Hong Kong:  Environmental Market Analysis

• Country Overview
• Market Estimates and Analysis
• Foreign Competition
• Regulatory Impact

COUNTRY OVERVIEW

Although Asia's leading success story, Hong Kong has had mixed success with environmental protection. Compared to the rest of Asia, Hong Kong is in the second tier of countries (with Singapore, Taiwan and South Korea) after Japan in terms of environmental investments.

State of the Environment

The bulk of Hong Kong�s most significant environmental problems has long been attributed to poor planning. Rapid and largely unregulated urbanization and industrial growth resulted in severe degradation of soil, water and air quality, and posed tremendous waste management and cleanup challenges. Much progress has been achieved in the 1990s, but much remains to be done.

Hong Kong has one of the world's most densely populated living areas, with little more than 400 square miles of territory, most of it on the fringes of Victoria Harbor. With its booming construction and manufacturing industry, Hong Kong's environment has paid the price for prosperity.

• "Flatted factories"-- high rise manufacturing facilities that employ a wide variety of chemical processes -- dump untreated waste, especially dyes and chemicals from electroplating, down the drain.
• The territory's waterways are severely contaminated, not only from industrial discharges but also from livestock wastes.
• Close to 25% of the population suffer from respiratory problems, many due to high levels of SO₂, NOx and particulate emissions from vehicles using unleaded gasoline.
• Untreated solid waste often commingles with municipal and consumer waste.

Some obstacles to improving the environment include:

• political uncertainties
• economic slowdown
• underdeveloped legislation
• intense international competition
• lack of acceptance of the value of environmental technology
• a shortage of skilled professionals, which will likely affect a company's ability to find reliable agents for long-term partnerships.

Government Action

Until the late 1980s, the government left Hong Kong's severe environmental problems unchecked. The Environmental Protection Unit established in 1977 merely played an advisory role, lacking the resources and backing to establish and enforce environmental legislation. Hong Kong's stance on the environment was finally addressed in the 1989 publication of the environmental white paper, "Pollution in Hong Kong? A Time to Act." This landmark publication admitted past mistakes and called for action by proposing a 10-year plan to address environmental problems. The Environmental Protection Department (EPD), established in 1986, began to develop institutional strength to administer environmental policies and regulations and enforce laws. The white paper serves as the foundation for current government policies on pollution for the territory.

Enforcement of these ordinances, however, could be far more forthright. For example, the declaration of the Water Control Zone in the Victoria Harbor in November 1994 was projected to result in the phasing in of effluent controls affecting up to 9,000 small and medium-sized factories through 1997.  Yet, fines remain relatively low because magistrates are reluctant to impose maximum penalties.

Environmental Awareness

Overall, environmental apathy predominates and to some degree is reflected by the public's unwillingness to pay for household pollution control services.   However, Hong Kong's large, sophisticated middle class has shown the beginnings of grassroots environmentalism. "Green" groups track domestic and international environmental issues and actively pressure the government to uphold proposed regulations and stiffen enforcement.

Business Opportunities

There are multiple business opportunities in pollution prevention and control technologies. According to the US Department of State's FY2000 Country Commercial Guide, the Pollution Control Equipment sector ranks 14^th among leading industry sectors for U.S. exports and investment for non-agricultural goods and services in Hong Kong.

The next five years will see ample opportunities for U.S. firms in pollution control equipment as planned infrastructure projects come on line and as industry works to comply with environmental regulations.

Equipment to support these projects typically accounts for 25-30% of the project cost and will offer over US$300 million in sales opportunities to U.S. suppliers.

The Economy

Hong Kong is primarily a service economy. Manufacturing and related industries now account for about 9% of the domestic product, compared to 23% 15 years ago. This is because much of Hong Kong's production has shifted to western and southern China, Indonesia, Africa and Latin America in search of low-cost land and labor.

Manufacturing was Hong Kong's fourth-largest employer, employing 309,160 people (12% of the total employment) in 1997. Mechanization, automation and relocation of assembly-type operations to mainland China have accelerated the development of more knowledge-based and higher value-added manufacturing. The clothing industry was the largest employer in the manufacturing sector in 1997, followed by printing, publishing and allied industries.

The manufacturing sector is strongly export-oriented. About 80% of the products manufactured are exported. Domestic exports amounted to $211.4 billion in 1997. Major export items included clothing, electronics, textiles, watches and clocks, and chemical products. In 1995, Hong Kong was the world's leading exporter of clothing, watches and clocks.

MARKET ESTIMATES AND ANALYSIS

Hong Kong's highest priority environmental sales targets are identified in the figure below. The supporting data and analysis combines both motivation to buy (regulatory pressure) and ability to buy (economic performance) to produce a unique perspective to guide business development efforts. The upper right quadrant represents potential buyers who have the greatest combination of both motivation and ability to purchase environmental goods and services. The size of each industry's circle indicates the approximate relative size of that industry in terms of value of output.

