1

Professor K.B. Chan

Chairman and Managing Director, Surface Mount Technology Ltd.

Chairman, Hong Kong Green Manufacturing Alliance

7 March 2006

Future Industrial Prospect and Opportunities in China, and Green

Manufacturing Challenge

2

Content

• Major Economic Zones in China

• Electronics Industry & Automotive Industry – Major Industrial Driving Forces

• Southern China & Hong Kong’s Advantages

• Green Challenge

• Hong Kong Green Manufacturing Alliance

3

Major Economic Zones & Surrounding Areas

Bohai Economic Zone

Yangtze River Delta (YRD)

Pan-Pearl River Delta (PPRD)

CHINA

China’s 2005 GDP = US$2.3 trillion (9.9% Growth)World GDP Ranking1. USA2. Japan3. Germany4. China5. Britain

Source: Gov’t news, Commercial news

4

Major Economic Zones

Zone Covered Area

Pan-Pearl River Delta ( PPRD )

9+2

9 Provinces: Fujian ( 福建 ), Guangdong ( 廣東 ), Guizhou ( 貴州 ), Hainan ( 海南 ), Hunan ( 湖南 ), Jiangxi ( 江西 ), Sichuan ( 四川 ), Yunnan ( 雲南 ), Guangxi ( 廣西 )

2 Cities: Hong Kong ( 香港 ), Macau ( 澳門 )

Yangtse River Dela ( YRD ) 6+1

6 Provinces: Zhejiang ( 浙江 ), Jiangsu ( 江蘇 ), Anhui ( 安徽 ), Henan ( 河南 ), Hubei ( 湖北 ) Shaanxi ( 陝西 )

1 City: Shanghai ( 上海 )

BohaiEconomic Zone7+2

7 Provinces: Hebei ( 河北 ), Shanxi ( 山西 ), Inner Mongolia ( 內蒙古 ), Liaoning ( 遼寧 ), Shandong ( 山東 ), Jilin ( 吉林 ), Heilongjiang (黑龍江 )

2 Cities: Beijing ( 北京 ), Tianjin ( 天津 )

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Strength of Economic Zones

Source: China Statistics Bureau, Hong Kong Census & Statistics Dept, Macau Statistics and Census Service

1 Includes eastern China, *Includes China, Hong Kong and Macao

Total 2,054 95% 1,207 93%

Economic Zone2004 GDP

(US$Billion)

% of the Greater China*

Annual GDP

growth

Populat-ion -

million

% of the Greater China*

Pan-Pearl River Delta (PPRD)

735 34% 13% 463 36%

Yangtze River Delta (YRD)

687 32% 16% 394 30%

Bohai Economic Zone

632 29% 16% 350 27%

1

Preliminary Figures Only (may not be 100% accurate)

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Characteristics of Pan-Pearl River Delta

Export-oriented:

• external trade of Guangdong accounts for over 30% of China’s total

• large numbers of foreign-invested manufacturers especially in Guangdong, with high concentration of Hong Kong-invested companies > 60,000

Major industries:

• consumer goods, light Industries, heavy industries, petrochemical

• > 40% are electronic related

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Industry and investment-oriented:

• Shanghai as the regional leader – finance and banking, automotive manufacturing, tourism

• becoming more internationalized

Major industries:

• automotive & auto parts manufacturing, electronics equipment and parts, textile, chemical fiber

Characteristics of Yangtze River Delta

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Diversified economy:

• cultural, political, R&D center - Beijing

• electronics manufacturing base - Tianjin

• local consumption recently attracted lots of investors from Japan, Korea

Major industries:

• machinery, steel, transport equipment, electronics equipment

Characteristics of Bohai EconomicZone

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Electronics Industry & Automotive Industry

- Major Industrial Driving Forces

10Source: isuppli, 03/2004

Electronics Production in China

• China is Factory of the World

• Advantage – Low cost & huge domestic market

• By 2007, electronics production:

Nearly US$300 Billion (> 20% of world output)

