Fifth day - Coca Cola Plant, Hong Kong Monetary Authority, Hong Kong Housing Authority

It is our fifth day, and the itinerary of the day includes a visit to Swire Coca-Cola Hong Kong, Hong Kong Monetary Authority and Hong Kong Housing Authority.

After enjoying a delicious dim sum breakfast, we proceeded to Swire Coca Cola factory to start on our guided learning journey.

Swire Coca-Cola HK Limited is a wholly owned subsidiary of Swire Beverages Limited and is the leading soft drink bottler in Hong Kong. It operates 17 production lines and produces more than 64 million unit cases annually. Swire is a highly diversified global group. Many of their core businesses can be found within the Asia Pacific region, where traditionally Swire's operations have centred on Hong Kong and Mainland China. Within Asia, Swire's activities come under the group's publicly quoted arm, Swire Pacific Ltd. Their objective is to advance a framework in which their packaging is no longer seen as waste, but instead as a valuable resource for future use. Swire’s packaging delivers value to consumers by meeting their needs for convenience, portability and functionality.

The company’s tour guide, Mr Eric, brought us around the building and explained how the company operates. Upon viewing the bottling and packing process of the cans and bottles of drinks, what struck us immediately was how capital intensive the plant is. It harnessed technology (such as capping machines) and requires very few workers in the production lines. In fact, most of the workers are concentrated in the marketing and administration departments.

We learnt that Swire Coca-Cola Hong Kong is a bottling plant which bottled the Coca-Cola formula from America. This means that Swire has control over the way it bottled the drink. In order to reduce cost of production to maximise profits, Swire imported special plastic bottles from Taiwan that are a few times smaller than what we see at the supermarket. These bottles are then blown up to full size (as shown in the picture below) at Swire bottling plant before they undergo stringent sterilization and finally filled with the beverage. 

This bottling technology save space on importing the raw material (plastic bottles), reducing shipping cost which takes into account the volume of the cargo. This reduces cost of production!

Swire also taps on the environmental consciousness of people in Hong Kong to reduce its cost of production by having an extensive recycling programme all over the city. Swire invented recycling machines to collect used bottles, cans as well as glass bottles. 

These are then processed and returned to its bottling plants to be sterilized and filled with beverages again. According to Mr Eric, Swire Coca-Cola Hong Kong currently holds 80-90% market share of the beverages market in Hong Kong. This implies that it enjoys significant economies of scale. For example, bulk purchase of plastic bottles alone enables large savings of cost. To tap on this, Swire also invented its own brand of beverage-Bonaqua, a type of mineral water. 

Hence, with many common raw materials needed across the different beverages Swire bottled, the firm is able to enjoy relatively lower material costs.

Although the firm holds significant market share in Hong Kong, it is evidenced that Swire continues to engage in product differentiation. For example, it uses American’s Coke Super Chill technology that chills the drink on the inside instantly when the bottle cap is untwisted, allowing consumers to enjoy the original taste of icy Coca-Cola chilled at minus 6 degrees Celsius. With the SuperChill refrigerators, consumers get to enjoy icy beverages by Coca-Cola, anytime, anywhere in Hong Kong. This technology is so far unique only to Coca-Cola. This is where cross-elasticity of demand can be applied where the demand for Coca-Cola beverages will only fall by less than proportionate when the price of beverages by competitors such as Pepsi falls. 

Next, the Hong Kong Monetary Authority (HKMA) was our second pit stop of the day. Upon entering the building, we were greeted with security guards watching our every move. This definitely gave us a sense of vigilance and self-awareness, reminding us to behave appropriately. Soon we were wholly engaged to the vast information presented in front of us.

The Hong Kong Monetary Authority was established on 1 April 1993 as Hong Kong’s central banking institution. The HKMA’s main functions and responsibilities are governed by the Exchange Fund Ordinance and the Banking Ordinance and are set out in the Exchange of Letters between the Financial Secretary and the Monetary Authority of 25 June 2003.