The EPD does not report regulatory enforcement activity related to Electronics and Electrical Products manufacturing.  We have placed those segments in the relative positions shown based on prior experience regarding the environmental compliance behavior of these industries.

Data for the size of Hong Kong's Fabricated Metals prodction industry is not available.  The size of this segment was estimated based on other characteristics of the Hong Kong economy and by comparision with the manufacturing industries of other economies in the region.

The above model suggests the following ranking of potential environmental market priorities by industry.

Industry Priority Ranking for US-AEP Business Development

Size of Environmental Equipment Markets in Hong Kong ($US Millions)

Industrial Equipment

Pollution Control Equipment (US$ millions)

Management Consulting Services for ISO 14000 (US$ millions)

Air Pollution Control Equipment � U.S. Market Share versus Total Import Market (US$ millions)

Imports were growing as of the end of 1997, up 14% from the previous year. The total imported environmental equipment market in 1997 was just over $163 million.

The imported environmental equipment market is composed of four main segments.

• Compressors, which include equipment for the pumping and regulation of in-plant gases and exhaust air, comprise about 40% of the market.
• Smaller air filters and blowers comprise 20% of the market.
• Gas filtration comprises about 15% of the market.
• Water filtration equipment comprises 24% of all imported environmental equipment sales.

These market shares have remained fairly steady over the past three years.

Infrastructure Projects

Although not included among manufacturing industries, Hong Kong�s construction business deserves discussion not only because it encompasses environmental infrastructure development, but also because non-environmental construction work represents opportunities for environmental solutions.

Although the economic downturn has retarded much private sector building, the Hong Kong government will continue to undertake large-scale infrastructure investment during the forecast period (1999-2003). In the February 1998 budget, the financial secretary pledged to earmark HK$235 billion (US$30.3 billion) for infrastructure spending during the next five years. In his policy address in October 1998, Special Administrative Region (SAR) Chief Tung Chee We said that although government expenditure would grow more slowly than in the past, commitments to infrastructure development spending during the next five years would be maintained. Such spending is not only aimed at ensuring the longer-term growth of the economy, it is also a way of cushioning the economy during the present regional downturn.

Some of the infrastructure projects to be undertaken during the next five years include the following:

• The West Rail project
• Mass Transit Rapid (MTR) network
• Roads and Airport infrastructure

Impact of the Asian Financial Crisis

As shown in the figures below, the industries that have suffered least since the onset of economic troubles in Asia are

• Printing and Publishing (-1.4%)
• Fabricated Metal Products (-4.9%)
• Textiles (-5.4%)
• Apparel (-8.6%).

Industries faring worse were

• Electrical Products (-29.8%)
• Plastics (-23.1%)

• Electronics (-18.6%).

Percent Change in Manufacturing Value Index, 1997-1998

* Production values for Food & Live Animals are unavailable. Therefore, 1997-98 growth figures are based on total export value figures from the same period.

Source: Hong Kong Census & Statistics Department

FOREIGN COMPETITION

The Hong Kong environmental market is limited and competition is stiff for newcomers. Hong Kong is already a regional base for many international firms. The market has historically been dominated by British consulting engineers and large Hong Kong construction groups. Major U.S., German, French, Dutch, Japanese, and Chinese competitors are also present. According to the US-Asia Environmental Partnership, the Hong Kong government consistently uses the services of ten major consulting firms in determining pre-qualifications and tenders. These consultants favor bidders demonstrating price competitiveness, technological advancement, financial stability and experience.

British firms are the leaders in Hong Kong's environmental consulting market, although a few, such as Scott Wilson Kirkpatrick and Ove Arup, have begun to move regional headquarters outside of Hong Kong. While the Japanese are not generally competitive in environmental consulting & engineering, they are ubiquitous in current major infrastructure projects. Because engineers are usually more expensive in Hong Kong, cost-effective U.S. firms can have price advantages.

To date, the most successful companies in Hong Kong in terms of revenues have been those winning build-own-operate (BOO) contracts for government-funded environmental infrastructure projects. After Japan, Australia and New Zealand, Hong Kong has led the emerging markets in Asia in spending on solid waste management improvements as well as involving the private sector in these activities. These include two major projects costing approximately $1 billion:  Tsing Yi Chemical Waste Treatment Plant and South East New Territories Landfill. Both projects were won by Waste Management International (WMI, London) with its Hong Kong partners, CITIC Pacific.  Browning-Ferris Industries also was awarded a $212-million dollar contract for the Western New Territories strategic landfill.

Opportunities will also exist for environmental consulting firms that can assist in preparing environmental impact assessment (EIA) documents themselves. Environmental consulting and engineering firms would typically benefit from these opportunities. Second, there may be significant opportunity for a wide range of environmental vendors who can contribute to the actual implementation of EIA requirements.

