U.S. and Hong Kong (1998)

Country Commercial Guides
FY 1999: Hong Kong

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CHAPTER V. LEADING SECTORS FOR U.S. EXPORTS AND INVESTMENT

Hong Kong, with the second highest per capita income in Asia, continues to offer good opportunities to U.S. businesses despite the economic slowdown. Telecommunications products and services are among the most promising as Hong Kong continues to liberalize its telecommunications market. Interest in computers and other information technology products should remain high given their high priority in the Hong Kong Government's agenda. Plans for a Science Park in Hong Kong and continued environmental spending suggest strong markets for scientific equipment and pollution control products. Increasing consumer sophistication is leading to growth in areas such as giftware, insurance services, medical equipment and franchising. Other "best prospect" sectors include paper products to support Hong Kong's large printing and publishing industry and building materials for residential and commercial projects.

Total U.S. agricultural exports to Hong Kong reached US$1.70 billion in 1997, our 7th largest export market. If seafood and forestry products are included, the total exceeds US$1.84 billion. Hong Kong has become an increasingly important and rapidly growing market for American foods and farm commodities. It ranks as the fourth largest importer of U.S. consumer-oriented agricultural products after Japan, Canada and Russia. Hong Kong imported US$1.3 billion of consumer-oriented products in 1997, up 10 percent from 1996. Overall, Hong Kong ranks as the fourth largest U.S. agricultural export market in Asia after Japan, Republic of Korea, Taiwan and the People's Republic of China. Prospects for 1999 are not as optimistic. The local market has been flat for much of 1998 due to the economic downturn locally and in China. A decrease of approximately 3 percent in US agricultural exports to Hong Kong is anticipated for 1999.

There is also potential growth for U.S. grocery line items as the number of food retail outlets continues to increase. Because of established ties and advantageous trading arrangements, most of Hong Kong's grocers traditionally looked to the United Kingdom, Europe, Australia and New Zealand for supplies. In recent years, however, those buying habits have been shifting and many American items are now available on local shelves, at highly competitive prices. U.S. style warehouse/club retail stores in Hong Kong continue to grow. GrandMart, established in 1993, was the first and now has eight stores which primarily carry food and non-food products from the United States. Unlike most supermarket chains, there are no slotting fees, giving U.S. companies access to this highly competitive market. Over the past few years a variety of new players have joined the local retail scene, such as Carrefour. Additionally, traditional supermarkets such as Park'N Shop have adopted the warehouse concept and have dedicated space in some of their stores for bulk items. A host of other new players have also entered the market and include Guangnan KK, City Super and Market Republic.

Hong Kong consumers like new products, and will experiment with different foreign products. U.S. suppliers have been successful in local Japanese supermarkets, and even Chinese grocery chains. U.S. Department of Agriculture food shows and in-store promotions also offer an excellent way for U.S. firms to introduce and promote new products to the Hong Kong market. With the U.S. Consulate General's Agricultural Trade Office's (ATO) services, and Hong Kong's strong economy, this is an ideal location for U.S. products.

A. Best Prospects for Non-Agricultural Goods and Services

Following is a list of the non-agricultural goods and services best prospects sectors for U.S. exporters to Hong Kong:

No.		Code		Sector Description
1		TEL		Telecommunications Equipment
2		CPT		Computers/Peripherals
3		LAB		Laboratory/Scientific Instruments
4		INS		Insurance Services
5		BLD		Building Products
6		FRA		Franchising
7		MED		Medical Equipment
8		PAP		Paper/Paperboard
9		TES		Telecommunications Services
10		RRE		Railroad Equipment
11		POL		Pollution Control Equipment
12		COS		Cosmetics/Toiletries
13		PMR		Plastic Materials/Resins
14		DRG		Drugs/Pharmaceuticals
15		AIR		Aircraft/Parts
16		ACE		Architecture/Construction/Engineering Services
17		FPP		Food Processing/Packaging Equipment
18		CSF		Computer Software
19		GFT		Giftware

Note: All Figures in U.S. Dollar millions unless otherwise indicated.

1. TELECOMMUNICATIONS EQUIPMENT (TEL)

Hong Kong has for many years been an important trading center for telecommunications equipment in the Asia Pacific region. Changes in Hong Kong's telecommunications policy over the last year portend further growth in this market segment over the next few years. In March 1998, Hong Kong's Office of Telecommunications Authority signed an agreement with Hong Kong Telecom International which provided for the early surrender of the company's exclusive license to provide external telecommunications services. This development will open competition in external telecommunications services beginning in January 1999, and in facilities-based services beginning in January, 2000. While it is unclear, pending the conclusion of the ongoing 1998 Telecommunications Review, the exact extent to which the market will be opened, the certain expansion of players on the international services side will spark significant new demand for high quality telecommunications equipment as new-to-market companies build businesses in areas previously closed to them. Among the items in greatest demand are optical fiber materials and cabling for use in the expansion of telephone network systems, keyline telephones, private branch exchange equipment and other switching/exchange apparatus, telephone sets, caller ID apparatus and other value-added telephone features.