Growth rate 12%, double of world’s

• Largest market: handset, DVD, TV

• Top 5: PC, home appliance

US$Billion 2003 2004 2005 2006 2007 CAGR

China 167.2 185.8 207.5 238.8 270.1 12.7%

World 1,001.5 1,081.4 1,146.8 1,205.8 1,280 6.3%

China’s % 16.7% 17.2% 18.1% 19.8% 21.1% --

11Source: Technology Forecasters, supplied by Market Manufacturing Insider 10/2005

Electronics Manufacturing Services(EMS) Industry

World Total Available Market (TAM) &Electronics Manufacturing Services (EMS) Revenue

109.6 120.5 132.2 148 166.2 187.6

1005.7 1076.5 1146.51229

1319.21417.510.9% 11.2% 11.5% 12.0% 12.6% 13.2%

0

200

400

600

800

1000

1200

1400

1600

2004 2005 2006 2007 2008 2009

US

D B

illi

on

0%

2%

4%

6%

8%

10%

12%

14%

Total Available Market EMS Penetration %

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EMS in China to Increase

Source: iSuppli, June 2003

Electronics Manufacturing Services (EMS) Production

US

Mexico

(E) Europe

China

0

10

20

30

40

50

60

70

2001 2002 2003 2004 2005 2006 2007

Bill

ion

of

US

Do

llar

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Automotive Sales in China

2.42

3.25

4.395.07

5.76

0

1

2

3

4

5

6

2001 2002 2003 2004 2005

Sales in Million Unit

Source: VDA, Wards.com, International Herald Tribune, China’s Association of Automobile Manufacturers

CAGR = 24.2%

2006 Forecast: 6.4 Million Units (12% growth)

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Top 10 Sedan Manufacturing Bases in China

China’s Sedan Output = 2.26 Million Units (Year 2004)

* PPRD figure includes Chongqing, YRD figures includes eastern China Source: Rounded Figures, National Bureau of Statistics of China

Jilin 336,800 (15%)

Henan 53,500 (2%)

Shanghai 549,900 (24%)Hubei 99,900 (4%)

Chongqing 157,300 (7%)

Jiangsu 89,900 (4%)

Guangdong 266,500 (12%)

Tianjin 219,800 (10%)

Anhui 87,000 (4%)

Beijing 182,200 (8%)

Bohai = 738,800, YRD = 880,200, PPRD = 423,800

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China’s Automotive Components Industry

Exports

• 2005 Jan – Nov’s : US$ 7.7 B*, 53.4% growth

• 2004 : US$5.6 B (5 fold over 5 years ago)

Sales

• 2004 : US$53 B (46.5% growth)

* Including Components, Accessories & BodySource: Gov’t, KPMG

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Automotive Electronics in China

Source: FOURIN China Auto Weekly

2000 2003 2005 2010

2.0

6.6

12.0

30.1

0

5

10

15

20

25

30

35

US

D B

illi

on

China's Automotive Electronics Market

2000 - 2010 CAGR >30%

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Trend in China’s Automotive Components Industry

• Automotive Output – could exceed 10 Million vehicles by 2010

• Automotive Components – over 30% growth

• Automotive Electronics – share of automotive component value increase from 10% to 30%

• Foreign/ Joint venture auto makers to procure local low-cost and high quality parts and components

• Domestic brands increase from 25% to over 50%Source: China’s Association of Automobile Manufacturers, KPMG

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Development of Southern China

& Hong Kong’s Advantages

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Pan-Pearl River Delta

9 Provinces:

• Fujian 福建 Guangdong 廣東• Guizhou 貴州 Hainan 海南• Hunan 湖南 Jiangxi 江西• Sichuan 四川 Yunnan 雲南• Guangxi 廣西2 SARs:

• Hong Kong 香港 Macau 澳門

2004 GDP

(US$B)GDP growth Population (M)

Guangdong 193.2 14.2% 83.0

Hong Kong 165.5 8.2% 6.9

Other 8 provinces + Macau 376.0 16.9% 372.9

Pan-Pearl River Delta 734.7 12.6% 462.8

(Growth in real terms) Preliminary figures only, may not be 100% accurate

Source: China Statistics Bureau, Hong Kong Census & Statistics Dept, Macau Statistics and Census Service

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2003 Output(US$

B)

Share 2010 Output(US$

B)

