insight newsletter - May Issue
Where is Hong Kong Going with e-business
By Stephen Weatherseed
This question is very important for businesses considering whether or not to implement an e-business strategy. A follow-up question should be "when"? Grant Thornton has been closely monitoring e-business trends in Hong Kong, after all, these trends represent key determinants of our own policies and service strategies.
To help us better understand the situation, our e*tech practice recently commissioned a survey asking Hong Kong managers to register their attitudes and opinions towards e-business. The survey focused on revealing the key issues underpinning Hong Kong's e-business future. Conducted in February 2001 by Mindtheme, a specialist research company, the survey interviewed 120 Hong Kong-based business managers. Every Hong Kong business sector was represented - finance, service, manufacturing, property and technology - and interviewees were evenly split male to female. The survey bridged all relevant age bands and results were analysed between businesses that are already active in e-business (39%) and those that are not (61%).
The e-future is clear
The future of e-business in Hong Kong fared well, according to the survey's encouraging results.The overwhelming majority (94%) felt that having an e-business strategy is essential to long-term financial success. Even among those businesses not yet engaged in e-business, 89% supported this view. And there was no significant difference of opinion between the varying industries.
The survey went on to reveal that 70% of business managers said their businesses either already have on-line business systems in place, or will have these facilities within two years.
For Hong Kong, these two principal findings have potentially significant implications. This information indicates that the majority of Hong Kong businesses expect to be transacting business on-line within two years, and if your business is not among them, you will be in the minority. This suggests that if you have not already formulated an e-business strategy for your company, you would be well-advised to start doing so.
It is interesting to compare attitudes from this survey to other recent survey results, which show a relatively low usage rate of the Internet at work in Hong Kong - less than 25%. This may indicate that Small and Medium Sized Enterprises (SMEs) - Hong Kong's typical businesses - are waiting for major companies and institutions, especially banks, to establish an effective on-line presence before committing to the necessary investment and changes in working practices that an e-business strategy would usually require.
Bumps but not detours
Despite the optimism, there are also concerns. The survey showed that nearly two thirds of managers felt that the current workforce in Hong Kong does not have adequate IT skills to facilitate e-business. This is not a new finding, and hopefully the recent announcement to allow the import of more IT specialists from the People's Republic of China (PRC) will help address this issue, at least in the short-term. Interestingly though, the survey reflected that a substantial proportion of managers believed doing business on-line will result in overall continued job growth, and that companies engaged in e-business are stable both in terms of operations and financial performance.
The security of conducting business over the Internet however, was an area where nearly two thirds of managers did not have a high level of confidence. A similar number also rated the convenience of conducting business on-line as less important than the need for privacy. Again, whilst neither of these findings is new, it was interesting to see that even for managers in e-business-enabled companies these were major concerns as well.
Almost three quarters of managers believed that many potentially profitable companies with a focus on e-business are failing because the market is not ready for the type of service or product they provide. In other words, the timing of the introduction of e-business is critical. Consumers - businesses and individuals alike - do not necessarily adapt as quickly as the advances in technology. Nevertheless, the two-year timeframe envisaged for 70% of businesses to establish on-line systems seems to indicate that this is the period by when the market should be ready for the e-business "take off".
Overall, the survey is encouraging for Hong Kong. Its findings support the view that e-business is here to stay and that businesses cannot afford to ignore it.
Grant Thornton's e*tech
e-business means much more than "going on-line" or building a website. Grant Thornton envisages e-business as skilfully working with technology to economise, to innovate or to expand the reach and markets of a business. Different companies and different industries will derive varying benefits from the Internet and associated business models. Therefore, the decision to adopt e-business is as significant and as relevant to an enterprise as setting up a new production-line or establishing a new branch. Having a well-formulated e-strategy, customised to your specific business, is fundamental to achieving real results.
The mission of Grant Thornton's e*tech practice is to make e-business work for your company, to help you around obstacles in tandem with the increasing acceptance of e-business. e*tech services provide practical advice and solutions to help SMEs adopt e-business as a channel to do and achieve more.
