A Slight Drop in SME Business Operating Environment Index for the Fourth Quarter

The Business Operating Environment Index for local small and medium-sized enterprises (SMEs) for the fourth quarter of 2005 recorded a slight drop, according to the latest findings of a survey conducted by the SME Centre of the Hong Kong Productivity Council (HKPC) in October 2005.

The survey on "Business Operating Environment Index for SMEs", initiated by HKPC in 1998, is conducted quarterly to gauge the views of Hong Kong's SMEs in the areas of market opportunities, financial and investment situation, operating costs, human resources and risk assessment. In the latest survey, a total of 512 SMEs were interviewed, of which 304 came from the services sector and 208 from the manufacturing sector.

Commenting on the survey findings, Mr Vincent Li, General Manager (Enterprise Value & Logistics Consultancy) of HKPC said, "The overall index for the fourth quarter dropped 5 percentage points from 11.6% in the last quarter to 6.6%, an indication that SMEs in general are concerned about possible changes in the business environment in the coming months."

Out of the five sub-indexes, four reported a decrease. Mr Li said, "The risk assessment index showed the most noticeable decrease of 10 percentage points (from 16.4% to 6.7%), reflecting a more risky environment is anticipated as compared to the last quarter. Concerns over a rise in oil price, interest rates and inflation are the contributing factors for the decrease."

"Also notable is the financial and investment index with a drop of 9 percentage points (from 4.2% to –4.8%). As the interest rates continue to rise, majority of the SMEs expect heavier financial burdens in the coming months," he said.

A moderate drop of 5 percentage points was noted in the market opportunities index (from –0.7% to –5.7%) after four successive quarters of improvement (from October 2004 to October 2005), reflecting that SMEs are generally cautious towards the market situation for the last quarter of 2005.

The human resources index also slipped 7 percentage points from 23.9% to 17.1%. "While SMEs still have difficulty in employing appropriate staff, they are also cautious of recruiting additional staff," Mr Li explained.

"No marked change was reported in the operating cost index which stood at 20.3% though there are concerns over possible rise in operating costs," Mr Li said.

In terms of sectoral differences, the overall business operating index for both manufacturing and services industries recorded a decrease of 5 percentage points as compared to that of last quarter, with the indexes scoring 5.8% and 7.2% respectively. "While the manufacturing sector is more optimistic than the services sector in terms of market opportunities, and the financial and investment environment, the latter is more positive in human resources and risk assessment factors," he added.

"A closer look at individual industries revealed that the business services sector is most positive about their business prospects, while the logistics and transportation sectors expect slower growth," he said.

Regarding SMEs' expectations of their business performance in the coming 12 months, 53% of the respondents anticipated a growth in business volume, as compared to 58% in the last survey. The expected average increase was 2.9%, a drop of 0.7%. The proportion of those not expecting any growth increased slightly from 34% in the last survey to 35%.

Concerning SMEs' forecasts on operating costs, 50% of the respondents predicted that raw material costs would increase in the coming 12 months. Among them, 80% anticipated the costs to go up no more than 10%. On staff salaries, 65% said that the pay level would remain unchanged, while 34% expected to have a salary increase of no more than 10% during the year. In addition, over 30% of the respondents anticipated a rise in rental and transportation costs, with the majority forecasting increases below 10%.

This survey also gauged the views of local SMEs on the growth potential of the local and overseas markets. The Mainland market (53%) was expected to have the highest growth potential, followed by the European (40%) and the Far Eastern (31%) markets. Close to 60% anticipated that the local market would remain unchanged.

On business development strategies, 66% of the respondents said that their present business strategy would remain unchanged in the coming year, while 29% would consider business expansion/further investment. For those with plans for expansion, 72% indicated the increase in investment would not exceed 10%, while 28% estimated more than 10%. In addition, the survey found that 31% of the respondents have started or planned to invest on the Mainland. To "expand the existing production facilities" and "penetrate into the Mainland market" were cited as the key purposes. "Within this group, however, 37% of them expressed that they have difficulty in penetrating into the Mainland, and 20% are not satisfied with the support services offered by the Mainland's financial institutions," Mr Li added.

With funding from the Innovation and Technology Fund (ITF) of the HKSAR Government, the SME Centre was established in December 1997 as a one-stop service centre to provide local SMEs with an easy access to a network of service providers including experts from HKPC and other relevant organizations covering the areas of banking and finance, information technology, forwarding and shipping, telecommunications and insurance, etc.

For media enquiries, please contact:
Ms Betty Lee
General Manager
Corporate Communications & Events
Tel: (852) 2788 5036
Fax: (852) 2788 5056
E-mail: emilyc@hkpc.org

HKPC
4 November 2005

Remark:
Index = % of respondents holding a positive outlook - % of respondents holding a negative outlook