Share CAGR

3 New Rising Industries

Electronic Information 71.5 23.5% 271.1 33.8% 21%

Electric Machinery 36.5 13.0% 109.6 13.7% 17%

Petrochem 24.6 10.5% 88.0 11.0% 20%

3 Major Traditional Industries

Textile 19.2 6.8% 33.7 4.2% 8%

Food & Beverage 14.0 6.5% 31.3 3.9% 12%

Construction Materials 10.3 4.0% 18.1 2.3% 8%

3 Major Potential Industries

Paper 6.5 2.4% 16.9 2.1% 15%

Pharmaceutical 3.0 1.5% 9.6 1.2% 18%

Automotive 9.0 3.7% 43.4 5.4% 25%

Top 9 Industries in GuangdongSource: Guangdong Industry Yearbook 2004 & Internal Source

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Next Wave for Guangdong – New & Hi-Tech Industries and Heavy Industries

• In 2004 added industrial output value of top 9 industries: > US$60 billion, contribute to 75.8% of provincial industrial growth

• Fastest growing industries

Electronics

Petrochemical

Automotive

Source: Hong Kong Trade Development Council

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Electronics and Information Industry in Guangdong

• In 2004, total output of Guangdong’s electronics & information industry: US$90 billion

Source: Hong Kong Trade Development Council

Products Major Manufacturing Bases

Handset, Computer Dongguan, Huizhou, Shenzhen

Electronics components, Home audio/visual equipment

Shenzhen

Software Guangdong, Shenzhen, Zhuhai

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Automotive Industry in Guangdong

• Production capacity in 2004: 540,000 vehicles

• Estimated capacity in 2005: 650,000 vehicles

• 2010’s capacity: 1.6 million (1.4 million sedans)

Source: Hong Kong Trade Development Council, Commercial News

3 Major Car Makers in Guangzhou, Guangdong

Unit Sales in 2005

Nissan 157,500

Honda 230,000

Toyota Start production by mid-2006, initial 100,000-unit capacity

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Petrochemical Industry in Guangdong

• 2005-2010: planned investment US$21.7 billion

• Output in 2010: US$88 billion (11% of Guangdong’s industrial output), 20% annual growth

• In 2020, oil refinery capacity: 100 million tons

• Foreign investors: Shell, BP, ExxonMobil

Source: Hong Kong Trade Development Council, Commercial News

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Challenges in Guangdong

• Shortage of energy, land, labors and skill workers

• Labor intensive enterprises: high costs while low profits

• Competition from Yangtze River Delta (eastern China) and Bohai Economic Zone (northern China)

• Environmental issue

Need to foster high value-added industries & upgrade industrial structure & environmental manufacturing

Source: Hong Kong Trade Development Council

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“Front Office - Back Factory” Model

Hong Kong Trading and financial center

Southern China

Manufacturing base

Co-operation

LogisticsMarketing

Product DesignAdministration & Management

Land & utilitiesLaborNatural resources

Supporting industries

R&DTechnologies

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Position of Hong Kong

• Major economic engine of the Pan-Pearl River Delta, financial and service center

• Over 40% of China’s Foreign Direct Investment - FDI is from Hong Kong

• HK companies operate more than 60,000 factories in Southern China, employing > 10 million workers

• 40% of HK Manufacturing GDP is electronics

Source: Hong Kong Trade Development Council

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Advantages of Hong Kong

• Excellent infra-structure, transportation, telecom

• Sound legal and tax system

• Mature equity market

• Efficient government with no corruption

• Center for arbitration

• Close political, economic and social relationship with China,

e.g. Closer Economic Partnership Arrangement (CEPA) - easier access to China markets for Hong Kong-made

products, and Hong Kong-based service companies

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Advantages of Hong Kong

• Cosmopolitan city – large number of foreign companies, promotion & exhibition

• Easy communication, English, Chinese

• Risk Management

• IP Rights protection

• Currency management - RMB

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Hong Kong Companies As Business Partners

• Understand both international and Chinese cultures, acting as bridge

• Connections with multinational companies, and foreign countries

• Substantial business experience in China, know “what not to do”

• Fast response

• Strong business integrity

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• Finance: IPO, capital raising

• Skilled Workers: education and training

• Professional Services: legal, accounting, banking

• R&D: co-operation with educational institutions

• Logistics: supply chain management

Hong Kong as Service Platform forGuangdong’s Industrial Development

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HK – Boosting Technological Developments

