Generation 40s – 四十世代

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Hong Kong needs to throw more caution to the wind when it comes to backing start-ups

BusinessCompanies
THE VIEW
2017-09-22
The biggest problem is an acute shortage of angel investors and seed money available, even before any venture capital money becomes involved – we need to take unconventional risks to succeed

The Hong Kong government is trying to transform the economy from its traditional to a new innovative economy, but doesn’t realise that creative failure rather than cautious success will lead the way.

Last week, Hong Kong launched its HK$2 billion (US$256 million) Innovation and Technology Venture Fund (IVTF) to encourage investment in local innovation and technology start-ups in an effort to improve economic activity.

The government is inviting venture capital funds to apply to become co-investment partners of the new fund, said Nicholas Yang Wei-hsiung, the Secretary for Innovation and Technology. The government will only make investments alongside VC funds.

The government is risk averse even though it needs to take more risks to build Hong Kong’s new economy. It does not want to directly and autonomously choose which investments to make because historically, civil servants do not want to take responsibility for losses.

Yet successful venture-capital investing requires the ability to accept and learn from losses. So the IVTF is depending on venture capitalists to do the due diligence and cover the bureaucrats’ collective reputations.

Matching funds are the easy way out for the government because this assumes that venture capitalists in Hong Kong are actually effectively serving the unique needs and problems of the city’s start-up ecosystem. Instead, the government needs to take on the most difficult part of kick-starting a new economy – tech or otherwise.

The biggest problem in funding start-ups in Hong Kong is that there is an acute shortage of angel investors and seed money available before venture money.

VCs prefer to invest minimum amounts of about US$3 million and more. Then, there is so much private equity available globally that private companies like Uber can be valued at US$60 billion and still be funded by private money. VC has grown so big that you can’t tell the difference from private equity.

And that tends to crowd out investment at the smaller, seed levels. As high net worth investors would prefer to make bigger investments in bigger, non-listed companies.

But, the problem in Hong Kong’s funding channel is that many start-ups are looking for less than a million US dollars, more like US$500,000 to roll out their product after a few years of development, or angel money of US$100,000 to begin a business.

Start-ups can attract investments of US$3 million and up if they demonstrate revenue or profits, or have completed a desirable technology. But Hong Kong’s relatively new world of new-economy start-ups require more support at an earlier stage. And only the government has the resources.

Hong Kong entrepreneurs have less experience in developing start-ups and even fewer have the initial capital. Even the GoGoVan founders had to desperately scrape together HK$20,000 each seven years ago. Lack of capital and experience are major problems in Hong Kong.

Incubators in Hong Kong tend to rent or give out shared office space; some may render business advice, but few are capable of actually funding start-ups.

Start-ups and their founders also tend to require lots of attention from their investors. Business plans rarely go according to plan. And turnaround strategies rarely turn around, since so much guidance and intervention is required.

The start-up game requires a tolerance of low-level failure. Using a VC expression, this means it is important to “fail early and fail often”.

The success rate is low for start-ups. And most people should be working for someone as employees rather than running their own business. It takes tremendous self-confidence and determination to launch a business. Historically, it has been much easier to flip property.

Local Hong Kong investors tend to ask start-ups the wrong questions. They ask, “How does it make money?” The right question is “ What problem does this solve?” There’s a big difference in mentality and mission.

It is difficult to raise VC money in Hong Kong. Many of them are interested in businesses that can scale outside Hong Kong, into mainland China and internationally. They are looking to turn a 10-million dollar company into a billion-dollar company in a few years. Mainland China is the only place in Asia where this can happen quickly.

I detect a natural prejudice against Hong Kong Chinese-founded start-ups. Most VCs think Hong Kong Chinese cannot operate successfully in China and are treated like foreigners in China as they need to take on a mainland joint venture partner.

This is especially risky in terms of divergent management attitudes or outright intellectual property theft or misappropriation.

The entire government and local financial community needs to take on more risk if it wants to transform the Hong Kong economy away from property development and traditional industries.