We appreciate that e-business decisions may be daunting. The cornerstone of our e*tech practice is to provide a comprehensive e-business solution. Grant Thornton will formulate and map out a strategy to adopt e-business into your organisation. Rather than proposing grandiose schemes, the key is to leverage e-business from existing strengths. Our approach is to:
1. Review in detail your company's existing markets, products and services, systems and front and back-end operations in terms of e-business requirements and opportunities;
2. Analyse what your competition and customers are doing and what technologies they are or will be using;
3. Work side-by-side with you or your senior management to develop a practical strategy to adopt e-business;
4. Estimate the impact of e-business in investment decisions; and
5. Refine the strategy into detailed tactical steps for your managers as well as assist in reviewing and selecting technology implementers and provide assistance with managing implementers to ensure successful deployment.
e*tech services are useful to companies exploring e-business adoption and also to those wanting to consolidate existing web initiatives into a coherent business strategy. Our philosophy promotes active participation by our client and its management as the best means to marshal change required for e-business adoption. This involvement is also instrumental in helping us formulate practical solutions that will work in your business and in reducing the total cost of our services.
Other e*tech services we provide include Webtrust, which independently verifies a website's privacy standards. Grant Thornton also provides customised outsourcing solutions for technology start-ups and high-growth companies.
Give us a call. We will be glad to help chart your company's e-business future.
For a more complete summary of the survey, please visit our website at www.gthk.com.hk/etech.
stephen.weatherseed@gthk.com.hk
What Makes a Successful Merger
By Stephen Weatherseed
Since technology companies are facing a downturn in the capital markets, many of them have found it difficult to raise funds to stay in business. This is resulting in mergers and take-overs, and in extreme cases, liquidation.
Recently conducted was a survey by the Grant Thornton Business Owners Council, a programme exploring business growth and wealth creation in today's entrepreneurial economy. The survey targeted 750 business owners and senior executives in the USA and found some major contributing factors for the failure of mergers and acquisitions, among them were:
Unfortunately, many mergers do not have a happy ending. What can be done towards a smooth integration of two businesses
Start early
The first step is to start early. Plan for the successful integration of two entities prior to identifying merger candidates or acquisition targets. Identify a target which would fit well with your business. This includes outlining and understanding your company's own strategic assets, as well as those of your target. The combination of both sets of assets should contribute to the overall strategic goals of your business.
Once you have identified a target representing an appropriate fit, and after a deal is negotiated, the acquiring company must work quickly to develop and execute a comprehensive plan which will serve to unify the people, processes and technologies of both entities into an integrated whole.
Ideally, each party will commence its planning process before the transaction closes. This may be difficult to realise, especially for entrepreneurial businesses, however if the acquiring company does not present a strategically sound vision for the combined entity and take immediate steps to implement it, personnel will feel forced to make decisions based on rumour instead of fact.
Communications
This proposes a second strategic imperative, communication. It is a vital aspect of successful integration plans for any technology company. For example, employees may be concerned whether cuts will be made in overlapping functions. If this is the case, the sooner management spells out the nature, timing and extent of these reductions, the better. Companies sometimes choose not to share this information due to the fear of loosing staff necessary to complete the integration, prior to its conclusion. While sharing information with personnel represents a risk, it can be offset by the use of bonuses, buy-outs or other incentives.
Companies failing to communicate on these issues frequently lose employees anyway, as people choose to leave as a result of uncertainty. In any case, companies that are deceptive during reductions can cripple their management’s credibility with all personnel - not only during the integration, but also long-term. Equally important as being honest with at-risk personnel is to communicate clearly with people vital to the ongoing success of the new enterprise.
Integration concerns are also vital in joint ventures or alliances. Co-operative by definition, these situations provide no single authority to address conflicts. Therefore, a clear, documented definition and distribution of responsibilities is essential in creating a successful joint venture or alliance. It is also important to establish early on exactly how revenue will be defined and divided in order to avoid straining the relationship.
The best joint ventures and alliances are driven by a commonly understood, shared strategic vision. Companies entering these relationships should have a very clear picture of what they want from the relationship and should fully understand their partner's goals.
Finally, companies heading into a joint venture or alliance should also understand when and how to terminate that relationship.
Companies considering these options should create a clearly defined goal for the venture, set performance measures that define its success, and have a strategy for ending the relationship if those goals are not being met or when the relationship is not flourishing as planned.
