slit)! ctr... .. .. ll. 4...]. 2.1.539 .3 x r . 1...: ‘ y. I :9 11:... :3... wind; .1...“ .2319, L 2: lwwmmr 01417 1890 This is to certify that the dissertation entitled Industrial Restructuring and Regional Division of Labor: A Study of the Electronics Industry of Hong Kong and Shenzhen Special Economic Zone (PRC) presented by Lai Si Tsui-Auch has been accepted towards fulfillment of the requirements for Ph.D . degree in Sociology Major professor MS U is an Affirmative Action/Equal Opportunity Institution 042771 LIBRARY Michigan State 4 Unlverelty PLACE ll RETURN BOX to remove thte checkout from your record. TO AVOID FINES return on or betore dete due. DATE DUE : DATE DUE DATE DUE l ‘ a . ., __ ‘ __, __ __ 7 _ __ ! MSU leAn Nflmettvertlorfimel Opportunity tnetltwon Wm. 1 INDUSTRIAL RESTRUCTURING AND REGIONAL DIVISION OF LABOR: A STUDY OF THE ELECTRONICS INDUSTRY OF HONG KONG AND SHENZHEN SPECIAL ECONOMIC ZONE (PRC) BY Lai Si Tsui-Auch A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Sociology and Urban Affairs Programs 1995 ABSTRACT INDUSTRIAL RESTRUCTURING AND REGIONAL DIVISION OF LABOR: A STUDY OF THE ELECTRONICS INDUSTRY OF HONG KONG AND SHENZHEN SPECIAL ECONOMIC ZONE (PRC) BY Lai Si Tsui 'Hfis dissertation discusses the industrial restructuring and regional division of labor between H.K. and Shenzhen SEZ tjuoughEistudy'of the electronics companies (H.K. and global) basaijxiH.K. 'The impacts of industrial restructuring on, and 13m development pathways of kxflfli cities are examined. The fhxfings are based (MN (I) documentary research, and (II) fmnxeen case-studies of electronics companies through {Emsonal interviews with manufacturers, and factory visits in both cities. Research findings indicate that regional production inanation has brought about short—term benefits for both cuties Math. trade-offs for" long—ternt development. H.K. bmmiits from cheap labor and land supply from the SEZ, bUt mufers from a further delay in technological upgrading. The emxmmic restructurimg has transformed the city towards a Center Cf' managing cross-border production. and. providing regkxml service, and its working classes bear the COSt Of emflmmuc transformation” H.K. is increasingly integrated into Um regiOnal division cfif labor cflf Guangdong Province; the regional division is structured in a way that Shenzhen and the EQarl River Delta cities have become similar but separate aujties dominated by H.K. capital, and compete against each cmher for foreign direct investment. Shenzhen SEZ has had lugh economic growth rates. But its industrial development has exhibited 51 lack CHE significant technology anchorage, skill formation and linkage effects, and remained over- ckmendent on migrant labor. Facing intensifying competition famithe Delta region, the SEZ is attempting to follow the pathway of H.K. to build a service economy. A one-dimensional orientation of both H.K. and Shenzhen.towards service economy mnlding without technological and industrial upgrading imneases the vulnerability CHE both cities txa the global economic fluctuations. Whether the existing regional relationships can be tnanslated into a more positive, developmental one depends on tmapolitical decisions of the present and future governments Oflxmh sides, with the impending unification of H.K. and QUna. Leaving the decisions to the invisible hands of the mnket will only enlarge the economic, social and regional inequity. Copyright by LAI SI TSUI-AUCH 1995 ACKNOWLEDGMENTS For the completion of this dissertation, I would like to convey my first and heartfelt thanks to my Ph.D. Guidance Committee members. Professor Richard Hill has given me \naluable comments on my papers, proposals and dissertation ctraft.at various stages of my doctoral program no matter where in: was--in Japan or on MSU campus. I am especially grateful to hinitaking me as research assistant in the third year of my program. Professor Bella Mody, for whom I have worked as :researrfilassistant during the first two years of my study, has offered me many opportunities to experiment ideas, to write and. to interact with scholars from diverse backgrounds. Professor Kevin Kelly’s lectures in "social stratification" has stimulated me to study the capital—labor relations in the semiconductor industry in California, which has laid down the foundation of this dissertation. Professor Chris Vanderpool has directed me to reflect upon the structure-agency problematic. Through his sponsorship I have obtained financial support from the Department of Sociology, School of Social Science and Graduate School. I thank the 40 manufacturers and managers who cooperated in my study. I thank particularly Mr. Siu Ming Lui for sharing his inside’s View of the electronics industry, and.Mr. Bhthou and his team of colleagues for providing contacts and guiding me during my factory visits in Shenzhen. Professor Edward Cruan (Director, Center of Asian Studies, University of Hong Kcmgfl has facilitated my research by offering me the Visiting Scholar status, office, and administrative support. I also thank the staff at the Center of Asian Studies, H.K. University Library, Chinese’s Special Economic Data and Research Unit (Chinese University of Hong Kong) and H.K. Trade Development Council. I owe special thanks to my brother, Mr. Hon Chung Tsui, who has supplied me information for this research in the past two years. Hon Chung, Hon Ming and Mr. Kai Wo Cheung (my brother-in-law) have offered me contacts for this research. Kai Wo has also provided me in-depth explanation about the technical details of the electronics manufacturing. I would like to thank friends and colleagues at MSU——Nai Hua and Jey Sundram for commenting on my dissertation proposal; Min Zhou, Wei Chen, Yuko Tasaki, Uta Knoche and Barry Bain for cheering up during my difficult time. My greatest debt of gratitude must be offered to my family and my husband’s family and relatives. Their love, support and acceptance of the changes in my life have encouraged me to carry'on” I reserve the last acknowledgement for Mark Auch, my husband” Without his painstaking efforts in editing, formatting and printing the dissertation drafts, I would not have been able to take the oral defense as scheduled” I owe my special thanks for his love and patience. To all of you, I offer my warmest thanks. vi m e-btb wtpuaw U'lUl mmm \l HFAFJHtAFJH (noibcomiH NNNNNN U'lvaJNH \l\l\)\l TABLE OF CONTENTS Introduction p.1 Problem Thesis statement Research questions and methods Chapter arrangement A note on terminology Rationale for study Literature Review p.16 Development paradigms Urban theory New international division of labor theory Theses on the restructuring of the world system Research on Hong Kong-—Guangdong integration Research Questions, Methods and Process p.48 .1. Research questions .2. Research methods .3. Research process The city/regional context p.69 .1. Hong Kong .2. Shenzhen SEZ The industrial context p.93 .1. The global diffusion of electronics production .2. The electronics industry of Hong Kong and Shenzhen A report of case—studies p.116 .1. The restructuring of the semiconductor industry .2. The restructuring of companies engaged in labor-intensive production An analysis of the impacts of restructuring p.166 1. Industrial restructuring and subcontracting 2. The impacts on H.K. .3. The impacts on Shenzhen SE2 .4. H.K. and Shenzhen: relationship and pathways vii (I) (DCDCD \DKO The political-economy of industrial restructuring and regional Conclusion Glossary Footnote division of labor .1. Hong Kong’s economic restructuring .2. Shenzhen’s .3. Towards a positive, developmental relationship economic restructuring .1. A summary of research findings and analyses .2. A reflection on theories Appendix I: Questionnaire Appendix II: Appendix III: Appendix IV: Bibliography Basic data of foreign electronics companies in H.K. Background of the respondents Investment characteristics of six Hong Kong manufacturers viii "OTJ "DU *0 *0 *0 .204 .245 .256 .257 .273 .279 .283 .284 .287 Table Table Table Table Table Table Table Table LIST OF TABLES Major characteristics of the case—studies Population of Shenzhen in selected years Basic data of H.K., Shenzhen Municipality and SEZ Foreign manufacturing investments in Shenzhen in 1992 Basic data of electronics industry in H.K. & Shenzhen Semiconductor producers in Hong Kong in 1986 & 1994 Firms & employees in electronics industry in H.K. Sectoral contribution to GDP in SBZ in selected years ix p.54 p.82 p.83 p.90 p.113 p.117 p.181 p.228 Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure 10: ll: 12: 13: 14: 15: 16: LIST OF FIGURES Economic cooperative regions in Asia Research process Map of Hong Kong Map of Shenzhen Typical procedures in reaching an OEM agreement Location of the Pearl River Delta region Electronics establishments in the PRD region Motorola’s Asia-Pacific facilities Company O’s production links in China Sanyo’s facilities in Hong Kong and China Organizational chart of Huaqiang Sanyo Capacity subcontracting Specialization subcontracting Changing intra—firm and inter-firm division of Labor Sectoral contribution to GDP in H.K. in 1980/1993 Sectoral contribution to employment in H.K. in 1980/1933 p U T3 *0 U T) ’U U T3 '0 p.3 p.68 p.70 p.81 .109 .111 .114 .121 .131 .136 .139 .168 .170 .172 .214 .215 Figure 17: Establishments/persons in manufacturing p.216 sector in H.K., 1975-93 Figure 18: Sectoral contribution to employment in p.229 Shenzhen xi LIST OF ABBREVIATIONS ANICs: Asian newly industrialized countries Bn: billion; (Mn: million) CTV: color television EPZ: export processing zone FDI: foreign direct investment EJV: equity joint venture H.K.: Hong Kong OBM: original equipment manufacturing PCB: printed circuit board PRD: Pearl River Delta R&D: research and development RHQ: regional headquarters SBZ: special economic zone "san Ci": three kinds of investments——wholly foreign owned venture, equity joint venture, cooperative joint venture US: United States UK: United Kingdom WFO: wholly foreign owned subsidiary HK$: Hong Kong dollar; US$1 = HK$7.8 (The HKS has been linked to the USS, through an arrangement in the note— issue mechanism, at a fixed rate since 1-17-1983) RMB: Renminbi (yuan), the official currency of China; US$1 = roughly RM88.6 (current rate) xii INTRODUCTION 1.1. PROBLEM The continuation of China’s Open Door policy, the economic transformation of Eastern Europe, and the reopening of Vietnam proclaims a "truly" global economy covering areas previously outside the orbit of transnational capital. However, coincident with the intensifying globalism, a trend towards regional economic integration has emerged. Regional economic integration it; consistent Mntl1 the emerging strategies of transnational corporations (TNCs) to build regional core network of affiliates centered upon their home countries. Attention. has 5x3 far‘ been. paid tx> the regionalization of production and trade centered on the Triad members (European Community, U.S. and Japan) (UNCTC 1992). In the West, one can see the formation of European Community (EC) 1992 and North America Free Trade Agreement (NAFTA). In the East, Japanese companies have incorporated East and Southeast Asian countries into their regional procurement, production and marketing networks. The Japanese, with a strong yen, has few choices but tx> Lmfi< for low-cost Asian contenders. New economic power bases represented by the ANICs (Asian newly industrialized countries) and overseas Chinese have 1 emerged in Asia and the Pacific (Kao, 1993). By the end of the 19805, H.K. was second to Japan as the largest source of foreign investment 111 Asia. H.K. tum; become tflma second largest overseas investor of Indonesia, Vietnam and Sri Lanka; and the third largest of Thailand. Taiwan is the second largest overseas investor of Malaysia and third largest of the Philippines. South Korea is the largest overseas investor of Sri Lanka and active in investing in Indonesia and the Philippines (AMRC 1992). Some Southern Korean companies have already initiated processing trades with the North Korean1 (Hoon, 1994). Singapore does not have a huge base of national capital but the government has launched the "growth triangle" scheme since 1989 to take advantage of cheaper land and labor from the neighboring border cities of Johor (Malaysia) and Batam (Indonesia). Even.Malaysia and.Thailand have started.to take advantage of the lower factor costs in their neighboring countries. Malaysian conglomerates have been investing heavily in auto assembly, power plant construction and banking in the Philippines since 1994 (Tiglao, 1995). A few Thai companies have been investing in the construction of container terminals and power plants in China in recent years (Huus, 1995). Accelerated by the pressure from the creation of regional 3 economic blocs around the world, Asia is gearing up towards further integration (Figure l). ///7 \ / orth Korea fin “‘ China , ou h K rasn‘ -\ g I (Z , ’ Vietnam l /g [I Singapo e Figure 1: Economic Cooperative Regions in Asia {dodified from Fujita K. (1992), Flexible Specialization, (Elobalization and the International Division of Labor. Paper presented at Osaka City University Institute of Economic Paesearch, Osaka, Japan. December. 4 The reintegration of China into the global economy brings both opportunities (its largely untapped domestic market) and threats to its regional neighbors (its wage rate even lower than that of the Philippines; just a little higher than that of Vietnam). China has had an average annual growth of around 10% since 1980. It has been seen as a "locomotive" of growth, taking in imports and investments from all over the world (Zielenziger, 1994: 72). China's northern and middle coastal provinces are targets of Japanese and South Korean companies for offshore production” Dalian (Liaoning) is said to be fast becoming to Japan what Mexico is to the U.S.——a low—cost manufacturing site within easy reach of the home office2 (Thornton, 1994). Shanghai has received investments in automobile, electronics and industrial engineering from Japan and South Korea (Sender, 1995a). China’s southern coastal provinces have become targets for offshore production from H.K., Taiwan and to a lesser extent, Singapore whose nationals have ethnic and cultural ties to China. The manufacturers operating in H.K. pioneered the relocation of labor-intensive processes to China in the early 19808, and the manufacturers of Taiwan and Singapore aadopted the same move in the mid- and late 19805. H.K. has tween the largest overseas investor of China, accounting for tsvo—thirds of the total foreign investment, and 25,000 ccnnpanies. Guangdong Province received 80% of foreign iiiVnestment from H.K. Investors from H.K. produce two-thirds 5 of Guangdong’s industrial output and employ 3 million workers in the Province (HK Yearbook 1994). Regionalization of production has taken place despite opposition from the state; Taiwanese manufacturers have constituted time largest investor i11 Fujian Province. The Taiwanese government feared that close economic ties with China would make it vulnerable to economic blackmail. However, the state has allowed its companies to invest in China indirectlyr via third. countries (mostly' H.K.) since September 1990 (see Jones et al., 1992). It further loosened its regulations on investments in China in 19933; an investment under US$1 million does not need tt>gy3 through third countries (Baum, 1994—5). Recently, some provincial and local governments of Chinese coastal provinces have offered special protection to Taiwanese investors by concealing the investors’ names and assets from the public. 12,000 Taiwanese companies are operating in China. Taiwanese businessmen funneled US$21 billion in exports to H.K. and through H.K. to China in 1994 (Baum, 1995). The Singaporean government has focused on building an "external economy", meaning to invest its surplus in foreign <:ountries. In 1993, the government announced that the country sshould not rely solely on Singapore and Malaysia (partially kxecause of the limited success of the "Growth Triangle") but tn: produce a ”real" external economy with 20% of all .SiJngaporean graduates and their families living and working abroad“. The government—linked companies have started to 6 invest heavily in (flfixmi as witnessed ill a US$6.3 billion project "Singapore II" - to build an entire city near Suzhou in 10 years (Sender, 1995b). The major players shaping the regional division of labor are no longer only the TNCs of the First World but small— medium companies (Hi the ANICB. This has given rise t1) a number‘ of questions: Do the new "TNCs" adopt investment strategies different from those of the "traditional", "old", "Western-Japanese" TNCs? How do corporate actions affect the ANICs and their regional neighbors? Does the regional division of labor reflect a dominate/subordinate relationship similar to any core-periphery relationship denoted in the dependency/world system/new international division of labor theorists; or is it likely to actualize the notion of "south- south" cooperation and rm) develop at more equitable relationship? 1.2. THESIS STATEMENT This dissertation deals with time issue of industrial restructuring and regional division of labor. lishall situate tlmaissue ineniindustrial—city—regional context, studying the eelectronics restructuring in Hong Kong and Shenzhen SEZ. "Industrial restructuring" refers to the structural cruanges ijlthe product mix and technology; the efficiency and refilative size of industries. It can take place at a firm, ;inchJstry' and industrial sector level. It involves the trwarusfer of productive resources from one part of the economy tc>earn9ther, and sometimes even across national borders (Ho, 1992). 7 "Regional division of labor" in this research refers to a situation.that companies extend.their production.systen1beyond the national borders to production sites in the neighboring countries. Cities or countries develop a mutual relationship in industrial production and become integrated economically; they can no longer be functionally autonomous in industrial/economic development. H.K. seems to lack the characteristics of a "traditional" core as seen in their dependence on markets, technology and components of First World countries, and their vulnerability to protectionist measures. But it appears to be a regional center of capital and economic power. China is not a typical Third World country; it has a high economic growth rate as well as political and military influence on the Pacific region and the world” While its coastal cities are depending on H.K. (and Taiwanese) investment, China itself is going to resume its sovereignty over H.K. in 1997, and enticing Taiwan to accept political reunification in the future. The regional economic integration is inter—linked with the issue of pxolitical unification. Shenzhen is located north across the H.K. border. An arxea of 327.5 square kilometers was enclosed to be a SEZ in 1J98CL The SEZs are ’special’ in the sense that they are the first areas within Communist China based on free market rnecflaanisms and in which foreign participation is promoted. Ennerizlmnn with its geographical proximity to H.K., has been a 8 cheap> labor ‘haven. for'IH.KJ industrialists throughout the 19805. The electronics industry is regarded as a basic, modern and strategic industry because electronics penetrates every aspect of life--production, consumption,1nilitary and.defen5e, and technological development. The industry produces a very broad range of products from the very simple to the very complex, from "mature" to rapidly changing technology. Hundreds of parts and components that make a completed electronics product can be arranged on a value—added continuum. Numerou55mall~medium local manufacturers of East and Southeast Asian countries have set up small workshops to produce electronics parts of lower added values and to supply them to global corporations since the 19605. The electronics industry bears a "clean" and "non—polluting" image (though it is reported to have caused health deterioration; see Grossman, 1979). Governments of many countries have encouraged electronics industrial development in their countries. The electronics industryb has been a highly globally diffused industry, and.the biggest recipient of foreign direct investments in the manufacturing sectors of many Asian countries. :n: has been a driving force behind many Asian economies based on its significant share of the national manufacturing exportsé. In H.K., the electronics industry has been the biggest recipient of foreign direct investment in the manufacturing sector since 1971, and the second largest anfloyer 1J1 the manufacturing sector (after' garment and 9 knitwear). The industry has been the largest industry of the Shenzhen SEZ and the largest employer in the manufacturing sector since 1984. Shenzhen, as compared to cities in the surrounding, hosts a much greater number of foreign investments, and. has attracted. more wholly foreign—owned subsidiaries and joint ventures than processing and assembly arrangements (HKFI, 1992). Hong Kong manufacturers constitute the largest investing group, followed. by the Taiwanese, Japanese and Western manufacturers. fflua major force (NE industrial restructuring ij1 this region is the capital-~both H.K. manufacturers and Western— Japanese manufacturers based in H.K. While the H.K. capital constitutes the largest overseas investor in time SEZ, the Western-Japanese capital is expected to bring about a greater qualitative impact (in terms of technological upgrading) on the SEZ. The Western-Japanese capital has a significant production investment in H.K. Their restructuring can exert a strong impact on the working classes in the colony. The research is designed to find out various corporate strategies adopted by both H.K. capital and the Western—Japanese capital. 1.3. RESEARCH QUESTIONS AND METHODS The research theme is articulated in the following three questions: (I) How do electronics companies based in H.K. restructure their investments with the opening of Shenzhen SEZ? (II) What are the impacts of the restructuring on both cities? ._. e.- 10 (III) What is the industrial and socio-economic relationship between the two cities, and which pathways are they leading? This research is based on: (a) documentary research; and (b) case-studies through face-to-face interviews(ba5ed on a pre—set, structured questionnaire with open—ended questions) with electronics manufacturers enui factory visits :ui both cities. The questions cover: (i) production organization, (ii) technological investment, (iii) industrial linkage, (iv) employment structure, and (v) assessment of the region. The companies are chosen based on the frdlowing four criteria: (I) the labor- and capital-intensity of production In this research, I classify production into labor— intensive or capital-intensive categories. In the capital- intensive production, II confine nut research tx> the semiconductor industry. In the labor—intensive manufacturing, I find it unnecessary to limit the sampling to a particular product since the production technology and cost dynamics of products in this category are similar. In this research, I have identified manufacturers of audio products, color TVs, telephone sets, computers (mother—boards), and. DC—DC converters . ‘ ’e \ s4.- _ . . 4 ..‘ ... .._ .“ e x. ‘ e M l .. l t . .‘~ "w, . ~. - ‘. “. .. w 11 (II) the location strategies Different plant location strategies adopted by electronics manufacturers include: (a) setting up production in Shenzhen while maintaining nenufacturing facilities in H.K.; (b) relocating the production completely to Shenzhen, and.keeping only the managerial and design operations in H.K.; and (c) maintaining production in H.K. without relocation. (III) the structure of the capital In this research, I have identified nine H.K. companies and four global corporations (one Japanese, two U.S. and one fast-expanding H.K.