Hong Kong’s financial industry professionals are still divided over how they can remake the city’s stock exchange. Many of the conservative, traditional stockbrokers think the proposed start-up board is too risky in terms of regulation.

But we will need to take unconventional risks to succeed.

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Hong Kong must focus on innovation and science to maintain its edge over economic rivals

South China Morning Post
CommentInsight & Opinion
2017-06-15

Ken Chu says its core values and a free, open market still set Hong Kong’s economy apart despite some challenges, but continued success in the digital age will depend on its ability to innovate and upgrade

Hong Kong has been named the world’s most competitive economy by the IMD Business School in Switzerland for the second straight year. The title is indicative of our strong fundamentals due to our core values and, together with “one country, two systems”, this sets Hong Kong apart from its rivals.

Therefore, we must safeguard and uphold our core values for continued economic success.

Given its small economy and market size, Hong Kong does not enjoy the economies of scale like mainland China. Relatively high wages mean Hong Kong does not have the advantage of competing on cost.

But, as Financial Secretary Paul Chan Mo-po noted shortly after the IMD rankings were announced, we do have a solid legal framework and rule of law that international investors feel comfortable with, an efficient administrative system, and sound banking, financial and transport infrastructure. Above all, we have an open and free market.

We must strive to maintain the cosmopolitan nature and openness of our market for Hong Kong to play the role of a super connector, for the mainland as well as the world at large. Only then will Hong Kong be able to maintain its long-term competitiveness. Competitiveness could mean high productivity, the capacity to produce more units with a given set of raw materials than rivals; it could mean efficiency, or producing at the lowest cost; it could also mean having what competitors do not.

Management guru Peter Drucker believes that, in the 21st century, knowledge-worker productivity is the real competitive advantage. That seems logical, in view of the new economy sweeping the globe. Economies everywhere need more knowledge-based workers, such as programmers, system analysts, animation artists, product designers, and so on. The more productive they are, the more competitive the new digital age economy is. If we agree, we should train workers with high technical expertise, and scientific and technological knowledge.

Harvard professor Michael Porter says competitiveness hinges on the capacity of industry to innovate and upgrade. This could be another way to maintain our competitiveness. However, we seem to have problems in innovation and science.

Hong Kong continues to slip down the Global Innovation Index rankings. Moreover, the Programme for International Student Assessment (Pisa), says Hong Kong’s performance has dropped significantly in science. Our STEM (science, technology, engineering and maths) curriculum must be strengthened to make future generations tech-savvy, or Hong Kong will lose out.

Fortunately, we still have a distinct edge over competitors – our strategic location. Being next to innovation hub Shenzhen and within the Guangdong-Hong Kong-Macau Greater Bay Area lets us tap a rich pool of technological talents and innovation resources.

Setting up a tech park at the Lok Ma Chau Loop and boosting financial aid to innovation start-ups represent the right way to spur technological advances.

Yet, there are challenges that undermine our competitiveness – high living costs, exorbitant rents, escalating labour costs, damage to our natural landscape and a widening wealth gap, highlighted by the latest Gini coefficient index.

After all, a city needs not only “hardware”, such as infrastructure, financial systems and innovation parks, to boost its competitiveness, but also people to drive economic growth and energise innovation. If talented people find it isn’t worth working and living in the city, they will eventually abandon it.

Dr Ken Chu is group chairman and CEO of the Mission Hills Group and a National Committee member of the Chinese People’s Political Consultative Conference


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Beyond summits: what the evolution of China’s cities can tell us about the state of the economy

South China Morning Post
CommentInsight & Opinion
2017-04-06

Curtis Chin says the feel-good boost generated by summits like the G20 in Hangzhou does not capture the real changes in the economy. More can be learned by tracking cities’ development after the meetings have moved on
Seven months ago, the world’s attention turned to Hangzhou ( 杭州 ) as leaders representing the Group of 20 largest economies met that September, at what was Barack Obama’s final appearance at a G20 summit as US president. The Hangzhou meeting was also the first-ever G20 summit hosted by China.

