The Best Location for Companies to Establish Asian Regional Headquarters

The center of global economic activity has been shifting toward the Asia-Pacific region and many multinational corporations are faced with the challenge of where to set up their regional headquarters for strategic purposes

By Louisa Wah Hansen

Earlier this year, the inaugural CBK Round Table Discussion was held at the CUHK Business School to discuss this topic.

The round table participants included Simon Galpin, Director-General, InvestHK; Mike Rowse, former Director-General, InvestHK; Raymond Wong, Corporate PR Director, SGS; Prof. TJ Wong, Dean, CUHK Business School and Prof. Xufei Ma, Department of Management, CUHK Business School. And the moderator was Prof. Didier Guillot, Department of Management, CUHK Business School.

 

The rapid expansion of China’s economic power in the past decade has led many multinational corporations (MNCs) to move their regional headquarters from either Hong Kong or Singapore to China, and the trend has exacerbated in the past few years.

Proximity to customers in Mainland China is the main drive behind the shift, according to Jennifer Wilson, Principal at Roland Berger Strategy Consultants’ Hong Kong Office and head of the company’s Marketing and Sales Competence Center in Asia.

She cites a number of examples to illustrate the change of regional balance: In 2010, for example, 24 multinational companies announced their plans to shift regional headquarters to Shanghai, including Walt Disney Co., Kraft Foods Inc. and Novartis International AG. As recently as 2012, AstraZeneca moved from Singapore to Shanghai whereas Nokia moved from Singapore to Beijing.

“Companies want to be close to their customers,” she says. “And clearly, the customers for many right now are in China, and so you see headquarters making those decisions.”

However, this trend is not an indicator that Hong Kong and Singapore are losing out in the battle to woo international companies to set up their Asian home bases there. Yes, they are feeling the heat, no doubt. But it is still too early to say that these two metropolises no long have the allure. One telling example is that Nissan’s luxury brand “Infiniti” moved its global headquarters from Tokyo to Hong Kong earlier this year.

“The company wants to be at the door to China, its most important growth market. Its global talent wants to live here. And it is a luxury brand. Hong Kong sets the tone for luxury for Mainland China in many ways. Their move is a big win for Hong Kong,” says Wilson.

In fact, both Hong Kong and Singapore came out remarkably strong in the “Asia-Pacific Headquarters Study 2011,” conducted by the European Union Chamber of Commerce in China in conjunction with Roland Berger. The findings show that Singapore performs best on many key selection criteria, including favorable legal and regulatory environment as well as stable and favorable political environment. Hong Kong is only slightly behind Singapore and is very strong in terms of administration, regulation and taxation. Although Shanghai ranks first on the most important criterion, namely, proximity to clients and markets, it ranks third behind Singapore and Hong Kong when assessed purely on these other criteria and scored notably lower on four out of the five criteria considered most important, including favorable business environment and favorable tax environment.

Each of these three cities has their strengths and weaknesses, and a bird’s eye view from a historical perspective yields an interesting picture. Having the advantage of hindsight after founding and heading the government agency Invest Hong Kong for eight years, Mike Rowse, speaking in a round table discussion hosted by China Business Knowledge @ CUHK at CUHK Business School on the subject of where is the best choice to establish Asian headquarters, sees Hong Kong and Singapore as still the two main choices of regional headquarters for MNCs nowadays, whereas China is in a category of its own.

“In many aspects, China is so big by itself that the China headquarters reports back directly to the United States or Europe, and the rest of Asia comes through the regional headquarters,” said Rowse.

Another panelist of the round table, Prof. Xufei Ma, Associate Professor at the Department of Management of CUHK Business School, delineated four criteria that he has identified in his new research paper “A New Tale of Two Cities” which can be used by companies to decide where they should set up their regional headquarters.

These four criteria are: home country; industry; organizational structure — global, transnational or multinational; and personal preferences. These four criteria should be further checked with the conditions, as well as the formal and informal institutions, of the candidate cities.