—China joint venture). (IV) the form of contract undertaken in Shenzhen Among the manufacturers who have set up subsidiaries in Shenzhen SEZ, seven engage in wholly foreign owned ventures; two in equity joint ventures, and three in cooperative joint ventures. Through desk and computer database research, I collected secondary informatitulfrtmlnews agencies, research institutes, industrial associations and government departments. Statistics auui data gathered include: CD the electronics industry of Hong Kong and Shenzhen; (II) macroeconomic data/policy of Hong Kong and Shenzhen (and Guangdong Province); and (III) the electronics industrial development in .Asia and the Pacific. 21.4. Chapter Arrangement Chapter 2 and 3 are to provide research directions. Crmnmer 2 gives a review of the literature on the structuring .. . I. ‘ et “ gar-D tv-‘u .,‘ . - o..‘.»d 12 of the world system, the restructuring of the global economy as a result of technological change, TNC investment strategies, the rise of NICs and their capital, as well as regionalisnt Finally, time literature on tine H.K—Shenzhen— Guangdong economic integration will be reviewed to highlight the direction of research. In chapter 3, I shall clarify the research concepts, the rationale of the research methods and field experience. Chapter 4: and ES discuss tine regional—city—industrial contexts. In Chapter 4, I shall provide a brief history of H.K.’s political-economic development that has Ihai to the recent regionalization of production and political reunification with China. I shall give a brief account of Shenzhen SEZ’s development in the context of China’s economic refornL Chapter 5 covers the global diffusion of the industry since the post-war era from the U.S. to Europe and Asia. It describes the crucial technological change, global competition, and the changing role of various countries in the .Asian regional division of production. Ptspecial attention is paid tx> the actual anui potential competitors of I{J<. and Shenzhen. Chapter 6 is a report of case-studies of electronics cxmnpanies. The chapter starts with a report of the tresn:ructuring of the semiconductor manufacturing with a specific focus on three major companies, one U.S. leading advennced IC producer, one British—H.K. IC subcontract assmanbder, and one H.K. logic chip producer. The second part 13 is a report of manufacturers engaging in labor—intensive production, including one Japanese consumer product manufacturery one U.S. electronics component manufacturer, one fast—expanding H.K.—China computer manufacturer, and a group of eight H.K. manufacturers of small—medium companies. Chapter '7 and. 8 anxa analysis sections. Chapter '7 summarizes the research findings based on both case-studies and documentary research. I shall analyze the patterns of corporate restructuring, the changing division of labor between H.K. and Shenzhen as well as the impacts on both cities. The Chapter provides an account of H.K.’s economic and social influence on Shenzhen, and the economic development directions of both cities perceived by the industrialists. The chapter concludes with a review of the research methods and techniques. In chapter 8, I shall discuss the political—economy of industrial restructuring and regional division of labor, and the problems of the present economic development directions. I shall outline the possibilities of industrial upgrading for kxoth cities. Chapter 9smnm3Lm>the research findings, based (on 'which I[ shall reflect upon. some theoretical concerns liighlighted in the literature review. 1 .5 . A NOTE ON TERMINOLOGY "Third. World. countries" refer t1) the poor“ and. non— inthistrialized countries in Asia, Latin America, Africa and true Caribbean. First World countries include those irmfiastxialized market economies of the U.S., Canada, Western 14 European countries, and Japan. Vflmnlll use these terms, I employ them cnflQ/.as abstract categories tx> denote certain common characteristics. I acknowledge the intense diversities that prevail among different countries. Starting from chapter three, I shall use the term "global corporations" instead of "TNCs", and "H.K. companies" but not "H.K.—TNCs". Since manufacturing companies inIIJC.are mostly small and not world—class companies, I hesitate to use the term "TNCs" to denote these entities even though they, by definition, can be classified as transnationals. 1.6. RATIONALE FOR STUDY The formation of economic cooperative regions has been intensifying. Attention has so far been paid to the regionalization of production and trade of the Triad members. 'This research represents 51 step tx3 recognize tflua regional division of labor shaped by the capital of the ANICs. Whether the regional division of labor between the ANICs and their regional neighbors (I) exhibits a dominate/subordinate relationship similar to any core—periphery relationship, (II) actualizes the notion of "south-south" cooperation, or (III) reviews a new phenomenon that requires a revision of the encisting theories, deserves rigorous research efforts. The iH.K.—Guangdong' integration shares an interesting Ioariallel to the integration led by Singapore as the city—state is the center of capital and economic power. The H.K.— Chiarxgdong integration shares another interesting parallel to that; led by Taiwan as the small—medium capital dominates the 15 investment, and both political entities are targets of political unification of China” A study of the H.K.-Guangdong integration can be a base for further comparative studies. Much of Guangdong Province’ 5 economic growth concentrates in the Pearl River Delta region where the development experience of Shenzhen has largely repeated. A review of 15 years’ (1980—1994) development and change of Shenzhen SEZ is hoped to enhance the understanding of the impacts of transnational capital in the SEZ, the PRD region and the larger Guangdong Province. The regionalization of production is a product of corporate actions and political decisions, and not a result of pure market force. An evaluation of the social and economic impacts of corporate actions, and state policies on regional division of labor is a first step to design proactive policies to enhance economic and regional equity. 2. LITERATURE REVIEW The emergence of regional economic integration coincident with globalism is related to the restructuring of the world economy, the rapid technological changes, adjustment of transnational corporations (TNCs), the rise CHE the :newly industrialized countries (NICs) and the DEM: capital. The changing situations make it necessary to rethink the existing paradigms. In this chapter, I shall review first the existing paradigms to assess their usefulness in enhancing the understanding of regionalisnt I shall review then the studies on regional division CHE labor, particularly (M1 the ELK.— Shenzhen-Guangdong integration. 2.1. DEVELOPMENT PARADIGMS Paradigms, conservativecnrradical,meadualistit:notions and a dichotomy of modern/backward (in modernization paradigm) and center/periphery (dependency theories) to describe the structure of ‘the analyze the Ihistorical, social and political contexts ixl'whiCh policy-makers choose tx> adopt market—oriented policies. The other perspectives, though based on different theoretical models and intellectual traditions, share the consideration of the external and internal political—economic forces in shaping NICs’ development. In the case of South Korea and Taiwan, the state capacity and relative autonomy have been enhanced by their geo-political position, economic aid from the U.S. and Japanese colonialism prior to independence. The states have played a crucial role in weakening the landlords, financing the industrial development, and repressing labor movement, and cultivating a local capital. In the case of H.K. and Singapore, analyses focused mithe city—state logic, the state—engineering, and extra- 27 economic intervention to enhance the social reproduction of labor. 2.4.2. Technological Changes and the Restructuring of TNCs In the development paradigms, TNCs are regarded as overwhelmingly powerful in structuring Third World economies. However, the TNCs have also undergone phases of changes. The development of TNCs is categorized into four phases: (1) the "no contest" phase (1945—60), (II) the confrontation phase (1960-75), (III) the conciliatory phase (1975-85), and (IV) the cooperative "sink and swim together" phase (1985-present) (quoted in UNCTC, 1991b; see also UNCTC, 1983, 1992; Wells, 1992). The "global factory" model of NIDOL has to be brought into re-examination. Rada (1980) posits that the advance in microelectronics and automation technology deems the cost-cutting strategy by offshore production less significant. He points out that TNCs (especially in textile, garments and electronics) shift their focus back to the developed countries and cross—investments will take place within the developed world. Schonberger (1986) discusses the spatial re—integration of auto production with flexible automation technologies and just—in—time (JIT) principles of organization in contrast to the earlier decentralizing trends depicted by the global factory model. Such a model affects the manufacturing not cmnly of cars but products of higher added values. The cost auivantage of practicing automation and JIT system has reduced tlma significance of labor costs. The small share of labor 28 costs suggests that a more extensive spatial division of labor through offshore assembly offers no great advantage. Sayer’s (1985, 1986) studies support this argument. He documents the restructuring of U.S. TNCs in semiconductor, consumer electronics and computer manufacturing. The new technologies pmtmmn;a limited.amount of "de-internationalization", with the policy of using offshore location being abandoned and manufacturing being centralized in First World countries. With technological and organizational innovations, there emerges industrial organization model called "horizontal internationalization" by' Gilpin (1987), and theorized. as "flexible specialization" In! Piore eumi Sable (1984). Companies extract higher added value through production for specialized markets. Flexible specialization combines the advantages of craft flexibility with the most advanced information processing and microelectronics technology. Companies organized into flexible production systems and located near to the specialized markets are able to respond quickly to nerket fluctuations. Since specialized markets concentrate in First World countries, the shift to low wage sites will not occur on the scale once expected. Companies increasingly emphasize their technological superiority. The astronomical costs cof tun) have forced companies to seek strategic alliances with their competitors ftnr joint R&D. This has given rise to the emergence of TNC smalaxies or systems based on the cooperation in R&D on core tectnnologies and complementary assets, to better utilize the 29 capabilities of the TNCs (UNCTC, 1991). The TNCs will increase their investments 1J1 First World countries rather than in the rest of the world. However, according to Sanderson (et al., 1989), the TNCs do not necessarily relocate back onshore despite the availability of automation technologies. Some companies do relocate some of their assembly lines back to the U.S. from Asia. Nevertheless, statistics show that Third World countries are playing an increasingly important role in assembly and manufacturing for TNCs. Sanderson et al. conclude that manual assembly is still cost—effective for less sophisticated products of low volume. But flexible assembly begins to show lower unit costs than manual assembly once the volumes exceed certain units. The availability of parts and transportation. costs rather‘ than. labor“ costs ‘has certain early pmognoses, assembly automation does not result in a massive phase—out of offshore {noduction. In the semiconductor industry, TNCs transfer the fhml testing (other than assembly) to their subsidiaries in 30 the developing region so that the products can be efficiently shipped to the regional customers. According to Ernst (1992), automation.will not drive TNCs to relocate their operations back to First World countries. Firstly, as automated machines are expensive, they are cost- effective only in a 24 hour cycle based on a multi—shift and seven-day/week work schedule. Countries with minimum labor and environmental regulations, are ideal testing grounds for practicing automation. Secondly, a rapid retreat to a less internationalized mode of electronics manufacturing involves substantial costs in closing down existing plants and re- shuffling supply and market networks. Thirdly, NICs display a sufficient supply of low-cost engineers, technicians and skilled workers for automated operations. Automation will reduce the employment of unskilled labor, but increase the employment of skilled labor. The increasing use of automated technologies in the electronics industry is likely to take place in a small group of industrial growth poles. The NICs, with certain specializatitnlof consumer electronics and the availability of component bases and engineering skill supply, are likely to attract automated operations of electronics manufacturing and simple design processes. The Philippines, Thailand, Indonesia, and China will continue to carry out low value— added assembly processes. These are first signs of a new knerarchy in the global production system. Ernst (et al, 19%N points out that the "differentiation.of mass production" 31 (rather than "flexible specialization") and the shift to product design and market development capabilities have become the dominant trend among electronics companies in First World countries. The ANICs are still badly equipped to catch up with this trend. Many electronics companies in the ANICs, so far, fail to upgrade their technological and organizational capabilities to cope with the new competitive environment and tflnus remain. dependent CH1 fairly' obsolete technology and marketing methods. In addition, they still rely CH1 First World countries for time supply of cmitical components. Southeast.Asian.countries’ electronics production remains overwhelmingly labor—intensive. Electronics exports are heavily dominated by wholly foreign-owned subsidiaries, with the participation of local companies limited to a subordinate role of suppliers of non—critical components and services to foreign companies. Mody (et al., 1990) argues that the internationalization of production persists. While automation creates incentives to move assembly processes back to time U.S., the American employees (n3 many companies have "forgotten In! not doing" assembly. Japanese companies that relied on automation in their production lmnma lost confidence ij1 their ability to compete by depending on only automated technology since the Yen shock of 1985-86. It is evident that many corporations are relocating offshore. Deinternationalization, continued internationalization aufl.various forms of adaptation of the TNCs are coexisting, . u 1‘r-rn‘ . - 4-D .uJ . lpl‘ '- - sue clue r- __ U V_~ "-. a. .‘_. V‘- ~ -. -_~ e v. . - .V‘ . e. ‘ ‘. .'. .\ ~"r-. . .A‘. :r‘! (I) V ’4' 32 depending on the industry, companies, and the governments of the host country and home country. Some generalizations can be reached: the search for markets, skilled personnel and component supply rather than simply cheap labor and land supply are increasingly important in TNC’s global strategic planning. 2.4.3. A Refocusing on Regions Hill (1987, 1990) alerts us that the "global factory" model oversimplifies and overgeneralizes the diversity of corporate strategies and the resultant spatial implications. He synthesizes three parallel trends of corporate restructuring—— vertical internationalization (global factory), horizontal internationalization (Gilpin, 1987) and the triad (Ohame, 1985)-— into a "trilateral" model of international division of labor. This is based on an intersecting, tri-regionally organized, tiered production system. The upper, higher value tiers «of the production system are cmganized in concentrated, company town complexes in the wealthy triad core nations... The lower value bottom tiers of the production systenl as well as the mass production of low priced, standardized vehicles are spread among NICs and poorer nations in the periphery of each Triad power according to a regional sourcing strategy: principally 1J1 Latin America for North American transnational firms; in East and Southeast Asia for the Japanese multinationals; and in Africa and the Middle East for Western European global companies. Considerable cross penetration continues among the Triad core powers ... (1990: 13—14). According to the UNCTC reports (1991a; 1992), regional economic integration is consistent with the emerging strategies of TNCs to build regional core networks of 33 affiliates centered upon their home countries. The foreign direct investment—led (FDI—led) regional integration creates pressures for the emergence of regional policy frameworks. It is unlikely that policy-led integration will bring about a unified regional economy without FDI—led integration at the production level. FDI—led integration is not confined to a regional context only, but may, increasingly, extend to the multilateral level. For instance, TNCs from time EC have invested more in the U.S. than in other EC countries, while Japanese TNCs invest more in the U.S. and EC countries than in Asia. Regional blocs are competing with each other. Fer example, NAFTA can attract FDI not only from the U38. and Canada, but from European and Asian countries. The agreement provides non-U.S. TNCs with an important incentive to build an export capacity in Mexico, since it will assure long—term, duty-free access to time ULS. 'market. Recently, several electronics companies were reported to have planned to relocate their production plants from China to Mexico to take advantage of the NAFTA (CNN World Report, 1995). Fujita my: al., 1991) studies the (global. dispersion pattern and spatial reorganization of 14 electronics TNCs from Japan, South Korea and the U.S. during the past two decades. [wring the past 15 years, the nine Japanese companies have increased their new production plants more rapidly overseas than in Japan. Most of the new plants are located in East .kfia, North America (mostly in the U.S.), and Europe. The shaneof East Asia has increased recently, while that of North 34 America and Europe remained rather stable, and the share of the rest of the world has been decreasing. Most of their overseas plants are of mass—production type, while new plants in. Japan include both trial—production plants and. mass- production plants. The two Korean companies start increasing their overseas production 1J1 Thailand and time Philippines during the past decades. R&D has been heavily concentrated in the U.S., Japan, and European countries. The global factory model is criticized in a number of recent. studies :hi the internationalizaticnl of (electronics production” Scott (1986) argues ‘that time NIDOL rm) longer consists of a simple bipartite split between the economies of the capitalist core and those of the world.peripheryz Rather, it has evolved into a complex spatial system with many different hierarchical levels and sub-regional articulations. New Ixnumke of growth centers, electronics proletariat and skilled scientific workers have emerged. Scott illustrates the tier-relationship between the TNCs and locally-owned large assembly houses in the ANICs and Southeast Asian countries. Yamada (1990) argues that the division of labor taking shape in Pacific Asia differs in important ways from the historic one based primarily on the need to tap reserves of cheap labor. The regional market has been weighing more heavily in Japanese companies’ investment strategies. The competitive environment compels time Japanese companies to invest in R&D leading to product differentiation from low-end products of simple functions to high-end products with r 5". c.-. ....- 4 .- ..A' u a A... ..4- An- all“- ‘u‘ s . 1"- uyA ‘ 35 differentiated functions. The production of low-end products have been taken over by the ANICs. Japan, the ANICs and Southeast Asian countries have been moving toward a multi- layered structure based. on kxnfli vertical and horizontal specialization. Chalmers (1986) studies the electronics industry" of Singapore and the other‘ ASEAN countries. ‘He sees that Singapore and the other ASEAN countries are both competitive and complementary in their electronics industrial development. Many TNCs have set up skill-intensive production and regional headquarters in Singapore, and relocated the labor—intensive production from Singapore to its neighboring countries. Whether the industry in the region can move toward greater homogeneity as operations in different ASEAN countries are automated, or whether the existing differences become more marked, will depend on the political decisions shaping the policy environment in which TNCs operate. Parsonage’s (1992) research (M1 the integration. of Singapore—-Johor (Malaysia)-—Riau (Indonesia) reveals a view similar to Chalmers’. Parsonage points out that a division of labor implies dependence and thereby a political relationship-- similar to a core-periphery relationship (fiscussed in the dependency paradigm. Singapore lacks the characteristics of a "traditional" core but has emerged as a regional center of capital and economic power to its neighbors (see also Carlsson and Shaw, 1988). The emerging ANIC—ASEAN Hflationship in general may either enhance the dependence of -;- ‘Uee to... I». veg—t bow .- “I n \ §. - I § e .~ . -1 _ 36 Southeast Asian countries on external capital and technology or translate the present dominant/dependent relationship to a more equitable relationship, and this will depend on political decisions of the states within the region. The potential for an equitable relationship stems from the view that the ANIC capital uses technology more appropriate for Third World countries than the global corporations, and both the ANICs and ASEAN confront the common protectionist pressures and "regional Japanese economic hegemony" (p.315). Parsonage, however, argues that the ANICs may not be more generous in transferring technology than the Japanese and U.S. companies given their dependence on Japanese technology and restructuring difficulties (see also Bello and Rosenfeld, 1990). Furthermore, the relocation of ANIC— supporting industries may hinder the development of local supporting industries in Malaysia and Indonesia. Whether the economies of Nblaysia and Indonesia will benefit from the integration in the Growth Triangle (GT) depends (n1 the nurturing' of linkages 'with foreign manufacturing investments beyond the supply of cheap labor. Singapore with its access to cheap labor in the GT, has worked to attract TNCs to establish higher value-added processes. ;Parsonage points out the negative social and economic impacts (of the economic integration-—the high inflation in Johor and Batami resulted from an influx of Singaporean property iJTvestment and tourism. The economic inequity within the GT has; aggravated not only between classes but between ethnic qr). 'ovu ... I- _ 'I‘" 'e~. “.... v~ -. -~ ’~ k“ u... ~,~ q \ 5 37 groups. A growing number of affluent ethnic Chinese Singaporean managers are building "second homes" in Johor and Batam. The alienation of workers in Johor and Batam from their mainlands is ixlaa manner similar to time workers in Shenzhen SEZ from the rest of the China. The development of the GT corresponds with significant ANIC investments 1J1 ASEAN, according tm> Parsonage. The external "Chinese" capital represented by Singapore and H K., and the internal Chinese capital has been gaining importance within Malaysia and Indonesia. This observation is supported by various recent studies (M1 the Chinese capital an; a new global power base (Kao, 1993). Bello and Rosenfeld (1990) suggests.a pathway of regional integration led by ANICs as a counterweight to Japanese and U.S. economic dominance. However, they are critical of the existing strategies used by the ANICs in integrating their periphery. They comment that the strategy of relocating to low-wage sites and using foreign workers will lead to social instability in both the periphery and the ANICs in the long run. They urge for developing equitable associations to facilitate fair trade and appropriate technology transfer, as well as labor and environmental protection. The ANICs should reduce their dependence on the U.S. and Japanese markets and develop intermediate technology suitable to their neighboring countries. They should also make use of regional resources. Forexample, South Korean manufacturers should employ Filipino engineers to strengthen their technological capacity; the on N A \ me: it . .....r ~ I-‘vee n.... V ‘A v'.. ‘ A .