How long ago and far away that seems as a new US president has moved quickly to dismantle Obama’s initiatives and executive orders, to transform his own campaign promises into reality.

For followers of the US-China relationship, the focus now turns from Hangzhou to Mar-a-Lago, the landmark Palm Beach, Florida estate and club that is the site of the first summit meeting between US President Donald Trump and Chinese President Xi Jinping ( 習近平 ).

At the G20 Hangzhou summit, Obama sought to solidify his foreign policy for the Asia-Pacific region. A seeming breakthrough had come when he and the Chinese president signed on to the Paris climate agreement – a diplomatic milestone for the world’s two heaviest polluters.

Obama also sought to increase international and domestic support for the Trans-Pacific Partnership trade agreement, discuss international law and maritime security in the South China Sea, and seek action on terrorist activity, violence and humanitarian crises across the Middle East.

Those days are past, but the evolution of Hangzhou and other Chinese cities deserves continued attention.

Not as well known to many as Beijing, Shanghai or even Guangzhou, the once small city of Hangzhou has been transformed into a metropolis of seven million people and is also the heart of China’s Silicon Valley. Home to e-commerce giant Alibaba, which owns the South China Morning Post, Hangzhou continues to lure tech start-ups and serve as a home base for entrepreneurs, including those who made their initial wealth through Alibaba as it grew.

Like many other Chinese cities, Hangzhou’s growth was fuelled early on in part by manufacturing, development and construction. These are also key drivers of China’s continuing pollution challenge. The consequences of that growth were at least temporarily addressed in the lead-up to the G20 summit.

Roads were renovated and buildings given facelifts. Thousands of trees were planted. Residents were given the week off to reduce the number of cars on the road. Factories were closed, and migrant workers were sent home – all efforts to reduce air pollution and bring “G20 blue skies”.

Artificial fixes and facelifts aside, Hangzhou has performed well vis-à-vis other Chinese cities economically. In 2015, the Milken Institute – a non-partisan economic think tank where I serve as the inaugural Asia fellow – ranked China’s large, mid-sized, and small cities based on economic performance in its inaugural Best Performing Cities China report.

Key inputs in the economics ranking included job and wage growth, foreign direct investment growth, and a measure of high value-added industry employment, among others.

In 2015, Hangzhou ranked 25th among China’s first- and second-tier cities. A year later, the city had moved up to 20th in the 2016 report, behind best performing city Guiyang ( 貴陽 ) in the Guizhou (貴州) province. Hangzhou significantly improved its categorical ranking on one-year job growth (from 30th to 10th), but did worse in five-year overall job growth (11th to 16th).

Chinese students work on the Ares, a humanoid robot designed by them with funding from a Shanghai investment company, displayed during the World Robot Conference in Beijing in October 2016. China is increasing funding for technology-intensive industries, including aviation, robotics and biomedical technology. Photo: AP

As China’s leaders work to shift the nation’s economy from a focus on labour-intensive, low-cost manufacturing goods towards innovation-based products and high-quality, hi-tech manufacturing and services-driven growth, Hangzhou may well serve as a test case of what can and cannot be achieved long after artificial G20 summit-driven investments and changes fade from view.

Internally, China is increasing funding for technology-intensive industries, including aviation, robotics and biomedical technology. The government also continues to shift low-cost manufacturing inland and redevelop coastal cities as hubs for more innovation-based ­industries.

Regional growth clusters are envisioned, including a “Jing-Jin-Ji” (京津冀) megalopolis region, which would integrate Beijing, Tianjin ( 天津 ) and the Hebei ( 河北 ) area into one super region, and a Yangtze River economic belt that would encompass the giant metropolitan areas of Shanghai, Chongqing (重慶) and Chengdu (成都).

A map of China and Central Asia is displayed at an exhibition in Los Angeles last year on Dunhuang’s cave temples. A red line on the map marks out the ancient Silk Road. Today, China seeks to foster a new Silk Road on land and at sea, to better connect to new and established markets. Photo: AFP

Externally, China is seeking to improve economic access, integration, capital and knowledge flows, as well as information sharing to other economic regions. The most notable effort is the “One Belt, One Road” initiative that seeks to foster a new Silk Road on land and at sea to better connect China to new and established markets.

