Singapore. South Korea. Taiwan. Hong Kong. Together these four countries, the Four
Tigers, led the way in making prosperity for its residents.
Each of the four tigers had deep roots in electronic assembly
and industry. That means assembling components into finished goods for export.
For a first few decades, the tigers got to a certain level of prosperity on the back of
this industry. As the 70s came around though, it became clear that this industry could not last.
Manufacturers were decamping for cheaper places abroad.
South Korea, Taiwan, and Singapore managed to "upscale" their efforts and
ascend the value chain. But Hong Kong
managed neither and they got left behind. This has had consequences that last to present day.
In this video, I want to talk about the fall of Hong Kong's electronics industry.
Hong Kong's economy started off as a shipping node connecting China and the rest of the world.
British exports to China (like opium) entered the country here.
But after the Communist Revolution, China closed itself off from exports from the West.
Furthermore, Chinese support of the Korean War led to an American embargo of goods to China.
Hong Kong needed to remake itself.
It found its way with two critical goods: Textiles and electronics. Shanghainese textile barons,
long seeing the KMT's end on the mainland, made their way to Hong Kong and set up shop there.
At the same time, Japanese companies like Sony began globalizing their supply chains.
Hong Kong offered a cheap place to assemble their radio and television products.
By the early 1960s, Hong Kong was the single biggest manufacturer in the developing world.
Building on top of cheap labor, liberal trade relations,
and a growing consumer culture abroad, Hong Kong got rich.
The Hong Kong textile industry did not last long and rising labor costs caused them to leave for
finer grounds elsewhere. Electronics industrial assembly began to dominate the Hong Kong economy.
For a long time, Hong Kong assumed a role like what China has today: The workshop for the world's
gadgets. Radio assembly, something that began with Sony in 1959, led to televisions and calculators.
Fairchild Semiconductors, the American semi maker, moved its electronics assembly work to Hong Kong.
Motorola and National Semiconductor soon followed.
Motorola especially would be a critical MNC jumping off point for Hong Kong's future
semiconductor industry. It gave Hong Kong that rare opportunity to acquire foreign technology.
## The Threat and How to Respond to It
This is a familiar story. Taiwan, South Korea and Singapore followed the same line. Well,
Hong Kong was first! As late as the 1980s, Hong Kong's industrial economy could be judged to be
far ahead in terms of technical sophistication and industry employment. Things seemed good.
But if you know the story then you know what is coming up next. I talked about this in my two
videos about Singapore and Taiwan. For companies and economies who initially compete on the idea
that they are "cheaper", there is always another cheaper labor supply somewhere else.
Very soon your buyers are going to go abroad, leaving you with nothing. In order to defeat
this challenge, companies need to do two things, both of which involve ascending the value chain.
You either "ascend" by creating your own consumer name brand
and going directly to the consumer. This is the approach that South Korea went with Samsung,
LG and Hyundai. What China is doing with Huawei and Xiaomi.
You win the ability to dictate your own prices and directly control the consumer relationship.
Or secondly, you upgrade your own offering and create a more sophisticated technical solution.
For Taiwan and Singapore, that meant going into semiconductor foundry.
This is cutting edge, extremely complicated stuff that hopefully only you can do.
What you control here is the ultra-special technology to make it.
Hong Kong failed to do either of those things. As a result, its electronics industry lost
its industry and the scar that is left continues to throb to this day.
## The Paths Not Taken
I think everyone wants to assign blame to something somewhere. I get it. It is part
of the human coping process. It helps to have a solid thing that you can point to.
But I also want to say before we embark on this section that success is never pre-ordained. In
fact, failure is more likely than not. Most things don't work out. It makes me wonder why we spend so
much time looking at when things do work out. We probably learn more by looking at the opposite.
Okay here we go. Let us start with the Big Event - the founding of TSMC in early 1987.
TSMC's independent foundry model would crack apart the old integrated semiconductor industry
and from then onwards put them on two parallel paths.
## A Hong Kong Foundry?
On one half you have the foundries, providing the industrial work of fabbing the chips. This is a
tough path that requires government-scale resources and military-style execution.
Taiwan, South Korea, and Singapore embarked down this path - bringing hefty
government-backed budgets with them to the fray.
The Hong Kong government did not encourage the growth of R&D-led
industrial upgrading within the electronics industry. For a number of reasons.
One part has to do with that Hong Kong was a colony beholden to the United Kingdom. There is
a lot to explore here in terms of the relationship between the colonizer and colony, perhaps for a
future video, but the relationship is that Hong Kong's fiscal hands were somewhat tied. The United
Kingdom's own difficult fiscal situation post-World War II constrained its colony.
Perhaps because of this, the Hong Kong Government adopted a fiscally conservative industrial policy
that emphasized the general macro-economy. They took the stance that their administration
should not pick winners or losers. They did not offer tax incentives to companies.