• Administer under ITC – Innovation & Technology Commission – Funding ~ 4 Billion HK$

• 8 Universities

• Establish 5 R&D centers from 2006:

Auto parts, logistics, textile, nano tech, IT & telecom

• ASTRI – Apply Science and Technology Institute

• HK Science & Technology Park – IC design, photonics

• Cyber Port – Digital entertainment

• HK Productivity Council

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• Joint funding efforts between the 2 Government to support R&D projects

• 2004 > US$ 40 million in 6 areas:

RFID , Auto-parts, electronics & IT, energy

tech, new materials, precision equipments

• 2005 > US$ 67 million in 6 areas:

communication, medical & bio tech, new

materials green manufacturing, agriculture

Guangdong/HK Technology Co-operation Funding Scheme

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Green Challenge

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Electronic WasteSource: Wen Wei Po

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USA 8.3 Mtons,39.5%

ROW 1.6 Mtons , 7.8%

Europe6 M tons ,

28.2%

Japan3 M tons,

14.4%

Asia-Pacific 2.1

M tons,10.2%

Electronics Industry

• One of the world’s largest manufacturing industry with over US$1 trillion output

• Produced 21 million tons of electronics globally:

Source: National Electronics Manufacturing Initiative, Inc.

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Revolution: Product Life-Cycle“Cradle to Cradle”

Remanufacture& Reuse

Obsolescence/Return

Customer Use

Manufacturing

Packaging/Distribution

Eco-ProductDesign

Parts, Materials

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Energy-using Product (EuP) Directive:

• Aims at product design to be energy optimized

Waste Electrical and Electronic Equipment (WEEE)Directive:

• Responsibility for collection, recovery and recycling of waste electrical and electronic equipment now rests with producers

Restrictions of Hazardous Substances (RoHS)Directive:

• Upper limit on 6 hazardous materials in electronics products

European Legislation on Green Electronics Products

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The Total Picture of EU Regulations

ProductDesign

Procurement

Manufacturing

Field Application

End of life

EuP RoHS

Collect, Reduce,

Reuse, Recycle

WEEE

(2007/8/11) (2006/7/1) (2005/8/13)

40

China’s Legislations

• “RoHS-equivalent” law, “Administration on the Control of Pollution Caused by Electronic Information Products” 《電子信息產品污染控制管理辦法》 :

– Announced on 1 March 2006

– Effective 1 March 2007

– Manufacturers, importers, and retailers must comply

– Apply to products manufactured in, sold in or imported into China

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• Electronics Radar

• Broadcast & Television

• Household Electronic

• Special Electronic Apparatus

• Electronic Applications Equipment

• Electronic Telecommunications

• Computer

• Electronic Measuring

• Electronic Components

• Electronic Material

China’s Legislations

China-RoHS covers following categories:

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China’s Legislations

• Major requirements of China-RoHS:

– Producers should choose materials, technique and craftwork suitable for reuse and recovery

– Other materials in addition to 6 stated in EU’s RoHS

– Labeling: name & content of hazardous substances, “safe-use period”, packing materials

• Can be reviewed every year (vs. 3 years for EU’s law)

• Punishable

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• Waste control measures and systems

• Monitoring on materials and components suppliers

• Testing of components

• New production process technologies and equipments, e.g. lead-free soldering

• Quality and reliability enhancement

• Management practice

• IT system upgrade, e.g. ERP

Issues of cost sharing, pressure from customers

Legislations Increase Costs of Manufacturers

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• Recall of all goods sold in the markets since the enforcement date for the law

• Fine on such goods, e.g. First WEEE prosecution - Boots Retail (Ireland), fined €1,200, and costs of €6,865 awarded to Environmental Protection Agency (Jan 06)

• Impounding of goods

• Banned from entering Europe

Possible Penalties for Violating EU Regulations

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• Policy Framework for the Management of Municipal Solid Waste (MSW)

– Producer responsibility schemes to be introduced:

Hong Kong’s Initiatives

Products Target Date

Electrical & Electronic Equipment, Vehicle Tyres, Plastic Shopping Bags

2007

Packaging Materials, Beverage Containers

2008

Rechargeable Batteries 2009

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• Policy Framework for the Management of Municipal Solid Waste (MSW) – Targets:

