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Following is the speech delivered by the Chief Executive, Mr Tung Chee Hwa, at the Federation of Hong Kong Industries 40th Anniversary Dinner tonight (March 23) (English only):

Chairman, distinguished guests, friends, ladies and gentlemen,

It is my pleasure to be here tonight to attend the Annual Dinner of the Federation of Hong Kong Industries. I would like to take this opportunity to pay tribute to the Federation for its contribution to the industrial development of Hong Kong in the past 40 years. These 40 years have witnessed the transformation of the Hong Kong economy and Hong Kong has been moving forward from strength to strength. Essentially this fruitful process of transformation is the result of our entrepreneurs being able to meet the challenges imposed on them by change. The Federation has always played a leadership role in this process.

On this process of transformation, I couldn't help but recall the notion of "strategic inflection point" put forward by Andy Grove, the legendary Chairman of Intel, in his famous book - "Only the Paranoid Survive" - which is about the Intel experience. To Andy Grove, a strategic inflection point is a time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just likely to signal the beginning of the end.

The first historical strategic inflection point for Hong Kong business is the rise of Hong Kong as an industrial centre beginning the late 50s'. With the influx of capital and know-how from the Mainland, our entrepreneurs, through their dynamism and adaptability, managed to change the course of Hong Kong's development to that of an export led economy. Thus we saw the establishment of the textile and garment industry, the rise and fall of plastic flowers and wigs, and the foundation of our electronics, toys, watches and clocks industries in the 60s' and 70s'. Hong Kong had successfully established itself as one of the Four Dragons in Asia.

But success had never come easy. We witnessed the second strategic inflection point in the 70s'. Towards the late 70s', we had a problem with two major factors of production, namely land and labour, in both cost terms and availability terms. But again our entrepreneurs demonstrated their dynamism and adaptability to take advantage of the Open Door policy of the Mainland in 1979. Thus since the 80s' we have in fact expanded our industrial base into Southern China and now Hong Kong entrepreneurs are running over tens of thousands factories there with an industrial work force of several million, thereby solving the land and labour cost problems. The expansion is not just onto the Mainland alone. We have seen Hong Kong factories all over Asia and increasingly more in other parts of the world as well. In response to this expansion, Hong Kong is now the leading service and support centre in Asia providing headquarter functions, headquarter engineering and manufacturing functions in marketing, design, finance, logistics and general administration for production facilities outside Hong Kong.

All very familiar to you, isn't it? I'm sorry. But the point I am trying to make is that this process of transformation is at present proceeding with greater intensity and unprecedented complexity. And what such transformation do to a business is profound, and how the business manages this transformation determines its future. The transformation I am referring to is brought about by the need to restructure our economy as a result of the Asian financial crisis, the fundamental impact of globalisation and the yet not well understood impact of technological application on business.

Indeed, we are coming on to the third strategic inflection point in our economic history. Aided by:

- an explosion of new knowledge coming from the great laboratories and research centres built by governments, universities and corporations around the world;

- open and efficient markets in a growing number of countries, big and small, ready to commercialise new knowledge to create valuable products and services;

- the coming into maturity of information technology, that is, computer science and communications technology, which makes it possible to process tremendous volume of new scientific and market knowledge, and to diffuse it quickly to potential users worldwide;

the knowledge economy is suddenly with us.

There are people who say "Do we need to join the knowledge economy?" "Can we not just stay with the good old days?" While everyone else is putting in hard work to boost real productivity with high-tech, new knowledge and original ideas, do you think we can still rely on capital asset inflation for prosperity and wealth creation? Do you think in an open economy like ours, where we have to compete with other cities

in Asia, we can survive the competition? The answer is no. Indeed, knowledge economy supported by innovation and technology is the only route. Actually, we have already seen the first wave of the knowledge economy in Hong Kong, as evidenced by the entrepreneur and capital market responsiveness to the Internet boom. Every day we are hearing about the establishment of e- or i- businesses, the promotion and development of e-commerce in existing business, the formation of strategic partnerships inside and outside Hong Kong, and so on. This is all very encouraging.