The HKMA has 4 main functions:

1. To maintain currency stability within the framework of the Linked Exchange Rate system
2. To promote the stability and integrity of the financial system, including the banking system
3. To help maintain Hong Kong’s status as an international financial center, including the maintenance and development of Hong Kong’s financial infrastructure
4. To manage the Exchange Fund

The HKMA maintains Hong Kong’s Linked Exchange Rate system, under which the Hong Kong dollar is linked to the US dollar at the rate of HK7.80=US$1. It supervises one of the world’s largest and most diverse banking centers and manages US$317.3 billion in official reserves, in the Exchange Fund (up to the end of December 2012). Lastly, it supervises and develops one of the most advanced efficient financial infrastructures in the world.

In the past, Hong Kong used precious metals as a form of payment, with silver and gold being the standard mode of transactions. As years progressed, the government of Hong Kong faced a pressing problem. The value of precious metals became higher than the actual coin value which made people to melt them and us it at a higher price. As a measure, the government used coins with cheaper metals to protect their currency and its economy. With years of colonization by the British and relations with China and Taiwan, the Sterling Pound, Ren Min Bi and Tai Bi officially became a legal tender in Hong Kong.

As Hong Kong started to rise as one of the 4 Asian tigers, it was paramount for them to protect their currency from counterfeits. A wide array of measures was undertaken to achieve this. Some of them was the advanced watermark, colour changing metallic strip, value imprint, value code and specialized paper with 100% pure cotton.

We also learnt about how the banknotes are made. Firstly, the banknote paper is specially manufactured with watermark and colour changing windowed metallic thread which is delivered to the Hong Kong Noted Printing Private Limited. To provide design, both sides of the banknote are printed simultaneously using litho printed. Silk-screen printing is also applied. It is used for the printing of dynamic colour changing pattern and iridescent image. Advanced intaglio printing provides an enhanced embossed feel.  Sheets will then go through a sheet examination. Each note of the sheets is individually numbered and printed with fluorescent images with additional security features. Printed sheets are then cut into single notes. An automatic Banknote Processing System is used for the final quality check of the banknotes. 

After the final quality check, single notes are strapped in packets which will be stored in a vault while awaiting collection by the note-issuing banks. Printed notes will then be transported to the vaults of note-issuing banks for storage. 

Up to this stage, the banknotes are not considered as issued. Banknotes are issued by the three note-issuing banks, against the Government’s Exchange Rate system. 

Certificates of indebtedness are issued by the note-issuing banks to this effect. On their return to the note-issuing banks, used banknotes are redeemed against payment from the Governor’s Exchange Fund in US dollars. These redeemed banknotes are considered unissued banknotes held in stock. Used notes are screened by machines at the note-issuing banks to sort out worn, damaged or soiled notes. Unfit notes are then shredded and sent for landfill.

Mrs Chan also shared with us on the monetary policies adopted by Singapore and other countries. We were given a preview of what we will be learning next year on macroeconomics problems and policies. As this is a self-visited tour, we did not have the chance to find out what monetary policies Hong Kong adopted. However, it certainly triggers our interest in the macro aspects of economics.

Last but not least, we visited the Hong Kong Housing Authority. Established in 1973, the HA develops and implements a public housing programme with the main objective of meeting the housing needs of low income families. 

Approximately 30% of the Hong Kong population lives in public rental housing units, with 52% living in private housing. The HA plans, builds, manages and maintains different types of public housing, including rental housing estates, interim housing estates and transit centres. Currently, 720,000 public rental housing are for lease, majority of them situated at the Kowloon Peninsular. 60% of these tenants living in these public houses have a monthly income of HK$1,500 (approximately S$9,000).

Housing in Hong Kong is in the form a merit good. It is viewed by the government as having substantial private benefits for the individuals themselves. However, it gives rise to the problem of income inequity where low-income households are not able to afford housing, leading to overcrowding (underconsumption of proper unit) and homelessness. Thus, in response to the aspirations of the low and middle income families to buy their own homes, the Housing Authority has come up with 2 policies – Home Ownership Scheme (HOS) and the Tenants Purchase Scheme (TPS). The HOS aims at helping first time home buyers, with a monthly household income below HK$40,000, to purchase flats at an affordable price. The eligibility to purchase the houses is that one must have an income of less than HK$8,800 (S$52,800). The prices of the HOS flats will also be set with reference to their mortgage repayment ability. On the other hand, the TPS was introduced to enable families living in rental housing to buy their flats at a cheaper rate over the next 10 years. Under this scheme, flat prices are given a further discount of 60% on purchase within the first year, which is as low as 12% of the market value.