At the end of 1997, there were 4.7 million telephone sets in Hong Kong, serviced by 3.6 million exchange lines (of which 1.5 million were business exchange lines), and 340,000 dedicated facsimile lines. The telephone density was 71 telephones, or 55 lines, per 100 people, the highest in Asia. International Direct Dialing service is available to over 230 countries and 1,300 mainland cities. These figures are expected to grow as additional competition is introduced and additional value-added services become available.

The mobile telecommunications market in Hong Kong, significantly expanded in 1996 with the issuance of six Personal Communications Systems (PCS) licenses, has undergone consolidation over the last year, with two PCS license holders selling their networks to existing mobile operators. This consolidation has increased the number of companies operating two or three separate networks, thus creating a significant, and growing, demand for dual band handsets. At the end of 1997, the penetration rate of mobile phone subscribers in Hong Kong reached 31.5%, the highest in Asia, and this rate had grown to 33% by February 1998. Cellular companies expect Hong Kong's mobile penetration rate will grow to 50% by early in the next century.

With the growing popularity of the Internet, the demand for high speed modems, fax modem cards, and pocket size external fax-modems for personal computers to transmit data via fixed telephone network has also grown. Given the ongoing global trend toward the convergence of telecommunications, information technology, and broadcasting industries, the demand for products with multimedia functionalities continues to expand. Satellite based telecommunications and television broadcasting services require advanced technology such as satellite earth station antennas, broadband application and equipment, networking equipment, transmission equipment. Technologies such as Asynchronous Transfer Mode, frame relay, and encryption solutions are also in increasing demand as the growing number of service providers seek to meet demands from new applications.

Finally, Hong Kong remains an important distribution and sourcing point for China's telecommunications market. As China's own telecommunications market continues to grow, Hong Kong will continue to tap into the great demand in China for telecommunications equipment.

Value of Telecom Equipment Products

		1996		1997		1998
Total Market Size		3,068		4,621		4,912
Total Local Production		1,172		1,207		1,267
Total Exports		3,995		4,293		4,593
Total Imports		5,891		7,707		8,238
Total Imports from the US		553		754		947

The above statistics are unofficial estimates.

2. COMPUTER AND PERIPHERALS (CPT)

Although the financial crisis which emerged last October has had a negative effect on most business areas in Hong Kong, including the Information Technology (IT) industry, over the last year there have also been some positive developments which point to increased growth in Hong Kong's IT sector.

The establishment by the Hong Kong Government of a new Information Technology and Broadcasting Bureau, and the concurrent appointment of an IT Secretary, indicates that the Hong Kong Government has recognized IT as an essential element of Hong Kong's future growth and competitiveness. In October 1997, Hong Kong Chief Executive C.H. Tung emphasized in his first policy address the importance of IT and has promoted IT applications in the arena of education by allocating more IT-related resources to primary and secondary schools.

Additionally, the Government has introduced a tax break scheme to encourage the purchase by businesses of hardware and software systems. These measures have been in support of the Chief Executive's pledge to "make Hong Kong a leader, not a follower in the information world of tomorrow."

We expect that data warehousing products, middleware, systems and network integration services, multimedia applications, and portable PC's will be the primary areas of growth over the next year. Imports of U.S. products will remain predominant in these areas. The challenge for U.S. exporters is to formulate competitive pricing strategies in the region given the dampening effect on spending brought on by ongoing Asian economic difficulties.

		1996		1997		1998
Total Market Size		1,550		2,000		2,100
Total Local Production		2,092		2,326		2,442
Total Exports		8,612		8,976		9,724
Total Imports		8,070		8,650		9,082
Total Imports from the U.S.		1,952		2,262		2,375

The above statistics are unofficial estimates.

3. LABORATORY AND SCIENTIFIC INSTRUMENT (LAB)

Hong Kong has become to a service-oriented economy in the last decade, with the service sector currently contributing some 84% of GNP. The Hong Kong SAR Government (HKG) has been trying to strengthen Hong Kong's manufacturing base, especially in the hi-tech areas. This need has never been more pressing with the current economic slowdown. Responding to the situation, the HKG is increasing its efforts to attract and keep manufacturing in Hong Kong. A plan to develop a Science Park is already on the HKG's agenda. Growth of Hong Kong's hi-tech manufacturing base will increase the demand for laboratory and scientific instruments, which are important for product development, laboratory analysis and quality control.

To enhance competitiveness and to meet the standards of its overseas buyers, Hong Kong's manufacturers in almost all disciplines (textiles, watches and clocks, electronics and toys) are spending significant resources on shortening the product development cycle. Since only a few laboratories which provide product safety and international standards certification exist in Hong Kong and their services are generally considered slow, manufacturing industry representatives have been urging the HKG to establish a comprehensive central product testing laboratory. Whether or not this laboratory is publicly owned, it will increase the demand for laboratory and scientific instruments.

Another major user of laboratory and scientific instruments is Hong Kong's environmental sector. The HKG is expected to spend more than US$ 1 billion on environmentally related projects in the next three years. This huge government expenditure represents some outstanding business opportunities for state-of-the-art laboratory and scientific instruments.

