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Reaping the rewards of the newglobal economy
www.pwc.com/projectblue
Project BlueCapitalising on thegrowth and globalinterconnectivity of theemerging markets:Financial services inHong Kong
04 Foreword
05 Section one:Opening up new routes to growth
07 Section two:Developing a competitive global presence
08 Going with the flow
09 Making sense of an uncertain future
11 Project Blue framework
Contents
PwC Project Blue 3
Project Blue explores the major trends that are reshaping the competitive environmentfor financial services (FS) businesses worldwide. Our clients are using the frameworkto help them judge the implications of these developments for their particular businessand look at how to take advantage of the changes ahead.
The rise and interconnectivity of the emerging markets of South America, Asia, Africaand the Middle East (together these regions form what PwC terms ‘SAAAME’) is inmany ways the most far-reaching of the developments facing the FS sector. Tradewithin SAAAME is growing much faster than the developed-to-developed anddeveloped-to-emerging market flows.
As one of the main gateways into China, Hong Kong is in an ideal position to benefitfrom the growth in intra-SAAAME commerce. This includes providing a launch pad forSAAAME companies looking to do business in China and Chinese companies seeking toextend their reach into other parts of SAAAME. As we examine in this paper, theopportunity and, indeed, challenge for Hong Kong’s FS businesses is how to provide theinternational presence and full service support that would allow their clients to developtheir business in new markets.
I hope you find this paper interesting and useful. If you would like to discuss any of theissues raised, please feel free to contact either me or one of my colleagues listed onpages 9 and 10.
Mervyn Jacobs PwC (Hong Kong) Financial Services Leader for Hong Kong and China
Foreword
Welcome to ‘Capitalising on thegrowth and global interconnectivityof the emerging markets: Financialservices in Hong Kong’. The paperis a Hong Kong-focused companionto our global paper: ‘Capitalisingon the rise and interconnectivityof the emerging markets’,the latest viewpoint in ourProject Blue framework.
4 PwC Project Blue
What do we mean by SAAAME?
‘SAAAME’ refers to South America, Africa, Asia and the Middle East. SAAAMEdoesn’t include Japan as this is a developed G7 economy. Mexico is excluded as ittrades mainly within the North American Free Trade Agreement zone and lesswith SAAAME. For now, Russia and the Commonwealth of Independent States(CIS) are also excluded from SAAAME, as trade is largely internal or with Europe.
Hong Kong is a key trade, logistics and FS hub for China and Asia as a whole.
While the city has been overtaken by both Shanghai and Singapore as the world’sbusiest container port,1 Hong Kong has the advantage of being the largest air freightcentre in the world.2 The city’s strong presence in air freight reflects its investmentin multimodal air, sea, road and rail links, and will be further bolstered by theplanned opening of a new air freight terminal in 20132 and government approval fora third runway.3
Trade and FS have always gone hand in hand in Hong Kong. Investors and corporationsare attracted by the city’s robust legal system, free movement of funds and access towell-developed banking and capital market facilities – the city came second overall inthe latest global ‘Ease of Doing Business’ index, ranking in the top five for gettingcredit, enforcing contracts, protecting investors and trading across borders.4
More than 70 of the world’s top 100 banks have subsidiaries or representative offices inHong Kong.5 Its capital market is the third largest in Asia after Tokyo and Shanghai(ranked by domestic equity market capitalisation)6 and has in recent years provided animportant conduit for investment into China. The value of IPOs in 2011 was the thirdhighest in the world,6 with a number of commodities companies listing in Hong Kongbecause of the proximity to their markets in China. The close trade and investmentlinks with the Mainland are further reflected in Hong Kong’s emergence as an offshorecentre for renminbi deposits and bond trading. In turn, many regional andmultinational groups have their headquarters in, and operate their treasury servicesfrom, Hong Kong.
The intra-SAAAME opportunityAs intra-SAAAME commerce continues to grow (see Figure 1 overleaf), Hong Kong isset to play an even bigger role as a gateway for international trade.
Many Chinese companies will want to use Hong Kong as a staging post for reachinginto Africa, Latin America, the Middle East and other parts of Asia. In turn, manycompanies from across SAAAME will want to use Hong Kong as a bridgehead fordeveloping their business and tapping into investment opportunities in China.