“These are the four levels that firms need to consider, probably simultaneously, when making decisions,” said Prof. Ma. “For specific decisions, probably the personal level is more important. For example, do the executives want to send their children to international schools? A report by the American Chamber of Commerce last year showed that expats from the United States considered several issues when deciding whether to move to Hong Kong or not. The first one was air pollution, and another — the most important one — was whether there would be an international school to educate their kids.”

Hong Kong in Defense of its Position

For all practical purposes, proximity to the target market is an important and decisive factor for international companies seeking to maximize their exposure to their customers. However, the decision of where to set up the regional headquarters has become a rather sophisticated one today.

Simon Galpin, the current Director-General of InvestHK, said at the round table: “Increasingly, multinationals are much more sophisticated in choosing different cities in the same region for different business activities. So they may choose Manila for their call center hub. They may choose Hong Kong for their legal or treasury functions. They may choose Shenzhen for quality control. So it is quite subtle. Rather than focusing on Hong Kong’s strength in a particular industry, we want to try to present Hong Kong for different business activities, the ones where we do have some comparative advantage.”

Galpin cites companies like KPMG, which have a number of their global functions, based in Hong Kong. “So we compete with different cities at different levels within functions.”

According to Roland Berger’s Wilson, there has been a game change in the role that Hong Kong plays. Hong Kong might have been a springboard for large MNCs to get a foothold in China in the past, but if a big company isn’t already in China today, “it’s kind of late in the game.” However, smaller companies filling niche demands may have a better chance of succeeding in the China market.

As such, Hong Kong could have an edge over other cities in being a regional hub for companies operating in the Mainland and around Asia-Pacific by providing such niche servicesas legal and financial advice, as well as nurturing high-tech, Silicon Valley-type start-up industries and cultural industries like film and entertainment. Its competitive edge lies in its talent pool and rigorous implementation of intellectual property protection laws.

Another example of a niche service that Hong Kong excels in is testing and accreditation service. Thanks to the tradition of a low level of corruption and legal transparency, Hong Kong has maintained a high level of trust among businesses that rely on ethical practices to ensure quality standards.

Raymond Wong, Corporate PR Director of SGS Hong Kong, a testing and accreditation company headquartered in Switzerland, said at the round table that Hong Kong has one of the best and most efficient accreditation schemes in the world, which is why SGS has chosen the city as its regional headquarters. “I have spoken with some of the major clients, who are retailers. They only recognize Hong Kong’s test reports, because they trust our accreditation scheme.” He added that foreign government agencies, such as the Federal Communications Commission in the United States, do not recognize any laboratory reports issued in China. “So we have to use Hong Kong laboratories as the approved labs to support [clients in] China.”

Rowse believes that Hong Kong should leverage on the trust that the international—including Mainland—communities place on the city to stay on the winning side. “Maybe we could introduce more ethics courses in business schools. We got it right basically. We should keep it right. It is a big plus for us.”

Another niche market that Hong Kong has filled is data backup centers. Wilson says Hong Kong has already become a hub for data centers because of its affordable and reliable telecommunications infrastructure and the lack of natural calamitiessuch as earthquakes. “As bandwidth has improved, many banks have their data centers here or in Singapore because it’s so reliable for backups. You don’t expect any political situations and problems that could take your whole network offline. For banks, it’s extremely important to have data centers and backups everywhere and Hong Kong is a good place to serve the region. Apparently we are connected to more fiber optics than any Asian economy.”

Wilson also believes that Hong Kong can serve as a perfect springboard for Chinese companies looking to go global: “I think Chinese companies who have listed in Hong Kong get more global recognition. Through the exposure of going through the Western requirements of listing, they become more global and better able to operate abroad. The capital market in Hong Kong helps to push Mainland Chinese companies out of China and put them on the global stage. Hong Kong is a good gateway for that, much more so than Singapore, due to the proximity.”

Other comparative advantages that Hong Kong has, according to both panel speakers and Wilson, are the independence, transparency and certainty of its legal system; the predictability and simplicity of its taxation system; and the mobility of its workers. Compared with China and, to a lesser degree, Singapore, it is much easier for overseas executives to get a visa to work in Hong Kong, and for executives here to fly anywhere in the world without cumbersome bureaucratic red tape.