		1996		1997		1998
Total Market Size		746		772		830
Total Local Production		600		750		800
Total Exports		1,351		1,683		1,820
Total Imports		1,497		1,705		1,850
Total Imports from the U.S.		303		403		510

The above statistics are unofficial estimates.

4. INSURANCE SERVICES (INS)

Insurance services continues to be a promising market in Hong Kong. Hong Kong's insurance industry enjoyed an average growth of 16.3% in gross premium income between 1992 and 1997. Gross premium income increased by 8.6% from US$5.96 billion in 1996 to US$6.47 billion in 1997. The main source of growth continued to be the individual life business, as the number of individual life policies in force recorded at the end of 1997 surpassed the 3.1 million mark. Nevertheless, only about 49% of the population in Hong Kong have purchased life insurance.

At the end of 1997, 18,259 retirement schemes were in operation in Hong Kong, with 9,911 (versus 8,989 in 1996) being run by insurance companies. Reported assets under insurance-industry management were US$2.27 billion, out of all reported retirement fund assets (US$13.5 billion) in Hong Kong. Retirement schemes in operation cover 861,576 employees or 29% of the working population.

As of December 1997, Hong Kong had 215 authorized insurers, of which 114 were incorporated overseas. Among the overseas incorporated insurers, the UK and the US (with 21 insurers) took the lead. Of all authorized insurers, 151 specialized in general insurance products, 45 in life insurance products while 19 offered both products.

With funding approved in April 1998, the Mandatory Provident Fund Authority (MPFA) is expected to be set up in the summer of 1998, and the scheme is expected to be implemented by late 1999 or early 2000. An estimated US$1.5 billion a year of retirement funds is expected to be injected in the first year alone, with growth continuing for the next 30-40 years until the system matures.

The government is keen to promote Hong Kong's reinsurance and captive insurance business. In 1997, the government relaxed some of the regulatory requirements for setting up captive insurance companies, which include reduction of minimum solvency margin to 5% of annual net premium or 5% of the net claims outstanding; exemption from the requirement of maintaining assets in Hong Kong; and exemption from the statutory valuation basis for assets and liabilities.

		1996		1997		1998
Total Sales		5,838		6,469		6,798
Sales by local firms		1,284		1,423		1,495
Overseas sales by local firms		0		0		0
Sales by foreign-owned firms		4,554		5,046		5,303
Sales by US-owned firms		1,606		1,780		1,870

The above statistics are unofficial estimates.

5. BUILDING PRODUCTS (BLD)

Public housing development, private residential and commerical development, infrastructure projects, and the China market are the driving force behind the demand for building products in Hong Kong. With Hong Kong's population expected to grow to 8.2 million by 2016 (i.e. 30% growth from the present 6.3 million level) and the SAR Chief Executive's pledge to produce at least 85,000 apartments a year and to raise the home-ownership rate from the present level of 52% to 70% in ten years' time, the demand for building materials used in housing, hospitals, schools and transport infrastructure will certainly increase in the coming years.

Scarcity of land and high labour costs have long been problems for Hong Kong's building industry. Skyscraper-type buildings, therefore, has been the solution. Building products that reduce the use of labour, save on construction time, and support highrise structures are generally favoured by the market. For example, prefabricated structures, slipform systems, and metal formwork which help to save on labour usage and construction time are becoming popular. Growing environmental concern has also opened up a market for building materials applicable for "Green Building" projects. In addition, recyclable and reusable materials such as metal propping, metal hoarding and scaffolding are used in place of bamboo, plywood and lumber.

Hong Kong relies heavily on imports of building products because local production is too small to meet demand. In the imports market, competition is keen with major players from China, Japan, Italy, Germany, Spain and the UK competing against the US. However, with their quality and novelty, US products are capable of being well positioning in the building products market in general.

		1996		1997		1998
Total Market Size		2,707		2,983		3,580
Total Local Production		858		900		1,080
Total Exports		1,861		1,944		2,333
Total Imports		3,710		4,027		4,832
Total Imports from U.S.		298		267		320

The above statistics are unofficial estimates.

6. FRANCHISING (FRA)

With a base of hard-working, entrepreneurial-minded individuals, coupled with its densely populated domestic market and its role as a gateway to China, Hong Kong is an excellent market for franchising. The Hong Kong Government has consistently followed a laissez-faire policy in relation to all commercial and manufacturing activities carried out in the territory. As a result, the legal climate in Hong Kong is conducive to franchising as there is no special legislation dealing with foreign investment or franchising. The only relevant laws affecting franchising are the laws concerning registration and licensing of trademarks, and general contract laws.

At present there are fewer than 100 franchise operations in Hong Kong. In addition to catering and retailing, commercial and domestic services are starting to establish their presence here.

In the longer term, Hong Kong is in a unique position to simulate and direct the growth of franchising in China. Through transferring of their know-how and expertise, both international and local companies can look to franchising as one method of achieving better access and penetration into China's vast market.

		1996		1997		1998
Total Sales by Franchises		818		869		902
Sales by Local Franchises		164		172		181
Sales by Foreign Franchises		654		687		721
Sales by U.S. Franchises		638		670		703

The above statistics are unofficial estimates.