The EPD homepage provides links to recent EIA applications and approvals. These documents may be useful in identifying sales opportunities.

• Environmental Reporting
• Solid Waste Management
• Air
• Noise
• Water

U.S. companies with equipment or expertise suitable for large-scale environmental infrastructure or consulting projects should consider working with one of the established environmental consulting and engineering companies discussed above.

While revenues are climbing for consulting & engineering (C&E) firms, profits are being squeezed by tight competition and the high cost of business development and bid proposals. In markets like Hong Kong, profit margins are typically only 5% of project costs.

Imported Equipment Market Share By Country

• Hong Kong's imported equipment market was fairly stable between 1995 and 1997, with a total value in 1997 of $160 million.
• The U.S. has the lead market share in the overall market and has maintained that lead consistently over the past three years.
• The U.S. dominated the market in 1997 with 24% of the market and a total of $39.5 million in total equipment sales.
• Japan and China are tied for second position in total market share with about an 18% share each.
• The Europeans are in the distant second tier of market shareholders, with between 2% and 7% of total market share.
• The U.S. completely dominates the water filtration equipment market, holding over 40% of market share for the past three years. Japan only holds about 13% of this market, while the Europeans and local importers have market shares in the low single digits.
• For the water filtration segment, installations of U.S. technology could become a showcase for regional trade missions for other U.S-AEP countries.
• Japan dominates the air filtration equipment market, maintaining over 30% market share. The U.S. and Belgium are in the second tier of market shareholders.
• For the air filtration segment, a study should be conducted to determine how U.S. firms could modify their technology to compete more effectively with Japan.
  

Market share by country of origin has also been very steady over the years between 1995 and 1997.

• The U.S. dominates with 24% of the market and a total of $39.5 million in total equipment sales.
• Mainland China and Japan have about equal market share at 18%.
• The United Kingdom has a much lower market share (7%) than one would expect from its obvious ties in the country.

In terms of specific market segments, the U.S. is by far the leading exporter of water filtration equipment to Hong Kong.

• With an almost 45% market share over the last three years, the U.S. sells almost 3 times the amount of equipment as its closest foreign competitor, Japan.
• This high level of market penetration implies that U.S. firms understand this market fairly well and that U.S. equipment meets the needs of Hong Kong buyers.
• Hong Kong could become a central proving ground for U.S. technology for other markets in the region. Perhaps trade missions could be arranged within Asia that showcase American-installed facilities in Hong Kong.

In contrast to water filtration, the Japanese dominate (with over 30% market share) the imported air filtration equipment market in Hong Kong, as they do in other US-AEP countries. The U.S. is second, followed by the Europeans, Belgium, UK, France, and Germany. Other US-AEP countries -- Taiwan, Singapore, and Mainland China -- make up the more regional competitors.

The fact that the U.S. is not as competitive in air filtration equipment as the Japanese and the Germans on a global basis was documented in a publication from the Office of Technology Policy entitled "The U.S. Environmental Industry, November 1998." The import trade statistics presented here for Hong Kong at least corroborate the OTP findings in terms of the Japanese but not the Europeans. There is no reason technically that U.S. manufacturers of air filtration equipment cannot compete with Japan or other foreign competitors. We recommend strongly that the air filtration industry be reviewed in terms of U.S. competitiveness in Hong Kong markets and presented to the major U.S. air filter manufacturers.

REGULATORY IMPACT

Hong Kong has instituted an environmental quality monitoring and regulatory enforcement regime under the direction of the Environmental Protection Department (EPD).  This regime is implemented by six local control offices with nearly 600 employees. A significant portion of enforcement activity is driven by public complaints registered with the EPD or other authorities. The EPD investigates complaints and dispatches inspectors to the field.

• The local control offices conducted over 70,000 inspections in 1997, resulting in more than 1,000 prosecutions and generating nearly $HK 20 million in fines.
• In 1997, the total number of complaints filed with EPD and the police was nearly 14,000, representing a 9% decrease over 1996.

With poor planning receiving most of the blame for past environmental woes, a major regulatory thrust in recent years has been to establish an environmental planning protocol. The Environmental Impact Assessment Ordinance became law in 1997, formalizing the requirement that all major public and private sector projects satisfy EIA requirements. EIA violations can result in severe penalties.

Enforcement Cases by Media and Industry

The EPD reports the following media and industry-based enforcement statistics for 1996 and 1997. Figures include numbers of complaints filed and/or conviction rates and value of fines.

Environmental Complaints and Enforcement 1996-97

A media-based perspective provides a useful indication of opportunity for environmental companies. We can further refine our picture of the marketplace by examining enforcement activities from the perspective of specific polluters as well. The table below lists environment-related complaints by media and industry.

Environmental Complaints by Media and Source/Industry 1997

Industry Ranking by Combined Air and Liquid Waste Complaints

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