Section one:Opening up new routes to growth
Hong Kong’s role as a gatewayinto, and out of, China is evolvingas the growth in intra-SAAAMEtrade accelerates.
PwC Project Blue 5
1 World Shipping Council Top 50 Container Ports2010 and Straits Times, 08.01.11
2 Business Monitor International Hong Kong FreightTransport Report Q2 2012
3 BBC News Online, 20.03.12
4 The World Bank Doing Business 2012
5 Hong Kong Government website ‘Hong Kong:The Facts’, November 2011
6 World Federation of Exchanges 2011 Highlights,19.01.12
What Hong Kong’s FS businesses havelearned from helping their clients to openup trade and investment links with Chinawill provide useful experience indeveloping new trading relationships andovercoming potential barriers in otherparts of SAAAME. This includesnegotiating licences, arranging trade
finance and providing support foracquisitions, plant and infrastructuredevelopment. They can also helppersonnel to relocate and settle in newmarkets. Further openings include wealthmanagement and access to newinvestment opportunities.
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Figure 1: Transformation in global trade flows
Trade value: $6.92trCAGR 2002–10: 8.0%
Non-SAAAME
SAAAME
Trade value: $2.82trCAGR 2002–10: 19.4%
Trade value: $2.67trCAGR 2002–10: 13.6%
Trade value: $2.16trCAGR 2002–10: 12.9%
Sources: WTO and PwC analysisNote: Russia and the Commonwealth of Independent States (CIS) have not been included in SAAAME definition because trade is largely international and/or withEurope. Mexico is excluded as it trades mainly within the North American Free Trade Agreement zone and less with SAAAME. Both areas remain very important growthmarkets and should be considered in relation to the SAAAME region.
To capitalise on the opportunities opened up by the growth in intra-SAAAME trade,Hong Kong’s FS businesses will need to extend their presence into new markets and beable to offer a full suite of trade, investment and other support services along the traderoutes being developed by their clients.
Some organisations will look to set up China and Hong Kong desks on the ground.They might also augment this with acquisitions. But a physical presence may be costlyand difficult to set up in many countries. It is therefore going to be important tomake the most of technology in extending customer access and providing end-to-endtrade services.
Joint ventures and collaborations with companies on the ground, includingcompetitors (‘co-opetition’) and non-FS providers such as telecom firms, are also goingto be important in extending international reach. And to attract the right partners, FSgroups need to think about what they can offer them that others cannot. This might becomplementary international coverage or access to a target customer base in Asia.
Some of the bigger players will be able to develop a pan-SAAAME presence to serveclients across all sectors. While smaller FS businesses will not have the funds to matchthis, they will have opportunities to specialise. This might be focusing on particularcountries/regions or targeting particular types of business.
Working closely with key clients and being able to follow them as they reach into newmarkets will be critical in helping to judge what regions and sectors to focus on. FSorganisations can then work with their clients to help bridge any potential gaps in thelocal financial infrastructure and overcome challenges in areas such as financing, riskmanagement, currency convertibility and repatriation of revenues.
Managing more complex and diverse operationsAs they reach into new markets, FS businesses will need to contend with a morecomplex risk profile. SAAAME countries have varied legal and regulatory frameworks,political systems, business ethics and cultures. It will be important to develop thetimely and reliable management information and risk management systems needed tooperate in new and unfamiliar markets.
Operating models will need to reflect the changing geographical focus of the business.They will also need to deal with more extensive partnership arrangements and besufficiently agile to respond quickly to unfamiliar market conditions, distributionchannels and cultural preferences.
The underlying challenge is talent. As their businesses grow, FS organisations will needto find ways to develop and attract more talent. A particular challenge for the sector isthat salaries, rents and other costs are often higher in Hong Kong than many otherSAAAME markets, including some of its nearest rivals such as Singapore. As FSbusinesses reach out beyond Hong Kong, they face the further challenge of securingsufficient talent in markets where suitably qualified and experienced people mayalready be in short supply.
Section two:Developing a competitive global presence
As Hong Kong’s FS businesses seekto extend their internationalfootprint, they will face new growthand management challenges.
PwC Project Blue 7
We believe that there are four key questions that FS businesses should consider as theylook at how to take advantage of these openings and provide the most effective supportfor their clients:
• How are your corporate clients following the shift in the focus of global growth andhow can you help them to respond more effectively?
