German Business in Hong Kong: Business Confidence Survey 2022

22/06/2022

Each year, GIC and GCC conduct a joint Business Confidence Survey in order to gauge the current sentiment and outlook of the German business community in Hong Kong. The latest survey gathered a total of 109 responses over a two-week period between May and June 2022. The lowest number of registered answers for any of the questions included in this summary report was 93 (with the exception of specific follow-up questions on companies’ relocation plans).

Key highlights

Most respondents assess Hong Kong’s business environment in 2022 as worse than 2021 in terms of attraction of overseas talent, regional headquarters location, and political climate.
Respondents’ business confidence in Hong Kong gets an all-time low average score of 2.30 (on a scale from 1 to 5). Companies’ overseas stakeholders are perceived to be even less confident in Hong Kong (2.09).
33% of surveyed companies are considering a partial or full relocation in the next 12 months. The most popular alternative: Singapore.
44% of surveyed companies have lost staff due to the Covid-related restrictions of the past two years; 48% see emigration as their main challenge in retaining staff.
68% of respondents rank the resumption of quarantine-free international travel as the top priority for their business, ahead of quarantine-free China travel (21%).

Surveyed companies cover all industries, sizes, and office functions

Survey respondents include corporate members of the German Chamber in Hong Kong (89%) as well as non-members (11%) including local subsidiaries or branches of German parent companies, sales agents and distributors of German brands, as well as locally established entities under German ownership. Respondents represent a wide range of industries and business sectors. By far the largest share (43%) was engaged in the sourcing and trading industry, followed by professional services (16%), logistics (12%), as well as R&D and testing services (11%) [1].

Regional headquarters, i.e. local entities with a parent company outside of Hong Kong and managerial responsibility for all business operations in the region, accounted for 37% of the total responses. Other office functions included regional offices coordinating some of their parent company’s business in the region (26%) and local offices of overseas companies with sole responsibility for the Hong Kong market (13%) [2]. Nearly one in four surveyed companies (24%) were locally established companies.

In terms of the number of employees in Hong Kong, survey responses were fairly evenly distributed between small offices with 10 employees or less (34%), medium-sized offices with 11 to 100 employees (38%), and large offices with more than 100 staff (28%). As for their respective companies’ global headcount, 32% of respondents estimated 500 employees or less, while another 32% worked in companies with over 10,000 employees worldwide.

Are Hong Kong’s location advantages fading?

Hong Kong offers several distinctive location advantages for German businesses in the region, as reaffirmed by most respondents to the GIC/GCC survey. For instance, these include the proximity to Mainland China; the connectivity to other markets in Southeast Asia; the beneficial legal and taxation system; low administrative hurdles and “ease of doing business”; as well as the international environment and talent pool. With that said, however, many respondents noted a decline in Hong Kong’s overall status as a business hub, due to the Covid pandemic and the administration’s handling thereof over the past couple of years.

Hong Kong’s business environment in 2022 is viewed considerably more negative than last year. According to a vast majority of respondents, conditions in Hong Kong have deteriorated in several categories since 2021, first and foremost with regards to the ability to attract overseas talent (93%), the appeal as a regional headquarters location (78%), as well as the political climate (73%). Furthermore, respondents saw negative changes in terms of the overall economic situation (68%), recruitment of local talent (64%), Hong Kong’s competitiveness as a logistics hub (60%), and infrastructure and connectivity (54%).

Virtually no substantial improvements were noted in any category compared to the previous year; office and housing costs stood out with 17% of respondents assessing the situation as better than in 2021. However, 77% did not see any changes in this regard, neither for better nor for worse. This was also the perception with regards to aspects such as taxation, financial services, public safety, labour costs, English language standard, and access to reliable information.

Looking ahead to the next year, most respondents were expecting things to either get worse or plateau at the current level. In particular, the attraction of overseas talent (77%), the political climate (66%), and Hong Kong as a location for regional headquarters (55%) were expected to deteriorate further in the coming 12 months. Meanwhile, on a (slightly) more positive note, some respondents were expecting improvements in the overall economic situation (26%), infrastructure and connectivity (19%), as well as office and housing costs (13%) in 2023 compared to this year.

Business confidence in a downward spiral

Compared to the previous year, respondents’ confidence in Hong Kong as a business location has further dropped. On a scale from 1 to 5 (with ‘1’ indicating low confidence and ‘5’ indicating high confidence) respondents gave an all-time low average score of 2.30 – down from 2.80 in the summer of 2021. More than three out of five respondents (62%) rated their own confidence in Hong Kong over the next two years with a low score of ‘1’ or ‘2’. Only 19% took a more positive outlook with a score of ‘4’ or ‘5’, while another 19% gave a neutral score of ‘3’. Likewise, respondents assessed their overseas stakeholders’ confidence in Hong Kong significantly lower than before, with an average rating of only 2.09 compared to 2.69 last year.

The dip in confidence is also reflected by the number of companies planning to relocate: One third of respondents stated their company was actively considering a partial (27%) or complete (6%) relocation in the coming 12 months. Singapore was by far the most frequently cited destination (16 mentions), followed by Mainland China (13), Germany, and Thailand (8 each). Notably, full relocations were only being considered by companies with less than 50 employees. Of those companies considering at least a partial relocation, as many as 77% were considering moving entire departments or functions, while 23% were planning to relocate only certain senior or technical staff.

Some 30% of survey respondents expected their company’s headcount in Hong Kong to decrease over the next 12 months, while only 12% expected an increase. In this regard, companies with more than 50 employees were leaning more towards a decrease than companies with less than 50 staff. 38% of all respondents expected their headcount to remain unchanged in the coming year, while 20% were uncertain.

German business community sends a clear message: “Act now.”

Hong Kong’s Covid-related restrictions are a major factor in companies’ planning considerations. Looking back, nearly half (44%) of all respondents stated that their company had lost staff due to the restrictions of the past two years. The impact was felt differently across companies and ranged from individual cases to as much as 25% of the total headcount. One respondent stated that around 50% of their company’s expat staff had requested to return to their home countries. Meanwhile, 48% of respondents cited emigration as their company’s main challenge in retaining staff.

Asked to rank potential travel policy measures by level of urgency for their business in Hong Kong, 68% of respondents put the resumption of quarantine-free international travel in first place, clearly ahead of quarantine-free China travel (21%). More than two years into the travel restrictions and still no end in sight, members of the German business community are running out of patience and Hong Kong may be running out of time, as multiple comments from survey participants further underline.

Several respondents voiced deep concerns over the current brain drain affecting the future of Hong Kong as a business hub, with some describing the status quo as “disproportionate” and “unacceptable” and urging the government to resume quarantine-free travel as soon as possible. As one commented, “if Hong Kong does not open up to the rest of the world, it will most likely lose foreign investment and its status as a regional business hub.”

Further to this point, another respondent wrote: “I am confident to say that once our company decides to leave, we will not come back, no matter if restrictions are lifted or not. Time is running out.” Many others expressed the same sentiment. “Hong Kong must fully open to international travel immediately,” one respondent wrote, before boiling the common sense of urgency down to two words: “Act now.”

[1] Other industries omitted for brevity. Multiple industry selections were allowed, hence added percentages exceed the total of 100%.
[2] Definition of regional headquarters, regional offices, and local offices, respectively, according to the Census and Statistics Department of the HKSAR Government.

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