The impact on the economic performance of China’s cities and economic regions – and on everyday Chinese citizens’ lives – of such ambitious internal and external initiatives is unclear. Future results will provide further input on how government and city leaders can best transform and leverage cities for economic growth. This may well include the need for implementation of policies that increase access to capital and knowledge, and free up the power of the private sector, as with Alibaba in Hangzhou, to drive future growth.

This July, the world’s attention will move on to Hamburg as Germany serves as host of the 12th meeting of the leaders of the Group of 20. There, as in Hangzhou last year, there will be much discussion and talk. What will then follow is the reality check of whether actions result and whether beneficial policies are implemented and ­enforced.

Much attention is understandably given to multilateral meetings and bilateral summits, as in the Xi-Trump summit at Mar-a-Lago.

Even more important in our increasingly urbanised world will be to continue to look at and learn from what is happening on the ground in cities and surrounding areas even after the summiteers have left.

Curtis S. Chin is a former US ambassador to the Asian Development Bank, and managing director of advisory firm RiverPeak Group, LLC.


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What Donald Trump got wrong about US manufacturing

CommentInsight & Opinion
2017-04-06
Winston Mok says his promise to bring back jobs to America is misguided, as the sector is in fact thriving – on hi-tech manufacturing – and any attempt to roll back globalisation would only hurt the US economy

Can President Donald Trump bring manufacturing jobs back to the US, as he promised in his presidential campaign? New jobs, perhaps. But not old jobs. And certainly not by starting a trade war with China. To think through how manufacturing jobs may be created in the US, it is important to first get a few facts and concepts straight.

First, US manufacturing is thriving. Standing at a historical high in 2016, US manufacturing output has grown by 45 per cent in real terms in the past two decades. The increased output was achieved with fewer workers through productivity gains from technological advances. The share of manufacturing in the US economy has remained little changed in the past 50 years. In contrast, after peaking a decade ago, manufacturing’s share in the Chinese economy has been declining. Manufacturing’s share of employment in China started falling even earlier, two decades ago. In fact, declining manufacturing employment is a global trend.

Second, the US has lost only limited manufacturing jobs to China in the recent past. Even before the rise of China as a manufacturing powerhouse, the US had been losing jobs to East Asia for decades. In the past decade or two, many of these jobs were consolidated from other parts of East Asia to China. In the process, these other Asian economies moved up the technology ladder to higher-value components.

When a laptop or smartphone is imported from China to the US, most of the value, other than the margins captured by brand owners or retailers, is contained in the critical components – made in Japan, Korea or Taiwan – in these devices. The value added by China can be very small. Some of the apparent US trade deficits with China are really indirect trade deficits with its allies – Japan, Korea and Taiwan – embedded in these products assembled in China.

Third, China may be fairly described as enjoying unfair cost advantages, with its poor pollution controls and worker rights protection. With development, these social costs are becoming increasingly unacceptable, and China has made improvements in these areas. But closing these cost gaps won’t bring jobs back to the US.

Nor will imposing tariffs on imports from China. Margins may decline and consumer prices may rise. Some jobs may go to lower-cost countries such as Vietnam. For hi-tech products, production may move to Singapore or Malaysia, even Korea or Taiwan. But these jobs are gone from the US for good. In a globalised world, targeted tariffs against a few countries cannot result in positive domestic outcomes.

This brings us to the fourth point. Low labour costs are not everything. Despite their high labour costs, Japan and Germany remain competitive in manufacturing through superior technology, quality and productivity. A good network of suppliers is key. China started with low labour costs. Over time, it has developed world-class clusters in some sectors. In the meantime, the US lost its old manufacturing jobs to East Asia such a long time ago that the related clusters no longer exist there. Even if US labour costs were to be heavily subsidised, it is hard to see the return of some manufacturing sectors.

