橫琴誌 | HENGQIN RECORD

Alexander Kocsis: How Hengqin can capitalize on its geographic and political position

Alexander Kocsis is a respected legal and financial professional with a decade of experience in China. He is regarded as an expert on business strategy and is a frequent commentator of Chinese affairs. Because of his deep knowledge of the Guangdong-Hong Kong-Macau Bay Area, Hengqin Record asked him to comment on recent developments in Hengqin. This is the second of three interviews.

HQR: How can Hengqin capitalize on its geographic and political position?

Alexander Kocsis: In essence, this is a strategy question and it is an important one because the answer will help shape the future for Hengqin. Unfortunately, most people think that strategy is simply a plan and, in that sense, they are wrong.

Sun Tzu said that, “People should not be unfamiliar with strategy. Those who understand it will survive, those who do not understand it will perish.”

So what is it exactly? The academic definition is that strategy is the combination of actions to exploit core competencies through which a company creates its own competitive edge with the goal of achieving above-average returns. In simpler words, strategy is about making specific choices to win in the marketplace.

Operationally, it is easier to understand if you think of it as a five-step process:

1)    Accurately identifying actual and potential problems and opportunities (external and internal environmental analysis);

2)    Determining necessary goals, at a corporate level to determine what businesses to pursue to gain above average returns and at a business level to develop and sustain a competitive advantage to gain above average returns;

3)    Developing a plan to accomplish those goals;

4)    Focusing resources in order to satisfy the plan;

5)    Executing it

Now that we have a basic understanding of strategy, I can begin to answer your question.

In regards to the first point, the Hengqin project is blessed with a strong infrastructure, a sound blueprint for its development and the support from government. On the other hand, policy has not mirrored the initial direction espoused in 2005 and the island itself is hemmed in by the ocean, Zhuhai and Macau, leaving it no room for future growth.

The seven pillar industries (finance, business services, tourism, innovation culture, Traditional Chinese Medicine, research and development centers for sciences, educational bases and high technology) are common targets. And the hope of attracting world leading companies is one shared by almost every development area.

Realistically, these are hard to achieve without substantial attractions – attractions which can be translated into mathematical benefits including cost savings, tax discounts, operating expense reductions, time curbs, economies of scope and scale, productivity increases, logistical connectivity and various ratios such as the incremental capital output ratio, which at this point Hengqin does not have.

In addition, being a financial hub is an extremely competitive field with new and emerging players like Dubai, Sydney and Budapest vying against the established players such as Hong Kong, New York and London.

There is also the issue of size. The latter three centers are respectively 2,755, 1,213, and 1,572 square kilometers (the former three centers are respectively: 4,114, 1,687, and 525 square kilometers), whilst Hengqin is only 106 square kilometers. It is clear that without a critical mass it is difficult to attract, service and operate firms that can propel an island into first class status, especially when the competition in each of the seven pillar industries is so keen.

Moreover, the Central Government has signaled time and time again that other centers have been “tipped” to be key financial centers (for example Shanghai, Shenzhen and of course Hong Kong).

Finally, because strategy is really about creating superior customer value relative to the competition, the “value”, along with the “vision”, must be clearly identified and communicated – this is still wanting.

The second point requires an objective approach and it is the one that leads to the most amount of problems. Everyone wants their project or business to grow, make money and become successful. The question is how? In other words, what are the realistic goals achievable with the resources at hand?

To help focus the question, basic strategy defines two generic approaches: price leadership and differentiation. It is in this respect that Hengqin can capitalize on its strengths (geographic and political position) to forge a strategy that will lead to long term sustainable success.

For example, instead of doing what everyone else is doing, Hengqin could differentiate its offerings or provide an environment that directly addresses the weaknesses and hurdles found elsewhere such as obtaining work permits, wholly foreign owned enterprise incorporations, bank loans, accessing qualified accounting and tax professionals, dealing with regulatory issues and access to affordable commercial space. These are all problems experienced throughout China.

Hengqin could provide these while reducing red tape, waiting times and high start up costs. Hengqin could also take a hint from the Central Government’s recent softening towards SMEs (Liu He, China’s economic czar, has just been appointed Chair of the State Council Leading Group for Promoting the Development of SMEs) and create an atmosphere attractive to SMEs.

Another possible direction is to use China’s location outside of America’s orbit to benefit from domestic hurdles. For example, the US Supreme Court has just ruled to allow states to collect sales tax from online and out-of-state retailers which may prompt the American Congress to introduce legislation dealing with e-commerce. However, for the time being, there are opportunities for those firms that are agile enough to seize upon the discrepancies and to address retail needs. Hengqin could provide briefings, advisory services and the opportunity to share information. It could also dramatically streamline and integrate trade, customs and logistics requirements.

All are methods of differentiation.

Becoming a price leader is not so obvious as real estate and service costs are rising quickly. However, it is possible to offer “overall” cost leadership compared to the other national “new areas” (Tianjin’s Binhai New Area and Shanghai’s Pudong New Area);  the other Guangdong free trade zones (Qianhai in Shenzhen and Nansha in Guangzhou); and China’s major financial centers such as Shanghai, Shenzhen and even Beijing.

This can be accomplished if Hengqin creates an environment that strives to enhance business efficiency and effectiveness by adopting advanced technology, promoting innovations such as the blockchain, developing integrated service operations, streamlining logistics, establishing a rigorous civil service, and above all, setting government faster regulatory timelines than other jurisdictions; and taking the lead in developing a strong employment infrastructure, because a healthy labor force is essential to the competitiveness and productivity of any economy.

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