SOSC005 Hong Kong Creative Industries& Cross-Border Production CHEN, Y.C. Assistant Professor Division of Social Science email@example.com
Overview • I. Spatial Division of Labor in Pearl River Delta • II. Creative Industry: Craft-based manufacturing • IIa. Watch Industry • III. Cross-Border Production: Jewelry Industry • IIIa. The Dark Side
Spatial Division of Labor in Pearl River Delta
Spatial Division of Labor (空間分工) • Hong Kong: center of management, information, coordination, finance and professional services • China: center of manufacturing site • “Triangle manufacturing”
Triangle Manufacturing • U.S. Buyers place their orders with Hong Kong trading firms or OEM firms, who in turn shift some or all of the requested production to offshore processing factories in low-wage countries such as China. • These offshore factories in China are wholly owned subsidiaries of Hong Kong manufacturers, joint-venture partners or independent overseas contractors. • The finished goods are shipped directly to buyers in the U.S..
Triangle Manufacturing China (processing factory) Hong Kong (OEM firms or Traders) U.S. Buyers OEM firms
Guangdong’s Locational Advantages (1) • Cost • Comparison of labor compensation in 2003 (US$/hour):
Guangdong’s Locational Advantages (2) • Industry Cluster (產業集群) • Concentration of complete up-stream and down-stream industry chain • Example: Dongguan • PC computer industry • All necessary materials and accessories can be delivered within half an hour • Production time shortened, overall competitiveness increased
Guangdong’s Locational Advantages (3) • Quality of semi-skilled workers on the rise • Experience accumulated since the opening up of the Mainland market more than 20 years ago • 20 million well-trained workers in the Province • Strengthen training in hi-tech areas to meet the needs of industry upgrade
Guangdong’s Locational Advantages (4) • Close to Hong Kong • Rapid industrialization through capital and technology transfer from Hong Kong. • Around 70% of Guangdong’s products are exported to other places through Hong Kong
Hong Kong Locational Advantages (1) • Credibility • Rule of law, respect for contract • Institutionalization • Well-established legal and professional systems, procedures and rules • Market-oriented • Market economy • Government does not participate in or interfere with market operations
Hong Kong Locational Advantages (2) • International Financial Centre • Comprehensive financial system • Freedom in foreign exchange • International Logistics Centre • Advanced logistics facilities • Robust growth in air and sea transport
Hong Kong Locational Advantages (3) • Information Centre • Free flow of information • Internet hub • Trade Networks • More than half a decade’s experience in trade • Free trade
Hong Kong Locational Advantages (4) • “Democracy” • HK government faces serious political crisis after July 1 mass demonstration (71 遊行) (500 thousands) against “basic law article 23” in 2003. • Beijing government supported Mr. Tung administration by passing the CEPA, hoping that the economic benefits will rescue the political crisis.
What is Creative Industry? • “Industries which have their origin in individual creativity, skill and talent and which have a potential for wealth and job creation through the generation and exploitation or intellectual property”. -- www.culture.gov.uk • “Advertising, architecture, the art and antiques market, crafts, design, designer fashion, film and video, interactive leisure software, music, the performing arts, publishing, software and computer services, television and radio”. – www.culture.gov.hk • Creative Industries make / produce content.
The Value Chain • Even though the definition of creative industry focuses on “service industry” but it applies well in “craft-based manufacturing”, such as watch and jewelry industry. Content Creator Creates Idea Holds IPRs Technology Driven Ideas Content Producers Develops Copyrights Packages IPRs Programming Content Content Distributors Distributes Copyrights Markets/Brands IPRs Distribution Platform Consumer Tickets, magazines, books, CD, Video, DVD, Radio, TV Net, WAP/3G
Organization Characteristics of Hong Kong craft-based manufacturing firms • Mostly small-and-medium enterprise (SMEs) with less than 50 employees. • Family owned • Finance through personal networks instead of banks. • Labor intensive assembly • Extensive subcontract system • Highly flexible (flexible production)
Flexible Production • Labor-intensive production system is flexible because producers can quickly organize a labor force in short notice. • Elaborate subcontracting system facilitates the rapid production of a wide variety of products with minimal personal capital investment • Subcontracting system act as a buffers when market shift unexpectedly. (share risk) • Take small orders (batch production instead of mass production), short delivery time,
Technological Upgrading • The competition from other developing countries (China, India, Thailand) have forced HK firms to upgrade their product to compete on high-ends market. • In reaction to shorter product cycles, CAD, CAM and RP* technology are commonly used. • 3D design and related IT technologies • ERP (Enterprise Resource Planning) is used to manage supply chain more efficiently. (供應鏈管理) • *RP: Rapid Prototyping
Front Shop, Back Factory (前店後廠) • “Front Shop, Back Factory” has been used to describe the integration between Hong Kong and Pearl River Delta. • With the relocation of Hong Kong’s manufacturing sector (low end) to PRD, firms in Hong Kong could focus on high valued added activities such as marketing, financing, and R&D. • It could facilitate the transformation from OEM to ODM and OBM more rapidly.