Entrepreneurial technology companies may find these steps more difficult to implement because of the close ownership of the original business, but, as commercial reality will show, there is little room for sentiment in executing an effective merger, acquisition or alliance.
stephen.weatherseed@gthk.com.hk
Which GEM Looks More Attractive - Hong Kong or Shenzhen
By Henry Cheung and Michael To
In May 2000, the Hong Kong Stock Exchange issued a consultation paper (Consultation Paper) which set out certain proposals to the Growth Enterprise Market Listing Rules (GEM Listing Rules) and invited market participants and the public to give comments on the proposals. It was expected that as a result of this consultation, the GEM Listing Rules would be revised and re-issued in the first quarter of this year. However, this has not yet happened.
On the other hand, earlier this year the Shenzhen Stock Exchange issued a consultation paper seeking comments from the market on the draft listing rules for its proposed Growth Enterprise Market.
The following table summarises certain requirements imposed by the draft listing rules of the Shenzhen Growth Enterprise Market, the existing Hong Kong (HK) GEM Listing Rules and the proposals set out in the Consultation Paper.
|
|
Shenzhen Listing Rules (draft) |
HK GEM Listing Rules (existing) |
Consultation Paper Proposals |
|
Profit |
None |
None |
Proposal to have minimum revenue or profit record
|
|
Turnover
|
Turnover from focused business should not be less than RMB5 million in total for the last two years
Turnover for the year immediately prior to listing should not be less than RMB3 million
|
None |
No change |
|
Asset Value |
Tangible net asset value should not be less than RMB8 million
Gearing ratio should not be over 70% at the latest audited balance sheet date
|
None |
No change |
|
Market Capitalisation |
None |
Market capitalisation cannot be less than HK$46 million at the time of listing
|
No change |
|
Track Record Period
|
24 consecutive months in one focused business
|
24 months of active business pursuits in a focused area
|
Proposal to reduce to 12 months |
|
Minimum Public Float
|
RMB20 million (at time of listing) and 25% of issued share capital should be held by public |
HK$30 million (at time of listing) and 20% of issued share capital at all times
|
No change |
|
Sponsors
|
Approved by China Securities Regulatory Commission
|
Approved by Hong Kong Stock Exchange |
No change |
|
Retained Sponsor Requirement
|
Two full financial years after listing |
Two full financial years after listing
|
No change |
|
Reporting Requirements
|
Annual, half-yearly and quarterly reports |
Annual, half-yearly and quarterly reports
|
No change |
|
Moratorium Period for Initial Management Shareholders
|
No disposal of shares by any initial shareholder is allowed within one year after listing
|
Initial management shareholders must undertake not to dispose of shares during the first two years after listing |
Proposal to reduce the lock-up period from two years to six months |
|
Restriction on Issue of New Shares
|
None |
Issue of new shares within six months after listing is not allowed
|
Proposal to ease this restriction |
|
Share Option Schemes
|
None |
Limited to 10% of the issuer's outstanding shares
|
Proposal to relax the limitation to 30% |
|
Corporate Governance
|
(a) Supervisory Committee with representatives from shareholders and staff (b) At least two independent directors |
(a) An Audit Committee chaired by an independent non-executive director (b) An executive director designed as the compliance officer (c) At least two independent non-executive directors (d) A qualified accountant
|
No change |
The above table outlines the similarities and differences between the listing requirements of the two markets. Whether the proposed Shenzhen second board would be a threat to the Hong Kong GEM depends not only on the listing requirements but also on other factors including company valuation, market liquidity and listing costs. Under the current climate, it appears that the proposed Shenzhen market would be more competitive than the Hong Kong market in these three aspects. However, Hong Kong’s international exposure and its better-developed corporate governance and market surveillance systems make it more attractive to Mainland companies wishing to develop greater efficiency and an international outlook. It remains to be seen whether these two markets will compete directly or will simply complement each other.
Money Laundering and Suspicious Transaction Reporting
By Mina Ho and Kevin O'Shaughnessy
Legislation has been developed in Hong Kong to address the host of problems associated with the laundering of proceeds from drug trafficking and other serious crimes. The relevant legislation is contained in the Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) and the Organised and Serious Crimes Ordinance (OSCO). In particular, Sections 25 and 25A of the DTROP and OSCO have a significant effect on how trustees and other financial institutions handle funds for clients.
