Seven Types of Consumer Commerce Businesses Will Succeed in the Future

Future of Sourcing: 2021 and beyond

Anson Bailey Head of Consumer & Retail, ASPAC Head of Technology, Media & Telecoms, Hong Kong KPMG China InvestHK Japan Briefing – February 25, 2021 Each of the trends identified Future of sourcing: 2021 and beyond in this sourcing study have accelerated with the beginning of COVID-19. This Key findings to think about: new study covers a number of established industry players along with 1 • Significant economic impact of COVID-19 has impacted the entire the start-up +digital ecosystem across supply chain for some time to come. Companies have suddenly not only supply chains but the wider realized that there is a need to digitize across those supply chains. consumer +retail sectors as we see the impact of those changing consumer • So where is the next Hong Kong? Well simply stated we 2 are never going to see another Hong Kong emerge in this behaviours. new era of digitisation and we do need to prepare ourselves for this new digital era where we operate across a seamless global marketplace. 3 • Organisations need to leverage new digital technologies to ensure they can track those changing consumer behaviours, consumer journeys and consumer spending patterns with the need for more precise consumption patterns through data analytics. 4 • The globalisation of supply chains will actually see Hong Kong survive and thrive but we must be more agile as we serve those future digital supply chains with next generation data analytics, AI and automation. 5 • Talent Development and upskilling our people is critical for the future survival with both the international business mindset and more innovative thinking required to stay ahead of the curve.

Hong Kong is transforming into the next steps as a global digital supply chain services hub. The city has taken on major roles in every link of the manufacturing chain, from product design and development to the delivery of goods to consumers. Our analysis focuses on several key points:

• A high concentration of sourcing talent can be found in Hong Kong • Hong Kong’s role as a regional hub in the rest of Asia and its long-established ties around the globe show it is an ideal place to manage supply chains • Strengths in financial, legal and commercial structures make the city a preferred place to carry out business between Mainland China and the world, especially through the Greater Bay Area • Impact of the Clustering effect of cities if you combine Hong Kong together with Shenzhen and Guangzhou • Hong Kong is well placed with its internationally minded sourcing +design workforce to support diversification of manufacturing across ASEAN • The rise and rise of ESG Reporting and sustainability • Changing consumer expectations about the origin and manner of production • The Hong Kong government’s continuing support and drive of innovation • New technologies are allowing businesses to operate more flexibly and seamlessly across the globe +regionally

Launch date: mid-November 2020

<60min via existing railway Guangzhou Zhuhai (South)

Proposed new 30min facility (2019) to via existing expedite border- Hong Kong railway crossing

Macau Shenzhen

60-80min by ferry Source: MTR Corporation, China Railway, KPMG Analysis

The dates of entry into force of the FTA for the following Parties are as follows:

Broadly speaking, for goods originating from Hong Kong, individual AMS has made the following commitments:

• Singapore commits to binding all its customs duties at zero, with effect from the date on which the FTA enters into force for Singapore;

• Brunei Darussalam, Malaysia, the Philippines and Thailand will eliminate customs duties of about 85% of their tariff lines within 10 years and reduce customs duties of about another 10%

Vietnam of their tariff lines within 14 years; June 2019

Brunei • Indonesia and Viet Nam will eliminate customs duties of about Thailand Darussalam June 2019 Oct 2020 75% of their tariff lines within 10 years and reduce customs duties of about another 10% of their tariff lines within 14 years; and Singapore Malaysia June 2019 Oct 2019 • Cambodia, Laos and Myanmar will eliminate customs duties of Indonesia about 65% of their tariff lines within 15 years and reduce customs June 2019 duties of about another 20% of their tariff lines within 20 years. https://www.tid.gov.hk/english/ita/fta/hkasean/index.html

Photo source: https://www.businesstimes.com.sg/government-economy/15-countries-including-singapore-sign-rcep-the-worlds-largest-trade-pact

