Is High Technology in Hong Kong's Future

I wrote this commentary for the May 1998 issue of Asian Venture Capital Journal two months after visiting Hong Kong as a guest of the new government after the handover.

Recently I had the pleasure of visiting Hong Kong as a guest of the government. The "theme" of my visit was to explore how Hong Kong will develop a high tech industry. While there, I paid particular attention to questions relating to government, capital and people. Thanks to the efficiency and hospitality of my hosts, I met over 60 individuals in the public and private sector to discuss this issue.

In recent action is any indication, the post-handover government is clearly eager to make sure that high technology is in Hong Kong's future. Shortly after my visit, Chief Executive C.H. Tung appointed Chang-lin Tien, former Chancellor of University of California at Berkeley, to chair his Commission on Innovation and Technology. At the same time, Executive Councilor Raymond Ch'ien led a 30-strong delegation from Hong Kong for match making meeting with high tech companies in Silicon Valley.

To be or not to be?
Dr. Ch'ien's view that Hong Kong will either join the "head table countries possessing advanced technology" or risk losing its strategic place of eminence is one shared by many that I spoke with. He argues that Hong Kong must and needs to install a second tier stock market to facilitate investments into high tech ventures. Of course, he understands that an NASDAQ type of stock market in Hong Kong is only part of the conditions necessary to nurture and grow high tech companies. The other major conditions have to do with availability of capital and techno-entrepreneurs.

Hong Kong is world renown as the place where fortunes are easily won by betting on real estate. Why risk money on high technology is a natural question. Before the handover, the Hong Kong government was actually constrained by the Joint Declaration, negotiated in 1984 between Beijing and London, which limited the amount of land that could be made available for development every year. Now no longer under such constraint, the Chief Executive has declared the government's intention to make more land and housing available. This is not only good news for people living in Hong Kong, but slowing down the rate of return on property investments should also enhance the appeal and help divert local capital toward high tech investments.

Besides availability of capital, Hong Kong will need projects worthy of investments. To turn ideas into projects that become funded ventures requires talented, trained and motivated people. Hong Kong has plenty of bright and talented people but are they properly trained and motivated about high technology? In the past, careers in property development and management, trading, banking and government service, all appeared more attractive to Hong Kong's Young people. Consequently, Hong Kong has seen a heavy tilt in the enrollment of their university students towards the soft sciences, e.g., real estate management or business administration.

Few wanted to embark on the steep slope of attaining a technical degree. Even those that made the climb often drifted toward more financially rewarding careers in investment backing and the like. The minority attracted to high tech careers find themselves ending up in places such as Silicon Valley where they can get proper training, funding and an opportunity to form a critical mass of fellow entrepreneurs needed for high tech ventures. There are a few exceptions to the rule in Hong Kong such as VTech. Typically there have not been funded by venture capital but by boot strapping from a modest initial investment and growing the business from retained earnings.

Mediocre in training and motivation
Hong Kong now has seven universities and colleges, all heavily subsidized by the government. There are now plenty of "seats" available for those Hong Kong residents that aspire to a higher education. Too many, some people in Hong Kong feel, because the students are not challenged and can muddle through. Akin to the problem plaguing the California K-12 educational system, the students are not forced to jump over a high bar. If they spend the required time in school, they graduate. Unfortunately this ease of entry and exit has led to a general body of college graduates that are mediocre in training and in motivation.

Opening enrollment, immigration
One solution is to open the universities to significant outside enrollment. Motivated students from mainland, Taiwan and elsewhere will raise the academic standard and benefit the entire student body. If there are sufficient inducements to remain in Hong Kong after graduation, these students will join the nucleus needed to start and develop high tech ventures. Though not be design, this is exactly how Silicon Valley came into being. As much as 50% of the undergraduate and graduate students majoring in technical disciplines attending Stanford and U.C. at Berkeley are either foreign students or first generation immigrants. They keep the standards high and many enter local workforce when they graduate.

In the same vein, Hong Kong needs to selectively loosen its immigration policy and facilitate an influx of skilled technical professionals to live and work in Hong Kong. The secret of Silicon Valley's success has been its diversity and continuous influx of immigrants from other parts of the world. Contrary to superficial first impression, these people create jobs--by starting companies--and not take away jobs from the local population.