7. MEDICAL EQUIPMENT (MED)

Hong Kong medical and health standards have risen considerably in recent years, and are among the best in the world. Hong Kong's 6.4 million people are provided with a comprehensive range of medical and health services by 13 private hospitals, as well as 44 public hospitals and 185 clinics managed by the Hospital Authority, amounting to a total of 29,432 beds. Supplying medical products to the Hong Kong Government is considered big business here, because nearly 90% of Hong Kong's hospitals are either government controlled or government assisted. Selling to the Hong Kong Government requires potential suppliers to first be pre-qualified with the Government Supplies Department (GSD). Therefore, companies who are interested in supplying to the public hospital should write directly to the GSD (see "Selling to the Hong Kong Government", Section IV, Part K). There are no legal or trade barriers to imports of foreign medical devices, no import duties, and virtually no regulation on the sale of medical devices.

Hong Kong does not manufacture any medical equipment. It relies entirely on imports. A large portion of its imports are re-exported to China. The medical market is dominated by American, German and Japanese products. The end-users of medical equipment require high quality, good after-sales service and competitive pricing. American suppliers interested in exploring the local market should solicit a reliable agent who is able to provide adequate technical support. Ideally, the prospective agent should also be able to cover part of the China market.

		1996		1997		1998
Total Market Size		133		221		254
Total Local Production		-0-		-0-		-0-
Total Exports		481		553		636
Total Re-Exports		425		505		606
Total Imports		613		726		907
Total Imports from the U.S.		194		235		259

8. PAPER (PAP)

Hong Kong is the fourth largest printing and publishing center in the world. Hong Kong is home to 44 newspapers, 708 periodicals and 140 international media organizations and more than 200 publishing houses. Its status as a regional financial center also makes possible a booming security printing segment. Modern machinery and equipment, an excellent communication network and proximity to other Asian markets all contributed to the industry's success. Currently, the territory's printing industry is the third largest manufacturing industry (US$ 3.2 billion recorded in 1994, the latest figure available). The industry has experienced steady growth (an average annual growth rate of more than 6% in the 1990s) and will continue to depend upon imports of quality paper products as raw materials.

To further stimulate the growth of the printing industry, the HKG has tasked the Graphic Arts Association of Hong Kong to set up a testing and analytical workshop. Apart from providing testing services on printing materials, tools and equipment, this workshop will also provide technical training and consultant service to facilitate the transfer of advanced printing technologies to the local printing industry. Along with the growth of the industry, environmentally friendly, quality paper products will continue to enjoy a steady increase in demand.

More efficient production methods and an increase in re-exports to China are two underlying factors accounting for the slight decrease in total paper market size. Responding to the worldwide surge in paper prices in 1995, local printers have invested in new printing technique and machinery which make possible the reduction of raw material wastage. In the last decade, many Hong Kong printers have set up production facilities in Mainland China. They themselves are heavy users of Hong Kong's paper re-exports to China.

		1996		1997		1998
Total Market Size		1,302		1,267		1,270
Total Local Production		360		363		370
Total Exports		1,368		1,499		1,600
Total Imports		2,310		2,403		2,500
Total Imports from the U.S.		430		449		470

All figures are in US$ million. The above statistics are unofficial estimates.

9. TELECOMMUNICATIONS SERVICES (TES)

Hong Kong's Office of Telecommunications Authority (OFTA) has instituted regulatory changes over the past year which have significantly expanded the market for foreign telecommunications service providers in Hong Kong. Early predictions of the outcome of the Telecommunications Review, under way since April 1998, indicate that OFTA is poised to open the market for telecommunications services in Hong Kong still further.

As part of the World Trade Organization's Basic Telecommunications Agreement, which Hong Kong signed onto in February 1997, Hong Kong opened up the market for the operation of Virtual Private Network services (effective May 1997) and for International Simple Resale services for facsimile and data (effective January 1 1998). Most significantly for the future of telecommunications services in Hong Kong, in March 1998, OFTA signed an agreement with Hong Kong Telecom International (HKTI) which provided for the early surrender of the company's exclusive license to provide external telecommunications services, a license which was not due to expire until September 30, 2006. The agreement for the early surrender of the license allows for competition in external telecommunications services to commence from January 1999, and for facilities-based competition to commence from January, 2000. While it is as yet unclear whether, or how many, foreign service providers will be able to compete in the facilities-based international service market or in the local fixed network markets, an early read of the outcome of the ongoing telecommunications review, which will decide these matters, is positive, indicating that opportunities may open up in those areas over the next couple of years.

In addition to these new developments, licenses continue to be made available on an unlimited basis for International Value Added Network Services (IVANS) (including voice value added services) Managed Data Network Services; Call-back Services; and Self-Provided External Telecommunications Services.

		1996		1997		1998
Number of Establishments--Communications		925		971		1,019
Value-added Tele communications (US$		3,360		3,390		3,560
Contribution to GDP		2.6%		2.5%		2.9%
Total outgoing calls (million mins.)		1,692		1,738		1,828
Operator Assisted		71		41		21
IDD		1,394		1,526		1,671
Facsimile and Data		228		171		137
Total Incoming Calls (million mins.)		1,594		2,121		2,821
Market Share by US Firms (est. 2%)		67		68		88

The above statistics are unofficial estimates.