Another intangible advantage enjoyed by Hong Kong, according to Prof. Ma, is freedom. “Probably the most important sustainable advantage of Hong Kong is—if there is one word to describe it—freedom; freedom compared with Singapore, let alone Mainland China,” he said. And while it is close to the largest market in the world, China, “it is also institutionally close to the rest of the world, especially the developed countries.”

Despite all these advantages, and despite the fact that Hong Kong made it to the 11th place on Monocle’s Most Livable Cities Index in 2013—four places above Singapore and the second Asian city behind Tokyo that made it to the top of the list, there are many areas with room for improvement if Hong Kong is to continue to attract executive talent and companies to set up their regional headquarters here.

Among the top “turn-off’s” are the high cost of living, especially when it comes to housing, office rentals and professional salaries. According to Rowse, Hong Kong is generally 10-15 percent more expensive than Singapore at any given time. And Wilson believes that the costs of having a presence in Hong Kong are so high despite the ease and speed with which a company can get registered and be up and running—that unless it is a company with a high profit structure, “it does not make much sense to build a big operation in Hong Kong.”

Another “turn-off” factor, which has been rather neglected, is the mediocre language skills of Hong Kongers, which could put the city at a disadvantage. “For Hong Kong to maintain its hub status here, people need to speak English and Mandarin very well, and it’s spotty on both sides in the younger generation,” says Wilson. “It’s all in the government’s hands. You have to recognize what power the city can have with those language skills, and not put it at risk of becoming a second-rate city.”

The Contenders for Hong Kong

While Singapore may have lost in some aspects to Shanghai and Hong Kong as a regional headquarters for multinationals, it remains a strong attraction for international talent thanks to its quality of life, infrastructure, skills and talent, according to the round table panelists and Wilson. For example, the air quality in Singapore is much better than in Hong Kong, and there are more choices for international schools, which is a plus for executives with children. In addition, according to the Asia-Pacific Headquarters Study, while Hong Kong is focusing on strengthening economic ties with China, Singapore is focusing on building competitive advantages, innovation capabilities and skilled talent—especially in R&D—in its strategic industry sectors.

Despite the fact that Singapore may not enjoy close proximity to China, it does have a closer distance from and relationship with South Asian and Australasian countries—a plus for companies interested in these emerging and relatively developed markets, respectively.

As for Shanghai, which is gradually emerging as the most important business center of China, it has been chosen by some foreign financial services players as the key city to incorporate their Asia-Pacific headquarters thanks to the talent that they find suitable for the Mainland’s financial institutions, despite the fact that they may not be as international as those in Hong Kong and Singapore. This is according to the Asian Headquarters study.

The study also pointed out that despite Shanghai’s growing attractiveness for foreign talent, senior international managers with sufficient Asia/China market knowledge and language skills remain rare. With regard to senior local managers, two key sets of skills were cited as falling short: general management skills, including sufficient international exposure, and English proficiency. Another big obstacle for Shanghai, according to the study and as mentioned earlier, is the inability of domestic Chinese employees to travel with ease.

To overcome these obstacles, says Wilson, the Chinese government needs to improve the visa application process so companies can send their employees abroad more easily.

Another obstacle that the Chinese government could do better is to streamline the process by which companies invest overseas. So far, investments abroad require a string of approvals from government agencies. Such legal red tape has actually provided opportunities for Hong Kong to become the gateway for Chinese companies to make mergers and acquisitions.

The fact that Shanghai has recently been chosen to be the pilot city to set up a free trade zone has important implications for the future developments of China and Hong Kong as financial hubs. Would it threaten Hong Kong’s position as the regional financial center? Read more in “A Closer Look.”

Beijing is another serious contender for MNCs to set up their “host-country headquarters,” according to Prof. Ma. One of the implications of his study mentioned above is that if MNCs operate in industries that have restrictions for foreign direct investment or global industries should choose Beijing as the location for host-country headquarters so that they can make good use of the corporate ambassador role to buffer potential intervention from China’s central government.