‘n ‘_‘ a.‘ ~ .. ~ 'w.’ . .t‘.“ 'v. ' u n. ‘Q \ 38 Filipino engineers have alternatives other than serving the U.S. companies. In order words, they are advocating south- south cooperation. 2.4.4. The Rise of the NIC-capital In NIC—capital led regional economic integration, the key unit of analysis has been the TNCs of the NICs (or named as the "new" TNCs) vis—a-vis those of First World countries (the "old" or "traditional" TNCs). Kumar’s (1981) edited book has a collection of research on the related issues. Wells states that the new TNCs possess technologies that are multi-purpose and labor-intensive. They do not require big capital outlay and are capable of utilizing locally available inputs. Ting and Schive present case studies of two Taiwanese TNCs and the findings confirm Wells’ formulations that ANICs' technologies are more appropriate to the recipient countries. Lecraw’s research findings (based on 23 subsidiaries of NIC-TNCs in ASEAN region), indicate that the new TNCs, as compared to the old TNCs, are smaller in size, deploy more labor—intensive technologies, import fewer inputs, have greater local equity participation, and are perhaps more profitable. These new TNCS manufacture unbranded, low—quality products. They compete on price and the products are more suitable to the needs of the consumers. Most of these TNCs have simple organizational structures, and enjoy the advantage of low marmngement and technical costs as compared to the First World transnationals. .... I can ..-, . .‘-. :10 Ill 've. III III I 4 A" 39 Kumar concludes that the home countries of the new TNCs can derive certain economic benefits from the foreign operations of their national capital. They increase foreign exchange earnings for the home country through the supply of machinery, equipment and related services. The discussion is followed up in another collection of essays by Khan (1986). Wells’ study of 602 manufacturing subsidiaries of the new TNCs illustrates that they invest mainly in the form of joint ventures, while the U.S.—TNCs invest mostly in the form of the wholly foreign owned subsidiary. He analyzes that the new TNCs do not have specialized technologies in their subsidiaries, and therefore do not need to centralize their decisions and avoid local partners in ownership arrangements. With small capital, they spend little on advertising and their products do not have well—known trade marks. They lack an adequate access to local distribution channels, and therefore prefer'tOIestablish.joint ventures with minority shares. The relative autonomy of each local subsidiary allows the interests of local and national markets in their production and marketing decisions. Local partners’ knowledge of local conditions, as well as their access to distribution channels, capital, management and political connections provide some additional advantages. Khan points out that the Mullingness to accept lower equity participation in tflme host countries, a local-market orientation, and the more polycentric character of their [managerial approach render TNCs more relevant to the ‘.. ‘v pp- vna eq¢ -Iu ..- ‘ u.‘ u,' ~ .- \ . ‘1 x .5 ‘. » e - , . ~ \ \ .e . x‘ . 40 development needs of the host countries. These characteristics «generate favorable attitudes :hi the host countries which. want to exercise economic and. political control over their national resources (see also Panglaykim, 1979). The sympathetic attitude of the new TNCs may be partially related.to the common historical experience in terms of cultural and ethnic kinship. Khan asserts that a more congenial working relationship between the new TNCs and the host countries can be worked out in contrast to the contentious relationship existing between the old TNCs of the Third World governments. Sabri-Abdalla (1980) argues that the DEW'TNCS can.promote economic and technical cooperation among developing countries and make a significant contribution to their development. They can establish economic complementarities among developing countries--discovering new areas of inter—linkages, pooling their resources, and extending the economics of scale through larger scales of production across the borders—-thus imparting a new dynamic tmn the development process 1J1 the developing world. Through the capacity to facilitate the flow of capital, technology, management and marketing skills to Third World countries, the new TNCs can assist in removing serious .bottlenecks in the developing process. The new TNCs can play an.instrumental role in facilitating the developing countries to specialize in viable sectors and specific products, and in benefitting from resource complementarities. Through the exstablishment of larger and more efficient production bases 4 1 for export, the new TNCs can increase the share of developing countries in the world’s total trade and manufactured output. All these possibilities facilitabe the establishment of ea viable base for the formulation and implementation of alternative development strategies towards greater self— reliance in the developing world. 2 . 5 . HONG- -GUANGDONG INTEGRATION Studies on the H.K.-Guangdong integration do not conform to the above-mentioned studies about the impacts of the new TTKXL Chai’s study (1984) assesses the impact of H.K. companies in the SEZs. His findings indicate that the job creation effect is limited. The technology transfer is low judging from the age of technology and equipment. The effectiveness and intensity of technology transfer are low since the inter-firm relationship is loose and temporary, and the H.K. partners do not care whether their Chinese partners can effectively apply the technology and know—how. The range of know—how transferred is restricted to production, to the exclusion of marketing or design and development. The forward and backward linkages of these investments are obvious: their inputs are acquired mainly from H.K. and their outputs are sent directly to H.K. for export. He argues that China cannot ;reljron H.K. and overseas Chinese to achieve its modernization gyoals. It also implies that, at least in the near future, (flaina's threat to H.K.’s competitiveness in overseas export marfl be neither moralistic or ethnocentric about this" (1992: 205). .. u , 4 .... ..>- n... ...-e- .. ~ . , -— 45 Some studies focus on exploring the relationship between H.K.-Shenzhen (and/or Guangdong). Industrialists argue that H.K.’s manufacturing base has not been weakened with the intensifying industrial relocation. The export- competitiveness of H.K. manufactured products has grown. The plants remaining in H.K. concentrate on product design that yields a higher added value than the labor—intensive manufacturing (Hong Kong & Macau Economic Digest, 12/89; H.K. Economic Daily, 5-3—93; 7—16—91). Shenzhen has been important to H.K. since it helps alleviate the labor shortage problem. H.K. can develop its service industries while at the same time keeps its control over the manufacturing industries, and the two sectors can actually play complementary roles to each other. Without a low—cost offshore production base, it is difficult for H.K. to maintain its position in world trade as a major supplier of consumer goods. Shenzhen and the Pearl River Delta areas help H.K. manufacturers solve recruitment problems and, more importantly, cut costs. Some argue that Hong Kong can take advantage of the complementarities with China to upgrade its industries toward skill-intensive manufactures (Sung, 1985). Hong Kong’s economic setting and.entrepreneurial skills are well-suited.to commercializrmg China’s existing technology. Despite its eccmomic backwardness, China hasaelarge industrial system and relatively advanced research in industrial basics including irudustrial electronics and basic industrial engineering (Ho, 1992). Hong Kong manufacturers can make use of Chinese w 7‘" 46 engineering labor to improve their design and development capability. However, the assumption of H K.’s commercialization of China’s science and technology is considered naive (Ng Ka Wai, the Chancellor of the H.K. Science and.Technology University). Very little cooperation has taken place since the open door policy. The birth of a new product requires basic research, applied research, design, model testing, mass production, industrial packaging, commercial packaging, and marketing. China and H.K. are good at the front end and back end of these processes respectively. Both have not devoted resources in the processes between. It will still take a long time for the two to be able to cooperate (Min Pao, 3—3—94). Chan (1988, 1991) looks at industrial relocation in the context of regional economic integration and the impacts on both cities. He examines the macro—data about the ILPL— Guangdong development. He concludes that the industrial relocation has caused structural unemployment in the manufacturing sector in H.K. Industries have been moved out of H.K., and the city is becoming a commercial city depending on service production and increasingly vulnerable to global inarket fluctuations. The outprocessing (n3 labor—intensive Inarmfacturing is unlikely to contribute to the development of capital and technology-intensive industries that Guangdong aiims to establish. Some commentators point out that the manufacturers based irl }{.K. would rather relocate north across time border to anew- .4 .. ....- ‘ n,- VOA. 47 continue their labor—intensive productitmlby means oflobsolete machinery, than venturing intO'new.areas, upgrading technology and.improving productivity (HKFI, 1992; FEER, 4-17—1989; Chan, 1991b). Hong Kong’s export manufacturing will have to compete with that of China when China absorbs advanced technology and obtains foreign contracts through H.K. (see Ho, 1992; Chan, 1991b; Oborne, 1986). Other' critics argue that Shenzhen. has Zbeen. able to attract foreign investments mainly from Hong Kong. It will hardly be able to weaken H.K.’s competitiveness and will simply become an industrialized hinterland or a "colony" of Hong Kong (Leung'eN1. al, 1986). Whether IIJ<. and Shenzhen complement or compete with each other depends on the restructuring of manufacturers and the political decision of both governments. This will be examined in this research. ,.-.. l.‘. . .. I- l'.\ c a..- U... r- 3. RESEARCH QUESTIONS, METHODS AND PROCESS This dissertation evaluates the H.K.—Shenzhen regional division of labor through a study of the restructuring of electronics manufacturers based in ILJL The concerns are articulated in the following three research questions. 3.1. RESEARCH QUESTIONS (I) How do electronics companies based in H.K. restructure their investments with the opening of Shenzhen SEZ? (II) What are the impacts of the restructuring on both cities? (III) What is the industrial and socio—economic relationship between the two cities and which pathways are they taking? The restructuring of electronics companies is not uniform. How do manufacturers restructure their investments? Who stays and who relocates? How is the decision related to the structure of capital, the kind of products produced and the production technology, etc.? For those who relocate to Shenzhen, how do they structure their investment, in which form of contract and scale of production, and why do they do so? liithis research, I shall explore a variety of strategies undertaken by manufacturing companies, the rationale behind and the consequent practices. The impacts of restructuring on H.K. are mainly concerned with the change in the structure of the economy, employment armi technology. (hi the economy, II focus (n1 industrial 48 .-‘ 5;" 49 relocation and the degree of deindustrialization. On employment, I examine the changes in the size of manufacturing workforce and the nature of jobs. On technology, I shall find out if H.K. manufacturers have improved the quality of their products and advanced into higher value—added production. Any single electronics product is composed of hundreds or even more than.a thousand parts and components, the production of each requires various capital, technology and skill inputs. A computer comprises of a motherboard, add—on—cards, a keyboard, ICs, cables, etc. A company producing ICs, especially those of the newest generation, invests heavily in R&D, precise machines, and skilled engineering labor, and adds high valueti>the products. itcompany'assembling'motherboards basically involves the purchase of ready—made parts and.merely assembles ‘them. The assembly’ requires; more standardized machines, lower skill and smaller capital inputs, and add lower valuetXDthe product. Timenumerous electronics products can be conceived to be in different positions in a value—added continuum. The production of high definition TV is on a higher end than that of a color TV, the production of which is on a higher end than that of a black and white TV. Developing countries began with performing lower value— added pmoductnmi for global corporations. Chadually, the naticmal capital obtained production experience and tended to gnnyvide more capital, technology and skill inputs to penetrate the higher value-added.product markets. They manufactured.the 50 whole product rather than just a part, and usually supply on an OEM (cmiginal equipment manufacturing) basis ti) global corporations. Over time, some may even develop their own brand name (OBN) products, by designing and developing new models and products. This is witnessed in the electronics development of time ANICs. Developing countries have been overwhelming dependent on the supply of high value-added components for their low value—added production. They try to move up along the "value added production ladder" to manufacture ICs and other critical components and parts, and aim at producing their own brand name products in order to compete in global markets, to earn foreign exchange and to maintain a positive trade balance (Hill & Lee, 1994). To increase the added value of products that a society produces is "universally" recognized as a way to improve the standard of living of that society. Certainly, only through a more equitable distribution of income can a society trickle down the benefits arisen from economic growth. In this research, I shall examine to what extent H.K. has moved up in the value-added production ladder. Regarding Shenzhen, my concerns surrounds the employment structure, technology transfer and industrial linkages. Technology has been the subject of a broad range of cdefinitionsfi. In this context, technology is considered to be t:he machinery and knowledge necessary to implement a rnanufacturing process. —. g a- 1"“ 7:23" “7"; "‘.:_~_‘v-‘r~,3v’v ~33§ V‘Yfi "4 ~ 3:..1 7““ ‘ wo-a- -J v-: 1‘ do-“ A ..... ~v-\: ‘aJw V-VV—Lue “be-“ C‘LberLa o-A «Ana‘s-en O-re wa-N A: FanneflA’A/V‘ rY—‘H‘:;Y Tn; C‘Y-ao- '-‘ Fri: n—V 332V”: s.--\.' ‘Dbue VL LVV.-..\J-V:‘: y‘a--:-v‘ -.-V ~“D\v lb L‘V O-vv-VNA «*4 A—v; : hgflhwfl‘filwvv Tn; a A d _: five—w: C .- I so: 3..“ a3». C- vvv‘-‘.v*v\:: -..V Devon 13 t..\.. r» ‘-\_‘\' 0‘ Q - sq s ‘ .— l. a *- -\ CECCXCICC: (erGUCCICE SKIII, rarck) the interviews kmaoause I found that the electronics industrial development in II.K. had been rather thoroughly discussed by the academicians, gcnnernment officials and industrialists and recorded in printed media. The libraries of H.K. trade Development 66 Council and universities have a rich collection.of information on the industry. Thanks to the improvement of the computer data base documentathmi, I could retrieve efficiently the published materials relevant to the research. I was advised that it would be difficult to get positive responses from the Shenzhen officials during this sensitive period. I attempted to make several contacts at the local offices dealing with foreign.direct investments but I was told that the persons-in- charge had gone for conferences. I therefore concentrated on doing documentary research. 3.2.2. Documentary Research Through.desk and computer data base research” I collected secondary' information from Inniversity' libraries, research institutes, industrial and trade associations, and government departments. Statistics and data gathered include: (I) the electronics industry of Hong Kong and Shenzhen - establishments ~ types of electronics products produced, — electronics import/export/re—export performance, - trade and production linkages - employment structure (II) macroeconomic data/policy of Hong Kong and Shenzhen (and (Suangdong Province) - trade pattern and production linkages between Hong Kong, Simenzhen and the developed countries - (economic and industrial development policies 67 (III) the electronics industrial development in Asia-Pacific — the division of production among the major electronics producing countries in Asia-Pacific - governmental policy on electronics industrial development 3.3. RESEARCH PROCESS The research was conducted during July to September 1994 as a oo xomm .Ammmav ascoomwao HmHHDmSUGH\HmHUMmEEOU cocucocw “condom mcmzo wcog 0202 020x .\0 cmwuam cmnm cmz meow cm as om Ham mam s\\ :4 omm mozH>oxm ozoouzux qmwmm When kilometers, municipality) was established in 1980, Shenzhen SEZ accounting for 17% 82 (with a had a population of only 333,000. size In 1993, residents has increased ti) 2.949 million, million population. temporary population of about 668,000, the total population of the SEZ temporary residents accounting of for 327.5 square of the physical size of the the whole municipality the number of 70% of The SEZ 1mm; 1.189 million residents, including 2.073 the with a accounting for 56% of (see Table 2). Table 2: Population of Shenzhen in Selected years Year 1980 1985 1993 “ Population Munici— SEZ Munici- SEZ Munici- pality pality pality Permanent 321 84 479 232 877 521 Temporary 12 10 403 238 2,073 668 Total 333 94 881 470 2,949 1,189 Temporary 4 11 46 51 70 56 Population (%) Sources: Shenzhen Yearbook 1981, 1986 & 1994 Most of the production and trade have concentrated in the SEZ. and In 1993, the GDP of Shenzhen amounted to US$4.7 billion The the income per capita was about US$1,730 in 1992. GDP of the SEZ alone amounted to US$3.6 billion and the income per capita was US$3,075 (about one-sixth of that of H.K.; see Table 3). Shenzhen has developed from a small border town 83 and rural farmland into a modern metropolitan with wall—to— wall skyscrapers indistinguishable from its archetypal capitalist neighbor, H.K. Table 3: Basic Data of H.K., Shenzhen Municipality and SEZ r- Data Cit Hong Kong Shenzhen M. SEZ Area (sq. km) 1,000 2,020 327.5 Total Population (Mn) 5.9 2.9 1.2 temporary N/A 2.0 0.7 permanent N/A 0.9 0.5 contribution to GDP (%) primary sector 6 3 1 secondary sector 18 56 55 tertiary sector 76 41 44 GDP (USS billion) 109 4.7 3.6 GDP/Capita (U85) 18,907 1,730 3,075 GDP increase in real 5.5 > 30 terms (%) inflation rate (%) 8.5 35 Sources: H.K. Yearbook 1994 Shenzhen Yearbook 1994 4.2.1. Shenzhen SEZ in the Context of China’s Economic Reform The People’s Republic of China was founded in 1949 following the Communist victory over the KMT which fled to 'Iaiwani .After three decades of war and.political instability, the economy and infrastructure were severely disrupted. The Imew government adopted a centrally planned economy, carried (Nit land reform and later established agricultural communes. China gradually faced the difficulties encountered by 84 other“ centrally' planned economies; an irrational pricing system, an emphasis on quantity rather than quality, and a lack of incentives. Under the "iron rice bowl" approach, state companies provided lifetime employment, housing, and medical care, with no effective link between individual output and salary. Till 1978, growth was primarily a result of an increased input of labor and capital, with little growth in total factor productivity. The mistakes of the "Great Leap Forward" program in 1958 led to a widespread starvation of three years. The social chaos caused by the Cultural Revolution, which began in 1966, also had negative economic consequences. Since 1978, China has begun a series of gradual economic reforms to increase the role of market forces, and that have resulted in dramatic economic and social changes. Reforms began with agriculture, which supplied 27% of China’s GDP and employed more than two-thirds of its labor force. Reforms were extended to the industrial and service sectors in 1984. The establishment of private companies has been encouraged, and state—owned companies’ share of industrial output has decreased from four-fifths in 1978 to about 50% in 1995 (Kaye, 1995). A.corporate income tax system-—with marginal tax rates de facto varying by companies——replaced the full remittance of profits of state—owned companies. Administrative decentralization has given provincial and local authorities more discretion in taxation and resource allocation. Reforms of the financial sysban are still in their infancy. The 85 foreign exchange market has been deregulated.on 3IJanuary 1994 with the government’s announcement of letting the RMB’s price depend on demand and supply. While international trade has been partially deregulated, trade barriers have continued to exist between provinces ems provincial governments want to prevent disputes caused by differing provincial pricing arrangements and to protect provincial producers. China also decided to use foreign capital by permitting the inflow of foreign direct investment and external borrowing from abroad, and by encouraging economic integration with its regional neighbors. Much cu? the economic integration is centered around the southern provinces of the Chinese mainland, which are geographically and ethnically close to H.K. (Guangdong) and Taiwan (Fujian). In the Sixth Five Year Plan document (1981—1985), Premier Zhao Ziyang announced the creation of SEZs in Shenzhen, Zhuhai, Xiamen and Shantou. Most overseas Chinese have their ancestral roots in Guangdong Province and Fujian Province. Guangdong is adjacent to H.KJ and. over" 80% of the ZH.K. population speak the Guangdong dialects. Chinese communities in Taiwan, Singapore and other Southeast Asian countries have their ancestral roots in Fujian and speak the Fujian dialects. The SEZs serve the political purpose of enticing H.K., Macau and Taiwan back to the Chinese rule. The Shenzhen SEZ and Zhuhai SEZ are adjacent to H.K. and Macau respectively, and Xiamen SEZ is just a few miles from the two coastal islands controlled by Taiwan. Chhmiwill resume sovereignty over H.K., and.Macau.in.1997 and 86 1999 respectively under the arrangement of "one country, two systems". China wants ti) demonstrate to Elie”. Macau and Taiwan its tolerance of capitalism in the SEZs. The SEZs played not only an economic but an essential political role in the regional orientation of the open door policy. The SEZs were modelled after the EPZs (export processing zones) regarding the incentive package, and the provision of a separate and "special" physical infrastructure, economic management, and legal environment to attract foreign investmentss. However, it was set out to be markedly different from Asia’s EPZs in a number of ways, reflecting the differences in goals. Unlike an EPZ which was set out to generate local employment and foreign exchange, Shenzhen SEZ was aimed to attain multi—sectoral development in scientific research, industry, financing and tourism. The SEZs were designated.to play four "window" functions: (I) bringing in foreign capital and advanced technology, (II) absorbing scientific knowledge, (III) introducing modern management expertise, and (IV) articulating China’s foreign economic policy (Jao & Imnnm; et al., 1986). In order to attract advanced technologies, Shenzhen SEZ was designated to ‘performl a matchmaker role between foreign investors and Chinese industrial companies. The SEZ offered cheap land, labor and infrastructure. The Chinese companies provided skilled labor and supplies of materials. Foreign companies were expected to offer capital, marketing and management tmechniques and technology. 