Section 25 of the DTROP and OSCO deals with property known or believed to represent proceeds of drug trafficking or an indictable offence. Indictable offences include those that most reasonable persons would consider to be a crime, and crimes which generate money for laundering are commonly known as "predictable crimes". The most common in Hong Kong include fraud, illegal casino gambling, loan sharking, corruption, tax evasion, bookmaking and smuggling etc.
If a predicate crime is committed outside Hong Kong, and its proceeds are dealt with in Hong Kong, the offence of money laundering is committed in Hong Kong. An offence is committed when a person carries out a transaction whilst having knowledge or reasonable grounds to believe that the transaction involves the proceeds of crime. The offence carries a maximum sentence of 14 years imprisonment and a maximum fine of $5 million.
Section 25A of the DTROP and OSCO deals with the disclosure of knowledge or suspicion that property represents proceeds of drug trafficking or an indictable offence. Any person who knows of or suspects that a transaction involves the proceeds of crime must make a report as soon as possible. Non-reporting is offence and carries a maximum penalty of 3 months' imprisonment and a fine up to $50,000.
The report may be made to a companies' Money Laundering Compliance Officer, if such a position exists, or directly to any police or customs office. In practice, reports are normally sent to the Compliance Officer who forwards them to the Joint Financial Intelligence Unit (JFIU), the unit which processes all reports.
Additionally, a "tipping off" offence is committed when, knowing or suspecting that disclosure has been made, a person discloses any information likely to prejudice an investigation into money laundering activities. The tipping off offence carries a maximum penalty of three years' imprisonment and a fine of $500,000.
Reporting suspicious transactions
Under what circumstances should a suspicious transaction reporting be made?
or
1. Large and/or frequent cash transactions.
2. "Structuring" or "smurfing" the use of multiple low-value transactions where one or a few large transactions could be used.
3."U-turn" transactions, where money passes from one person or companies to another then back to the original person or company.
4. Accounts being used as temporary repositories or showing increased levels of activity on the first banking day after Hong Kong horse races, indicating illegal bookmaking.
5. Countries, currencies and nationals commonly known to be involved in international crime.
The level of suspicion is raised if the customer cannot give a legitimate or reasonable explanation when questioned about their financial activity. If practical, staff should ask:
(a) The reason for the transaction; and
(b) The source of funds and/or beneficiary.
Step 3:
Review known information, activities and patterns of the customer. Staff should know historical information regarding the financial activity and type of transactions made by their corporate customers and clients.
Step 4:
Review steps 1-3 above to decide if the activity would normally be expected from the customer.
It is important to note that Section 25A provides that any disclosure made under this Section shall not be treated as breach of contract or of any enactment restricting disclosure of information and shall not render the disclosing party liable for damages or any loss arising from disclosure. Therefore, institutions need not be afraid of breaching their duty of confidentiality to customers when it involves disclosure under these Ordinances.
kevin.oshaughnessy@gthk.com.hk
Doing Business in China- the Human Resources Issue
The first step towards establishing a commercial presence in China would be to gain a thorough understanding of the application procedures and approval processes involved in such a venture. Equally essential would be to gather in-depth knowledge regarding China’s business environment and its unique statutory requirements. In the following article, we have attempted to list and explain several statutory requirements and practices applicable to most foreign establishments in China. Once again, the importance of researching and understanding local practices cannot be over emphasised.
Labour Law and local regulations
In place since 5 July 1994, the PRC Labour Law applies nation-wide in its capacity to regulate employer-employee relationships and to outline employees basic rights. Article 106 of the Labour Law however, delegates to provincial local governments the authority to issue detailed implementation rulings.
Employment contracts
An enterprise and an individual should enter into an employment contract. The contract may be of a collective nature or on an individual basis. It should contain the following provisions:
1. Tenure
2. Duties and responsibilities
3. Workplace safety and working conditions
4. Compensation
5. Labour discipline
6. Conditions for termination of contract
7. Responsibilities for breach of contract
Tenure
The tenure of an employment contract may be a defined period; open-ended or on an assignment basis. The Labour Law stipulates that a probation period may not be longer than six months.