Creation of new 15 Asia Pacific countries free trade zone Australia 1/3 world Brunei population Signed Cambodia Businesses 29% Global GDP China reconsider their 15 Nov but will rise to Indonesia supply chains with 2020 nearly 50% by Japan key benefits of 2030 Laos harmonization Malaysia given complexities of trade within Myanmar Expected to Asia Pacific region New Zealand eliminate range of Philippines tariffs on imports Singapore over several years South Korea including Telecoms, Thailand FS, professional Vietnam services, IP, ecom +movement of business people

Source: KPMG analysis

Source: KPMG Analysis Source: World Trade Statistical Review 2020, World Trade Organisation

Guangdong Guangdong GDP $1.6 trillion (2019) GDP: $669bn (2012) Population: 115mn Population: 104mn

Vietnam Vietnam GDP: $262 billion (2019) GDP: $124bn (2012) Population: 96.2mn Population: 92mn

Source: xinhuanet / Tradingeconomics.com

Other Countries

Phones VIETNAM Computers & Related items MEXICO

Electronic Components CHINA MALAYSIA Clothing VIETNAM Leather Products GERMANY VIETNAM

Furniture VIETNAM

Motor Vehicles & Parts MEXICO Rubber & Plastic Products CHINA

Fabricated Metal Products VIETNAM CHINA 1% 2% 3% Source: Silk Road Associates

Exports, $ billion

USD bn Date of data

Mainland China 239.8 Sep-20

Bangladesh 2.7 Jul-20

Cambodia 0.9 Apr-20

India 27.6 Sep-20

Indonesia 14 Sep-20

Japan 56.8 Sep-20 Mainland China South Korea 48 Sep-20 US$239.8 bn Japan US$56.8 bn Malaysia 21.3 Sep-20 South Korea Pakistan 1.9 Sep-20 US$48 bn Pakistan Bangladesh US$2.7 bn Taiwan 30.7 Sep-20 US$1.9 bn Taiwan Cambodia The Philippines 5.1 Aug-20 US$30.7bn India US$0.9 bn Hong Kong Thailand 19.6 Sep-20 US$27.6 bn Thailand Vietnam US$19.6 bn US$27.5 bn Vietnam 27.5 Sep-20 Philippines Malaysia Total ex mainland China 256.1 US$5.1 bn US$21.3 bn Indonesia Source: https://tradingeconomics.com/country-list/exports US$14 bn

236 226

176 177 163

144 USA Imports 131 111 104

83 84 87 85

337 339 69 65 67 54 60 54 316 48 49 41 283 26 25 2125 15 18 13 11 11 15 8 8 8 8 6 5 6 6 7 8 8 8 6 5 5 5 0 0 0 0 1 2 2 1 1 1 1 1 224 Bangladesh Cambodia, China Pakistan, Vietnam Morocco, Turkey Indonesia Ethiopia Other SSA 185 184 171 Myanmar, Sri Lanka, Tunisia Africa

140 Malaysia India

91 95 2010 2014 2018 2023e 2028e 2033e 80 68 69 68 72 72 72 59 54 59 46 51 49 44 48 46 45 48 51 34 39 41 38 33 32 33 34 36 34 34 35 14 6 7 9 11 13 6 6 6 6 5 5 0 0 1 2 3 4 China Vietnam CAM Bangladesh Cambodia, India, Sri Indonesia Jordan Other SSA Ethiopia and CAR Myanmar, Lanka, Africa Malaysia Pakistan

2010 2014 2018 2023e 2028e 2033e

Import volume of apparel from origin countries into the EU and US, ‘000 FFEs. Source 2010-2018 historical; Seabury database / 2023-2033 projections; Maersk and Duke Global Value Chains project

Japan has been the second largest foreign investor in Hong Kong for the past five years. Number of Japanese regional headquarters, regional offices, and local offices in HK County/ territory 2016 2017 2018 2019 2020 where the parent company was 1,393 1,413 1,398 located 1,376 1,378 Mainland of China 1,123 1,264 1,591 1,799 1,986