Singapore and Taiwan's successes in developing their native high tech industry are not suitable for emulation by Hong Kong, because they possess comparative advantages that are absent in Hong Kong. Most notably, Singapore has an aggressive hands-on government with the world's highest per capita foreign reserve at its disposal. Taiwan enjoys the support of a stock market that is absolutely in love with high tech listings and a technical workforce peopled by significant reverse brain drain from the U.S.

However, Hong Kong has one major comparative advantage with the potential of outweighing all others: namely, the potential synergy when combined with the resources of Mainland China. These can solve the near term shortfall until Hong Kong starts to generate a significant crop of high tech workers and entrepreneurs. Offering access to China's huge market is also part of the advantage for Hong Kong. This can be used to attract high tech partners from the West that are seeking to build a successful base in China.

A dark cloud
A dark cloud looming in Hong Kong's future in the threat of its children becoming victimized by local politics. A movement is afoot to teach in mother tongue only. Mother tongue in Hong Kong means teaching in Cantonese. Such a more will surely consign Hong Kong's future generations to a dismal future. Even now, Hong Kong is accused of producing a crop of students fluent in neither English or Mandarin or written Chinese. In a contemplated move, some 100 elite schools with long traditions in Hong Kong, representing less than 20% of the total number of schools, will be allowed to continue teaching English as the second language. The rest will teach in Cantonese only. The response is predictable. Wealthy families will send their children to preparatory schools and private, high tuition, international schools. The rest of the population will be condemned to second class citizenship because of their illiteracy in English and Putonghua or Mandarin Chinese, the most important languages of commerce the the next century.

If mother tongue teaching in favor of Cantonese wins the ongoing debate, the future of Hong Kong will be dismal. Period. Cities such as Shanghai, Singapore, Manila and Taipei will all become serious contenders for the regional headquarters of multinational corporations. Dreams of developing a high tech industry will evaporate faster than a puddle under Hong Kong's noonday sun.

Government incentives
The Hong Kong government is telling the world that they are going to be friendly to high tech ventures in Hong Kong. They can't offer much of a tax break because their tax rate is already one of the lowest in the world. They can offer the Industry Technology Center with space at below market rates as incubator for ventures at their infancy; and a Science Park in the New Territories for more mature enterprises. Hopefully, they will be successful in changing the culture of Hong Kong and make the people of Hong Kong more aware of the importance of technology in their future. Through government's efforts, young people in Hong Kong can begin to see the glamour in pursuing high tech careers.

Many venture capital firms operating in Asia are based in Hong Kong even though they have not been actively locally. They have a vested interest in helping the government chart a course favorable to formation of ventures that will merit their consideration for investment. While only a few have already made their mark in technology ventures,more will surely find their way in. The venture investment firms in Hong Kong are in the best position to help this along and become the first to find and fund the professionally invested high tech ventures to be born in Hong Kong.

Hong Kong SAR after 100 Days

Before the handover of Hong Kong, the West, ranging from such prestigious publications as The Economist and Fortune to tenuous sources not qualified to make predictions but did anyway, was uniformly certain about Hong Kong's dismal future. The economy would collapse, dissidents arrested, printing press shutdown were among the dire predictions. Now that Hong Kong has reverted to China for more than 100 days, it's time to review and see if there are any changes and telltale signs of doom.

Since the handover, the new Chief Executive, C.H. Tung, has visited the heads of state of Malaysia, Singapore and the U.S. He was not accompanied by the respective ambassador from China to those countries. He acted alone. In the old days when the British appointed governor made similar calls, he was always accompanied by the respective British ambassador. This is one clearly visible change.

Li Peng, Prime Minister of China, visits Hong Kong in September to attend the World Bank/IMF conference. He is loudly booed by demonstrators whose sympathy lies with the Tiananmen protest and dissidents. The Hong Kong police makes no move to quell the protest.

Wei Yung has been invited to serve as adviser to a newly formed think tank, Hong Kong Policy Research Institute. Wei is a former member of Kuomingtang's Central Committee, former cabinet official, and former chancellor of KMT party school, Sun Yat Sen Institute. KMT, in case anybody doesn't know, is the ruling political party in Taiwan and no friend of Beijing.