Fifth, market trends will drive some manufacturing jobs to the US, ironically through investments by East Asian manufacturers. But many of these new plants will be automated. Thus, workers with different skills may be needed than those previously laid off. Job creation ultimately hinges on skill development.

Finally, US manufacturing is among the world’s most competitive. The US should nurture its high-productivity manufacturing, instead of wanting a return of low-value manufacturing. America’s strength is based on its manufacturers’ high research and development investments. This strength can be fully exploited if they can source components, and sometimes outsource production, globally. Thus, they must have unfettered access to all major markets.

Impeding free trade is certain to undermine US manufacturing competitiveness. Protectionism is no way to create jobs. And any trade war with China, as estimated by a leading US think tank, will only lead to the loss of millions of jobs in America.

Winston Mok, formerly a private equity investor, is a private investor


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How China can replace the US as a champion of clean energy

CommentInsight & Opinion
2017-04-01
Reda El Chaar says Beijing’s massive investments in clean energy make it the natural choice to take over the leadership role occupied by a wavering US, and China can step up in several ways

The US has been at the forefront of clean energy initiatives in emerging markets and is considered the global leader in this sector. In particular, its Power Africa campaign has improved electrification of the continent and played an important role in helping African countries use more wind and solar power.

Under its new political leadership, however, the US looks set to back away from participating in global action on climate change.

Any roll-back could create a void in global climate leadership. At present, Europe is too fragmented and too preoccupied to play a strong international role in the wake of Brexit. So who will champion renewable energy on the world stage?

However unlikely it would have seemed just a few years ago, China is the most credible candidate. The world’s second-biggest economy is evolving into the undisputed global leader in the wind and solar sectors, via an unprecedented wave of investment in manufacturing, and technology research and development.

China has realised the economic and political advantages of rising to the challenge of leadership. As Tim Buckley, director of the US-based think tank Institute for Energy Economics and Financial Analysis, said: “As the US owned the advent of the oil age, so China is shaping up to be unrivalled in clean power leadership today.”

The new US administration’s more America-centric approach may ultimately result in programmes such as Power Africa being sidelined at a time when Africa is close to reaching take-off for its transition to renewable energy. A US pullback could seriously undermine efforts to speed up electrification and provide cost-effective power for the hundreds of millions of people who are currently denied regular access, leaving a large vacuum on the ground.

But how ready and willing is China to step in?

At the UN climate change conference last year in Marrakech, Morocco, China made a clear pitch for leadership, with senior negotiator Zou Ji stating that if the Trump administration stepped back on US climate commitments, “China’s influence and voice are likely to increase in global climate governance, which will then spill over into other areas of global governance and increase China’s global standing, power and influence”.

The economic incentive for China is clear. The country has become the largest market for renewable energy, with 34GW of solar photovoltaic capacity and 23GW of wind power capacity installed in 2016 alone, according to estimates. Vast support for research and development and new manufacturing investment has enabled China to play by far the biggest role in changing the economics of renewable power globally, making renewables cheaper than fossil fuels in a growing number of countries around the world.

The Chinese National Energy Administration recently confirmed its intention to invest at least US$360 billion on renewable energy development by 2020, a move that will create about 13 million jobs in the sector. Meanwhile, constant cost reductions and quality improvements in Chinese solar power modules are already allowing some developers to bid for projects at lower costs.

What does China need to do to step up?

While its clean-tech revolution is changing facts on the ground, playing a wider leadership role is a different question. Supplying equipment is one thing. But developing the vast number of projects that emerging markets need is another. The transformation will require a complex ecosystem of institutions, companies and entrepreneurs, and the availability of competitively priced capital.

Chinese companies need to grasp the huge opportunities available and get involved in more partnerships with international developers, and with local entrepreneurs. The Chinese government and financial institutions need to engage with initiatives being sponsored by regional institutions such as the African Development Bank, and assist local governments with designing the right frameworks and institutions to allow projects to be financed and built.

Reda El Chaar is executive chairman at Access Power