Japan 1,376 1,378 1,393 1,413 1,398 717 717 728 750 745 USA 1,353 1,313 1,351 1,344 1,283 UK 656 675 712 713 665 Singapore 382 408 427 446 453

Germany 357 382 396 420 400 420 428 421 431 427 Others 2,739 2,805 2,884 2,905 2,840

Total 7,986 8,225 8,754 9,040 9,025 239 233 244 232 226

2016 2017 2018 2019 2020 Source: Census and Statistics Department, HKSAR Government Regional headquarters Regional offices Local Offices

Japan exports of electrical, electronic equipment to Hong Kong in 2019 Top 5 categories by export value in Value 2019 (US$) Electrical, electronic equipment $12.40B

Commodities not specified $6.42B US$12.4 Bn according to kind

Pearls, precious stones, metals, $2.48B coins

Machinery, nuclear reactors, boilers $2.03B

Essential oils, perfumes, cosmetics, $1.21B Top 3 categories: toiletries

Total Electronic Integrated Diodes, Transistors Electric capacitors, US$33.6Bn Circuits & and Similar Semi- fixed, variable or Microassemblies conductor Devices adjustable (preset) $5.21B $1.59B $1.25B

Source: https://tradingeconomics.com/japan/exports/hong-kong

July 2019: Feb 2021: 1st store in 7 outlets in HK HK

Vietnam

India

Indonesia Bangladesh

Malaysia Thailand Cambodia

Hong Kong’s dynamic start-up ecosystem

source: InvestHK

Source: The Hong Kong Government budget, Finance committee paper, Our Hong Kong Foundation, KPMG analysis

Source: Global Innovation Index 2020

Key Trend Description Enablers + Examples of Startups

Source new or alternative Bio-based/ Synbio Recycling Localized materials in local markets with the help of material materials technology for production purpose.

Automation/ Robotics Blockchain 3D design

Enhance productivity, Digitized efficiency and production transparency of supply chain through digitization.

Shift production back to On-demand production 3D printing Localized domestic markets or production/ neighbouring regions to nearshoring reduce risks and react to customer demand faster.

Source: http://www.themillsfabrica.com/tfsg2020/announcement/

The government and regulators intend to develop Hong Kong into a green and sustainable finance hub for GBA and Asia Pacific.

May 2020

Framework for HKMA to assess a • Hong Kong Monetary Authority financial institution’s readiness to manage climate and environmental • Securities and Futures Commission related risks • Environment Bureau 6 key elements: • Financial Services and the Treasury (i) governance, (ii) corporate planning Bureau and tools (incl. scenario analysis & • Hong Kong Exchanges and Clearing stress testing), (iii) risk management Limited process, (iv) business policies, • Insurance Authority products and services, (v) performance and resources, and (vi) disclosure and • Mandatory Provident Fund Schemes communication. Authority

COVID-19 pulse survey November 2020

KPMG International — home.kpmg/consumersnewreality

30 Four consumer trends — Overview

COVID-19 is forcing all sectors to reconsider their business models, their capital structure and their routes to market. There are four critical macro trends expected to shape how these considerations need to be made.

Economic Erosion impact of trust

Home is Rise of the digital new hub

Building on Prime Day in the U.S., shopping festivals will become a critical driver of sales both online and in-store. We expect more retailers will join existing festivals or create their own festivals and we have seen record numbers for Singles Day.