They instead focused on providing resources for basic needs
like transportation (MTR), public housing, and healthcare.
A lack of industrial and manufacturer representation in the Hong Kong Legislative
Council meant that Hong Kong policy never took coherent, aligned direction towards
encouraging R&D upgrading. Dominated by financial and trading interests,
policy was steered towards free trade, low profit tax, and a "smaller" state.
Larger geopolitical concerns also loomed over the multinational manufacturers as well.
A foundry costs a lot of money. You are investing hundreds of millions
and it can take years to recoup the investment.
Political concerns surrounding the Handover did have some influence here. But I do want to add
that they are secondary and had the administration wanted to, they could have been addressed.
Larger than all of that was the land problem, as is always the case in Hong Kong. Some arms of
the Hong Kong government tried to provide land to help keep industrial factories from leaving. And
there are a few areas: The Industrial Estates in Tai Po, Yuen Long and Tseung Kwan O are notable.
But at the same time, there is no denying that the HK government as a whole pushed land prices
higher and higher because that was how they made money. Sometime in the 20th century, the Hong Kong
government found itself generating the majority of its revenues from land sales rather than taxes.
Manufacturers already struggling to compete against foreign competition suffered not only
from a rising cost of labor but also surging land rents. Thus the Hong Kong electronics
assembly industry died. Companies packed up and moved elsewhere - mostly to China.
All that was left were the "knowledge-based" functions like sales, consultation, account
management and marketing. Manufacturing employment collapsed. Huge numbers of workers were laid off.
Hong Kongers have felt the consequences of this blue collar collapse ever since.
## Hong Kong's Fabless Opportunity
The other half of the semiconductor industry would be that of the fabless semiconductor makers.
They design the chips that the foundries make. They manage the customer relationship.
These include Qualcomm, Nvidia, and now Apple.
Countries with a pool of highly educated engineers with an entrepreneurial kick - the USA,
UK, Japan etc. They might not be able to build and host semiconductor foundries,
but can host the companies that those foundries might make chips for.
Hong Kong could have grown a company like Qualcomm or Nvidia. And for a few years it seemed possible.
The Hong Kong fabless semi space held a lead over their rivals in Taiwan and South Korea.
Hong Kong's location in the heart of the consumer electronics supply chain
gave it a head start. Furthermore, many highly educated engineers
lived in Hong Kong. It offered a pool of talent for multinationals to tap.
Motorola's Hong Kong division in the early 1990s was very strong in microprocessor design.
They even took the lead in developing the company's Dragonball microprocessor series.
Motorola’s presence offered the chance to seed an entire industry.
Hong Kong even had a homegrown champion of their own, Valence Semiconductor. Founded in 1985,
Valence began by offering layout design services to foreign companies like Fujitsu and NEC.
They then grew into designing entire systems for their customers,
with their chips finding their way into many popular consumer products.
This all faded away however. Valence was a standout, but the rest of the Hong Kong semi
industry did not have the technical chops to reach escape velocity. Lacking sufficient know-how,
investment capital, and government support, the industry weathered away.
Motorola decamped, scaling back their design center in Hong Kong and moving operations to
Suzhou, Shanghai, and Beijing. While they did spinoff a few smaller design shops before they
left - On Semiconductor and Solomon Systech are notables - these tiny shops are nowhere large
enough to train and sustain a semiconductor design ecosystem. Talented young engineers
would end up going abroad to find well-paying work.
Other countries began offering attractive deals to bring multinational corporations to their shores.
Singapore and China are especially great at doing this, but India and even Taiwan competed too.
Motorola management asked Francis Ho, secretary of commerce and economic development at the time,
for state support in 2002 to stay in Hong Kong but was turned down. So they left.
## Conclusion
Singapore’s officials like to emphasize the global competition for talents.
To me, the lesson of Hong Kong’s electronics industry is that no
administration should take the current highlights of its economy for granted.
In a way I understand the administration's actions. They believed in a philosophy that
supported the macro-economy as a whole. The administration provides the market
building blocks and the market takes care of the rest. And I think such a philosophy
definitely can achieve success when it comes to certain industrial policy goals.
But maybe the electronics and semiconductor industries just will require more involvement than
others. Your competitor governments are highly involved, offering market-distorting incentives
to steal away customers and more. Thus, your own administration needs to get involved. If every
other kid at your kid's school are getting private lessons from their parents after class, then you
are going to need to do the same with your own kids if you want them to stay ahead of the curve.
There is an assumption that economies naturally adjust over time to industry declines.
Hong Kong lost its electronics industry but gained a vibrant finance/services industry.
The latter rising as the former declined. But I feel like Hong Kong’s general de-industrialization
has had costly human consequences for itself and its people. It was the loss of a big tax base,
and the losers stayed lost over time.