Can shifting sands be a solid foundation for growth?

EY Growth Barometer 2017 Hong Kong highlights Can shifting sands be a solid foundation for growth? How Hong Kong businesses are driving their growth agenda

2 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

EY Growth Barometer 2017 Hong Kong Highlights 1 Aiming high for growth... 5 2 Combating competitive risk... 7 3 Recruiting skilled talent... 8 4 Improving productivity... 10 5 Boosting innovation for growth... 12 3 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

Executive summary Business confidence is soaring among middle-market companies in Hong Kong, despite global shock waves of geopolitical instability, demographic change and rapid technological advances. Two-thirds (69%) anticipate growing 6% 25% this year, significantly higher than the World Bank global GDP growth forecast of 2.7%. Hong Kong business leaders underpin this confidence with strategies to expand into new geographies and industries, organically and via acquisition, with improved supply chain and operations efficiency and skilled talent as the key weapons in their armory. These findings come from a new longitudinal global survey by EY of middle-market companies, which represent 99% of all enterprises and contribute almost half of global GDP. In Hong Kong, as elsewhere, the middle-market sector drives economic success, high-impact entrepreneurship and innovation. What is it about middle-market companies that enable them to accelerate growth? Are there lessons for all corporate leaders, whatever their business size? The EY Growth Barometer explores middle-market leaders growth ambitions, strategies and challenges, and their attitudes to global risks and uncertainties. The survey covers 2,340 C-suite executives in businesses with revenues of $1m to $3b and selected high-growth companies that are less than five years old. About the survey EY Growth Markets commissioned Euromoney Institutional Investor to undertake an online survey of 100% C-suite (60% CEOs, founders or managing directors) in companies from 30 countries and with annual revenues of $1m $3b. The survey was conducted from 31 March 2017 12 May 2017. The 2,340 respondents are geographically representative of global GDP (as per World Bank 2016 data). EY further invited its global network of Entrepreneur of the Year TM alumni to take the survey. The survey was available in English, French and five other languages. Further in-depth, follow-up interviews were conducted during May 2017 to provide additional specific insights. 4 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

CHAPTER 01 Aiming high for growth More than one-quarter (28%) of Hong Kong middle-market companies anticipate delivering 11% 15% growth, compared with just 16% of companies in the rest of the world. A further 38% expect to grow at 6% 10%, again outstripping the global cohort (34%). At the other end of the scale, 31% of Hong Kong business leaders are looking to more conservative growth rates of 0% 5%, in line with their global peers. However, no Hong Kong businesses are facing negative growth, compared with 6% in the rest of the world. Entry into a new geographic market is the primary growth strategy, ranked by 26% of Hong Kong responses against 24% globally. This reflects Hong Kong s continuing role as the gateway to China and the world. In the past 20 years, it has seen M&A activity jump fivefold as mainland firms use the city to go global and Western multinationals buy into Hong Kong companies to deepen their penetration into the region. 1 Growth into an adjacent business activity is the second most important strategic priority at 23%, followed by M&A acquisition opportunities with 20%. Entry into a new geographic market is the primary growth strategy for middle-market companies in Hong Kong. 1 www.scmp.com/business/companies/article/2098520/hongkong-ma-activity-jumps-fivefold-20-years-chinese-firms-use (accessed 16.07.2017). 5 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

What revenue growth rates do you expect your company to achieve in the coming year? Hong Kong Rest of world More than 50% 2% 26 50% 4% 16 25% 3% 7% 11 15% 16% 28% 6 10% 34% 38% 0 5% 31% 31% Negative growth 6% 0% 10% 20% 30% 40% 6 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

CHAPTER 02 Combating competitive risk The highest-ranked external risk to growth is increasing competition, with 23% of Hong Kong responses vs. 20% globally. This reflects the maturity of the market with many established players jostling for trade, a factor exacerbated by sluggish demand, the second greatest internal challenge with 18% of responses (14%, globally). Geopolitical instability is the second greatest external risk, in common with the rest of the world. That Hong Kong business leaders focus more on what they can shape their place in the market rather than international affairs beyond their control, brings home the resilience and dynamism of the sector. The biggest internal challenge is seen as insufficient cash flow, with 19% of Hong Kong responses (15%, globally). With this squeeze on cash it is unsurprising that margin/profit improvement is the main metric of success, improved supply chain and operations efficiency the joint No. 1 success factor for growth, and supply chain efficiencies one of the top two levers for boosting productivity. Again with money in mind, Hong Kong business leaders rate more investment/affordable capital as one of their top three growth factors, unlike the global cohort, where access to capital may be easier. On the face of it, Hong Kong middle-market responses suggest a low prioritization of IT: they put technology disruption as the fourth most significant internal challenge with 14% of responses, against the global cohort s top ranking with 17%. Moreover, unlike the rest of the world they do not include new technology among their top three factors for growth, and they list technology as the least important innovation driver. However, this apparently low emphasis may actually reflect the relatively advanced adoption of new digital technologies in Hong Kong the territory is ranked fifth globally for technological readiness by the World Economic Forum. 2 The biggest internal challenge is seen as insufficient cash flow, with 19% of Hong Kong responses (15%, globally). 2 www.weforum.org/reports/the-global-competitivenessreport-2016-2017-1 (accessed 16.07.2017). 7 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