So far no press in Hong Kong has been closed by authorities. That's a fact. Critics have resorted to accusing the press of "self-censorship" in order to stay on good terms with Beijing. The accusation of self censorship is rather subjective and difficult to quantify. However, one Hong Kong official recently points out to me that the Basic Law guarantees freedom of information. If the government should step in and tell the press to stop practicing self censorship, whatever that means, then in effect the government will be telling the press what to say and thus taking away thatfreedom.

Hong Kong's foreign exchange reserves reached $85.3 billion by end of August and represents the fourth largest holding in the world, after Japan, China and Taiwan, in that order. The government is sufficiently confident of its financial strength to contribute $1 billion to the loan package extended to Thailand to help bolster the strickened baht. In summary, I can find no signs of impending economic collapse.

According to the latest survey of Hong Kong people, 82% believe the situation in Hong Kong will improve or remain unchanged. This is an increase of 8% from the survey taken two months earlier, shortly after the handover.

The western media, not for lack trying, have not been able to find circumstances where Tung is acting at the behest of Beijing rather in the interest of Hong Kong. In interviews during her visit to the U.S., well known activist, Emily Lau, has had to resort to a kind of no-win logic. Namely, if Mr. Tung is not obviously doing Beijing's bidding, it is because he is getting his marching orders secretly.

One hundred days admittedly is not a long time in the context of 50 years of the one-country, two-system experiement launched by Deng Xiaoping. At least for now, critics prone to demonize China at the slightest provocation are maginalized and subdued.

Hong Kong Stories

Out of 100 billionaires in Asia, 13 of them are in Hong Kong. The poorest of the 13 billionaires, barely qualifying with networth of only $1 billion, is C.H. Tung, the incoming chief executive of the government when Hong Kong reverts to China.

The fable of Hong Kong's high density of billionaires, roughly one billionaire for every half a million population, is becoming familiar even in the West, usually not too well informed about the mysterious East. Some of the stories of wealth peculiar to Hong Kong are less well known and, I think, the West would find startling if not flabbergasting.

Take the former Hongkong Hilton for example. Once the largest hotel in all of Hong Kong, the owner had spent $14 million and nine months to remodel and rennovate into the "hotel of the next century. " Just six months after the reopening in 1995, the owner announced its permanent closure and bought Hilton International out of the remaining 20 years of management contract.

Why? Simple Hongkongnomics. It seems that due to its prime location, the land, if made suitable for an office building, is worth twice the value with a hotel standing on it! Since the land was appraised at around $130 million, it was no brainer to throw out the hotel, $14 million worth of improvements and all. Today the foundation for the new office tower has been laid, but the owner seems to be in no hurry, being swayed no doubt by some indication of supply in office space exceeding demand. No one so far has suggested that the owner might have miscalculated.

Recently comes another story that belong in the "can-only-happen-in-Hongkong" category. Parking spaces are so scarce in some areas that many office buildings are selling parking spaces at $100,000 or more a pop. That's in U.S. dollars for one very tight parking space. Don't have a car, you say? No problem. One of the parking garage developers is throwing a free car to the buyer. Some buyers who can't afford the millions to participate in the booming real estate market of Hong Kong are buying these spaces on speculation.

Just how expensive is real estate in Hong Kong? On a recent Sunday edition of the South China Morning Post, a feature article described the spacious accommodations that a young couple can buy in Vancouver, Washington D.C. and London but would have to pay at least five times more in Hong Kong for a fraction of living space.

Over dinner with the president of a trading company, he proudly described the merits of his young director of sales, not yet thirty years old. He said that he is paying Eugene, the sales director, over $100,000 a year and worth every penny. But the owner noted with regret, even at that salary, Eugene cannot as yet afford to buy his own flat in Hong Kong.

All that glitters from the Pearl of the Orient may be gold, but may still not be enough to get a decent place to live.

Hong Kong's Future as Seen by a Native Son

At a recent luncheon in San Francisco The Honorable Edward Chen, member of Hong Kong Executive Council, spoke on the subject of "The Future of Hong Kong." His indisputable claim to authenticity was in distinct contrast from the typical and endless stream of superficial western views on the same subject.