10. RAILROAD EQUIPMENT (RRE)

Although the downturn in the Asian economies is slowing down projects in some countries, the Hong Kong Government is actually accelerating infrastructure projects to boost the economy. In the next decade, Hong Kong will invest more than US$17 billion to build up an efficient roadway and railway network (the railway network will include domestic and cross-border links). For railway projects alone, the Hong Kong Government will invest about US$14 billion in the next five years on three priority rail projects, namely the West Rail, Tseung Kwan O Extension (TKO), East Kowloon Extension (EK) and Ma On Shan Extension (MOS). For both the West Rail and TKO, various detailed design contracts have already been awarded in early 1998, and it is now time to move forward to the construction and equipment procurement stage.

From mid 1998 to 1999, Hong Kong's railway operators, Mass Transit Railway Corporation (MTRC) and Kowloon Canton Railway Corporation (KCRC), will be pre-qualifying and eventually awarding the construction and system-wide contracts for the West Rail and TKO projects in phases. (The system-wide contracts refer to areas such as electrical & mechanical [E&M], rolling stock and fare collection systems.) Traditionally, few U.S. construction companies have been active in Hong Kong. However, U.S. equipment suppliers, especially the ones in signaling and communications, environmental protection and train control systems, have successfully taken part in Hong Kong's railway expansion and refurbishment projects. Using the just completed Airport Railway as an example, the U.S. share in the system-wide contracts was about 3%, as illustrated in the 1996 and 1997 figures below. Since quite a few American companies (such as Parsons Brinkerhoff and Binnie Consultants) have won some technical studies (preliminary engineering) and also major detailed design contracts as prime or sub-contractors for both the Westrail and TKO expansions, this will likely lead to an overall higher American participation in railroad equipment supply. In addition, as outlined above, the market is expected to grow substantially over the next several years, so the outlook for American railway equipment suppliers is very promising.

		1996		1997		1998
Total Market Size		440		480		720
Total Local Production		0		0		0
Total Exports		0		0		0
Total Imports		440		480		720
Total Imports from the U.S.		13		15		32

(Note: 1996 and 97 figures are almost entirely related to the Airport Railway - spending on the Westrail and TKO projects begin in 1998.) The above statistics are unofficial estimates.

11. POLLUTION CONTROL EQUIPMENT (POL)

The next five years will see ample opportunities for US firms in pollution control equipment as planned infrastructure projects come on line and as industry works to comply with environmental regulations. The key areas for US firms are municipal sewage, industrial wastewater, air pollution control and solid waste minimization equipment.

In addressing Hong Kong's environmental infrastructure requirements, the government anticipates awarding over US$ 1 billion of project contracts over the next three years, from 1998-2000. Projects currently being awarded or planned include: municipal sewage treatment systems and related equipment for US$ 500 million; four refuse transfer stations for US$ 130 million; three remaining landfill restoration sites for US$ 100 million; a two million tons per year waste-to-energy incinerator for US$ 300 million and a low-level radioactive waste storage facility for US$ 20 million. Equipment to support these projects typically accounts for 25-30% of the project cost and will offer over US$ 300 million in sales opportunities to US suppliers.

There are plenty of business opportunities in pollution prevention and control technologies. In October 1997, the government put forward a waste reduction plan which includes a policy of waste avoidance, minimization and material recycling. The goals are to reduce the amount of waste requiring disposal, to prolong the service life of landfills, and to reduce the costs involved in transporting, disposing and treating the waste. Total waste reduction cost, including waste minimization technologies and services, will be US$300 million over the next 10 years. This should provide excellent opportunities for US firms, as US technologies are considered highly competitive in Hong Kong's market.

In 1996, the government implemented the water quality control zone (WCZ) effluent discharge regulations for Hong Kong waters. However, enforcement of the effluent discharge guidelines is taking effect slowly as a government grace period expires and as enforcement becomes more stringent. The Hong Kong Industry Department estimates that the total cost of compliance for Hong Kong's two thousand factories now affected by WCZ will reach US$ 200 million, spread over a period of 5-8 years. The key industries needing waste water control equipment are electroplating, printed circuit board, bleaching and dyeing, and food processing.

		1996		1997		1998
Total Market Size		221		228		247
Total Local Production		11		12		14
Total Exports		40		48		52
Total Imports		250		264		285
Total Imports from the U.S.		63		89		105

The above statistics are unofficial estimates.

12. COSMETICS AND TOILETRIES (COS)

Hong Kong is a very important distribution and marketing base for cosmetics. Since the lifting of the 30 percent duty on cosmetics and perfumery products in Hong Kong in March 1993, the demand for these products has been increasing steadily. Imports of cosmetics, perfumery and hair care products reached US$616 million in 1997, an increase of 20% over 1996.

Hong Kong has an extraordinary efficient wholesale and retail network to cater to the growing consumption needs of an affluent population, which includes both local consumers and tourists. Supermarkets, large department stores, convenience stores and modern shopping centers have become increasingly popular. With the high per capita income of around US$27,000, there has been a growing demand for products offering better quality and service.