CHAPTER 03 Recruiting skilled talent Complementing their ambitious growth intentions, middle-market leaders in Hong Kong plan extensive recruitment. More than one-third (38%) of responses prioritize more full-time staff, against 27% globally, with additional part-timers sought by a further 16%. The Hong Kong C-suite is also embracing the flexibility of the gig economy; with 22% intending to recruit freelancers/contractors, significantly ahead of the global cohort (18%). This aligns with its ranking of the shift in working patterns as the second most-disruptive external megatrend with 34% of responses, far higher than the rest of the world which places it fourth with 19%. Hong Kong middle-market leaders acknowledge the importance of recruiting the right type of people. They rank talent with the right skills among their top two factors for growth and, along with the rest of the world, cite more people with specialist skills as their top talent need. Along with other mature markets, they also recognize the threat posed by the lack of skilled talent, ranking it as the third greatest challenge to growth with 15% of responses (14% globally). In line with their focus on external contractors, 78% of middle-market leaders in Hong Kong, vs. 86% globally, agree that growth depends more on the strength of a company s wider network than its internal capabilities. This shows that C-suite leaders in Hong Kong, like their peers around the world, are routinely complementing their internal skills and capabilities with a collaborative external ecosystem that may include suppliers, partners, customers, influencers and even competitors. Hong Kong middle-market leaders acknowledge the importance of recruiting the right type of people. 8 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

What are your hiring plans over the next 12 months? Hong Kong Rest of world Hire more full time staff 27% 38% Hire more part time staff 16% 14% Hire more freelancers/ contract staff 18% 22% Keep current staffing levels 19% 31% Reduce staff 6% 9% 0% 10% 20% 30% 40% 9 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

CHAPTER 04 Improving productivity Business leaders in Hong Kong as around the world are looking for ways of improving productivity to reignite growth. Almost one-third (32%) of respondents say an improved organizational culture is the best route to heightened productivity, against 19% globally. Meanwhile, more people who are an excellent cultural fit is their second most important talent need. This strong focus on creating a positive internal culture could be seen as a means of outshining competitor companies in order to attract scarce talent. Almost one-third (32%) of respondents say an improved organizational culture is the best route to heightened productivity, against 19% globally. 10 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

Which factor will most contribute to improved productivity in your business over the coming 12 months? Hong Kong Rest of world Improved organizational culture 19% 32% Supply chain efficiencies 22% 24% Economies of scale 16% 20% Technology 12% 22% Workforce efficiencies 8% 11% Instilling purpose at the 5% core of our company 7% 0% 10% 20% 30% 40% 11 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

CHAPTER 05 Boosting innovation for growth Innovation is crucial to all nations growth, particularly as rising consumer demands and new technology stretch the boundaries of the possible. In line with their ranking of increasing competition as their greatest risk, Hong Kong business leaders consider competition as their main innovation driver. In pursuit of increasing innovation, companies draw strongly on entrepreneurial start-up methods. Partnering with/investing in start-ups is the main innovation-boosting strategy at 21%, compared with 13% in the rest of the world. This demonstrates that, in Hong Kong, the middle market is following the lead of larger global corporates and harnessing the insights of younger companies. Hong Kong has a strong entrepreneurial culture, says Agnes Chan, Hong Kong and Macau Growth Markets Leader, EY. We see companies reaching out to start-ups to access new, bleeding-edge technologies and new business models. In a similar vein, tasking small teams with experimental projects is Hong Kong C-suite leaders second priority for sparking innovation, along with harnessing the power of staff creativity and insight. While change and uncertainty are the new normal for businesses across the world, Hong Kong has undergone seismic shifts in recent decades, economically and politically. To stay ahead of change, business leaders need to plan continuously and in advance: however, 47% of Hong Kong respondents still spend 80% of their working hours on day-to-day activity with just 20% of their time devoted to strategy, higher than the global figure of 43%. More positively, over half (56%) of Hong Kong business leaders aspire to spending 40% of their time on future planning, compared with just 44% of their peers in the rest of the world. Hong Kong has entrepreneurship deep in its DNA, says Chan. Sitting at the center of dynamic new economies in the Asia-Pacific region, while maintaining historic relationships with the developed world, the confidence displayed in these survey results is well-placed. 12 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

Contact Agnes Chan Hong Kong and Macau Growth Markets Leader, EY +852 28469921 agnes.chan@hk.ey.com Global data To delve further into your country findings and make comparisons around the world please visit ey.com/growthbarometer to interact with all the global survey results. Over a third (34%) are set to grow 6% 10% this year, more than double World Bank GDP growth forcasts (2.7%) and 14% of all companies target growth over 16% Expected revenue growth in next year Negative growth 0 5% 6 10% 11 15% 16 25% 26 50% More than 50%

14 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

15 EY Growth Barometer Hong Kong. Can shifting sands be a solid foundation for growth?

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