Professor Chen, president of Lingnan College, has degrees from Hong Kong University and Oxford and visiting appointments at Yale, Oxford, Stockholm and U.C Davis. While he is an advisor to the current London-appointed governor, he will step down after the transition on July 1 and return to an academic life. If he had an ax to grind, it was not readily apparent at the luncheon organized by the Hong Kong Economic & Trade Office.

Chen, a specialist in economics and Asian studies, began his speech by noting that he had been going around the world explaining Hong Kong to the West. He had just come from Europe and he expressed amazement at the depth of ignorance of the Europeans on the Hong Kong situation. He also recalled how The Economist had predicted in 1984, after Beijing and London had come to terms, that there would be no more new buildings in Hong Kong. In fact, he pointed out Hong Kong's longest sustained economic boom began after 1984.

He gave three reasons why the transition from British control to Chinese control has been so extremely smooth.

First, the Basic Law that will govern Hong Kong after the return is based on the joint declaration negotiated over a two year period between London and Beijing and is an international document registered with the United Nations. Under the terms of settlement, only issues relating to foreign affairs and defense will be subject to Beijing approval. According to Dr. Chen, the Beijing government has never reneged on any international treaty in which they are signatories.

Second, Hong Kong people are given 13 years of advanced notice to prepare for the transition. Those that wanted to leave have ample time to do so. In the meantime the local economy has adjusted to the prospects of a new master. The British common laws have been localized and translated into Chinese so that after the transition, the majority of Hong Kong people will, for the first time in Hong Kong's history, be governed by laws written in their own language.

Third, the attitude of the Hong Kong people towards China and China towards Hong Kong has changed during this interim period and Hong Kong has grown accustomed to the prospect of becoming part of China. Those that are not comfortable with the idea have already left. Recent survey showed that 80% of the Hong Kong population look forward to the return to the motherland. (Dr. Chen did not mention that the population of Hong Kong has been increasing during this period.)

For the next three to five years, Chen expects Beijing to keep their promises for at least four reasons: (1) As a matter of "face," essential to all Asians, Beijing would want Hong Kong to fare even better economically under their control than previously under London.

(2) A stable Hong Kong is basic to maintaining stable and positive relationship with the ASEAN countries. Contrary to the perception in the West, China views its relationship with neighboring ASEAN nations as more important than even with the U.S. or Russia.

(3) Beijing also needs a stable Hong Kong to reassure Taiwan that the principle of one country, two systems works. Even more important, China wants the U.S. to stay out of Taiwan and would not wish to provide the U.S. with any excuse to interfere.

(4) While Hong Kong will gradually lose its edge as entrépot and source of foreign exchange earnings (to Shanghai and other Chinese ports), Hong Kong people with their decades of experience will be essential in helping China build the economic institutions needed to privatize state-owned industries, to provide public housing, to establish rules for an orderly public securities market and other policies needed to further strengthen China's economy.

While Chen cannot predict what will happen to Hong Kong after the 3-5 year, near term future,--he doesn't think anybody can--he does see serious problems that Hong Kong will face and need to overcome. An average of 150 people, mostly from China, enter Hong Kong every day. The incoming government will need an education system and manpower policy to absorb this influx. (On a population equivalent basis, that's comparable to making room for 20 million immigrants every year in the U.S. vs. less than one million actual legal immigrants now.)

Hong Kong's real property market is controlled by a monopoly of seven firms and is the cause for the astronomic cost of housing. The new government will have to get rid of these anti-competitive practices.

With the massive inflow of new people, urban poverty is becoming more evident in Hong Kong. The relatively abrupt transition from a manufacturing economy to a service economy (in about 10 years) is adding as many as 1 million under employed work force to the problem. This is going to be a non-politically induced but nevertheless real social problem that the new government will face for years to come.

None of these problems have attracted the attention of western media. Hong Kong is but a stop enroute to their next assignment. The views of someone that really ought to know just might be the needed deodorizer to neutralize a highly charged atmosphere created from absymal lack of informed opinion.