Visitors to Hong Kong make cosmetics and perfume prime targets of their shopping trips. Although the overall prospects for Hong Kong's cosmetics for 1998 are not encouraging because of the Asian financial crisis and the resultant slower economic growth, an expected recovery of tourist arrivals in the longer term should bode well for local sales of cosmetics.

In order to assist U.S. exporters, the U.S. has organized a pavilion at the annual Cosmoprof Asia Show (formerly known as Asia Beauty) for the past several years. U.S. companies have been very successful at this show. As these companies have realized, Hong Kong is important both as a major market in its own right and as a springboard for exporting U.S. cosmetics products to the rest of the region.

		1996		1997		1998
Total Market Size		1,400		1,652		1,818
Total Local Production		1,002		1,146		1,261
Total Exports		114		110		121
Total Imports		512		616		678
Total Imports from the U.S.		203		238		254

The above statistics are unofficial estimates.

13. PLASTIC MATERIALS & RESINS (PMR)

Hong Kong has a small plastic resins and compounding market sector. Most of the plastic resins are imported. Plastic raw materials produced in Hong Kong, limited to polystyrene (PS), satisfies only 20% of local demand. The rest is imported, mainly from Korea, Taiwan, Japan and the US. Major local end-users include plastic factories producing toys, packaging materials, shoes, housewares and casings for electrical and electronic consumer goods. Asian countries are very price competitive. In contrast, American plastics are more expensive but of better quality. The U.S. is strong in engineering plastics which are used for more sophisticated and higher value added products, where the local end-users are willing to pay more for better quality.

Hong Kong has been a major world supplier of consumer products. In recent years, however, to reduce land and labor costs, Hong Kong manufacturers have shifted production to mainland China. As such, much of the imported resins and plastic materials are re-exported to China. In addition, China's production of plastic products has increased tremendously as its economy has developed, and domestic plastic materials cannot meet the demand. Consequently, China imports a lot of plastic materials through Hong Kong. Since there is a huge demand for resins in China, the sales potential for plastic materials and resins in Hong Kong is substantial.

		1996		1997		1998
Total Market Size		1,449		1,416		1,345
Total Local Production		350		385		423
Total Exports		5,331		5,462		6,008
Total Re-Exports		4,699		4,878		5,609
Total Imports		6,430		6,493		7,467
Total Imports from the U.S.		932		835		850.5

The above statistics are unofficial estimates.

14. DRUGS/PHARMACEUTICALS (DRG)

Sales potential for Western medicines in Hong Kong is substantial. Total pharmaceutical imports last year reached US$1,339 million, of which Western prescription medicine accounted for US$545 million, and over the counter drugs US$794 million. Hong Kong will continue to import Western pharmaceutical products because its domestic production does not meet the market demand. The total import market growth in 1996 was 10%. Most products are imported from the U.K., Japan, Germany, China and the U.S.

The Hospital Authority is responsible for the management and control of all public hospitals, and is the biggest pharmaceuticals end user in Hong Kong. Drugs are a major and growing expense for the Hospital Authority. They spent US$155 million on drugs during fiscal 1997/98, and expenditures are likely to exceed USD166 million during the current fiscal year. More importantly, the figures are growing at an annual rate of 7%. All pharmaceutical products/medicines must be registered with the Pharmacy and Poisons Board, Department of Health before they can be sold to the Hospital Authority, and purchase orders will be handled by the Government Supplies Department (see "Selling to the Hong Kong Government", Section IV, Part K).

U.S. pharmaceutical products are well regarded and welcome in Hong Kong. In addition, there has also been a large expansion in "re-export trade" (i.e., the import of products which are then "re-exported" to a foreign market), largely triggered by the demand in China. U.S. companies interested in entering the Hong Kong/China markets should find a reliable agent/distributor to represent their pharmaceutical products in both areas.

		1996		1997		1998
Total Market Size		395		468		533
Total Local Production		197		181		175
Total Exports		1,021		1,052		1,115
Total Re-Exports		910		973		1,031
Total Imports		1,217		1,339		1,473
Total Imports from the U.S.		81		97		112

The above statistics are unofficial estimates.

15. AIRCRAFT AND PARTS (AIR)

Hong Kong's replacement airport located in Chek Lap Kok, 25 kilometers west of Hong Kong's central business district, began operations on July 6, 1998. The airport, operating 24 hours a day, has an initial capacity of 35 million passengers and three million tons of cargo annually. Upon completion of the second runway and associated facilities, the new airport will have capacity of 87 million passengers and nine million tons of air cargo annually.

At present, Hong Kong is served by 67 scheduled airlines which operate 2,910 direct flights in and out of Hong Kong weekly to 100 other cities. In 1997, these airlines accounted for 160,515 aircraft movements and brought 30 million passengers and 1.62 million tons of cargo throughput at the Hong Kong International Airport at Kai Tak, making the Hong Kong airport one of the busiest in the world.