• If you can’t develop a pan-SAAAME presence, what specific sectors or regions couldyou target as you look at how to build on your strengths and existing relationships?
• How can you use technology to provide customer access and trade services indifferent parts of the world?
• How will you need to adjust your risk management capabilities, talent managementand operating model (more joint ventures, longer lines of communication etc.) asyou extend your international presence?
Going with the flow
Hong Kong’s position as a keylaunch pad for intra-SAAAMEcommerce will open up hugecommercial opportunities for its FSbusinesses. But to capitalise on theseopportunities, clients will expect fullservice support where and whenthey need it.
8 PwC Project Blue
PwC Project Blue 9
Making sense of an uncertain future
We’re working with a range ofFS organisations to judge theimpact of the mega-trends shapingtheir industry, and where and howthey can compete most effectively.If you’d like to discuss any of theissues raised in this paper, or theimpact of other trends examined inProject Blue, please contact any ofthose who are listed here, or yourusual PwC contact.
Mervyn JacobFinancial Services Leader for HongKong and ChinaPwC (Hong Kong)Tel: +852 2289 2700Email: [email protected]
Harjeet BauraPartner, Financial ServicesPwC (Hong Kong)Tel: +852 2289 2715Email: [email protected]
David Eldon Senior Advisor PwC (Hong Kong) Tel:+ 852 2289 2788 Email: [email protected]
Duncan FitzgeraldPartner, Financial ServicesPwC (Hong Kong)Tel: +852 2289 1190Email: [email protected]
10 PwC Project Blue
Josephine KwanPartner, Financial ServicesPwC (Hong Kong)Tel: +852 2289 1203Email: [email protected]
Peter PT LiPartner, Banking and Capital Markets LeaderPwC (Hong Kong)Tel: +852 2289 2982Email: [email protected]
Stephen A WoolleyPartner, Financial ServicesPwC (Hong Kong)Tel: +852 2289 5089Email: [email protected]
The Project Blue framework seen here begins with the considerations needed to adaptto the current instability. It then goes on to assess what FS businesses need to do to planfor, and ideally take advantage of, the changes ahead.
One of the main things we’ve been looking at is the extent to which these developmentscould disrupt existing business models. We’ve also been looking at how these trendsare feeding off each other. A clear case in point is the extent to which rapid growth inemerging markets is spurring a mass influx of people into the cities.
Our clients are using the framework to help them judge the implications of thesedevelopments for their particular business, and look at how to take advantage of thechanges ahead. Will business and operational models still be viable in this newlandscape? What strengths within the business would allow it to develop a leadingposition? What talent and investment will need to be put in place now, to prepare forthe changes ahead?
Project Blue framework
The Project Blue frameworkconsiders the major trendsthat are reshaping the globaleconomy and transforming thebehaviour of consumers, businessesand governments.
Figure 2: The Project Blue framework
Source: PwC Project Blue analysis
Project Blue Fram
ework
Global instability
Regulatory environment Fiscal pressures Political and social unrestAdap
t
Rise and interconnectivityof the emerging markets(SAAAME)
• Economic strength• Trade• Foreign direct investment
Demographic change • Population growthdiscrepancies
• Ageing populations
Social and behaviouralchange
• Urbanisation• Global affluence• Talent
• Capital balances• Resource allocation• Population
• Changing family structures• Belief structures
• Changing customerbehaviours – social media
• Attitudes to financialinstitutions
Technological change • Disruptive technologiesimpacting FS
• Digital and mobile
War for natural resources • Oil, gas and fossil fuels• Food and water• Key commodities
Rise of state-directedcapitalism
• State intervention• Country/city economicstrategies
• Technological and scientificresearch and developmentand innovation
• Ecosystems• Climate change andsustainability
• Investment strategies• Sovereign wealth funds/development banks
Plan
www.pwc.com/projectblue This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
For more information on Project Blue, or other Financial Services programmes, please contact Áine Bryn, Global Financial Services Marketing Leader, PwC (UK)on +44 207 212 8839, or [email protected].
For additional copies, please contact Maya Bhatti, Global & UK Financial Services Marketing, PwC (UK) on +44 207 213 2302, or [email protected].
© 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopersInternational Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act asagent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of itsmember firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions ofany other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.
