advises the Government on issues affecting the development of SMEs, to explore and come up with recommendations on new measures to help SMEs by June this year.
26. The SMEC has so far identified five areas of concern to SME, namely, help improving SME financing, building better business environment, enhancing human resources, promoting technology application and expanding market access. These are identified as the major areas which Hong Kong SMEs, having survived the Asian financial crisis, need to address in order to cope with the challenges brought by globalisation of the world economy, the advent of knowledge-based new economy and the Mainland's accession to World Trade Organization.
27. While the SMEC has yet to come up with detailed recommendations, it has so far arrived at some preliminary observations regarding the principles to be adopted in exploring further support measures to SMEs. I would like to share some of these observations of the SMEC with you below.
28. First of all, in view of the disparities in the size and mode of operations among the more than 300,000 SMEs in Hong Kong, the SMEC believes that no single package of support measures can be expected to achieve the same level of success for all SMEs. On the other hand, resource constraints also make it difficult to provide tailor-made support measures for SMEs of different trade and size. In any case, it will be against the principle of equity for the Government to provide support to only a few selected sectors. The SMEC therefore considers it prudent to focus on advancing the general interests of SMEs as well as addressing their common concerns and to propose support measures accordingly. Hence, sector-specific support measures would not be the main thrust of Government's SME support measures.
29. Secondly, instead of meddling with the self-adjusting process of the market by picking winners or subsidising losers, the SMEC is of the view that Government should encourage SMEs to strive to excel through self-enhancement, and assist by providing a business-friendly environment and appropriate incentives or support measures.
30. Thirdly, the SMEC notes that certain problems encountered by SMEs in the aforementioned five major areas have much to do with their business culture and management capability. (Corporate governance)
31. For example, the financing problems encountered by SMEs are, to a considerable extent, attributable to the fact that many enterprises do not normally maintain an acceptable degree of transparency with their accounts and are therefore unable to provide the documentary proof of sound business and financial conditions required by banks/financing institutions for loans. (This is an area where professional accountancy services can help!!)
32. Indeed this is why some of them have not been able to secure loans even amidst the changes currently taking place in the enterprise loan market, i.e. a gradual shift from asset-based financing that is prevalent in Hong Kong before the Asian financial crisis to non-collateral and credit-based financing.
33. Similarly, apart from insufficient capital and short-handedness, the problems encountered by SMEs in human resources development and information technology applications are also partly due to a lack of interest or understanding about the importance of training on the part of the SME owners and their staff.
34. To help SMEs tackle these problems and keep up with the times, the SMEC considers it essential to start with helping them adjust their business culture and mindset, alerting them to the need for good corporate governance and developing a corporate culture conducive to their long-term competitiveness.
35. Last but not the least, the SMEC believes that while SMEs should be encouraged to help themselves through self-enhancement, it is also necessary to take a serious look at the current support services and market opportunities available as well as the needs of SMEs, identify the gaps left unfilled, including information gaps and mis-match of resources, and then come up with the needed solutions.
36. The SMEC has just launched a public consultation exercise to invite views and suggestions from the public and will taken into account views received when coming up with its recommendations. I am sure that the Committee, with the benefit of the expertise, experience and devotion of its Members, as well as its constant dialogue and consultation with businesses, will inject fresh impetus to our support to SMEs.
37. Meanwhile, the Financial Secretary has announced in his Budget on 7th of this month that he would allocate an extra sum of over US$ 37 million (HK$ 0.3 billion) to set up a SME training fund that aims at helping SMEs build up their human capital.
38. In addition, he has announced measures to help Hong Kong businesses capture opportunities emerging from China's accession to WTO and development of the Western China. These include enhancing our infrastructure links with the Mainland, providing greater support services for business and facilitating more inter-flow of people and knowledge.
39. The Trade Development Council is also tasked to provide more market information and advice on doing business in the Mainland. It will conduct an in-depth analysis of the South China region and set up a China Business Advisory Unit for the provision of one-stop services to the many SMEs operating in Guangdong.
40. With the new SMEs support measures in the pipeline, I believe that SMEs in Hong Kong would be better able to tap on the new opportunities that arise. However, while the Government will do its utmost to help SMEs to build up their long-term capabilities and overall competitiveness to meet the new challenges and opportunities, it is crucial that SMEs also take the initiative to heighten there awareness of the changes and challenges ahead of them and to be prepared to take actions to equip themselves and enhance their capacities in all the five aspects aforementioned.
41. With these remarks,
I shall pause here. I am happy to take questions from the floor and hear
your thoughts on this subject.