On top of that, the Government has also implemented the Home Purchase Loan Scheme (HPLS), Mortgage Subsidy Scheme (MSS) as well as the Buy or Rent Option (BRO) to meet the ever increasing demand for housing. Interest free loans and subsidies are provided to lower the costs of consumption, causing the consumer to internalise the external benefits and hence increasing consumption to the socially efficient level. Moreover, subsidies make housing cheaper and affordable for the low-income households, reducing the inequity problem.  

Efforts were made to enhance the sustainability of the housing works by incorporating green concepts into the planning, design and management of the public rental housing. 57 states has been redeveloped and revitalised so far. Initiatives such as micro climate studies and wind and solar panels installation, seek to increase the use of renewable energy to achieve sustainable development. With the use of computerized simulation models, the local climate can be optimized to enhance wind environment of the site, natural ventilation and daylight for the domestic flats, thermal comfort of external areas and energy efficiency. A pilot grid-connected mono-crystalline silicon PV system at Lam Tin Estate has been in operation since August 2009. Its power output can cater for part of the electricity demand of the estate’s communal facilities. What’s more, there would be free Wifi located in almost every part of these new housing schemes! All these would increase the quality of life of these tenants and the general standard of living in Hong Kong will be tremendously enhanced.

Should we, as Singaporeans feel fortunate for our affordable and spacious housing as compared to the tiny exorbitantly-priced shoebox apartments in chopstick-like skyscrapers in Hong Kong? We can make a comparison between both countries before we draw further conclusions.

Firstly, in terms of density, less than 7% of Hong Kong’s land is designated for residential use, and woodlands, grasslands and wetlands constitutes 67% of the city’s 1,108 square kilometres. As compared to Singapore, 14% of its land is allocated for housing purposes. Secondly, in terms of pricing, under the HOS scheme as mentioned above, the prices of new HOS flats will be set in accordance with the mortgage repayment ability of eligible households. For example, the price of a new HOS flat with a saleable area of 400 to 500 sq ft will fall in the range of HK$1.5 million to HK$2 million (approximately S$250000 to around S$330000).  In terms of affordability, it will take a household with an annual income of HK$300,000 (S$50000) which is approximately five years to pay off its loan using all of its annual income. 

Whereas in Singapore, citizens are eligible to utilise the Central Provident Fund (CPF) which is a compulsory comprehensive savings plan where the employer contributes 16% of the employee's monthly gross salary and the employee contributes 20% of his monthly gross salary. For example, Singaporeans are able to use the amount available (eg. $100,000) in the Ordinary Account to pay off the loan amount of the HDB flat (eg. $500,000). Therefore, this lowers the loan amount and monthly installment citizens are required to pay, making it more affordable to purchase housing in Singapore in comparison to Hong Kong.  Thirdly, in terms of rental, about 2.1 million people live in Public Rental Housing (PRH) flats in Hong Kong. PRH rent, inclusive of management and maintenance costs, is reviewed every two years and adjusted according to PRH household income. As of March 2012, PRH monthly rent ranged from HK$260 to HK$3,520 (S$43 to S$590). On the other hand, in 2011, about 2% of Singapore’s population resided in rented flats. HDB only provides subsidized rental for 1 or 2 room flats. Rent varies from S$26 to S$275 depending on household income and flat type. Households that wish to rent 3-room flats have to go to the open market, where rental for 3-room flat ranges from S$1,630 to S$2,300.

All in all, the trip to the Housing Authority was an enriching experience with a deeper understanding on how the Hong Kong government allocates housing targeted at the lower income households. The various schemes implemented had benefitted and help to curb the prevalent housing problem. However, there is still an unabated demand for housing in Hong Kong, due to the lack of government resources for identifying and developing residential sites.

This marks the end of day 5 as we proceed on to the last day of our learning journey in Hong Kong!