Investing In Hong Kong

Hong Kong agents and distributors can increase sales of U.S. products in both Hong Kong and Mainland China. Given Mainland China's size and diversity, it is sometimes advisable to work with different agents for different regions of Mainland China.  Hong Kong firms are eager to work with serious exporters. U.S. firms can show commitment to success in this market by using metric measurements, providing Chinese-language materials, responding quickly to inquiries, meeting relevant standards, and visiting the market for first-hand understanding and relationship building.  Companies considering entering this market should understand Hong Kong's fast-paced business climate. Decisions are made quickly. Firms must respond immediately to inquiries or risk losing opportunities to faster-moving competitors.
 
Using an Agent or Distributor

Working with agents and distributors in Hong Kong is very much like working with agents and distributors in the United States. An agent takes orders in the supplier's name.  Distributors act in their own name and may stock products purchased from the manufacturer for resale.  Hong Kong has no special legislation regarding agents and distributors. Virtually anything to which both sides can agree and put into a written contract is acceptable and enforceable; this includes restrictions on territory and a grace period for termination of the agreement. While Hong Kong law does not require legal counsel, the more complex the contract, the more helpful legal counsel can be in drafting the text. Items that are often in the contract include:

1. Exclusivity of sales territory - businesses should be careful about granting an exclusive agency too soon or in too large a territory if the agent is to have coverage beyond Hong Kong.
2. Discussion of proprietary information – local law prohibits theft of intellectual property, but prevention of piracy is always less expensive and more effective than postfacto remedial legal action.
3. Levels of sales activity – set specific targets and goals the agent or distributor must meet in order to maintain or renew the greement.
4. Duration.
5. Payment terms.
6. Quality control – inspection – verification.
7. Rule of law – jurisdiction in the United States vs. Hong Kong. Generally, Hong Kong is chosen, but another location may be specified.
8. Covenants restricting business activity following cancellation of the contract.  There are many types of agents and distributors in Hong Kong, ranging from those who simply stock retail stores with standard items to agents who provide sales, engineering and technical support for complex systems. It is common for a single company to deal in a wide variety of products in a particular sector. Agents and trading companies may be less specialized than companies in a large economy like the United States, but the best ones are focused and have contacts in a special line of business.

Establishing an Office

Foreign companies are allowed to incorporate their operations, register branches, or set up representative offices freely in Hong Kong. There is no restriction on the ownership of such operations. Company directors need not be citizens of, or reside in, Hong Kong. Reporting requirements are straightforward and not onerous. There is no distinction in law or practice between investment by foreign-controlled companies and those controlled by local interests. There are no disincentives to foreign investment such as limitations on the use or transfer of foreign currency, or any system of quotas, performance requirements, bonds, deposits, or other restrictive regulations. High labor and rental costs are the major disincentives to establishing a presence in Hong Kong. To incorporate or register in Hong Kong, the foreign company should first file statutory declarations and submits the necessary documents to the Administration Section of the Companies Registry. Specific information on establishing an office in Hong Kong is available at:

New Companies Section
Companies Registry
14/F, Queensway Government Offices
66 Queensway
Hong Kong
Tel: (852) 2867-2587
Email: crenq@cr.gov.hk
Website: www.cr.gov.hk

Direct Marketing

Hong Kong has a well-developed network of retail outlets. Supermarkets, department stores, convenience stores and modern shopping malls have become increasingly popular, because of their easy access, convenient location and seven-day accessibility. Consumers prefer buying products from retail outlets to buying products through mail order or person-to-person selling, as they consider retail shopping a leisure activity.  Direct sales account for less than 1 percent of total retail sales, though direct sales have increased in popularity following the economic slowdown in 1998. Many who lost their jobs turned to direct selling, while others who suffered pay cuts joined direct selling companies to augment their income. Direct sales continued to increase despite the economic recovery and better job prospects. The volume of direct sales grew between five percent and ten percent over the past few years, particularly in nutritional supplements. The demand for nutritional supplements increased as Hong Kong consumers became more health-conscious following the SARS outbreak.

Joint Ventures & Licensing

Joint ventures or strategic alliances can be very helpful in entering the market and are particularly important in competing for major  ojects.  Licensing is increasingly common in the field of brand name product manufacturing and marketing.

Selling Factors

The major selling factors are the same as in the United States: price, quality, compliance with technical specifications, timeliness of  elivery, and service. Initial sales require more face-to-face contact as Asian agents, distributors and buyers generally place a premium on developing personal connections.  Hong Kong firms are eager to work with serious exporters. Firms can show their commitment to successful market entry by using metric measurements, providing Chinese-language materials, responding quickly to inquiries, meeting relevant standards, and visiting the market for first-hand understanding and building relationships.  Companies considering entering this market should understand Hong Kong's fast-paced business climate. Decisions are made quickly. Firms must respond immediately to inquiries or risk losing opportunities to faster-moving competitors.

Due Diligence

Knowing your business partner is critical to evaluating any major business deal. In today’s business climate, while a company’s  inancial and legal standing are important, issues relating to the company’s reputation, history, business ethics, integrity, business acumen, and influence in its business sectors and local environments can all be critical to a successful deal. One key aspect, often misunderstood, is that negative information need not be a deal killer. Such information often offers opportunities to re-negotiate better terms and/or structure deals to mitigate identified risks. The key to due diligence is to do it up front, before any commitments or deals are signed. Unlike Mainland China where it is difficult to gather information, getting information on Hong Kong entities is relatively easy. There are many service providers that offer investigative due diligence. A list of Hong Kong service providers is available from the U.S. Commercial Service Hong Kong website.

Franchising

Hong Kong’s legal framework and high per capita income attract foreign franchisors looking to sub-franchise. It is relatively easy to set up a foreign franchise operation in Hong Kong as there is no specific legislation governing franchising operations, no exchange controls, no anti-trust laws, and no foreign equity participation or local management participation regulations. Disputes arising from a franchise agreement are subject to the common law (and specifically to contract law) and to legislation relating to licensing, and protection of intellectual property rights, and registration of trademarks/service marks.