Opinion: Hong Kong Corporations Need to Transform Now
Hong Kong rode on the tailwinds of China’s surging economy over the past two decades. However, the culmination of recent crises (from trade wars to political unrest to Covid-19) resulted in a technical recession in 2019 and a bleak outlook for 2020.
Tourism and retail have experienced the worst hit, with visitor arrivals down 96% in February year-on-year. The retail statistics for February are yet to be published — but one just needs to walk through the empty high-street malls to expect the worst. Trading and financial services, industries that account for two-fifths of Hong Kong’s GDP, also face headwinds. Spillover effects on other key pillars of the economy such as commercial real estate or professional services will follow.
Hong Kong has managed to bounce back from previous crises and come out stronger. For example, the added value of financial services dropped more than 20% during the 2008 financial crisis but has since more than doubled. This time, however, some industries will not only experience a longer recovery but also face structural challenges. These challenges include the shift towards digital business models, the deceleration of growth in China, repatriation of mainland Chinese luxury spending, increasing pressure in global trade and the diversification of supply chains away from China — to just name a few.
Nonetheless, many Hong Kong corporations hope to apply their battle-tested approach of simply sitting out the crisis — expecting the city to bounce back quickly. They have learned from past crises and built considerable cash positions, increasing their resilience compared to many overseas corporations, which had to request government support soon after the coronavirus hit.
However, to prepare for a new reality and structural changes, Hong Kong corporations need to overcome the lethargy enabled by low debt, large cash positions and complicated conglomerate shareholding structures (which limit the influence of activist investors). Despite Hong Kong’s reputation as one of the most competitive and digital economies, many Hong Kong corporations lag behind their global peers. Customer experience is often archaic (e.g. the common use of arrays of printed forms or also checks in banking), the use of analytics and digital in its infancy — especially compared to leading companies on the mainland.
To escape legacy processes and thinking, and prepare for the arrival of more nimble and advanced competitors, the time is ripe for Hong Kong corporations to transform. Banking is one such industry. In the Chinese mainland, services such as Alipay have transformed the way people think about payments and investments. In Europe, major fintech players such as the mobile banks Revolut and N26 increasingly challenge incumbents. The Hong Kong Monetary Authority issued licenses to launch the first virtual banks (many of them backed by Chinese tech companies) last year, acting as a catalyst for change.
What does it mean to transform? Transformations seek sustainable step-change improvements in business performance, while strengthening organizations and positioning them to win in the years ahead. Experience shows that the following three-pillared approach promises high success rates and execution certainty.
Transformation is not cheap, nor is it a one-time effort. Thus, the first pillar of a transformation is about “funding the journey” — introducing a number of short-term initiatives that will achieve early, tangible wins to send cash to the bottom line, whether through revenue enhancement, cost cutting, or both. Such quick wins will energize the organization, build momentum and free up capital for the larger transformation effort.
The second pillar, “winning in the medium term,” requires going beyond short-term goals and rethinking the company’s operating and business models, essentially rewiring the way the company delivers products and services to its customers. This may include an innovative go-to-market approach or a new digital business to complement or compete with legacy operations.
The third pillar of a transformation is the people needed to sustain it, including the context in which they work. Without a strong focus on the company’s team, organization, and culture, the transformation will fail. “Organizing for sustained performance” means putting people first and creating an environment in which they can thrive. With the right team, structure, operating systems, and culture—a transformation will deliver, and sustain, improved performance.
Lars Faeste is the managing partner for BCG’s Greater China business.
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