87 A SEZ is characterized by a free—market economy and a dominance of foreign investment. The SEZ’s regulations on foreign enterprises stress preferential treatment and safeguards for foreign investment. The provisions of the Regulations on the SEZs are summarized as follows (see Jao & Leung et al., 1986): (I) Goods produced by foreign companies are primarily for export, and these companies can operate independent of state intervention. (II) Parts of the products produced are allowed to be sold to Chinese domestic market under prior approval. (III) Foreign investors are guaranteed a reasonable rate of return on their invested capital through preferential 6 and treatment. The privileges include low income tax exemption from duty on productive capital. (IV) The enterprises are free to manage their labor. 4.2.2. Shenzhen’s Economic Development Of the four SEZs, Shenzhen was the first to be founded and has developed the fastest. In many ways this zone has served as a paceesetter for China's open door policy in economic development. Before its designation amsea SEZ, Shenzhen was a small border town, with some market-town functions but very little industrial development. It contained small-scale Inanufacturing companies, engaging mainly in the production of fertilizer, small farm tools and daily consumer items. In 88 1979, the gross industrial output value was about USS? million and the total industrial employment was estimated.to be around 5,000. From its opening until 1983, Shenzhen SEZ was a cheap labor haven for Hong Kong manufacturers. Many of them, being hard—pressed by rising wages, moved north across the border the labor-intensive processes, obnoxious industries and manufacturing requiring a large amount of space. Shenzhen was once a dumping ground of Hong Kong’s dyeing and textile— finishing industries. In the early 19805, Shenzhen SEZ also had a bias towards property and tourism owing to the significant influence of Hong Kong investors in the SEZ. Most of the SEZ investment came from Hong Kong and the investment decisions of Hong Kong businessmen were to a large extent based on what they perceived to be the safer bet, that was the utilization of the resources of Shenzhen to satisfy urgent Hong Kong market demands. A logical and important consequence of this influence was the spilling over of the property boom from.Hong Kong to Shenzhen. A lack of reaction space during weekends antlfor short holidays in Hong Kong was another factor leading to a flow of investment into hotels and holiday resorts during the initial years of the SEZ. The early bias soon led to saerious problems as the property market in Hong Kong plunged into a deep recession in 1982. The need to redirect the development strategy of the SEZ back to the promotion of matnifacturing was reaffirmed. 89 Investments 1J1 industrial. projects; began ti) overtake property investments by the end of 1983 and became the dominant sector of foreign investment in the SEZ. The rapid industrial growth has been financed by foreign direct investment from.IIiC, Taiwan, Japan, LLS. anmi Singapore. Since the industrial development is dominated by the small— medium companies from H.K. and Taiwan, its industrial structure has been narrowly based on light industries. The H.K. investments concentrated in electronics, textiles, garments, toys and.watches. The Taiwanese major manufacturing investments include shoes, umbrellas, toys, garments, electronics and computers (HKTDC, 1991). The industrial value output of light industries reached US$3.95 billion, representing roughly 67% of the total industrial output (Shenzhen Yearbook 1993). H.K. has been the largest source of overseas investments. Until 1985, H.KJ constituted 2737 contracts (96.88%) amounting to US$2612 million (90.32%) of foreign investment and thereafter about 70% of the total foreign investment. Japan was the second largest investor till 1990. Taiwan has heavily invested in Shenzhen since 1989 anmi has become the second largest source of overseas investment since 1991. Over the years, Shenzhen has diversified its sources of foreign investment. But H.K. still constitutes 70% of the total foreign investment. In the SEZ in 1992, H.K. and Macau companies owned 656 "san ci" ventures while the Western- Japanese companies had only 124 ventures (see Table 4). 90 Table 4: Foreign.Manufacturinq Investments in Shenzhen.in 1992 L ality Municipality SEZ Investments in SEZ Investment (%) W-J WFO 64 SS 86 W-J JV 74 69 93 H.K./Macau WFO 54 45 83 H.K./Macau JV 656 605 92 Source: Shenzhen Yearbook 1993 The "san ci" constituted 48% of the manufacturing establishments of the SEZ, making up 76% of the Shenzhen’s total industrial output in 1992 (Shenzhen Commercial/Industrial Directory 1993). The export of "san ci" reached US$3 billion, representing 59% of the total export value of the whole municipality. While the export value of Shenzhen Municipality reached US$5.09 billion, with an increase of 48% over 1991, the increase of "san ci" export was 61% over 1991 (Shenzhen Statistics Yearbook 1993: 25). This indicates the significant share of "san ci" in the industrial development and export. In 1992, the registered "san ci" in production and trade has reached a number of 5757 companies in Shenzhen. Most of the city’s economic activities concentrated in the SEZ. The SEZ attracted 87% of the city's industrial output and 95% of contracted foreign investment (Shenzhen Yearbook 1993; China Economic Review, 12/1993). Between 1979 to 1992, Shenzhen has attracted 6,108 projects of foreign investment at a value of 91 US$7.15 billion. The city has by far attracted more foreign investment than any other city in the country. Shenzhen has overtaken Shanghai as China’s largest exporter in 1993, with an export value of US$7.8 billion. It was voted the fifth strongest economy among Chinese cities, after Shanghai, Beijing, Guangzhou and Tianjin (HKTDC, 1993). 4.2.3. Shenzhen's Attempt for Change Despite its impressive growth in GDP, industrial value and export, Shenzhen has attracted mostly labor—intensive production and has been seen as a workshop of H.K. In addition, ii; is facing tflua development bottlenecks——rising costs of land, labor and infrastructure, and competition from the Pearl River Delta region and Shanghai Pudong development zone. Some argue that Shenzhen’s best bet lies in its role as an information and service center for southern China (instead of an industrial and technological center) (Rosario, 1987). In 1991, the Shenzhen Municipal government announced that Shenzhen would focus on the development of the tertiary sector and "new" and "high" tech industries (H.K. Economic Daily, 1/1994). Entering into the 1990s, Shenzhen has attempted to <3hange its function of being a "workshop" for H.K. to prxyviding higher value-added service and products (China-Hong Kong; Economic Monthly, 6/1994). The Shenzhen Municipal Government Reform Committee and Guangdong Province Reform (Conunittee have announced that Shenzhen will be developed to be "aruather Hong Kong". This is in line with Deng Xiao-ping’s thcnnght that China would need to create ”several Hong Kongs" 92 (Special Economic Zone Economics, 4/1992: 12-13; 5/1992: 8-9). The Shenzhen government has recently set an investment guide. Large shopping and retail industries, tourism, exhibition, warehouse and storage, and finance are on the list of encouraged projects7. Restricted projects include the production of TV sets, telephone sets, radios and recorders, hi-fi systems, color TV tubes and glass covers, laser record players, record.and.CD players, and circuit boards. Forbidden projects include printing and dyeing, electroplating, metallurgy alkalized printing, slaughtering, etc. Since 1991 the government has adopted some measures to improve investment environment--expanding the securities market, and setting up a duty-free raw materials market and two Ibonded. districts (similar~ to free trade zones where imports and exports need not pass customs) bordering H.K. In addition, foreign investors are now allowed to develop large tracts of land for both industrial and residential uses (China Economic Review, 12/1993). Shenzhen. provides land enui labor txa the .H.K. manufacturers based in IIJ<. MkK) in tunnl export capital, technology and jobs to Shenzhen. Both cities have adopted <3Xport—oriented strategy and competed with their neighboring ecxonomies in the global electronics market. The organization of? the production system of the region mirrors the demand of tfma global market and the competition from the newly irmbistrialized economies. 5. THE INDUSTRIAL CONTEXT 5.1. THE GLOBAL DIFFUSION OF ELECTRONICS PRODUCTION 5.1.1. The U.S. hegemony Rapid global diffusion is one of the most salient feature of the electronics industry. After the second world war, the U.S. emerged as the leader of the global electronics industry. This was partly a result of its effort to convert its massive, war—related production capacity to peace time production of industrial and consumer products. The giant U.S. electronics companies possessed the technological, financial, managerial and marketing expertise to penetrate foreign countries with growing demands for consumer products resulted from wartime shortages. The advance in telecommunications and transportationtechnologyfacilitatedtfluainternationalization of the industry. Among the war-torn countries, Western European countries made the fastest recovery and posed a demand for U.S.-made electronics products. The Western European countries offered tax incentives to attract foreign direct investments and.posed high. duties on imported products. They succeeded in attracting investments of the U.S. electronics companies. Cormyequently, Western Europe became the second major center of time electronics production. 93 94 Further industrial booms encouraged the U.S. manufacturing companies to seek investment opportunities outside Western Europe. Under the aid of special legislation by the U.S. government, the offshore plants were allowed to re—import the finished products under beneficial tariff conditions. This policy helped to foster the "global assembly". In the early 1950s, offshore manufacturing flourished in Japan, which had an abundant supply of low-wage labor. In the 1960s, the U.S. companies established assembly plants in Hong Kong, Taiwan, South Korea, Singapore, Mexico and Puerto Rico. 131the late 1960s, Southeast Asian countries adopted the import-substitution industrialization. policy. Global corporations started to build manufacturing plants in these countries in order to penetrate their markets. ,{ During the period of the U.S. hegemony in the global electronics industry, global diffusion was primarily aimed to exploit cheap labor in Third World countries. The technical and spatial division. of labor" was highly' polarized. with knowledge- and capital—intensive processes in First World countries and labor-intensive processes in selected sites of Third World countries. More than in any other industrial sector, competition in the global electronics industry has lmeen.dominated by U.S. companies and Japanese companies. In higfli value—added electronics products such as computers and sendxzonductors, global competition "has come quite close to an excflnisive US—Japanese affair" (Ernst, 1992). 95 5.1.2. The Challenge from Japan In the 1970s, the U.S. hegemony began to be challenged by the ascent of Japan. The development of the Japanese electronics industry has been driven by commercial rather than military applications which significantly affect the economics of competitionK Japanese companies emphasized cost reduction, product differentiation, product quality and improvement, and the "high speed-to market" (Ernst and O’Conner, 1992: 64). They started IX) establi8h offshore plants as early as in the late 19508 to cut the production costs. These strategies enabled Japan’s penetration in the world markets for electronics products. Japanese consumer electronics products (from radios in 19508, TVs in the 19608 and 19708, audio equipment in the 19708, and VTRs and video camera recorders in the 19808) flooded the U.S. market. The U.S. electronics companies were gradually expelled from producing consumer electronics for the world markets. 5.1.3. The Spread to ANICB In the late 19508, Hong Kong became the next Asian city to attract U.S. offshore investments and the first city to holti Japanese electronics investments. H.K. offered an abundant supply of low wage labor. Hong Kong, a duty-free gxmrt with a low corporate profit tax rate and transportation facilities, provided favorable conditions for foreign inxmastment. Taiwan quickly followed Hong Kong to lure elecfi:ronics investment from the U.S. Taiwan set up EPZs and offered tax incentives and an abundant supply of labor. 96 Taiwan’s success was followed by South Korea in the mid-19608 and Singapore in the late 19608. 5.1.4. The Technological Change and its Impacts on ANICs The global competition in electronics production has continued to accelerate the technological change, industrial restructuring, and competition and cooperation among global electronics corporations. These have exerted. tremendous impacts on the electronics industry of the ANICs whose development has been dependent on the investment by, and technology transfer from global corporations. The 19708 witnessed the single most important technological change in the electronics industry——the advance in microelectronics? The automation of assembly and quality control processes was ‘made possible. 1&3 a. result, the electronics production in First World countries has become much less labor-intensive than before. Higher quality products are now being produced with the use of computer-aided design, computer-aided manufacturing systems and industrial robots. With time application CHE microelectronics technology, different stages of a production process can now be linked up under one central control. Forward and backward integration can enlarge the gains from an integrated information system. The microelectronics technology' enables time evolution : bah-‘dva A . ..-p..:p. nu $-1-v. v --I-~.v--y-h. ._ ‘ u nun“.-. ...,‘N, ‘ .n ‘ I ”3.5... ‘ ¢ -! ‘ Y"-‘ ‘H .. .A.‘ A- "‘ ‘1‘ “‘““-V~AI . . ‘ “A I .b ..V -‘u .“D- ' - .- ~-. ... j 4:1. .. ._ . ..h - ...,‘ - rho...~‘ 'A r «q ~L . "ubv '1 4‘ ‘ ‘. 97 products in First World countries, and develop networks of component suppliers and assemblers close to the pmoduction plants. Hence, they store very little inventory of parts and components and obtain quick delivery from their suppliers nearby. By so doing, they can reduce their working capital. Traditionally; two typescflfcompetitive strategies canlxa discerned :ui the telectronics industry--cost. reductitnl and judicious pricing. In a situation where rapid market growth is no longer assured, product differentiation capabilities have gained considerably in importance. This includes the definiticmlof product standards and market segments, provision of customer services and the "speed—to—market" for new products and services. The center of competition has thereby shifted beyond the sphere of production to R&D, and to the coordinatitm1of increasingly complex network transactionS‘with component suppliers, customers auxi external technological sources (Ernst, 1992). The 19808 witnessed some signs of deinternationalization of electronics production. Microelectronic applications reduce tine significance CHE labor costs, euui increase the capital intensity anui the advantage cfif proximity tx> niche markets concentrating in the First World. In the late 19708 anui early 19808, the growth of eflectronics foreign direct investments (especially in semiconductors) in Asia was rather slow. The U.S. companies such as Motorola, Intel, Fairchild, Appliexi Microcircuits, Apple, IUflfl, Prism (1). established onshore automated assembly plants (Sayer, 1985). Some 98 Japanese companies withdrew from South Korea and Taiwan, and established their own onshore assembly plants. In general, the diffusion of electronics production to Asia has continwai. The global corporations retain their operations in the ANICs to take advantage of the abundant supplies of low—cost skilled labor and the established regional sourcing networks. The automated operation is so expensive that it is only cost—effective to operate it on a 24-hour cycle and on a.nuflti-shift and seven-day per week schedule. Countries with minimum labor regulation are ideal sites to practice automated assembly. Automated operations are very costly and the investment can be risky especially in a rapidly changing market. Many companies still prefer offshore semi—automatic production to onshore automated assembly production” The practice of automation is uneven among different processes, products, and electronics producing countries. Automation has taken place more in semiconductor manufacturing than consumer electronics manufacturing. 1X1the semiconductor production, automation is :practiced.more in wafer fabrication.and testing processes than assembly processes. Automated production processes are also seen.nmme in the ANICs than in Third World countries. The afloundant supply of low wage labor in Third World countries keep£;the balance between the alternatives of automation and the: 'use of less expensive semi-automatic manufacturing prtxxesses in offshore subsidiaries of global corporations. 99 5.1.5. Global Subcontracting and the Asian Division of Labor To cope with the intensifying global competition brought by the technological change, the global corporations devote resources to produce high value-added products, develop new technologies, and consolidate their global distribution networks. They increasingly subcontract to companies of the NICs to produce mature products on an OEM basis. Presently, global corporations are focusing on higher value-added products (integrated circuits, computers, and multiple— function VTRs) while ANICs are specializing in lower value— added products (TVs, audio equipment, computer peripherals, watches and calculators). This is termed as "product specialization" (or "horizontal division of labor). In recent years the ANICs have been moving from a vertical toward a horizontal division of labor with First World countries in electronics production. Originally confined to labor- intensive manufacturing for the global corporations, the companies of the ANICs are now increasingly undertaking an integrated local production or supplying products on an OEM basis (explained later in this chapter). The electronics production is characterized by the fact ‘that companies tied. to .Iapanese companies are strong' in form strategic alliances with global corporations to carry out R&D, and market research, and to train its personnel4. 5.1.7. The Potential Competitors of H.K. and China Malaysia is increasingly specializing in lower value- added products such as audio equipment which is also a major product line of H.K. electronics export. Malaysia is becoming the next large-scale producer of VTRs (after South Korea and Taiwan), as most of the leading Japanese companies transfer their production to the country to reduce costs and bypass the restrictions imposed by the Western European countries and the U.S. The government has set up free trade zones in several sites and allows 100 percent equity ownership by foreign companies, even for projects catering for the local market. The labor costs remain low on the international basis, with an average rate of about 15% of the U.S. average rate and half that of Singapore. Malaysia has a supply of low—cost engineers. Penang has attracted 16 U.S. semiconductor 102 manufacturers. Malaysia has today become the third largest exporter of packaged semiconductors. National Semiconductor has set up the first wafer—fabrication facility in Penang. Motorola, Intel, Fujitsu and Hitachi have also announced plans to establish wafer fabrication processes in Malaysia. Malaysia has begun to attract some investments in computer peripherals assembly (mostly' by 'U.S. companies based in Singapore). The electronics industrial development of Thailand is similar to that of Malaysia. The labor cost of Thailand is lower than that of Malaysia. The government has offered substantial tax holidays to foreign investors and allowed them to sell 20% of their production in the local market. Thailand 1&3 strategically located (13 provide an access to the 100-million-strong Indo-Chinese markets of Cambodia, Laos, Vietnam, and Burma. Thailand.has attracted assembly processes of computer and peripherals as well as consumer electronics. Thailand has become a major producer of computer peripherals in Asia. Thailand’s rapid development owes much to the transfer of production capacity by leading U.S. disk drive companies from their bases in Singapore. At the same time, Japanese {manufacturers of keyboard, floppy disk drives, micromotors, and.cmher peripherals also established large—scale production prrxzesses in Thailand. In absolute terms, Thailand's exports renuiin small, but in terms of growth they have outperformed EVETI South Korea and Taiwan over the past few years. T h e Ifliiliqopine economy has been in.a better shape in recent two to 103 three years. A Japanese and U.S. multinational aid program was extended to the Philippines to cope with its external debt and to embark on the export-oriented industrialization. The Philippines has a low wage rate (even lower than that of Thailand, and one—fourth of that of Taiwan and South Korea). The Philippines has attracted investments from South Korea, Japan, Taiwan and the [LEI Uniden, a Japanese company of communication equipment, closed en1 electronics factory in Taiwan and replaced it with one in the Philippines. 5.2. THE ELECTRONICS INDUSTRY OF HONG KONG AND SHENZHEN 5.2.1. A brief History of H.K.‘s Electronics Industry 5.2.1.1. Since 1959: Radio and radio parts production H.K.’s electronics production began with radio assembly for a Japanese corporation, Sony. The intensifying competition with the U.S. electronics producers in the late 19508 and the growing wage rates in Japan, drove Sony to partially' internationalize its :radio .assembly. By' 1959, H.K.’s plastic industry had already been established for 12 years and was capable of making casings and knobs for small radios. The manufacturing of plastic toys powered by batteries in the 19508 brought into existence companies which could manufacture simple electrical products such as wires, trzunsformers, batteries, switches enui dry cells. .All the supporting industries were in place. The only input H.K. neeCkad to produce wireless radios was the transistor which coulxi be imported from Japan. 104 H.K.’s first electronics companies, the Champagne Engineering Co., assembled over 4,000 radio a month for Sony under a subcontract arrangement (Henderson, 1989). By 1960, Champagne and two other companies had started to manufacture their own radios at a cost even lower than that of the Japanese (due to lower labor' and. overhead. costs). Consequently, the H.K. radio export to the U.S. effectively undercut the Japanese at the lower end of the market during 1960-61. By 1961, 12 companies manufactured radios in H.K., of which tn“) were joint—ventures with.IJA3. companies (Ng, 1992). The successful competition with Japanese producers led to a Japanese government ban on the export of transistors to H.K in 1962. They were, however, substituted by imports from the U.S. and Britain. Meanwhile, the H.K. radio output increased by one—third that year. The Japanese government realized that its ban was ineffective, and lifted it in the same year. Furthermore, the H.K. companies moved quickly to manufacture condensers, capacitors and radio-transistors for radio production in 1962. The radio manufacturing industry flourished. The number of companies increased in the following years (HKGID, 1993b). 