Hong Kong has three home-based airlines (Cathay Pacific, Hong Kong Dragon Airlines, Air Hong Kong), which own a total of 74 aircraft. Macau, the Portuguese enclave approximately 30 miles to the southwest of Hong Kong, opened its airport in 1995, with one home-based airline, Air Macau. Replacement and expansion needs both in Hong Kong and Macau definitely create a demand for more aircraft, particularly now that Hong Kong's replacement airport at Chek Lap Kok has become operational.

Previously, the Hong Kong Aviation Engineering Company (HAECO) managed all aircraft maintenance at Kai Tak. Now that the new airport has opened, there are three franchises for line services (HAECO, China Aircraft Services Ltd and Pan Asia Pacific Aviation Services) and one base service managed by HAECO. The expected increase in aircraft movements, as the new airport rampes up, will increase the demand for aircraft maintenance parts. The Macau aircraft maintenance hangar, which became operational in 1997, has also increased the demand for aircraft parts. Finally, nearly half of Hong Kong's re-export of aircraft parts goes to China. With China's aviation industry growing at a 13% annual rate, demand for aircraft parts for replacement and maintenance purposes should continue to increase.

The U.S. already maintains 75% and 55% share of the import market for aircraft and aircraft parts, respectively. The U.S.'s long established reputation in Hong Kong should enhance its competitiveness still further in the expanded market after 1998.

		1996		1997		1998
Total Market Size		1,733		463		532
Total Local Production		0		0		0
Total Exports		112		112		129
Total Imports		1,845		575		661
Total Imports from U.S.(*)		672		110		124

*This includes imports of both aircraft and parts. For 1996, the figure reflects mainly the purchase of 7 new aircraft. For 1997, the figure represents mainly aircraft parts imports. We estimate that import of U.S. aircraft parts is growing at 15% per year.

The above statistics are unofficial estimates.

16. ARCHITECTURE/CONSTRUCTION/ENGINEERING SERVICES (ACE)

Hong Kong is planning substantial infrastructure projects including improved cross border links, railway systems, environmental services and new container terminals. Accompanying these activities are the ever present housing demands. To support these projects, Hong Kong continues to need the service of consultants, building professionals, engineers and construction companies.

Competition in the Hong Kong construction industry has always been keen. Among the 100 architectural firms, 160 engineering firms and 2,000 contractors active in Hong Kong, a large percentage are locally-based companies and some of them are originally and/or presently headquartered in the U.K. and Japan. Other foreign companies competing in the market include those from China, France, Germany, Australia, Korea and the U.S.

U.S. companies contribute only a small fraction of the local market. There are about 10 U.S. architectural firms, 5 engineering consulting companies, a few interior designer firms and environmental consultants who maintain a presence here. Opportunity continues to exist for U.S. firms which can provide specialized consulting services in areas such as architectural design, interior design, landscape design, project management, building services management, waste management, pollution control, fire engineering, traffic consulting etc.

		1996		1997		1998
Gross value of construction work		15,011		16,812		18,830
Consulting fee involved (approx.5%)		751		840		942
Market share by HK firms (est.90%)		676		756		848
Market share by US firms (est. 2%)		15		17		24.5

The above statistics are unofficial estimates.

17. FOOD PROCESSING & PACKAGING EQUIPMENT (FPP)

Hong Kong's food processing and packaging industry has grown hand in hand with its prosperity and westernization. Today, the food and beverage industry is ranked sixth among Hong Kong's manufacturing industries in terms of gross output. In the 1990s, the industry has been experiencing an annual growth rate of over 4%. Through the years, the industry has grown not only to serve the general public, but also has expanded into assuming an important international position. Many multinational food companies (such as Campbell's Soup, Nissin Foods, Amoy Food and CPC/AJI) have manufacturing bases established in Hong Kong. Their products as well as other local brand food products (such as Lee Kum Kee) are being exported to many overseas markets, including Europe and North America. To meet Hong Kong's and international markets' tightening hygiene and food preparation standards, the food processing and packaging industry has adopted advanced food processing technologies and shifted into utilizing modernized food processing machinery from overseas.

The Hong Kong SAR Government (HKG) has been very active in supporting the local food manufacturing industry. Not only did it fund food-related research through the local Industry Department and set up a Food Packaging Technology Center, it has been allocating resources to organize educational courses in food science and technology. The primary objective is to upgrade the food industry and elevate every aspect of food manufacturing, from quality assurance, to laboratory analysis to actual production. To meet the industry's production automation needs, advanced food processing and packaging machinery imports will continue to grow.

Hong Kong re-exports about 70% of its total food processing and packaging equipment imports to the rest of China. Some of these re-exports are attributable to Hong Kong companies having their production facilities there, while the rest are resold to the Mainland's food and beverage industry. Hong Kong can be expected to continue acting as the food processing and packaging machinery trading agent for Mainland China.

		1996		1997		1998
Total Market Size		124		221		215
Total Local Production		35		40		45
Total Exports		303		224		260
Total Imports		392		405		430
Total Imports from the U.S.		66		73		80

The above statistics are unofficial estimates.

18. COMPUTER SOFTWARE (CSF)

Information Technology (IT) spending in Hong Kong, one of the most developed IT markets in the region, amounted to U.S.$1.8 billion in 1997, according to the IT research firm Dataquest. Of that figure, purchases of software (packaged products only) accounted for U.S.$70 million last year.

