The three capitals of China: which one is right for your Chinese HQ?

Chief Executive, The, Dec, 2004 by Rebecca Fannin

Hong Kong hasn't yet been able to establish itself as a major technology hub. It has developed a "Cyberport" for emerging businesses and also the Hong Kong Science and Technology Park for research and development, but it does not seem to possess the risk-taking, highly trained technical talent that exists on the mainland. Shanghai's technology hopes seem linked to the semiconductor industry. Taiwan's SMIC, which went public on the New York Stock Exchange earlier this year, used vast open land in the emerging Pudong district to erect two plants and build residential housing, schools, shopping, restaurants and recreational facilities. Chairman and CEO Richard Chang says such convenient access to services keeps his staff productive as he aims to make SMIC the leading semiconductor producer in China. Other chip plants are located as far away as Suzhou, which is considered part of Shanghai's economic zone. Shanghai is called the "dragon's head" and outlying areas represent its "tail."

Overall, it's clear that the center of gravity for many companies has shifted toward the mainland, and that means even the companies with deep roots in Hong Kong have to shift some functions, whether or not they maintain headquarters in the former British colony. Hong Kong players such as the trading firm Li & Fung are finding that they need to straddle both markets. Group managing director William Fung says that 40 percent of his company's supply-chain management business comes from China, and it's "growing like crazy." To help service those clients and to help lower the cost of its own operations, Li & Fung has moved clerical staffers north of the Hong Kong-China border. But top managers still handle production and sourcing from a drab office in Hong Kong's Kowloon section, not far from what Hong Kong bills as the world's busiest seaport.

"China is the world's largest factory, and Hong Kong is an ideal sourcing center for importing goods from China, for higher value-added jobs," says Fung. "Here you have connections to the financial community and there is a free flow of information and a legal system for protecting long-term contracts." He adds that China's cities are within "striking distance" of Hong Kong, meaning that the management team doesn't have to travel more than two to three hours to reach its far-flung operations in China.

The Case For Hong Kong

In the final analysis, Hong Kong possesses some strengths that neither Beijing nor Shanghai can yet boast and perhaps never will. Noble Group, a commodities trading company, maintains its management headquarters in Hong Kong, conveniently located next to the new Hong Kong Convention Center in Wanchai. CEO Richard Elman, who keeps track of the firm's cargo ships on a large computerized map displayed outside his office, says there's no way Noble could be in Shanghai. The simple reason is because of foreign exchange controls on Chinese currency. "If you're only marketing within China, that's fine," he says, "but if you are doing business globally like we are, it doesn't work." No one knows when or if China will lift those controls and make the renminbi fully convertible.