5.2.1.2. The 19608: Production Differentiation The industry was also diversified to the production of FM ratiios (1964), television tuners (1965), and calculators (13968). Companies moved beyond assembly to produce television setxs, recorders and calculators as well as parts and subassemblies for these products. Exports of parts and 105 components grew quickly in the later part of the 19608 (Ng, 1992). Nevertheless, the critical components were imported. In the 19608, a number of semiconductor manufacturers started to establish assemblies in H.K. Fairchild Semiconductor; the "mother" CHE Silicon.‘Valley3 moved. its assembly to H.K. in the face of substantial price competition in transistor markets. Motorola, National Semiconductor and Sprague followed. IQ! the late 19608, I{J<. has become the principal Asian assembler of semiconductors for the U.S. market. Japanese companies such as Hitachi, Oki and a number of others also moved their assemblies to H.K. Several local companies emerged tx> assemble chips fin: the global corporations (Henderson, 1989). 5.2.1.3. The 19708: "Fad" Products iflmagreatest increase intfluaelectronic industrial output in the late 19708 were "fad products". They were consumer products. with short product life cycles. They were fashionable items that were sensitive to changing consumer tastes. One example was the electronic calculator -- the kind included in medium-priced wallets or offered as promotion gifts in direct-mail marketing. Others included electronic toys, watches and clocks, and telephones with various features (HKGID, 1993b). 5.2.1.4. The Eighties: Microcomputers The manufacturing of computers emerged in the early 1f9808. The manufacturing was not technology—intensive. H.K. asusembled mostly 8—bit micro-computers at the very low end of 106 the market. With ROM (read only memory) and RAM (random access memory) of up to 64K, they were mostly home computers to run small simple programs and to play electronics games (HKTDC, 1984). H.K. companies learnedtxanake micro-computers by making television games, electronic games and calculators in the late 19708. Seeing the increasing global demand for microcomputers, some of the large local companies entered into the production of this new product. At the height of its growth, there were 30 companies manufacturing computers and computer parts. The first Hong Kong—made computers were exported in 1981, and the sector was expanded quickly in the next two years. The low-priced home computers were like consumer products in their short product life and simple technology requirements (HKGID, 1993b). Most of the companies experienced financial difficulties in the mid-19808 China spent heavily on the imports of computers in the early 19808 but later canceled many of its orders with its inability tx> pay with foreign currencies. This exerted EH1 adverse effect (M1 H.K.‘s computer manufacturing. Even large companies (large by H.K. standard, e.g. listed companies in H.K. Stock Exchange) failed. They were not as fast as their Taiwanese counterparts to bring out :new products and their delay hampered them to get a significant market share. Many withdrew after a while’s atn:empt and the sector remained stagnant. 107 5.2.2. The Structure of the Electronics Industry The electronics industry has been H.K.’s second largest export earner after the clothing industry, accounting for an export value of 57,333 million and 25.7% of the total domestic export in 1993. It consisted of more than 1,446 companies in 1992. It has been the second largest employer in the manufacturing sector. It employed 53,591 workers in 1993, representing 11%cfifthe manufacturing employment. It has also been the largest recipient of foreign direct investment since 1991. In 1992, the U.S. was the largest overseas investor in the industry, constituting 47% of the total investment; .Japanese and the Netherlands were the second and third largest investors respectively. The three leading investors together accounted for 91% of total foreign investment in the industry (HKGID, 1993a). Although the two largest investors, U.S. and Japan, comprised only 6% of electronics establishments, they employed 35% of the industry’s workforce. 'Their restructuring affects the H.K. economy and numerous employees in the industry. Most of the H.K. manufacturers work as OEM suppliers for global corporations. That is, they produce according to the specifications given by the contractors, and do not need to carry (nu: marketing ijl foreign markets enni R&D. Foreign contractors send personnel from the headquarters or employ in8pecting agents to inspect the OEMImanufacturers’ production technology, factory lay—out, and sales records, etc. before deciding to place an order. After production, the in8pecting 108 agents examine the products to be shopped to the contractors (see Figure 5). Recent high commission rate for the agents have cut the profit margin of low—priced product manufacturers. A Japanese manufacturer does not place an OEM order with H.K. nenufacturer unless there is ea 30% t1) 40% saving in production costs as compared with domestic manufacturing. This amount of cost saving is required to cover offshore procurement risks and to allow for additional transportation, insurance, quality inspectitnland warehousing expenses (HKTDC, 1991a). All respondents reveal that the Japanese customers are more demanding than the Western customers. The OEM manufacturers need to achieve a high degree of vertical integration and to have highly automated facilities of the required standard. They then place trial orders and will increase the order size only if the quality is stable (within the permitted ratio (ME defeats t1) shipment size). It is reported that the U.S. buyers generally allow'a defect rate of 10% of the shipments, Japanese companies demand zero defects. Such a high standard of quality requirement naturally entails high production costs. 1139 Establishing Business Contacts Contractor Inspects HK OEM Firm’s Company Background, Production & Quality Systems Contractor Provides Specifications < HK Firm Gives Technical Drawings Making of Prototype V Contractor Approval Pass Contractor's Test > Negotiation of OEM Agreement Trial Order > (may occur:) Contractor helps Setting up Production Facilities Quality Checks by Contractor's Engineer Stationed in HK Factory A V Satisfy Contractor's Reliability Tests Increase of Order Size Contract Expires Renewal/Review of Contract Terms .Figure 5: Typical Procedures in Reaching An OEM Agreement Source: Modified from HKTDC (1991), OEM Business with Japan’s Electronics Industry. 110 Manufacturers ck) benefit :fnmn contractors ea certain degreecfiftechnology'transfer. The contractor (especially the Japanese) sends personnel to theCHfldnenufacturer’s factory to advise the establishment of production lines and conduct sample checkg IH.K. companies can learn advanced manufacturing technologies, new design, production management, and methods of setting up quality assurance system. The electronics industry' has been facing structural problems——rising wage and land costs, a low level of technology, weak supporting parts and components segments, severe competition with local and overseas counterparts, and an over-reliance on the U.S. market and on Japanese supply of critical components. Nearly 80% of Hong Kong electronics manufacturers maintain their competitiveness by moving assembly processes north across the Hong Kong border to Shenzhen and the Pearl River Delta region (see Figure 6) where abundant supplies of comparativelyr cheap> labor‘ and liNKi are available (HKTDC, 1990). They can then make use of the preferential entry into the U.S. under the Generalized System of Preferences (whereas Hong Kong has lost GSP after January 1988). The total number of foreign. companies reached 51 peak; of ‘129 1J1 1988 but declined.tx> 82 in 1992. Some global corporations such as Sanyo, Philips, Commodore, AST, etc. moved a part of their production from H.K. to Shenzhen and the Pearl River Delta region. lll .mmfluumdch mo coflumumpmm mcox mcom .Ammmav muamo Mm>flm Hummm as osmEumm>cH.gcox gcom ”momsom coflgmm muamo Ho>flm Hymmm mzu mo COADMUOJ ”m mungflm a:c.5.5> 0 QB . 395:: ......z: RUK&MQ . N 9.3.95: 0 O :2:3.5.fi 52.2.25 ..m._ma..o..~ . 0:123“. \s. 2.25950 0 4 f a 0 52.235 «5.23:3...» . 3.5.0.”..N. a g 23:23... ~ 0 .. 32:...” NUZ—>OCQ ozoocz<=o ’ 112 5.2.3. Shenzhen's Electronics Industry There was only one electronics assembly factory in 1978 employing 100 workers, and it could produce only simple radios, amplifier and transformer. By the end of 1983, the electronics industry became Shenzhen SEZ’s largest industry as the manufacturers based in H.K. moved their production north across the border. In 1985, the electronics industry constituted 48.7% of the total industrial output (Chen, 1987). The assembly and processing' branches of the electronics industry grew at the expense of other industries and against the government’s wish of industrial diversification. Despite industrial 11rces: Data of 1986 is provided by Henderson (1989); Data of 1994 is based on interviews and case—studies 118 The number of production establishments has been decreasing (see Table 6). Most of the global corporations have either moved their production back to their homelands or to China and Southeast Asian countries. Motorola HK, Swire Technologies and Philips are exceptions. Among the U.S. companies, Fairchibd, and Sprague have closed their operations. Teledyne has moved its assembly to Thailand. Commodore has moved its production to South Korea and the Philippines, and set up a computer sales operation in H.K. Microsemiconductor has shifted the assembly to Scotland and carried out sales ix11iJ<. National Semiconductor produces only in the Philippines and has turned the H.K. operation into an.Asia marketing and sales office, distributing and providing technical support to customers (Computerworld, 4—18-91). Siliconix has turned its H.K. operation into a regional office. Zilog maintains only a regional office and sales function in H.K., and its production is carried out in the Philippines and other Southeast Asian countries. Among the Japanese companies, Hitachi closed its semiconductor production in 19781and.has been maintaining the functions of consultation, international procurement, marketing and after sales service. Sanyo has moved its assembly and testing processes to Shekou (Shenzhen, China), Thailand and back to Japan. Oki has shifted its design and Aproduction to Taiwan, Japan and Singapore, and is keeping a iregional office in H.KJ .Among the European companies, Philips (tlhe Netherlands) maintains its assembly of LCD and sales in 119 H.K. Ferranti (Britain) has stopped its joint venture with Semiconductor Devices and moved back to Britain. Semiconductor Devices was one of the oldest (25 years) and largest of H K.’s contract assemblers when.it was a member of the London-based Wheelock Marden group of companies. The British-H.K. company sold Semiconductor Devices t1) a H.K.- based group, Wheelock H.K. because it did not have confidence in the future of H.K. after 1997. The H.K.—based group had a very strong relationship with China. It closed its 30,000 square foot manufacturing facility with aeworkforce of 700:hi H.K. and shifted all its production to Suzhou (China)2. It set up an office in a commercial district (in Wanchai) and carried out only marketing and procurement in H.K. The government subsidy in industrial land use for high— tech industries came late to prevent the withdrawal of some manufacturing companies but not too late to rescue some. Motorola's presence in time Tai Po Industrial Estate has attracted a«clustering of local companies (Pacific, RCL, ASAT, Hua Ko, Vitalic). However, these companies have not yet been successful in obtaining contracts from Motorola since their production technology has not met the demand of Motorola’s requirementex All of these companies keep major manufacturing processes and design work in Tai Po. ASAT and 'Vitelic relocated part cfif the labor—intensive 113 assembly work to their factories in Shenzhen. The following reports the study of three semiconductor ngfiflnpanies: (I) Motorola Semiconductors H.K. Ltd.; 120 (II) a subcontract assembly house owned by British capital based in H.K.; and (III) a H.K. chip producer. 6.1.1. Motorola Semiconductors H.K. Ltd. 6.1.1.1. Production Organization Motorola Semiconductors H.K. Ltd. (Motorola HK), established in 1967, is a wholly foreign owned subsidiary of Motorola Inc., ea US$17 billion. (1993) company%, and. the headquarters of the corporation’s Asia-Pacific Semiconductor Products Group. The Asian—Pacific headquarters coordinates its subsidiaries in China (in Tianjin), Taiwan, Korea, Japan, Southeast Asian countries, and Australia (see Figure 8). 121 6 fl Senda7 Beijing.R Seo 1R”;4 Aizu ~M Pusa ad? Tokyo CD Tianj'n <3 0. Singapore Kuala mpur H: Asia Pacific Headquarter R: Regional sales office M: manufacturing Sydney Melbourne Afrgiglure 8: Motorola’s Asia-Pacific Facilities / 122 The company was established to do final testing of US— manufactured circuits. Manufacturing consists of die bonding and wire bonding of linear ICs and microprocessor testing. Today, the company designs and manufactures advanced semiconductors such as high—density dynamic RAM memories, complex ASIC and BiMOS and bipolar ICs for many types of applications by CAD/CAM/CIM (computer—aided design, computer- aided manufacturing, computer—integrated manufacturing). Many semiconductor companies have moved out of H.K. because of the high land prices in the city. Motorola HK suffered from rent increases and moved its manufacturing facilities several times. The management realized that it would be impossible to operate in Hong Kong without owning land to build manufacturing facilities in the long run. The company bought an industrial building in Kai Fong industrial district 11 years ago when the land price decreased during the Sino—British negotiation over Hong Kong’s future. Again it bought the land in the high tech zone of the Tai Po Industrial EState in 1990 (at a subsidized rate offered by the H.K. government) when there was not so much competition for the Industrial Estate after the Tienanmen Event 1989. With this purchase, Motorola HK will not be threatened by the land prices in H.K. and can consolidate its development in the territory. 6 ° 1 .1.2. Technological development The company inaugurated the Silicon Harbor Center, a 3 . . . . . 26 . 000 square foot 3-storied faCility, in December 1990 in 123 the newly acquired 7.2 acre land ijltflme Tai Po Industrial Estate. This is an ultra—modern.plant housing Motorola’s Asia Pacific headquarters, a regional computer center, an integrated circuit design center, and a manufacturing center which is fully automated and linked via fibre optic local area network and high speed satellite with the company’s global operations. According to the manager, these technologies represent not only the "state—of—the—art" in the H.K. electronics industry, but also one generation ahead of similar facilities in the U.S. and European countries. Technological improvement is 51 guiding" principle to enhance the company’s competitiveness since it is seen as the key to quality improvement and speed to market. In the year of the Dragon, 1988, the Motorola HK design team delivered an application specific integrated circuit (ASIC), dubbed DragonKat. DragonKat makes it possible to create rniniaturized end products such as multi—language translators, auflvanced pagers, and portable telecommunications equipment. TYie chip’s read only' memory (ROM) can. be programmed. by 54C>torola customers giving the users the flexibility to create cl'L-lsstomized applications. Design data for the DragonKat can be t117€insmitted on a high speed satellite link to Motorola WC>1?ldwide’s mask and wafer fabrication facilities in the U.S. 1?}163 chips themselves are processed in what Motorola considers thD loe a "state—of-the art" silicon wafer facility in Scotland (1N1C3t:orola publications; Yager, 1991). 124 The company is creating an alliance between the industry, gnovernment and academia like that in Silicon Valley, (California. It is working closely with the universities and Fmolytechnics in H.K. Many of the key members of Motorola HK cmame from these tertiary education institutes. The company focuses on training by providing resources such as: (I) Nkotorola University in Chicago, (II) Asia—Pacific training Chesign center in Singapore, (III) in—house on-job training, (IVU in—house instructor training, and (V) local consultancy training. 6 .l.1.3. Employment Labor cost reduction is not a main concern for the ccnnpany. According to the respondent, a reduction of labor ccmst may kme crucial for low—end manufacturing but rmN: for <3aglital-intensive production which.cannot betmgved flexibly to Whexrever labor and land costs are low. The relocation of a Capital-intensive manufacturing involves higher costs than that of the labor-intensive manufacturing; the former has hiélkner capital-to-labor ratio and demands more space to inStall equipment and machines than the latter. The company has no plan to build manufacturing plants in SOuthern China. According to the respondent, although the IEUDCDI? cost in China is presently low, it will increase in a fen” fi/ears. The company will not move the design process to Culirléi whose technological level remains low. Chinese Engi-heers have a good command of theoretical knowledge but 1aCk practical and application—specific knowledge. The 01 125 company understands that China in the long run will not tolerate the situation that global corporations exploit the China market without using its local resources. The company will not blindly follow the trend to relocate to wherever the labor and land are cheap. Instead, Motorola HK expands its operations in H.K. Motorola HK has about 3,000 employees including 1,600 engineers, professionals, and support staff. To maintain its competitiveness, the company follows the principle named as "QuST" (quality, speed and team work). 6 .1.1.4. Assessment of the region Motorola regards H.K. a8 a valuable center not only for its growth potential, but as a centrifugal point for technical support activities in Asia and the Pacific. H.K. has not provided adequate supplies of components and engineers for IC manufacturing and design. However, its geographical location and its communication and information infrastructure facilitate the company to procure components from Pacific— ASia, and to recruit engineers from Singapore, Britain and U.S. As technological complexity increases, the need for ClOse customer liaison for prompt design modification also intensifies. The H.K. location is close to many major CuStomers in the region. The company considers stable go\fernment and local tax rates favorable factors to hold a Capital—intensive facility. Moreover, H.K. has the strategic advantage in penetrating the potentially high volume China 126 market. Motorola has a strong confidence in Hong Kong’s future. The market-driven economies of Asia represent a system so successful that they will influence China’s implementation of the one country, two systems concept to endow positive benefits to H.K. after 1997 (C D. Tam, vice president and general manager of Motorola’s Asia pacific division, Computerworld, 12—13—90:2). According to the respondent, Hong Kong should go for "high-tech" production for two reasons. Firstly, the city has technical and business personnel who are exposed to the world business trends. Secondly, Hong Kong is an international center and has efficient communication and information networks necessary for regional and global procurement and subcontracting. 6.1.2. A subcontract assembler, Company S 6 . l . 2 . 1. Production organization Company S is owned by a British conglomerate——"hong" Which has had a long history of Operation in H.K. and China. It was established in 1986 as a subcontract assembly house asSembling microprocessors used in computing and life—saving EEquipment in aircrafts. It is financially independent of the mot her company. Most of the customers are U.S. semiconductor CornEDanies (85.88% in 1993; West European, 11.11%; Asian, 3~OES‘35). Usually, a contractor provides silicon wafers (already fabricated) to the company for assembly. 70% of the Orders are obtained from large global semiconductor companies avg '- 1.1 L A.‘.~V\ — vvv -~~. . f l I B i-.ol \A.‘-, s‘v-‘b. 'F‘ap .— . \ nu“, _ a. ' ”HEY " vo ““wy- a. by, Ly . ‘n -... I I" ...“ .A a.‘.' (I! .11 ‘ AA \~~t - '5 v, - \N‘v. , O ,A 127 and the orders are stable. The rest is obtained from smaller companies and the orders tend to fluctuate. 6 .1.2.2. Technological development The company is facing strong competition mostly from the South Korean companies which produces higher—end, higher quality products. It does not face direct competition from those of Thailand and the Philippines which concentrate on lower—end, lower quality products. To maintain its competitiveness, the company devotes efforts to improve quality, yield, delivery and communication“. The company has been upgrading the ICs through size reduction (smaller, thinner and more compact). The company does not invest in basic research; since it is too costly for a subcontract assembly. The quality improvement of ICs is handled by a tlecrhnical support team composed of nearly 100 technicians. The whole engineering section (process control, technical Support, design and development, industrial engineering) has 227 employees. The training of engineering for the SeIniconductor industry has started late in H.K. and the supply haS been inadequate. The company is employing more than 50% of the technical support team from Malaysia, Singapore and the Philippines. To source new technologies, the company seeks lieensing from R&D companies in Silicon Valley, California. Over the past 8 years, the company has been expanding in let size (from 67,430 square feet in 1990 to 132,940 square fth in 1994), manufacturing facilities and workforce but redLlcing inventory. It has adopted the Japanese JIT method, 128 by establishing a close relationship with the suppliers in Hong Kong to ensure quick delivery (same day order and supply) and to reduce inventory costs. The company uses highly automated and specialized technology. It includes MIS (management information system), robotics, automatic inspection, automatic assembly, quality control circle, total quality management, electronic data exchange and real time data collection. All models are the latest revisions and the designs "representing the state of the art in assembly". To satisfy upcoming quality and cleanliness requirements, the company equipped the manufacturing facility with continuous particle monitoring and display, positive pressure in all clean room areas, and humidity and temperature controls/displays. The company has Obtained the ISO9000 qualification for its productions. 5 - l . 2.3. Employment Over the years, the workforce has steadily increased, but at; a rate much lower than that of machines and equipment. The automated manufacturing facilities are operating 24 hour/day at a 6—day/week schedule. The company is employing Workers as direct labor for assembly and 69 foremen Supervision. (Most of the low-skilled workers are 751 for new lmrTligrants from China. Some of them have just arrived in H.K. and do not even speak Cantonese, the dialect spoken by H.K. Chinese.) The training department provides a few days’ t _ . . . ralning to new workers and retraining when the workers are Shifted to another. For quality assurance, it has 92 workers 129 and 36 quality assurance staff. For marketing, shipping and tnanagement, it has 174 staff. In total, the company has a inorkforce of 1349. 