Working hours
China now practices a five-day working week. The prevailing statutory working period is eight hours per day and no more than 40 hours may be worked during the average week; however, if the situation requires, and with the employee’s consent, the employer may extend the working period by three hours per day up to a maximum of 36 hours per month. The overtime payment scale is specified in the Labour Law as follows:
1. Minimum 150% of the normal wage for overtime on regular working days.
2. Minimum 200% of the normal wage for overtime on rest days and where no compensation leave can be arranged.
3. Minimum 300% of the normal wage for overtime on statutory public holidays.
Statutory public holidays and annual leave
Statutory public holidays include:
1. New Year
2. Chinese New Year
3. International Labour Day
4. National Day
5. Others as specified in relevant regulations
Employees who have worked for one year or more with the same employer shall enjoy paid annual leave.
Working conditions and labour protection
Enterprises are required by law to ensure that working conditions comply with the State’s safety and sanitary standards. Special provisions are laid out in the Labour Law to protect female workers and junior workers (over 16 but under 18 years). For example, the minimum maternity leave is 90 days and enterprises are not allowed to employ juniors under the age of 16. Non-compliance will incur penalties and, in serious cases, lead to the revocation of the employer’s business licence.
Wages
Wages paid to workers shall not be less than the local minimum standard wage. The minimum standard wage varies depending on the area. It is determined by the provinces, autonomous regions and municipal People's Government and is reported to the State Council for record-keeping purposes.
Social security and welfare
In addition to paying salaries, employers are required to participate in social insurance schemes and make contributions in accordance with the relevant State and local regulations. According to the prevailing regulations and practices, an employer's contributions to various social security funds will differ from place to place. The table below shows some major contributions by employers and staff to social security funds in Beijing and Shanghai.
|
|
Beijing |
Shanghai |
||
|
|
Employer |
Staff |
Employer |
Staff |
|
|
% |
% |
% |
% |
|
Retirement |
19 |
7 |
24.5 |
6 |
|
Unemployment |
1.5 |
0.5 |
2 |
1 |
|
Medical |
2.5 |
1 |
12 |
2 |
|
Housing fund |
10 |
10 |
7 |
7 |
(1) Calculation is mainly based on the individual wage/salary.
(2) The above information is for reference only. Please check the relevant regulations for detailed calculation methods.
The total social security and welfare may constitute an additional payment cost as high as 40% of the total.
Labour union
All workers have the right to join or organise a labour union that represents and protects the legal rights and interests of workers and that carries out its activities independently. An enterprise (covers all types of foreign investment enterprises) is required to contribute 2% of its employees' total wages to the relevant labour union(s).
Recruitment - Representative Office (RO)
A RO is prohibited from recruiting local workers directly from the public. Instead, it must recruit local staff through an authorised agency like the Foreign Enterprise Service Corporation (FESCO). Legally, the employer-employee relationship is one between FESCO and the individual. Foreign investors may identify for themselves suitable candidates and can make the decision regarding hiring and firing of staff. If required, FESCO will help to identify suitable candidate(s).
Recruitment - Foreign Investment Enterprise (FIE)
FIEs, including joint ventures and wholly foreign-owned enterprises, are allowed to employ staff either directly or through recruitment agents. If wanting to recruit staff using mass media such as newspapers, the FIE will require approval from the local Labour and Social Security Bureau before the advertisement can be published. If your company plans to recruit staff through a recruitment agent, it is advisable to ensure the agent holds the appropriate licence. In the next issue we will continue to explain the statutory requirements on capital and finance.
For further information, please contact:
Wilfred Chiu kwc@gtb.com.cn
Desmond Yuen desmond.yuen@gthk.com.hk
Alice Law alice.law@gthk.com.hk
New accounting standards
The Ministry of Finance has promulgated three new and amended five existing accounting standards. The three new standards cover intangible assets; borrowing costs; and leasing. The five amended standards are cash flow statements; debt restructuring; investment; changes in accounting policy and estimates and correction of accounting errors; and non-monetary transactions. The standards for intangible assets and investment are applicable to joint stock companies, while the rest are applicable to all enterprises and are effective from 1 January 2001.
Amended PRC Law of Sino-foreign Equity Joint Ventures
The People's Congress adopted proposed amendments to the Joint Venture Law on 15 March 2001. The law has been amended, among other reasons, to remove the requirement to report production plans to the government. Changes also cancel the previous law which gave priority to local suppliers over international suppliers. Under the amended law, joint ventures may source overseas or local suppliers of raw and other materials according to fair and reasonable principles.
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