– Reduce MSW by 1% per annum up to the year 2014

– Increase recovery rate to 45% by 2009 and 50% by 2014

– Reduce total MSW dumped in landfills to < 25% by 2014

Hong Kong’s Initiatives

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Hong Kong Green Manufacturing Alliance

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Why We are Highly Concerned

• Southern China - hub for electrical & electronic manufacturing: > 40% of Guangdong’s industrial output

• Hong Kong companies operate > 60,000 factories in Southern China (> 10 million workers)

• > 40% of HK manufacturing companies are related to:

electronics, electrical appliance, watch, toy

• Electronics products shared 45% of HK’s exports (2004) and 14% exported to EU (USD 16.3Billion)

• Not many factories are ready for the directives

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Hong Kong’s Electronics Exports

Source: Hong Kong Trade Development Council

Major Markets Share Growth

Chinese Mainland 48% 28%

EU 14% 28%

US 12% 11%

ASEAN 7% 20%

Singapore 3% 22%

Japan 5% 23%

2004 Total Electronics Exports = US$116 B

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• A non profit making organization supported by manufacturing and trade associations

• Alliance officially formed on February 1, 2005

• Chairman: Prof. KB Chan

• Secretariat: Federation of Hong Kong Industries

• Steering committee – holds regular meeting

• Government support

Establishment of Hong Kong Green Manufacturing Alliance (HKGMA)

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Background

Members

• Federation of Hong Kong Industries

• Hong Kong Electronic Industries Association

• Hong Kong Electrical Appliances Manufacturers Association

• Hong Kong Toys Council

• Hong Kong Watch and Clock Council

• Toy Manufacturers’ Association of Hong Kong

• Hong Kong Watch Manufacturers Associations

• Federation of Hong Kong Machinery and Metal Industries

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Background

Advisors:

• Hong Kong Productivity Council

• Hong Kong Trade Development Council

• 6 universities in Hong Kong such as City University of Hong Kong and Hong Kong Polytechnic University

Observer:

• Innovation and Technology Commission, Government of Hong Kong Special Administrative Region

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Activities of HKGMA

Mission

• To facilitate transformation of HK manufacturing industry into “Green” & enhance its competitiveness

Activities• Raise awareness

Seminar, promotions, Green campaigns

• Provide guidelines for compliance Workshops, factory visits

• Technology advancement Coordinates R&D, data base, global watch

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Activities of HKGMA

• Green Standard

Set standards

Recognition of consultants, labs, factories

• Industry representation

As spokesman

Liase and advice Government

• Platform for Networking

Domestic & international

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HKGMA Delegation to Brussels (5 – 9 March 2006)

• Purpose

Start a dialogue channel with relevant European institutions

Gain understanding of and 1st hand information on related regulations

Liaise with other countries (member states)

• Meeting with European Parliament European Commission Trade and Commerce Associations

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Past GMA Events (over 3,000 participants)

Month Examples of Event Attendance

Jul 05Asia Electronics Forum & CEF China

> 300

Sep 05 World Electronics Forum (UK) > 150

Oct 05Seminar in Protec Japan, Study Mission to Japan

> 100,20

Feb 06Seminar on Restricted Substances Directive in China

> 600

Organized/Coordinated > 20 events in 2005, e.g. seminars, workshops, conferences, study missions:

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Coming Events

Date Major Event Venue Agenda Organizer

3/2006 Seminar: Latest Development of WEEE & RoHS

Hong Kong

Introduction to and Discussion on WEEE & RoHS

HKGMA

4/2006 GMA Workshop

Hong Kong

Lecture on Green Manufacturing Compliance

HKGMA

9/2006 World Electronics Forum (WEF)

Hong Kong

Seminar on Electronics Industry and Environmental Development

HKEIA

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Summary

• The 3 major economics zones will be China’s industrial growth engine > 90%

• Successful co-operative model of HK/ Guangdong helps boost the economy of Pan-Pearl River Delta

• Electronics, automotive, petrochemical industries are major economic driving forces

• HK’s technological development play an important role

• Up & coming issue – to comply with green manufacturing