6.1.2.4. Assessment of the region The company still maintains its operation.in.H.K. and has riot planned to move to China, unlike the food industry in its corporate group. H.K. provides efficient communication and 'transportation that China cannot offer yet. Moreover, for a capital~intensive manufacturing facility, the fixed cost is rnuch higher than the variable cost. The labor cost <:on8titutes less than 20% of the total cost and therefore a :reduction of labor is not an immediate concern. The overhead <:osts (machines, equipment, maintenance, etc.) are high in such an assembly no matter where it is located, and the Imalocation to China or Southeast Asian countries involves too Thigh a cost. Moreover, China has been still constrained by true ban by COCOM6L1ntries. The establishment of a design center takes much 1631538 cost than that of a wafer fabrication plant or a mask SleDp. In: is much safer for global corporations to set Lu) deassign processes in H.K. than in China when copyright r63‘Saulations are largely ignored in China. H.K. can benefit from these investments in upgrading its design capability 130 since the local engineers can experiment their ideas. The local manufacturers can turn to these design centers for the service of design and this will help advance H.K. ’8 transition to higher value-added production. The marketing officer points out that H.K.’s industrial policy has been inadequate in advancing the semiconductor industry. The government should have learned from its Taiwanese counterpart to support the semiconductor industry7. But she does not expect to change before 1997 since "the boss (H.K. government) will have to leave". Hopefully, after 1997, the Chinese and Special Administrative Region governments will create a long—term policy on the technological development of the whole country including H.K. 6 .1.3. Company O, a logic chip manufacturer 6 .1.3.1. Production organization Company 0, 'instead of owning expensive manufacturing facilities like the global corporations, has taken advantage of technological and human resources of China in the production of a popular model of logic chips". To avoid the risk of heavy capital investment in wafer fabrication, the CCDrnpany has been subcontracting to Chinese state—run companies W1'lich are already equipped with the required production CeChnology. Two are in Guiyang and two in Guangzhou and one in shanghai (see Figure 9). The one in Shanghai is an equity jCDint venture, of which Company O owned 51% of the equity. Al 1 these companies obtained government loan ten years ago to fiIiance the purchase of manufacturing equipment to modernize 131 their production. But they did not have enough local demand and the equipment was underutilized. Company O supplies the subcontractors wafers procured from the U.S. and Western European countries for wafer fabrication. The fabricated vveafers are then shipped to Company O’s wholly foreign owned subsidiary in the SEZ for labor—intensive assembly. Company O keeps an office for marketing and procurement and a storage facility (for wafers) in H.K. Shang’.i Guiyang 655382??? ‘éfix. Hong Kong F - We 9: Company O’s Production links in China 132 Some subcontractors are equipped with larger processing capacities than Company 0 requires. In this case, the company takes only 70% of the processed wafers and lets the subcontractors sell the rest in the domestic market. Since the subcontractors are state—run companies, they have channels to sell. They can then avoid underutilization of their machines. Through Company O, they can get high-quality wafers. In return, Company O does not need to pay processing fees or invest in expensive technologies. Since the wafer is expensive, the company demands a high yield and low defeat rate from subcontractors. It has to understand the technology, management and production quality of a subcontractor. The usual practice is that it places a trial order. When the subcontractor brings out satisfactory products, both sides will enter into contract. The contract SED'ecifies the time of delivery, processing fee and Compensation paid by subcontractors in case of defeats. However, the Chinese companies never pay compensations and so ‘3 he company has to be very careful in selecting S ubcontractors. The subcontracting relationship is C3C>rnparatively stable. The subcontractors invest heavily in equipment and demand stable orders. Company O, as a Q0Iltractor, also has to invest heavily in wafer purchase and E I‘efers a stable relationship. Through subcontracting to various Chinese companies, C . QI'T‘lpany O could register as a small investment and hence get 133 cpiicker approval from the SEZ authorities. It can evade a nLunber of taxes and save time by avoiding red—tape. There are many items of taxes. Small companies can avoid some of them by playing on personal connections with local authorities. Large companies, such as the listed companies and global corporations, can hardly afford the risks. Many companies simply register as new companies by taking on new company names in order to get tax privileges after their expiration. However, my company cannot do so because the Shenzhen government no longer welcomes labor—intensive investments. So, I have to follow the regulation to pay profit tax (managing director, Company 0). 6;- 1..3.2. Employment The company will keep its factory in the SEZ despite the rtissing labor costs. The SEZ set up is small; it is equipped TnEiiJnly with testing equipment and tools costing about US$2 million. The assembly of ICs is labor-intensive and the VVCDIflqers need only a few days’ training. It employs only about 543 ‘workers, and can afford the rising labor costs. The H.K. marlagers can commute between the SEZ and H.K. on the same day. The company no longer keeps a production facility in.H.K. 'Ififlei office carries out narketing, procurement and pmoduct SE r1’SJineering design. The company employs 4 staff. The owner Li‘és; the only engineer. The main market is H.K. (35%), China (‘:3 (3%), Southeast Asia and the U.S. 6 ‘ :1--3.3. Assessment of the region The company will keep its H.K. office. Tflue advanced rTtunication infrastructure and the free flow of information 134 are crucial for the purchase of high-quality wafers. A free flow of market information is essential for the purchase of high—quality wafers. Overall, the local semiconductor industry has declined. The banks in H.K, supports only the booming industries but not those in crisis. Presently, the banks are not interested in electronics industry. H.K. has lost in its competition with Taiwan in technological development. In the semiconductor production, H.K. can perform wafer fabrication and mask making of only the lower-end chips that Taiwan has stopped producing. Southeast Asian countries have not been able to challenge H.K. yet since their comparative advantage lies in assembly but not design and wafer fabrication. In 3 to 5 Years, H.K. can still maintain its competitiveness in manufacturing low-end chips. H.K. needs to upgrade its CeChnology for higher-end semiconductor production since China Will succeed in taking over the lower-end production in the fL11Cure. 6 - 2 . THE RESTRUCTURING OF COMPANIES ENGAGED IN LABOR-INTENSIVE PRODUCTION The companies engaged in labor—intensive production “it Cientified in this research have moved all the manufacturing DI"Ocesses to the SEZ and kept the service functions in H.K. The following reports five case studies: (I) the Sanyo Group < I I) Company R, a U.S. electronics component producer; (III) C b e Legend Group, jointly owned by H.K. and Chinese capital; 135 (IV) Company W, a H.K. audio product manufacturer; and (V) Company M, a H.K. electronic toy producer. 6 - 2.1 The Sanyo Group Sanyo Electric H.K. Ltd. (Sanyo HK) is a subsidiary of Sanyo Electric Inc. (Japan)9. The company coordinates the H - K.—-southern China region. It was established in 1960 in H - K. It has two wholly foreign owned subsidiaries in H.K. (see Fig. 10) and has extended its production from solely radios in 19608 to cassette tape recorders, color TV sets, calculators, CD players, air conditioners, VTRs as well as supplementary components such as loudspeakers, electric motors, printed circuit boards, plastic molding, electric Cables, CD pick up and CD mechanisms. 6 - 2.1.1. Production organization Sanyo HK has established one WFO and six joint ventures in Shenzhen (see Fig. 10), and supported them by financial assistance, management structure and distribution channels. The choice of Shenzhen is due to its proximity to H.K. Sanyo HK has been supervising the operations in Shenzhen. All the aSsembly processes of semiconductors and consumer electronics eXcept one production line (batteries) have been shifted to S1'lenzhen. Only 300 workers are left for that production line. Se~I1yo HK is in charge of the procurement and marketing of the finished products by its Shenzhen plants. H.K., as a f inancial center, is an ideal place to raise funds to support he operations in Shenzhen which are still running defiCits. 136 .L . M Guangzhou Shenzhen '1n H: headquarters 5: sales office W: WFO J: JV L: liaison office M: manufacturing plant I‘fimjwure 10: Sanyo’s Facilities in H.K. and China 137 Two out of the six plants are equity joint ventures. Sanyo wishes to penetrate the Chinese domestic markets and the Chinese partner desires to obtain 'up—to—date technology. Sanyo looks for customers, supplies the production technology, supervises the production, and arranges exports. In return, the Chinese partner is responsible for worker management and domestic sales. Huaqiang Sanyo Electronic Co. Ltd. (HQS) is an equity joint venture between Sanyo HK and Shenzhen Huaqiang Electronics Industry Corporation (a state company), each for 50% of the capital. It was established in 1984 with a capital of US$6 million and a 15-year contract. HQS has a slogan—- "HOS will be made a model of joint venture of China". Its production has expanded from solely color TV sets to tape recorders and VTRs of Sanyo brand name. HOS has obtained licenses to sell in the Chinese market: tape recorders (25% for domestic sales and 75% for export to U.S., Europe, Middle East, the former USSR), color TVs (50% for domestic sales and 50% for export to U.S., Canada, East lEurope, Europe, the former USSR, U.K. and H.K.) and VTRs (100% for domestic sales). The General Manager points out the .strong competition from the Chinese color TV manufacturers \NhiCh can produce CTVs at a much lower cost and thereby sell eat a lower price in the domestic market. HQS’ products are of Iiigher quality and more expensive but the Chinese market for lluxurious products is small; the profit remains pretty low. The VTR production has been set up for two years and the 138 products are sold only within the Chinese domestic market. The cost of imported components is high. If the company exported the VTRs, it would need to pay transportation and marketing costs. All these would add up to become too expensive and the products would not be as competitive as those of their competitors. 6.2.1.2. Technology deployment The contract specifies a technology transfer from Sanyo to its partner, Huaqiang Company. The tape recorder factory has 6 production lines and completes process equipment with an annual production capacity of up to 1.2 million sets of stereo radio recorders and audio components. The factory deploys precision instruments to strictly control the production process. The color TV factory owns two modernized assembly lines which annually produce 600,000 color TV sets. The factory is equipped with core automatic testing equipment and Semi—automatic insertion machines. To ensure an adequate supply of high quality parts and CIOmponents for the production of the three products, the Company set up a plastic injection and coating factory in 1985. It imported from Japan eight large injection machines and four coating robots to actualize full automation. The factory produces cabinets for color TV sets and tape recorders. Since it is equipped with a capacity higher than 1:laat demanded by HOS, it takes orders from other companies. HQS also established an automatic insertion factory in 1991 which is presently equipped with 14 fully-automatic insertion 139 machines for printed circuit board (PCB) units and has a 20— hour work system in shifts. It engages in the insertions of components parts for PCB units of color TV sets and tape recorders for the company. Workers and foremen are trained to work with the sophisticated equipment. Other than the hardware and quality control, a technology transfer includes the organization of management (see Figure 11). The general manager is designated to be a Japanese from Sanyo and the deputy general manager is from Huaqiang. For individual departments, the chief is from Huaqiang and the deputy chief is from Sanyo (Fig. 12). The Japanese staff has a higher mobility than the Chinese since the Japanese may return to Japan at the end of their appointment. Therefore, the departmental chiefs are allocated to the Chinese to sustain continuity.’ At the senior level of management, HQS has 10 from Japan, 7 from H.K. and 40 Chinese Officials ("ganbu") from Huaqiang. The Board of Directors 1 General Manager 1 Deputy General Manager I _ F I I I l I 1 'Tape Plastics Finance Purchase Import & General . ZRecorder Injection Dept. Dept. Export Affairs Office Factory' Company Dept. Dept. Video Automatic Planning Personnel Technology Quality Tape Insertion Dept. Dept. Development Control Recorder Factory Dept. Dept. Factory we 11: Organization Chart of Huaqiang Sang 140 6.2.1.3. Employment HQS employs 1,600 employees. For the workers, the sex ratio is surprisingly about 1:1 (also observed during factory visit). HQS obliges to the quotas imposed by the Labor Service Company on the employment of workers from outside the Guangdong Province. It provides 1-year contract or 3—year contract to its workers. The General Manager thinks that the management of labor in Sanyo (Japan) is much more paternalistic and hierarchical than that in HQS. In HQS, the working atmosphere is much more relaxed. The respondent further points out that H.K. manufacturers have advantages in language and culture as compared to the Japanese concerning the management of labor. The control over workers is more lax in HQS as compared to that in H.K.—owned factories in Shenzhen” The General Manager comments that China has to improve its labor quality. Presently, HQS can actualize only 60% of its capacity owing to the low quality of labor. The turnover rate of engineers is rather high since time engineers often ruuu: for better—paid jobs after gaining some experience. 6.2.1.4. Industrial linkage Companies granted a license to sell in the domestic market are required tx> increaae the local content of the products manufactured. Over the years, HQS has reduced its reliance on the Japanese vendors and procured components and raw'materials in Guangdong Province. Their quality is not as 141 good as that of the Japanese vendors. Ikn: the company is willing to make compromise on that. Subcontracting plays an important role in the procurement of HQS. When HQS confirms a list of pmocurement, it will deliver it to Sanyo HK. Sanyo HK will procure from Japan, H.K., Southeast Asian countries through direct purchase and subcontracting which constitute 70%. The rest is procured by HQS from within the<3uangdong Province through direct purchase and subcontractingu HQS is linked to 100 subcontractors, most of which are medium-sized plants of 500 workers. They manufacture parts and components according to the specifications of HQS. rams performs assembly and testing. HQS has a technology development department which is responsible for collecting information on the technological level of the parts-producers in China. HQS at times rents out its equipment to subcontractors to facilitate their production. It sends personnel to inspect the subcontractors and to pmcwide technical guidance. The inspection is on a regular basis. At times the company does reject products of unacceptable quality and demands an improvement. To guarantee a supply on time, HQS provides subcontractors both a long-term plan and a short-term plan. It informs each subcontractor 3 months before it places its order and sends a memo a month before its due date. The orders HQS places have been rather stable. The price is negotiated and both sides can usually reach compromise. 142 The General Manager complains about delays in delivery by the Chinese suppliers. The quality is rather unstable and there is often an increase in price because of the depreciation of the RMB. Nevertheless, HQS does not dismiss subcontractors but tries to strengthen its technological guidance and to maintain a longer term relationship. 6.2.1.5. Assessment of the region H.K., to Sanyo and the other Japanese producers based in H.K., has changed from. being’ a cheap labor' site to an observation tower of the Chinese market since China’s adoption of the open door policy in 1978. Sanyo HK is keeping an eye on the political development in China. If H.K. maintains the status quo, Sanyo will maintain its operation in H.K. China is still a "communist" country in the eyes of Sanyo and many other Japanese companies, according to the Chairman of Sanyo HK. 6.2.2. A U.S. electronic component manufacturer, Company R 6.2.2.1. Production Organization Company R, a subsidiary of a U.S. company, was established in H.K. in 1984 to produce DC-DC converters. The company has been managed ker{J(. personnel (including the managing director who accepted my interview). In the first 3 years, it carried out production with a workforce of roughly 150 people. Since the production. processes ‘were labor— intensive and required young female workers, it started its first wholly foreign owned subsidiary in the SEZ 7 years ago to take advantage of time cheap labor supply. Vflxni it had 143 orders beyond the production capacity of its branch plant, it subcontracted the surplus order to a H.K.—based manufacturer nearby. After one and a half year, it established another wholly foreign owned subsidiaryu When its market expanded and had more orders, the wholly foreign owned subsidiary subcontracted them to another H.K.-based manufacturer nearby. The same process took place every one anui a half year and presently it has four wholly foreign owned subsidiaries and four subcontractors. The company subcontracts 30% of its orders to these subcontractors. There are reasons for having four wholly foreign owned subsidiaries instead of one. Firstly, land near to the already established wholly foreign owned subsidiary was not available. Secondly, the company can minimize risks (breakdown.in production due to natural disasters, strikes and government intervention) and maintain flexibility. Thirdly, the company does not need to afford more production facilities and staff to manage more workers. Fourthly, when the business fluctuates, the company does not need to lay off its own labor. The subcontractors are overwhelmingly dependent on the company. Nevertheless, they lmnma their survival strategy against market fluctuations. For example, if they have an q order which needs 200 workers, tflmn/ will employ only 150 workers and pay them in H.K. dollars for overtime work. When the order is reduced, the company does not need to lay off its workers. 144 The company has tremendous influence over the subcontractors; it supplies all the technical tools, testing equipment and quality control equipment needed for the production to the subcontractors. The subcontractors also need to do production report in the same format as the company’s WFO. Over the years, the company has not reduced the workforce in H.K. It has increased the lot size. It has a workforce of 100 to do pilot runs and testing of the products. After the pilot run, the whole production is carried out in the branch plants and the subcontract assembly houses. 'The assembled products are then transported back.tx> the H.K. office for testing, and distributed to its customers worldwide. The H.K. office carries out marketing, distribution, material control and purchasing, while the U.S. headquarters carries out design and development, customer relations, finance and marketing. Over the years, the H.K. office has succeeded inreign customers. Presently, the manufacturer is employing 4 administrative staff and 4 engineers (one is recently 155 recruited. from. China). The engineers are employed for technical support. The manufacturer clarifies, "H.K. manufacturers do not do R&D. Nearly all H.K. manufacturers copy the designs from trade journals." 6.2.4.2. Technology deployment Manufacturer W moved all the production tools from H.K. to its SEZ operation. Many of them have been used for 8 to 10 years. The production is confined to assembling and testing. Assembling is largely labor—intensive—-fittimg hundreds of tiny parts and components. They are "tools" (such as stone ovens, wire cutting tools) rather than "machines". Testing involves more sophisticated and semi-automated equipment. 60% of the tools and equipment were imported from Japan, 25% from Taiwan and 15% were purchased in H.K. The costs ranged from 'US$800 to 7,000 a piece. Since the electricity supply is not sstable in Shenzhen (China), the tools need repairing after two )M3ars in operation. Manufacturer W points out that a high level of automation :is not appropriate for his production; automation is meant for Standardized mass production, and not cost—effective for Small-scale production. The order he obtains is usually Emnall, and each contractor has some slightly different SENECifications in functions and appearance of the same prOduct. The workers are required to undertake a few days' on-job training which focuses mainly on the specific tasks they LIIidertake. The company does not have a training department 156 and does not keep records of workers. Systematic training as such is commented as "not needed" due to the low-skill requirement of the jobs and the high mobility of workforce. 6.2.4.3. Employment Manufacturer W stays at his H.K. office during Monday to Thursday and his factory from Friday to Sunday, which operates during weekends. He sends two H.K. managers to stay at the factory ti) supervise time daily production. ZHe employs 10 Chinese managers and staff at an average salary of RMB2,000 (US$230) each, 8 engineers at RMB1,500 (US$170) each, and 600 operators at RMB600 (US$70) each. The managers and engineers are given contracts but not the operators. The manufacturer offers contracts to the Chinese managers and engineers. However, many Chinese engineers quit vflmni they succeed in finding better-paid jobs. Since the manufacturing deals with tiny parts, manufacturer W requires workers to have good eyesight, patience and discipline, and preferably female which account for 85%. The manufacturer relies on the Labor Service Company to look for workers. The Labor Service Company sends inspectors at different administrative levels to inspect his factory' quite Final Parts Assembly & H.K. Testing Components, Semi—finished —————————— part; 7 7 7 7 7PEoEuEt§ 7 7 7 7 7 7 SEZ Processing Factory Component/Parts Electronics Supplier Manufacturer AExport Order Headquarters < Headquarters H.K. Components, Finished Products Order Parts Branch Components, Branch Plant > Plant SEZ Parts iv Present ElELgre 12: Changing Intra-firn1& Inter—firm Division of Labor 173 7.2. THE IMPACTS ON H.K. 7.2.1. Being a manager of production A production system based on a network of branch plants and subcontractors requires effective coordination and control. The function of strategic planning centralized in the H.K. headquarters is getting more important. The H.K. headquarters performs strategic planning, design and product development, finance management, marketing and branch plant management. Some large companies keep small production facilities for pilot run and testing. A manufacturer needs a head. office ti) house sales and Imarketing, sourcing, and design, along with storage and possibly showroom facilities. Industrial premises catering for mainly production are getting vacant since manufacturing operations have moved away. Companies are moving away from the congested environment of traditional manufacturing areas such as Kwai Chung and Kwun Tong to newer industrial areas such as Siu Lek Yuen near .Shatin, Kowloon Bay and Quarry Bay (see also H.K. Ididustrialist 11/13). 