Geely to build luxury cars in ...
Hong Kong By Andrew Dembina
HONG KONG - More than three decades after
a mass exodus of manufacturing from the territory
of Hong Kong to mainland China, as land and labor
costs became prohibitively expensive for factory
operations there, one mainland company looks
poised for an unlikely reversal of the trend.
In a bizarre twist of economic logic, the
PRC's most prolific domestic automobile
manufacturer, Geely, has its sights set on car
design development and production in space-starved
Hong Kong. On June 21, 2005, Geely Automobile
Holdings Limited and The Hong Kong Productivity
Council (HKPC) signed a memorandum of
understanding (MoU) to collaborate in the
development of the first made-in-Hong Kong
passenger car and related automotive components
projects in Hong Kong.
Speaking at the
signing ceremony, HKPC chairman Andrew Leung said,
"This collaboration marks a milestone in the
development of the automotive
industry in Hong Kong. Under this arrangement,
HKPC, and the soon-to-be-established Automotive
Parts and Accessory Systems R&D Center, will
support Geely in its automobile development
project, which will be participated [in] by Hong
Kong manufacturers." The HKPC, a
government-affiliated organization involved with a
wide range of trade-related research projects, is
planning to launch this new center at the end of
2005.
So why would a mainland manufacturer
consider operating in Hong Kong? To obtain cachet,
for one thing. The "made in Hong Kong" tag would
be a badge of status for mainland customers, who
are Geely's primary target market. And while a
sizeable duty between the Hong Kong Special
Administration Region (SAR) and the PRC used to
exist, under the Closer Economic Partnership
Arrangement (CEPA) agreement between the two
established in 2004, mainland manufacturers who
set up operations in the SAR qualify for
substantial tariff exemptions on exports to the
PRC. Hong Kong also offers better intellectual
property protection than is currently available in
the PRC.
"Upon successful implementation
of the project, we would look into the possibility
of producing this new model in Hong Kong for
export overseas, or leveraging on the CEPA
advantages to introduce [it] to the PRC market,"
Leung said. On the expected benefits of this
collaboration to the Hong Kong manufacturing
sector, Leung said, "The collaboration will open
up new horizons to local industry through
participation in the development of this
mid-to-high-range automobile. With the expected
gain in capabilities and experience in product
design, technology, and research and development,
the industry will benefit from an overall
enhancement in competitiveness on the
international automotive supply chain.
"While HKPC and the R&D center will
work closely with Geely to conduct various
engineering design and automotive R&D
projects, local manufacturers can contribute in
the development of the critical components for the
new automobile," continued Leung. "We will provide
testing services on the newly developed automotive
parts, ensuring that they are in compliance with
international standards, and assist suppliers to
attain the TS16949 quality standard for the
automotive industry," he said. The HKPC estimate
that the project will create some 800 related jobs
in Hong Kong.
Geely has declared that it
will commit investment of HK$1.44 billion (around
US$185 million) to the development of a Hong
Kong-made luxury car. The 3-liter GH1 model, the
company's first premium sedan, is expected to have
a price tag of around 300,000 yuan (US$37,000) in
China. The GH1 will be produced in Hong Kong
within the next 24 months, said Li Shufu, chairman
of Hong Kong-listed Geely. The company says it
will market the car to both the mainland and
overseas markets. Hong Kong automotive component
producers, many of whom invest in mainland
production, will also participate in the
development of the car.
Zheng Yifang,
deputy director of the Economic Committee of
Zhejiang province in the PRC - where much of
Geely's operations are based - showed high
appreciation for the cooperation with Hong Kong.
After the signing of the MoU, he commented that
the agreement marked a milestone for Hong Kong and
Zhejiang's industrial and enterprise development.
"This cooperation makes good use of the CEPA
policy between Hong Kong and the PRC, which brings
about advantages in market competition," he said.
KK Yeung, executive director of the HKPC, also
sang praises of the CEPA, which was encouraging
mainland industry to consider the advantages of a
Hong Kong partnership. In the case of Geely, it
will directly benefit from the government's
investment of some HK$350 million in the HKPC's
Automotive Parts and Accessory Systems R&D
center.
But, as Hong Kong's economy
currently shows signs of strengthening, with
inflation, consumer spending and real estate
transactions and prices all nudging upward,
skeptics might question the economic viability of
manufacturing in the SAR, whose production costs
will be significantly higher than those possible
in the PRC. While Hong Kong's labor costs dipped
in recent years following an economic downturn
prolonged by the SARS outbreak in 2003, the
current economic surge is expected to soon make a
positive adjustment on salaries.