Alibaba's Single Black Friday and JD’s 6.18 Festival 10.10 Day Day Festival Cyber Monday generated $29 billion in A newholiday? generated $74.1 billion generated $10.8 billion in 2020sales in sales for 2020 sales for 2020

An extended event almost doubled (85.6%) Alibaba’s Singles Day GMV in 2020

250,000 brands participated Over 470 brands achieved more than 31,000 overseas RMB100 million in GMV

Lower tax rates as compared to other High web traffic: developing countries: According to a recent study done by Go Globe Hong Kong places tax only on the profits earned by shows that the majority of Hong Kong consumers the businesses with Hong Kong jurisdiction. That spend a lot of time (4–5 hours per day) shopping simply means that incomes earned by the online. businesses in Hong Kong will be taxed, while This simply means they spend more than 24 businesses that deal in Hong Kong but earn their hours per week on just shopping online. That is income out of Hong Kong’s jurisdiction are not something great for e-commerce businessmen. liable to pay taxes. High traffic internet users can be a great indicator It helps them in reducing poverty and provides e- Lower tax High web for startup entrepreneurs. commerce business opportunities to both foreign Records have clearly shown the purchasing power and local entrepreneurs. rates traffic of Hong Kong people who likely spend more on online stores than purchasing it on the spot. Hong Kong is an Strong annual growth rate: ecommerce Easy availability of company formation agents in Hong Kong: Hong Kong has shown great annual growth Hub and has been ranked number 15 under the Formation agencies provide you agents that help UNCTAD B2C ecommerce Index 2018 that is Company or guides e-commerce entrepreneurs to set up quite high and impressive as compared to Strong annual their business platforms through the internet. other Asian countries. This shows how e- formation Hong Kong provides you such agents who help the commerce has played a brilliant part in growth rate entrepreneurs make their lives simpler by guiding influencing the economic development of agents with questions and difficulties they face during Hong Kong. setting up their e-commerce business. Hence, it Poverty rates of Hong Kong are decreasing eliminates barriers faced by most foreign entities giving locals a higher purchasing power- that when trying to do global business. is something considerable for the startup entrepreneurs. Source: Medium.com

“Japanese toy manufacturer Bandai Namco offers a textbook example of Hong Kong's appeal. The China market now accounts for 30 percent of Bandai's consumer spend with 70 percent of manufacturing done in Mainland China and the rest in Japan. As the company looks to diversify operations in Southeast Asia, it regards Hong Kong as a trading and finance hub where the city's international mindset and expertise serve its business the best. Mark Yim, Bandai Logipal’s Deputy General Manager in Hong Kong, says, “We expect to see an increase in ecommerce from our hub in Hong Kong that covers Thailand, Taiwan and Singapore.”

The word ‘retail’ is likely to become redundant and will be replaced by ‘consumer commerce’; seven type of business models will emerge as winners going forward: 1 2 3 4 5 6 7

Platform Multi-national National Heroes Value based Smaller country Category Independent/ businesses are the retailers will will focus on retailers focused brands specialists with Mutuals with go-to-market transform into cross-border (discounters) will offer true expertise direct to consumer growing channels for B2B platform partnerships to evolve their online and product model will bypass online and B2C markets businesses, grow create synergies value proposition traditional retailers loyalty via M&A and scale programs and rapid- response supply chain

© 2021 KPMG, a Hong Kong partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited (“KPMG International”), a private English company limited by guarantee. All rights reserved. Printed in Hong Kong, China. 37 Seeing a “shifting In Conclusion focus” to Chinese +ASEAN markets with the speed of change of Emerging more digitally Technologies Rise of minded consumers like AI purpose led in this ‘new normal’ +Blockchain +3D businesses with a Think Customer +virtual tech will greater focus on impact ESG+ global supply We need to have new chains sustainability mind-set from a Innovation will with HK well placed customer viewpoint! be critical in the to be the centre for Get ready for increased future and we must professional transparency! Get services ready for those focus on Talent changing Development where we upskill consumer and reskill with behaviours Digital +AI with Covid-19 +Analytics accelerating Digital!

Anson Bailey

Head of Consumer & Retail, ASPAC Head of Technology, Media & Telecoms, Hong Kong KPMG China

[email protected] +852 2978 8969

Keigo Yoshida

Director, Global Japan Practice KPMG China

[email protected] +852 2685 7603

kpmg.com/cn/socialmedia

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