7'.2.2. Becoming an Asian regional service center Despite a reduction of production activities, an iIicreasing number of global corporations are expanding their Sexles, after sales service and regional coordination function ifi I{.K. The city is seen as a valuable center not only for itfis growth potential, butamsa centrifugal point for technical Sk¥p§mmt.activities in the Asia—Pacific region. The location of H.K. is close to many major customers in the region. 174 Moreover, it allows companies to have a close watch over the Chinese domestic market. Out of the 57 subsidiaries of global electronics corporations listed in the Directory of Hong Kong Electronics Industry (HKEA 1994), 26 have regional headquarters or offices, and 28 carry out sales in the territory. Only 13 maintain production in H.K. (see Appendix II). 7.2.3. Failing in Developing into a Technological Core No doubt have H.K. manufacturers undertaken product diversification and deployed technology of higher sophisticationz. 'This is reflected in a marked move from the assembly of simple transistor radios to the production of a wide range of consumer electronics, computer products and electronics components in recent years. But H.K.’s technological upgrading has lagged behind that of its competitors. H.K.’s technological level in the semiconductor industry was reported in 1978 to be behind Japan’s only 5 to '7 years, and South Korea’s and Taiwan’s were behind H.K.’s (NUng Pao, 2—29—1978). As reported in 1980, "Taiwan’s wages are cheaper; but that’s all. Hong Kong has a much better cpaality and sophistication" (H.K. Standard, 11—7—1974). But H.K. has lost in its race with South Korea and Taiwan in t6P—Chnological development. As early as 1981, international ‘EPQQerts warned that H.K. was already lagging seriously behind Cthmer ANICs iii technological upgrading lII the electronics industry and called for a backing of the semiconductor ir1<flustry (H.K. Standard, 6—1-1981). 175 Despite its early entry into the electronics production among its NIC peers, Hong Kong currently depends on Taiwan and South Korea for the supply of critical components and parts (Ho, 1992). As revealed. in the case studies, critical components such as integrated circuits are imported from Japan and to a lesser extent from South Korea or Taiwan. Henderson (1989) conceives that H.K. is becoming a technological core of the Asian regional division of labor and possibly also of the Chinese domestic division of labor in the semiconductor industry (and electronics industry as a whole). Henderson’s conception is theoretically-based; he rejects a polarized core—periphery paradigm and conceives the possibility of aa NIC ti) become 51 regional core. But his conception does not apply to the development of the semiconductor industry of H.K. A growing number of companies are setting up final testing and design in Taiwan or the Singapore——Malaysia region, which have an increasing capacity'of wafer fabrication eand design and development. H.K. does not have an adequate ssupply (if engineers of relevant knowledge. Moreover, the czosts of engineering labor in H.K. are higher than those of EkDutheast Asian countries. The potential supply of Chinese eUgineers has not increased H.K.’s capability in attracting dEisign and higher value—added production processes. The C1linese engineers lack exposure to the international technological development and market. Global corporations are iIlclined to employ engineers from Singapore, Malaysia and the 176 Philippines, who are generally more fluent in English.and.more exposed to international business culture. Semiconductor manufacturers withdrew their production or shifted to sales and regional coordination function in H.K. without investing in design and final testing functions. The local production complex has not made significant technological upgrading and remains producing low-end chips. Their technology does not meet the requirement of global corporations based in H.K. and has not been able to develop production linkages. Motorola subcontracts, instead,ti)South Korean manufacturers. H.K. companies are becoming quality—conscious and eager to get international recognition as witnessed in the application for ISO9000 qualification. However, most manufacturers see their competitive advantages lie in cost reduction, product differentiation and responsiveness. Product differentiation takes place at the level of product feature, using standardized technology to remodel the products. The engineers are employed not to develop new products but to support OEM—-layout, designing casing of c:1ients’ ideas or schematic diagrams, cosmetics and features CDf new products. Product design and development is largely a Cxlpying of the existing standard design with minor mOdifications in functions, features and.outlooki .Although an irhirease of 20% to 30% in profit arises immediately with the rEilocationofproductionti)China, companies channelize little tCD strengthen the design and development capacity. Hong Kong 177 manufacturers look for short—term benefit and quick pay—back. Subsidiaries of global corporations have the R&D concentrated in the headquarters of their companies in the First World, and the profits made are not used in H.K. for technological upgrading. Most H.K. companies do not develop their own brand names and remain overwhelmingly dependent on OEM relationships to market their products. H.K. manufacturers generally welcome OEM business since they need not invest in overseas marketing. Even capital—rich listed companies do not develop OBN products. This is validated by the fact that 92% of the local electronics companies are wholly or partially dependent on OEM contractors to market their product. Only 8% (HS the local companies market solely under their OBN. A lack of brand name development reflects a lack of proper design and development infrastructure as well as marketing capabilities. It is a "chicken and egg" problem. .As long as local manufacturers can rely on OEM business, they eare not willing to strengthen the design and development, and rnarketing capabilities. 'Till they develop these capabilities, tiiey cannot develop their OBN business. H.K. does not have world—class manufacturing companies as a. result of the low—tech nature of production and the dOrninanceofsmall-mediumcompanies. The existing world—class cOrnpanies which extend their operations to all over China and Ot-her Asian countries are non—manufacturing based: Cheng Kong (IYEal estate), Hitchison (satellite TV, ports and mobile phone 178 systems), Hopewell (regional builder of infrastructure). In a Far East Economic Review 1995 survey3ci top local companies in each Asian country, not one electronics or manufacturing company is among the top—10 of H.K. (The top—10 include conglomerates on banking, communication, transportation, public utility, service and real estates.) In Taiwan, computer company.Acer is ranked as number 3 and Taiwan Semiconductor as number 10 (and the other top—10 mostly are manufacturing concerns in plastics, chemicals, textile and cement, etc.) In South Korea, Samsung Electronics is ranked as number 2 and Goldstar as number 5 (and many other top-10 are manufacturing companies ii1 auto, iron anmi steel industries, etc.). In Singapore, Creative technology is ranked as number 6 12/29- 1/5, 1995). H.K. possesses important features to develop design processes and to hold capital-intensive production. They are: (I) advanced telecommunication4 and transportation .infrastructure, (II) free press and flow of information, and (III) low tax and free port, and (IV) minimum government intervention. Although H.K. has an inadequate supply of engineering labor for semiconductor production and a weak lqinkage industry, Motorola.can overcome these disadvantages by IYiaching out to neighboring countries to procure parts and CZCanonents, and to recruit engineers and subcontractors. H.K. Legend can organize an international R&D team of software and hardware engineers in H.K., Shenzhen.and San Jose (California, U~53.) with the availability of an efficient telecommunication 179 infrastructure ii114i(. However, without strong government support and long term strategic planning, manufacturers hesitated to transit to higher value—added production and to invest in technological upgrading. 'The reality contradicts to the claims of the policy—makers (such as the Industrial and Commercial Secretary, Department Chief of the Industry Department) that H.K. has already undertaken high value—added production and the government has devoted a great effort on technological development (Economics Dao Pao, 1-3-1994). 7.2.4. Experiencing a Change in the Employment Structure The industrial wage ci'}{J(. is the second highest in Asia, just after Japan. It has increased from around US$38 in 19708 to more than US$500/month (four to 7 times higher than the wage rate in the SEZ; see HK Yearbook 1994) with associated welfare benefits?. However, the real wage increase in 1993 over 1992 was only 1.9 per cent over the previous year; (The salary for the supervisory and technical employees is mostly over US$1,250; and the annual increase of the real \Mage is higher). Apparently, some manufacturers are employing (Chinese immigrants for assembly work in H.K. The electronics :industry has a tendency to use more full-time workers than egarnents, textiles or plastics; cost—cutting through giving CNJt. piecework anmi outwork ii; less .likely. Manufacturers ‘Ermgaging in labor-intensive production have largely relocated tileir' manufacturing facilities to Shenzhen and Southern C“'llangdong. 180 The massive relocation of production processes has led to a structural change in the employment structure of H.K. The global corporations’ withdrawal of production from H.K. has also led ti) a significant reduction (fl? employment. The impacts of restructuring are not uniform on various branches of the industry; the workforce reduction is larger in branches in which the production is more labor—intensive. As shown in the case studies, the radio, TV and communication equipment manufacturers have dismissed all the workers and closed the factories in H.K. while the IC manufacturers retain a workforce for rmrfinr production. processes. In. 1993, the employment of the part and component branch fell from 25,702 in 1991 to 21,792 in 1993 at an annual average rate of 7.9%. The radio, television and communication equipment branch fell from 10,129 to 5654 iii 1993 at EU] average annual rate of 24.75% (HK Yearbook 1994). The number of establishments of the industry reached a peak of 2009 in 1989 and decreased steadily to 1446 in 1992 (HKGIDb, 1993; see Table 7). The number of employees reached 51 peak of 109,677 in 1989 and dropped at an average rate of :13.5% to 53,591 in 1993 (HKGIDb, 1993). Electronics factories iii the mid—19608 to mid-1970s were large, employing on average rTIOre than 100 persons. The relocation to China and increased alltomation have led to a significant drop in the industry’s aKnerage factory size. In 1992 the average number of workers FKEr establishment was 42 persons (HKGIDb, 1994). 181 Nevertheless, this was still much larger than that of the average manufacturing establishment which was 14 in 1992. Table 7: Firms & Employees in Electronics Industry in H.K. F Data # of Firms # of Average # of Persons/Company Persons % of Manu- % of Manu— facturing facturing Electronics All Year Industries Workforce Industry Manufacturing Industries 1965 35 5,013 143 39 (0.4) (1.5) 1975 490 53,833 110 22 (1.6) (7.9) 1985 1,304 86,115 66 18 (2.7) (10.1) 1988 1,939 109,677 57 17 (3.8) (13) 1989 2,009 99,455 50 16 (4) (12.4) 1992 1,446 60,653 42 14 (3.4) (10.6) 1993 N/A 53,591 N/A N/A (11) Source: Employment Statistics, H.K. Labor Department 7.3. THE IMPACTS OF ELECTRONICS INVESTMENTS ON SHENZHEN SEZ The impacts of foreign investments on the SEZ may not be easily generalized with the co-existence of companies of different capital origins and resources, forms of investment and subcontracting, and various products requiring different technological sophistication and labor intensity. The following provides some tentative conclusion from the case studies. 182 7.3.1. Technological Transfer Equipment transfer is limited in the operations of small— medium H.K. companies. Manufacturers frankly admit that they have brought simple tools rather than machinery to the SEZ. These tools were imported mainly from Japan, Taiwan or purchased in H.K. in early to mid-19808 and used in the H.K. operations. The level of automation is very low. The production of color TV involves automated assembly line and equipment of greater precision, and the company'is planning to sell the whole production line to the Chinese contractoru Not all companies stay vdiii obsolete technology. The surface mount technology if; deployed k»! the electronic toy manufacturer who supplies OEM products to atlapanese customer. In order to outbid their competitors, manufacturers are aware of the need to invest in new equipment. The possibility of technological upgrading of labor-intensive industries does exist. Global corporations may' not necessarily" employ' more sophisticated equipment since they relocate mainly the labor— intensive production to the SEZ. The U.S. electronic component company deploys mainly simple tools for assembly. The manufacturing of computer mother—boards atIShenzhen.Legend is labor—intensive and the only sophisticated machinery used is the surface mounted technology. Sanyo’s operations were also highly labor-intensive in the early 1980s. The installation of the relatively advanced technology in Huaqiang Sanyo (and the other recently built 183 subsidiaries of Sony) has been a move to exchange technology with market. Sanyo is permitted to sell 100% of its VTR production to the Chinese market, 50% of the color TVs and 25% of tape-recorder production. Sanyo has built 7 subsidiaries in Shenzhen and plans to keep their operation if social and political stability are maintained. The joint venture contract of Huaqiang Sanyo lasts for 15 years. Many global corporations sell their "mature" production lines to their partners at the end of their contracts and moved on to higher value-added production. It is believable that Sanyo is eager to see if the production skill is properly mastered and applied by its partner. Technology transfer is likely to be comparatively effective and intense. The central and local governments are dissatisfied with the low capital-intensity of the production. Shenzhen.has not had an industrial base with adequate supplies of skilled labor and components (discussed later). The government has encouraged the inflow of migrant labor to fill the workforce. With the supply of cheap, unskilled labor on the one hand, and an inadequate infrastructure on the other hand, Shenzhen can attract only labor—intensive production. The technological deployment of "san ci" does not seem to differ from that of the processing and assembly investment. One manufacturer revealed in a telephone conversation that he had removed the robotics in his processing workshop in Dongguan (north of Shenzhen) because of the low skill level of the workforce. (Japanese automobile manufacturers complain about the 184 insistence of the Chinese authorities on the use of robotics even if less costly methods can accomplish the task)(Sender, 1995). China’s ability to attract the import of advanced technology has been restricted by COCOM. The production of ICs, computers aumi computer peripherals may'rmmii to import some technologies classified as relating to ndlitary electronics, which are forbidden to be exported to China, a "Communist" country. This obstacle was removed with the lifting of the ban in mid—1994 (HKTDC, 1994). The equipment transfer is further hampered.by the Chinese side itself (see also Watanabe, 1993). It is observed that the Chinese do not observe the intellectual property rightsS. The Chinese perceive the obligation of confidentiality of the transferred technology differently. Copyright violation issi) serious in China that global semiconductor corporations find it undesirable to set up design centers in China. Whether the technology transferred to the SEZ is appropriate is hard to conclude. Most manufacturers produce for export and do not need to adjust their product design to the local consumer taste, and are not demanded to increase the local content of their products. They therefore do not need to adjust their production technology and methods. The range of skill transfer is confined to production, to the exclusion of marketing. The activities of marketing, and design and development are mostly centralized in the H.K. headquarters. With advanced communication and transportation 185 infrastructure, H.K. is an ideal place for contractors and subcontractors, suppliers and buyers to meet. Most of the manufacturers find that the Chinese technical personnel have sound academic knowledge but are not adequately exposed to the latest development of international market requirements. H.K. Legend demonstrates that the design and development capacity can be shifted to the SEZ to take advantage of the relatively low—cost technical and.engineering labor. But this is not yet common among the manufacturers in H.K. H.K. Legend is a special case since one of the shareholders isaerinese corporation with sound technological foundation as a partner. The company aims to integrate the management style of H.K. and the technological foundation of China, and time management have rm) psychological. distance toward the brain reserve of China. Instead, manufacturers tend to apply for the import of Chinese engineers to join the design and development teams in H.K. The local engineers are employed mainly for technical support that is quite limited in scope. Manufacturers are not keen on transferring skills as the turnover of engineers is high. Skill transfer is built in the organization structure of Huaqiang—Sanyo. Sanyo obtains orders, supplies the production technology, supervises the manufacturing, and arranges exports. In return, the Chinese partner is responsible for worker management and domestic sales. The positions of departmental chiefs are allocated to the Chinese 186 and those of deputy chiefs to the Japanese in order to maintain the continuity of management. Skill transfer takes place in a stable subcontracting relationship. H.K. Legend rents out equipment to the subcontractors and sends personnel to inspect the subcontractors’ production to ensure the quality of products. However, all manufacturers choose local Chinese companies to be their subcontractors. The U.S. company has so far subcontracted only to H.K. companies operating in Shenzhen. The local manufacturers tend.to be at a€3Camea haven forlii<.manufacturers, service industrialists, 249 jproperty developers, and time Chinese bmreaucrats and "red capitalists". Facing intensifying competition from the Pearl River Delta region for industrial processing and failing in upgrading its technology, the SEZ is attempting to follow the pathway of H.K. to build a service economy. While H.K. has taken 50 years to go through various stages of economic development, Shenzhen seems to have compressed the stages of development into two decades. The developments of both cities have been driven by very different political—economic forces and circumstantial factors. Whether the H.K. model can and should be repeated is questionable. A one—dimensional orientation towards service sectoral development without technological and industrial upgrading will make both economies vulnerable to global economic fluctuations. The rising costs of land, living and labor in southern Guangdong will continue to drive H.K. manufacturers to move northwards. At certain points, H.K. managers cannot commute back to H.K. in a day or two, and the coordination and transportation costs will increase. While Guangdong has been closely tied to H.K. and tends to accept the H.K. way of doing .business, the inland may not. The animosity towards "Hong Kong Chinese" may not manifest in the same way as the Einimosity towards affluent Chinese in Malaysia and Indonesia. 'then H.K. becomes a part of China, H.K. industrialists will Eifapear less as foreign investors but more as national €3I1trepreneurs; the polarization is then between classes and 250 regions internal ti) a country; Moreover, there exists a possibility for China to suffer from labor unrest and a ibreakdown of law and social order accumulated by economic and regional inequity. An over—dependence on Chinese labor and land supply will subject H.K. manufacturers to the risks of Chinese economic fluctuations and social instability. An import of Chinese labor to H.K. is likely to drive down the local wage increase in real terms, and to strain the supplies (if housing eumi social amenities :UI the congested city. The city is likely to have an enlarging economic inequity with the H.K. managerial and professional personnel prospering from the expanding service economy, and the local and imported labor sharing much less of the prosperity and being kept divided. This scenario is similar to that of the global cities such as New York and Los Angeles. An enlarging economic inequity is also witnessed in Shenzhen. Rampant speculation has led to a rise in land costs and the emergence of a visible leisure strata. These newly rich, together with government officials, members of the military, police units, entrepreneurs and professionals enjoy luxurious lifestyles. However, the temporary workers receive Llow wages and little welfare protection. They are restricted ‘CID numii of the government—funded social amenities. 'The lilncreasing economic inequity has given rise to contradictory SScocial attitudes, which can cause problems if the 'Llriderprivileged demand a greater share of the economic EDITosperity of the SEZ. 251 The negative social and economic impacts of the regional (economic integration--overheated property development, high inflation, and economic and social inequity—-are similar to t:hose taking place in the Growth Triangle discussed by iPersonage (1992). The alienation of the SEZ temporary workers from the inland is similar to that of the migrant workers in Johor and Batam from their mainlands. Shenzhen has gone two fast in focusing on service sectoral development without consolidating ea manufacturing base. H.K. has apparently gone far to service sectoral development without the corresponding industrial upgrading to support a balanced development. Both cities need industrial upgrading to sustain a more balanced development which can in turn serve to translate the existing regional relationship into a more positive, developmental one. H.K. has the preconditions to attract higher value-added design and development processes, as seen in its strong telecommunication, information and media, and transportation eand banking infrastructure. The electronics industry of H.K. lias largely lost in its race with South Korea and Taiwan in Elie medium-end electronics production for the global markets. It: can instead target technologies demanded by China. China needs to upgrade its product and process t6E’chnology. Many state-run companies have been equipped with I~7€31atively advanced technology which remains underutilized. j7lfiie:production of consumer electronics is heavily dependent on ll"Ugborted components. Timeproductitmiof electronics components 252 (such as ICs) can enhance the forward linkage since the products can be supplied to the intermediate goods sectors. 'The H.K. industrialists can facilitate technology transfer by (organizing three—way joint ventures, jointly' with. global corporations and Chinese companies. Shenzhen is an ideal location for land supply due to its proximity’ to H.K. Moreover, Shenzhen needs to promote technological upgrading. The Chinese officials should not give too many concessions to foreign investors whose profiteering ‘will increase the economic and social costs of the region. The Shenzhen government should strengthen law enforcement, fight against corruption, and reform the bureaucracy" and. work culture. These will help create:a more predictable investment environment for investors. It also needs to develop industrial training and retraining, and to evaluate its household registration policy to allow'more migrant workers to become permanent residents so as to maintain a stable workforce. Industrial integration requires supporting policies in ‘territorial, labor; communicatitmiandytransportationi housing, Emmi environmental protection. Unfortunately, the pmesent Shovernments of both sides have not collaborated in the <fleevelopment of the infrastructure for this region. 