"If Geely
is manufacturing parts in Hong Kong or moving
design and engineering facilities here, that would
be one thing. Manufacturing a whole car here would
be quite another," said Michael DeGolyer, a
professor of Government & International
Studies at Hong Kong Baptist University. His
specialty is political economy, notably economic
transitions with a political aspect. "Geely
putting [an auto plant] in Hong Kong would
probably be a better measure of China's
inefficiency in capital allocation than a smart
[business] move. It might also indicate a rather
severe misunderstanding of the nature of Hong
Kong's economy by mainland entities. The venture,
if it launches, and if it is for whole car
assembly or major component manufacture in Hong
Kong, would have a short and unhappy life."
DeGolyer reasons that the venture's
prospects look poor due to both quality and cost
issues. "Geely cars are certainly not up to local
(Hong Kong) tastes and standards," he says. "This
is the place with the world's highest level of
Rolls-Royce and luxury car ownership. The Geely
line is far from top of the line - so I have a
hard time figuring the advantages of locating
manufacturing in Hong Kong, or understanding their
intended target markets for the cars made here.
Hong Kong is still a high-cost economy and [has]
high-cost workers relative to those on the
mainland. It also has somewhat stricter law
enforcement, including environmental laws, and
these would add costs Geely does not currently
have in its mainland plants - despite regulations
to the contrary. Geely seems much more likely to
simply list in Hong Kong and use [the SAR] for
financial, outsourcing, and management expertise.
Geely may be looking for greater sophistication
for currency trading since it will need to protect
itself much more from currency fluctuations in
[the] future, especially if it aggressively enters
the international car market as it apparently
plans to do. This makes much more sense than
manufacturing in Hong Kong."
Considering
the issue of whether eligible duty-free tariffs,
possible under the CEPA, outweigh the high
production costs of land and labor in Hong Kong,
Lawrence Ang, executive director of Geely Holdings
Ltd, said, "If the next round of CEPA
[negotiations] allows tax-free import of cars made
in Hong Kong to China, it will help to improve the
feasibility of the project. Higher production
costs in Hong Kong is not something which bothers
us a lot. In other high-cost countries [such as]
Europe and [the] US, we also see a lot of
successful industrial companies doing very well,
like BMW, Porsche, Nike and Coca-Cola, for
example. Higher production costs in Hong Kong only
means we need to design the plant more carefully
to avoid including too many labor-intensive
production processes in the project and to employ
outsourcing [elsewhere in the PRC] extensively in
the project. The key of the project is, like other
successful consumer product companies in the
world, to focus on design and development, brand
building and marketing, which are all strengths
found in Hong Kong."
No specific
industrial site has been pinpointed in Hong Kong,
according to Ang, but he admitted that space is a
budgetary concern. "A typical car plant of ours
could be as large as 200,000-500,000 square
meters, but we aim at much smaller site in Hong
Kong due to the high land cost here. We believe we
could work with 100,000 square meters in Hong Kong
by focusing on only the high-value added
production process in Hong Kong and outsourcing
other parts of the production process."
No
concrete plan for the GH1 production figures has
emerged yet as Geely has not officially approved
the car specifications. "But [going by] Geely's
own guidelines, a new plant should start with at
least 50,000 units per annum to be economically
feasible," said Ang. "Of course, the bigger the
better, but this very much depends on whether you
can sell the output and whether you have the money
to build such big facilities. "We preliminarily
estimated that development of the cars could cost
around US$185 million, which includes development
costs for the key components, [including] engines,
gearboxes, body and design."
Geely's
ambitions are not limited to its Hong Kong
initiative. The company, which forecasts it will
sell 150,000 cars this year, up from 100,000 units
last year, with exports up 150% in 2004 to more
than 3,000 units, clinched a deal with a partner
to assemble cars in Malaysia in May. Production
there will start in late 2005, with components
shipped from China, and is targeted to reach
30,000 cars next year. Geely also bid for MG
Rover's automotive molds and production equipment
in April 2005, but the new owners have not
responded so far.
As for the Hong Kong-PRC
project, after the MoU was signed on June 21,
Geely shares have not reacted much to the news,
says Ang. He believes this was a rational
reaction, since very few details have been
finalized or disclosed so far.
Andrew Dembina is a freelance
writer. Based in Hong Kong for 13 years, he was
previously editor of Hong Kong Life, the
Sunday magazine of the Hong Kong Standard
newspaper.
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