The rapid advance of technology, including the Internet boom, has directed user preferences toward Internet-enabled and electronic commerce solutions, such as electronic banking, electronic shopping, electronic data interchange and smart cards. Software for the above applications will be therefore be the major growth areas over the next year. Another area of growth will be the demand for Y2K compliant solutions in the market for small to medium-sized enterprises which will seek for conversion services or replacement systems, as well as applications which are certified Y2K compliant. Educational software and content providers; multimedia software; and computer graphics will also be in demand.

Imported software accounts for over half of the software products sold in Hong Kong, and U.S. products have been a major player in this market. However, with the recent devaluation of Asian currencies, and concurrent lowering of technology production rates in the region, U.S. software producers may have to revise their pricing strategy in order to remain competitive.

		1996		1997		1998
Total Market Size--
Products *		58		70		74
Services **		569		700		735
Total Local Production--
Products *		13		18		19
Services **		455		600		630
Total Exports--
Products *		75		98		103
Total Imports--
Products *		120		150		158
Total Imports from the U.S.--
Products*		58		80		84

*Standard software packages sold in recorded media form for other than sound or images.

** Customized software systems and services sold usually on a project basis.

The above statistics are unofficial estimates.

19. GIFTWARE (GFT)

Gift-giving is a well-established part of Chinese culture. In addition to its Chinese heritage, Hong Kong has also been heavily influenced by the west, as it was ruled by the British for 150 years. Gifts are given, therefore, on established western seasonal holidays such as Christmas, New Year, Valentine's Day, Mother's and Father's day, and also on Chinese holidays such as Lunar New Year and Mid-Autumn Festival. Gifts are also given on occasions such as weddings and birthdays. Finally, influenced by mainland Chinese conventions, seasonal and occasional gifts given to business associates are becoming popular in Hong Kong, as are sales promotional gifts. There are numerous items that can be classified as giftware since they are chosen in accordance with the receivers' taste and interests, and the givers' budget and thought, such as wine, coffee, tea, chocolate, candies, toys and games, cassette players, jewellery, tea sets, sweaters, clothing accessories, handbags/wallets, lighters, watches, sporting goods, etc.

Interested U.S. exporters can sell their gift products through wholesalers in Hong Kong. There are many gift wholesalers in Hong Kong who are either traders or manufacturers. They prepare product catalogues, always equipped with new products, to show to their customers. In recent years, buying habits have been shifting and many American items are now available on local shelves at highly competitive prices. Finally, U.S. style warehouse/club retail stores in Hong Kong continue to grow.

Although Hong Kong has become an increasingly important and rapidly growing market for American giftware products, industry sources indicate that China is also a very promising market for the U.S., especially for branded medium to high-end giftware products, because there is a growing demand for such items due to the rising affluence in China.

		1996		1997		1998
Total Market Size		29,250		31,099		32,654
Total Local Production		435		391		371
Total Exports		19,765		22,730		25,003
Total Imports		48,580		53,438		57,286
Total Imports from the U.S.		785		864		868

The above statistics are unofficial estimates.

B. Best Prospects for Agricultural Products

Sector Description

Poultry Fresh Fruit Red Meats Processed Fruit and Vegetables Ginseng Hides and Skins Tree Nuts Lumber Cotton Dairy Products Wine and Beer Eggs Fresh Vegetables Snack Foods Seafood

Of all U.S. agricultural exports to Hong Kong, poultry, oranges, red meats, processed fruit & vegetables, ginseng, hides & skins, tree nuts and lumber are the leading items. Once again, poultry meat topped the list of U.S. food exports to Hong Kong in 1997 at US$436 million. This represents a 4 percent increase over the 1996 level of US$419 million. Chicken meat was the star performer as Hong Kong consumers continue to enjoy U.S. chicken wings, feet and chicken franks, and the China market absorbs a large share of Hong Kong's poultry re-exports.

Exports of U.S. fresh fruit and vegetables alone totaled a record high of US$257 million in 1997. The United States is the number one supplier of fresh fruit to Hong Kong; and of all fresh citrus and non-citrus fruits exported offshore from the U.S., Hong Kong purchases approximately 8 percent of the total. Hong Kong is among the top three U.S. export markets for oranges, apples, grapes, tomatoes, celery, lettuce, peppers and onions. Hong Kong, with perhaps the highest per capita consumption of fresh oranges in the world, imported 188,634 metric tons of oranges from the United States in 1997. Fresh apples, grapes and lettuce have also done well. Frozen vegetable imports too, led by mostly French fries, continued to rise.

US ginseng exports to Hong Kong, on the other hand, have fluctuated up and down over the past few years. For 1997, US ginseng exports to Hong Kong totaled 1,723 metric tons or US$82 million. US wild and cultivated ginseng is still much sought after in this market, and, the US is the second largest supplier in terms of value behind the PRC.

U.S. exports of tree nuts including pistachios, almonds and macadamias have also done extremely well in this market over the past few years. In 1997, total tree nut exports grew by 21 percent over the 11 percent increase in 1996, to US$59 million, more than 5 times the 1990 level of US$10.8 million.

[end of document]

Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.

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