From OEM to ODM and OBM • OEM : Original Equipment Manufacturing refers to the subcontracting system in which foreign firms provide specification of a product. Local (OEM) firms produce it and foreign buyers sell them using their own brand. • Buyers and OEM firms usually cooperate where buyers provide: • Selection of capital equipment • Training of managers, engineers and technicians • Advice on production, financing and management
ODM, OBM • ODM: ‘Original Design Manufacturing’ refers to local firm carries out some or all the product design (as well as production) tasks according to the general design supplied by the MNCs. • OBM: ‘Original Brand Manufacturing’ refers to design and produce using own brand. • The risk of shifting to OBM is losing the HK firms might lose their existing OEM contract because foreign buyers do not trust a firm that do both OEM and OBM. (create competition)
HK watch industry took off in the 50s • 1950s: Hong Kong watch makers made watch accessories such as cases, bands, and dials. • 1960s: Watch makers rapidly progressed to assembling mechanical watches (with imported movements (表芯) from Japan and Switzerland). • Clocks were produced with locally produced movements and parts.
The increasing competition in the 1970s. • 1970s – with diode technology, HK watch assemblers moved into light-emitting digital (LED) display watches. • LED was replaced by liquid crystal display (LCD) watched in late 1970s. • Many HK assemblers entered production, competition rose. • Japanese watch production increase at the same time, further fueled the competition and drove down the prices.
Quartz Analog shift in the 1980s • In early 1980s, digital watch accounted for 60% of the value of the total output; Quartz analog watch made up only 8%. The rest is mechanical watch. • By 1984, quartz analog and digital watches each accounted for 43%. By 1989, quartz analog doubled, while digitals fell to 6.6%. • Due to the flexibility in Hong Kong watch industry, the rapid transformation was possible.
Innovation in the 1990s • 1990s: Hong Kong watchmakers continue to be innovative in design of parts, cases, bands, and accessories. They were sold to major watch producing countries such as Japan, Switzerland, and the U.S.. • Firms began to use CAD/CAM for design and manufacturing of more complex watch cases and bands. • Firms began to do watch movement-assembly in order to break away from dependence on movement firms in Japan and Switzerland. • Low-end watches assembly moved to PRD.
Quantity and Variety of products • Quantity: Hong Kong surpass Japan to became the second largest watch producer (after Swiss) in the early 1990s. • Variety in finished products. • analogue to digital watches, • metal to plastic watches, • fashion to classic watches, • standard to jewelry watches, • novelty to sport watches. • Variety in parts and component: assembled movements, cases, watch straps, dials and parts for watch cases and bands.
III. Cross-border Production: the Jewelry Industry
Hong Kong Jewelry Industry • Hong Kong's jewelry industry is dominated by the precious jewelry sector. • Combined with re-exports, Hong Kong is the leading exporter of imitation jewelry and the second largest exporter of precious jewelry in the world. • Small stones fashion jewelry, pure gold items and jade are most popular. • Jewelry production focus on medium-to high-priced products.
PRD – Jewelry Processing Base • PRD becomes HK’s largest jewelry processing base (加工基地). Hong Kong jewelry makers moved to the area to find low cost and skillful craftsmen. • More labor intensive cutting (切割) and polishing (打磨) are done in China (also in India). • The more skillful part such as forming, moulding, die-casting and assembling are often done in Hong Kong.
Panyu : the jewelry center (珠寶谷) • Panyu District (番禺) of Guangzhou City has more than 200 Hong Kong jewelry processing factories • Employ more than 50,000 workers. • Process 100 tons of gold and platinum yearly; US$600 million in total production value; • Export volume is US$800 million • 95% of the jewelry on HK market is processed here
CEPA – duty free access for HK jewelry to China • Under CEPA that came into effect on 1 Jan 2004, a total of 16 tariff headings related to Jewelry made in Hong Kong are not duty-free. • However, it required a lot of process (forming and assembling) to be done in Hong Kong in order to qualify. • Ideally, foreign jewelry firms (like the Italian firm) might take this advantage to invest in Hong Kong in order to take advantage of CEPA … i.e. export to China. • All in all, CEPA is a positive measurement, but its effect might take some times to realize.
Occupational Diseases • To save cost, many jewelry processing factories do not have enough protection for the workers against occupational hazard . • For example, polishing process (打磨) creates a lot of hazardous dust. • Workers should be given warning and knowledge regarding the risk • Workers should be given enough protection to prevent occupational disease 惠州力奇 (Lucky Gem) 廠外觀(攝於2004年8月) Source: www.luckygerms.info
Testimonial from a silicosis victim (矽肺病患) • “He learned how to cut and sand semiprecious stones like opal, topaz and malachite into hearts, stars, pearls, and diamond shapes that are strung together to make rings, bracelets and necklaces. • Mr. Hu sat shoulder to shoulder with other cutters and polishers in confined workshops. Often working 12- and even 18-hours days, they generated clouds of dust that hung in the air even when windows were wide open and the fans were set to high.” Source: JOSEPH KAHN “Making Trinkets in China, and a Deadly Dust” New York Times, June 18, 2003 A silicosis victim holding his own lung’s X’ray
Victims protest • Since the owners of various jewelry processing factories deny compensation to the victims, Hong Kong labor organizers helped the victims demand for compensation. • For more information about the protests: • http://www.inmediahk.net/public/article?item_id=11375&group_id=16 • http://www.inmediahk.net/public/article?item_id=18320&group_id=16 Victim protested inside the Lucky Gem office in H.K. 在灣仔會展中心的”國際珠寶展”前示威 1 Mar 2005