9 - 2. A REFLECTION ON THEORIES The predominance of H.K. capital and the prevalence of LiT- K. currency and culture over Shenzhen, the Delta region and ‘tllle larger Guangdong has left the impression that the latter 253 is the "colony" or "satellite" of the former—~much like the traditional core—periphery relationship. The prevalence of Iorocessing trades in the Delta region and the SEZ’s failure in attracting higher value—added production and technology ‘transfer seem to confirm the theories of world system, dependency and NIDOL. Wallerstein has argued that the semi- peripheral countries themselves were exploiters, benefitting from the exploitation of peripheral countries. However, H.K. lacks the traditional characteristics of a core. While H.K. is an economic center of southern China, it needs the economic backing of the Chinese government. It is vulnerable to the political turbulence of China (as seen during the Tiananmen Event 1989), and conflicts between the British—H.K. government and the Chinese government (over the future of H.K., airport-building and democratization reform). .After Milton Friedman’s recent prediction of the elimination of the HK dollar by the Beijing government after 1997, the value of the HK dollar fell drastically and recovered only after the reconfirmation by the central bank of China to keep ‘the currency after 1997 as stated in the Basic Law (Holloway, i1995; Silverman, 1995). H.K. has a low technological level and is unlikely to be title technological core of the larger China. If H.K. does not L1EDgrade its technology, it will face intense competition from £3l'lenzhen and the Delta region. Emlike a traditional core Vvlniuii has a widespread network of satellites, H.K. depends EDI‘imarilyr on. China for labor and land. supply. It. will 254 certainly suffer from a breakdown of production in case of domestic turmoil in China. The argument that Shenzhen and the Delta region are "economically colonized" by H.K. and suffer from the exploitation ci'I{i<. is not totally valid. The Chinese authorities have allowed or even encouraged the massive use of migrant workers and have been lax in enforcing the Chinese law and regulation. The reinforcement of the "gift economy" (corruption and bribery) by H.K. capital and Chinese authorities has left the Chinese working classes unprotected from exploitation. The argument overemphasizes the role of external factors and underestimates the role of internal factors in shaping economic and social development. The Chinese ruling classes should Imi: be seen ems passive and unable to make a change. The theories of dependency, world systeml and. NIDOL criticize global corporations of exploiting the labor resources and markets of Third World countries without transferring' appropriate technologies ti) these economies. Third Worldists or south—south cooperation advocates consider the ANIC capital more liberal in transferring technologies, «and more willing to accept lower equity participation in the Fkost countries. The polycentric character in their managerial Eimeoach renders them more relevant to the development needs be the host countries. The findings ii) this research do Iii: lend support to tlfiese hypotheses. Most of time H.K. manufacturers aim at 255 making quick profit and reducing production costs. They tend to play on personal connections to get around Chinese law and regulation. The transfer of technology is limited and the local content of their production is low. Most of them exercise a total control over the production and management without the participation of local partners. While global corporations may not employ advanced technologies, they tend to maintain a more stable subcontracting relationship, extend technical assistanceti)subcontractors,anmlprovide systematic training to workers. One should avoid romanticizing the complementarity between the ANICs and their regional neighbors, and between the semi—periphery and the periphery. One should be aware that the global corporations are not uniform and static. Foreign companies which do not have the economic power of the world—class corporations have increasingly sought partnerships with H.K. companies to invest in southern Guangdong. Further research may need to devote a focus on this type of partnership in shaping the regional division of labor. Regional integration has been intensifying with the .impending unification of H.K. and China” The only alternative fcn‘ the region is to translate the existing regional Irelationship into a more positive, developmental one. This “Jill depend Ci) the political decisions (ME the present and fiiture governments of both sides. Leaving the decisions to tlfme invisible hands of the market will only enlarge the eCionomic, social and regional inequity. GLOSSARY .Add—on—cards: a printed circuit board assembled and designed to be added to the motherboards of a personal computer to provide additional functional capabilities. Bit: binary digit or basic unit of information (0 or 1) Byte: usually 8 bits, a second-level unit of information, Storage of one character. chip: an integrated circuit; sometimes the unpackaged device. IC: integrated circuit; a small semiconductor device (usually silicon) containing many interconnected circuit elements. LCD: liquid crystal device; K: short for kilo which in computer terminology refers to 1,024 bytes; similarly M (for mega) refers to (1,024)2=1,048,576 bytes. Microprocessor: a chip containing a whole central processing unit (including arithmetic, logic and control functions) of a computer. Motherboards: a printed circuit board that integrates all the major functional elements of a personal computer, including the CPU, other microprocessors, memory, input/output connectors and other electronic components, and performs the central control functions of a personal computer. Peripherals: external devices connected to a personal computer, such as printers, monitors and keyboards. RAM: random access memory; a device to store and retrieve information. Software: set of instructions or programs telling the hardware what to do. ILSI: large—scale integration; refers to the number of circuit elements on a single chip. hkefer: a thin round disc (usually around 3 to 5 inches in diameter) of semiconductor material on which many identical chips are made at the same time. 256 FOOTNOTES Chapter 1 (1) The South Korean government has recently permitted its national companies to conduct processing trades with North Koreai The companies export materials to North. Korean factories for processing and the products are re—exported to the South. (2) Dalian SEZ (in Liaoning Province) which was a part of Japan’s Manchurian empire has now become a hub for Japanese economic activity. Eight non—stop flights (four hour flight time) per week between Japan and Dalian are available to facilitate Japanese managers to commute back and forth on the same day. Land in Dalian is much cheaper than that in the SEZs in the South and Shanghai’s Pudong area. The average annual wage is about US$700, less than half of that in Shenzhen SEZ. Piesently, 100,000 workers are employed by Japanese factories, manufacturing from. chopsticks to industrial motors. Of the US$1.7 billion total Japanese investment in China in 1994, one—third was in Dalian. More than 800 companies have set up manufacturing plants in.Dalian. So far, Japanese companies have invested more than US$6 billion in this city of 5.4 million people. (3) The Taiwanese government, while relaxing restrictions on trade, investment and travel to China in 1987, still limits trade with China to 10% of its total exports and imports in order to avoid a dependence on China. The government has loosened some regulations on Taiwanese investment in China in 1993. It allows investors to commit up to US$1 million during a two-year period.without registering the venture. IILpermits more manufactured items for investment and certain industries on a case—by—case basis. Some 100 special cases were approved in mid-1993 including bicycles, motorcycles and other higher technology industries. (4) Despite three quarters (n5 its population being ethnic Chinese, .Singapore 1mm; been. late iii investing ii) China. China’s Minister of Trade and Economic Cooperation, Wu Yi, tindiplomatically called Singapore’s investment in China up to 1992 as "small potatoes". But now Singapore is expanding its .investment quickly. In 1992, Singapore companies have .invested US$1 billion in China, more than the entire amount JJuvested during the previous 12 years. Senior Minister Lee Pfiian Yew expressed a new attitude towards the GT in April, 15993: "We cannot just stick to Singapore and Malaysia... It is <3CHivenient, it is near home. They [Singaporean.managers] just S3C>‘there for a day and come back. That is not a real external EEC3C>nomy. That is just an adjunct to Singapore, just across CIIEB borders." 257 258 (5) The electronics industry is composed of numerous products. Different research organizations have different ways of classifying time products. Iii this research, It use the definition printed in "Hong Kong’s Manufacturing Industries 1993" by Hong Kong Government Industry Department, since most of the statistics about the industry I use in this report are compiled by the HKGID. According to HKGID, the electronics industry’s product line cover "radic>cassette recorders, hi—fi systems, compact disc players, TV sets, calculators, electronic watches anmi clocks, electronic toys anml games, telephones, modems, cellular telephones, photocopying machines, micro-computers, portable computers, computer peripherals, computer-aided design and testing equipment, switching power suppliers, printed circuit boards, liquid crystal displays, quartz crystals, semiconductor devices (including integrated circuit wafers), handheld databank products, fax machines and electronic dictionaries" (p.54). One has to be careful to read the statistics. Some of the surveys done by HKGID exclude toys and watches and clocks as electronics products. An example is the "1993 Survey of Overseas Investment in Hong Kong’s Manufacturing Industries". Some of the directories published by industrial and commercial federations adopt the United Nations International Standard Industrial Classification of all Economic Activities (I.S.I.C. Rev.2). The electronics products include: 3832 manufacturing of transistorized radios 3834 manufacturing of receivers and communication equipment 3854 manufacturing of watches and clocks--electronic 3844 manufacturing of electronic parts and components 3839 manufacturing' of electrical and. electronic consumer products 383 manufacturing of electrical and electronic products 3833 manufacturing of electrical appliances and housewares 3831 manufacturing of electronic toys (6) Of the total manufactured exports in 1987, electronics export constituted 45% in Singapore, 24.1% in South Korea, 23 8% in Hong Kong, and 21.5% in Taiwan. Chapter 2 (1) While there was no universally accepted definition of the <2riteria by which a country was classified as a "NIC" (and fhence no agreement as to which countries should be so Chafined), a number of researchers adopted the OECD (1979) 9133Uping of DHIB--H.K., Singapore, South Korea, Taiwan in ASia, and Mexico, Brazil in America, and Portugal, Greece and Spa in in Europe. 259 Chapter 3 (1) In: one extreme, technology is tmmv something gets done (Schumacher, 1973). Near the other extreme, technology is carefully defined as an "intricate set of detailed knowledge, skills, and specifications of product designs, production and processing techniques, and meaningful systems used to manufacture particular industrial products" (Baranson, 1978:13). Some typologies have been created such as "hard" and "soft", "embodied" and "disembodied" technology, etc. 'The "hard" and "embodied" technologies refer to the tools, equipment and machines. 'The "soft" and "disembodied" refer to the management, marketing, and finance handling skills and knowledge. (2) In this research, I follow the classifications of the size of manufacturing companies in IH.K. and. in China. by' the following two studies. Sit and Wong (1988) defines H.K. "small-medium" companies as of 1-199 workforce. Thoburn et al. (1989) defines ITJ<. subsidiary iii China as 21 "small" company when it has a workforce of 1-49 workers, as a "medium" company with 50-499 workers, or a "large" company with more than 500 workers. (3) The other two "lai’s" are "lai yang zhi zuo" (manufacturing according to samples) and "lai liao zhuang pei" (processing using assembly line operations). Most processing agreements are small—scale investments and take two forms. In the first formt the Chinese jprovide factory' premises and equipment and the foreign partner supplies the required raW'or semi—finished materials for processing and assembly. The job is specified in the contract with a fixed delivery date. The Chinese side has no control over the processed or assembled product. It receives a processing fee to cover rent, wages, water and electricity supplies. In the other form of cooperation, the foreign partner supplies the Chinese side with the necessary equipment at an agreed price. The Chinese side pays in installment by charging lower processing fees. (4) In compensation trade, the foreign partner rents the necessary equipment and technology to the Chinese side which repays in the form of its output as rent. The main aim of this cooperation is to transfer advanced technology to existing Chinese companies. (5) It is not easy to get an in—depth answer to open-ended questions covering various areas in an hour’s interview and a half—an-hour follow—up interviewm 'The findings of the impacts of foreign direct investment on Shenzhen remain exploratory and tentative. In the interviews with the Japanese personnel vflm) do not speak English and Chinese and interpreters are involved, half of the time was reserved for translation. In some cases, the interview took place in an office environment 260 when the respondents need to answer phone calls or coordinate some tasks in the office. An ideal situation for an interview to take place is in a setting outside the office. Redding (1990) studies overseas Chinese capital and suggests that an ideal setting of an interview is a restaurant. This can happen only if the researcher personally knows the respondents. Unfortunately, this does not happen in my case. In this research, I have made an interview for five hours with a manufacturer first in his office and then iiiaa restaurant. This interview was comparatively in—depth. Another interview took place after office hour (for two hours) and the conversation was also fruitful. Time, space and personal relationship are important in conducting interviews. I have tried to let the respondents elaborate the topics they were interested in rather than insisting on collecting data for all the questions on the questionnaire. The advantage is that more insider's experience can be collected. However, this isciimevdtiia trade-off that comparison.between companies is at times difficult to make. (6) According to this manufacturer, he receives often requests for interviews. Usually, his secretary discards immediately these requests and will not pass them on to him. Chapter 4 (1) The deep water harbor of H.K. can hold a ship carrying 5 to 6 ton. Shenzhen does not have such a harbor. Shanghai’s Wang Po Jiang has shallow water. Hong Kong’s deep water bay enables it to dominate the whole southern China trade. (2) H.K ’s population increased from 1.6 million in 1941 to more than 2.3 million in 1950. The city had an estimated Chinese refugee population of 667,000 refugees in 1954. The unemployment rate was 15.1% among post—war immigrants. The integration of this large number of unemployed.people into the labor market posed a great challenge to the government. (3) China’s participation in the industrial sector is difficult to quantify, owing to the practice of using H.K. residents as middlemen to disguise real ownership. The investments in real estate are more difficult to access. The share has definitely increased with the tremendous Chinese effort to sustain the real estate market during the 1982 slump in prices. (4) There is counter—evidence to capital flight and emigration. The number of foreign companies roughly doubled during the period of Sino—British negotiation. Still there Ihas been more companies coming into H.K. than leaving (SCMP, 20-7-94). The total number of highly educated people in H.K. 261 throughout the period has increased (Overholt, 1993). The Singaporean.government has tried to lure H.K. professionals to immigrate, but its attempt has not been successful. Only 6,000 lii<. people lmnme migrated.ti) Singapore while 6,500 Singaporeans have migrated to H.K. Singapore’s population is only half of that of H.K. That means Singapore’s emigration to H.K. is twice the rate of H.K.’s emigration to Singapore. Moreover, the emigration has become stabilized after 1992; the rate of emigration in 1993 is 20% less than that in 1992. A growing number of migrants have returned to Hong Kong (China and Hong Kong Economics, 7/1994: 12). (5) The idea of setting up SEZs emerged before the 19808. In the early 19608 Zhou En Lai proposed special areas of the country where export facilities wouLd be set in) for light manufactured goods. These were named.as "chukuo jianggong qu" in Chinese, a term later associated with Taiwan’s export processing zones. These were not operated until after the Cultural Revolution; some 27 bases were established in Guangdong, Jiangsu, Shandong, Zhejiang, Liaoning, Hebei provinces, and some autonomous regions. Specialized export factories (98 (NE them) were also set LKL These factories accounted for 33% of all Chinese export receipts. (6) "San ci" are exempted from income tax for 2 years starting from the first profit~making year and allowed a 50% reduction from the third to fifth year inclusive. After the expiration of the above-mentioned period, a company, whose value of export products amounts to 70% or more of the total value of products manufactured in that year may, upon approval of the tax authorities, be subjected to income tax at the reduced rate of 10% for that year, while a high—tech company may get a further extension of 50% reduction for 3 years (SMEDB, 1994: 659). (7) Other encouraged projects include infrastructure (traffic transportation; post and. telecommunication, energy; water supply and garbage disposal), mechanical and electrical projects, electronic and telecommunication equipment production (computer and software, communication industries, micro-electronics anmi its components, optic-electronic technology, office automation and high—class household appliances), manufacturing of tiansportation equipment and petro—chemical industry, construction material, jewelry industry and new products (biological engineering materials, new energy source materials and electronics information materials). Chapter 5 (1) The R&D of Japan was characterized by a bottom-up approach with) a focus (it the manufacturability. For example, the (circuits (of the semiconductor) chosen to develop were those 5 262 whose design anmi process specifications guaranteed 51 high reliability. This enhanced product quality, product demand, and cost reduction, and thereby accelerated product cycles. In the U.S., the long predominance of military requirement has led to a different set of priorities. The focus was on very demanding system performance requirements, which.ledti)51top- down approach to circuit design with little concern for the manufacturability, production cost and the speed-to-market. This has led to a tradition of pursuing the "state-of—the art" or "breakthrough” technology (Ernst et al., 1992: 64). (2) It is the development of a complex and powerful integrated circuit which can embody a complete processing unit. (3) Japanese companies are increasingly setting up operations in Singapore to develop electronic switching equipment software for Third World countries, technical training for other Asian countries (Matsushita, Sony and Toshiba), component procurement (Toshiba, NUtsubishi, Sony, INK: and Fujitsu), and integrated circuit design (Matsushita and NEC). Aiwa has established a R&D center to develop radio—cassette with compact disc player. Singapore now accounts for more than 50% of Aiwa's total production (Yamada, 1990). (4) The Singapore Technology Corporation Limited-~a diverse group of companies created with government investment in November 1987--announced the formation of the Chartered Semiconductor Limited. Chartered Semiconductor is a joint venture between STC, and Sierra Semiconductor Corporation (U.S.), created to build a state—of—the-art CMOCs facility to design and build application—specific integrated circuits. STC first invested in Sierra Semiconductors in the Silicon ‘Valley, and obtained technology transfer from Sierra. It then invited National Semiconductor, a potential major customer to EDarticipate. The three partners buy 50% of the joint \Ienture’s production, making it financially viable from the kaeginning. 55 engineers from Chartered Semiconductors were :initially trained at Sierra Semiconductor and National Semiconductor facility in the Silicon Valley (Dataquest 1992) . (5) Shenzhen produces 20% of the country’s color TV output; 222.34% of the country’s tape-recorder (including Hi—fi); 30% CDf the country’s telephone set; 25% of the country’s floppy (disk (Shenzhen Industrial/Commercial Directory, 1993: 670). .Qhapter 6 (1) Henderson (1989) documented that Hitachi carried out deSign, assembly and testing in H.K. in 1986. But the Prioduction was stopped in 1978, according to a manager of the fgwnpany (with whom I had a telephone conversation in August 94). 263 (2) Each worker is paid only a monthly wage of US$47, even lower than that in Shenzhen and the PRD areas. The disadvantage of manufacturing in Suzhou is that the delivery of finished products to H.K. takes two days rather than one day as that in Shenzhen and Dongguan (north of Shenzhen). (3) The company ranked 23th.cni Fortune’s 500 liri;ffer fibre access ti) the trans-oceanic systems. 'The 280 bdegabit Hong Kong—Japan—Korea cable and the 420 Megabit Hong Icoo mcozmmamu 6cm mzmw>umucfl Hmcomnmm .4mx: .>uumsucH moacouuumHm .x.m Mo >u0uumuao ”wousom mofiuuo HmCmemu ”a umuSQEoo "U muflcouuomam umEDmcoo ”mu «\z «\z «\z «\z ¢\z com a mug ooa mmaflfisa .x.m\mcflno «\z «\z «\z «\z o oom.a m um.mH.mo mmflaflna . 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Hamm =cofluomccoo Cu mmcmofla may now mmcmnuxm unmflu= m :uflcz ucwEmUHOwcm Ca coaum mnu >3 Umufizwmu mumxuo3 30c Ou mcwcflmuu non 3mH on» nuflB Qfizmuwcupmm mm mucwcoaeoo mmmcHnu -Co .mxmm: ozu mumuwo “>u0uomm mzu o>ummmum Cu Nmm Cw m>mum mo ucmEmuSoouQ may mmmmmuocH .x.: Eouw Umuumwmcmuu mHOOB m mumxuo3 3mg Ou mCfiCwmuu non -co .m>mp 3mm m mumwwo N>H0uumm socmfism Ou m>0E Ou mcmHm wamflumume mcfixomm >Hco mxsm .x.: Eouu pmuuwumcmuu mHOOH 0 muwxuo3 soc Ou mufi>umm mmamm mcflcwmuu noh-co :mxmp 3mm m can -uwuwm o: wmpfl>0pa mumfladazm wwmum m>HumuuchHEpm Cu mcflcflmuu coflumooawp ace >pmmu pcm mmmcflcu new mucmcomEoo uODSQEOU mpmwwo u>u0uomM cmzmmcoo :fi pcma ucmzon >UmmpH¢ 0mmcfl£O mmmcousa uoc mmoo .x.: Eouw pmuuwwmcmuu mHOOF z mumxuoz 3m: OD mcflCampu noh-co .m>mp sow m mumwwo “mumm> mucmCOQEOO 0H hoe pom: >Ummuam IxuOuomu cmsmmcoo ob m>OE ob mcmHm mmocflcu mom: >Hmumm .x.: EOuw poppwwmcmuu maooe 4 mEuwm Cmemm mnu mo ucmEmmmmmd ommxcflq awauumsch unmeonamo >mo~oczumb A.UuCOUV >H Xapcwmmd BIBLIOGRAPHY BIBLIOGRAPHY Amin, S. 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