But we should do more than that. We should harness the potential of technology to add value to our economic activities. And particularly information technology holds the key to our future. Technology manifests itself as products, services, essential infrastructure and tools to improve business productivity and efficiency. I am very encouraged that after the initial skepticism there is now a consensus in the community that innovation and technology is going to be an important engine of our growth in the 21st Century. But again behind the dot com facade we need to deepen our understanding of innovation and technology. We need to be able to make productive application of technology to add value to our businesses and to make ourselves more competitive in the global business environment, nowhere is more important for these to happen than in our industrial sector. And it is not just for big players but also for the medium and small manufacturers. I am glad to see that the Federation is a forceful advocate for this particular cause.

I would like to say additionally a few more words about our industries. Relying on cheaper labour cost and lower land cost on the Mainland, so much of our past and present activities are in the form of outward processing and OEM. In order to improve profitability and realise our full potential, in addition to embrace innovation and

technology, our industry needs to move up the value chain, for example, by offering product design or engineering solutions to our clients; by getting into original design manufacturing or even branding of our product, exploring niche markets, and internationalisation of our businesses. I believe Hong Kong people's creativity and entrepreneurial spirit is fully capable of achieving this goal. Furthermore, China's accession to the WTO provides a huge market for Hong Kong business to promote their products and develop their brand names on the Mainland in order to prepare for the world market.

For those who are involved in textiles and garment sector, let me say a few words. The well established Textile quota arrangement will be phased out by 2005 because of the WTO Textiles and Clothing Agreement. Hong Kong is already one of the major garment and textile producers. New York, Paris, Milan and Tokyo are the leading fashion centres of the world, and Hong Kong is increasingly known as a fashion design centre also. How can we expand our world market beyond 2005 is a major challenge for you. As a Government, we will do all we can to provide the necessary infrastructural support, in areas such as training of manpower, skill enhancement, overseas promotion, to ensure your continued success beyond 2005. Knowing you well, I am sure you are already planning ahead. I look forward to your suggestions.

Like in business, as a Government, one of the greatest challenges is to manage change. We are aware of the silent but rapid march of science and technology. We are aware of the need to embrace the knowledge economy. But in order to respond to this rapid change, over the last two years, we, as a Government, have accelerated the deregulation of our telecom industry providing more competition and lower cost. We have established the Growth Enterprise Market to provide another source of capital. We have liberalised the rules on the admission of talents to provide much needed skills for the knowledge economy. And through the Digital 21 program, the Government is also implementing the electronic delivery of services to our citizens. We are committed to making the knowledge economy work.

Furthermore, the $5 billion Innovation and Technology Fund is operating well. In addition to enhancing the existing applied Research and Development programmes in our universities, we are seeing grants being allocated for joint university - enterprise Research and Development programmes and for small business research programmes, the benefits of which, including intellectual property, will go to enterprises directly. The Science Park is now up and running, the Cyberport is moving along, and in fact in the Science Park, three international technology companies are signing up and we are falling into the familiar bureaucratic trap that supply is lagging behind demand quite significantly! As I said Cyberport is moving ahead. In the next few weeks I am going to announce the appointments to the Council of Advisors on Innovation and Technology and to the Board of Directors of the Applied Science and Technology Institute (ASTRI). This will strengthen our advisory framework with a successor to Professor Tien Chang-lin's Commission and also our Research and Development infrastructure in mid stream research.

No doubt you have heard the Financial Secretary announcing two weeks ago in his Budget Speech about the measures that strengthen our institutional support for innovation and technology. These include the establishment of an inter-bureau committee chaired by him personally to coordinate the government programmes for innovation and technology, the establishment of an Innovation and Technology Commission within the Trade and Industry Bureau, and the recruitment of technologists and scientists to strengthen professional expertise within the Administration.

Ladies and gentlemen, as the great historian Arnold Toynbee has demonstrated in his "A Study of History": civilizations rise or fall depending on whether they are able to give the right responses to challenges under demanding conditions. This situation of challenge and response is clearly where we, and in fact our competitors, are today. I am confident that our industry will be able to continue to respond effectively through the market and shrewd business sense to the challenges we face and bring Hong Kong to new heights. We will fare better than our competitors. I look forward in this process to the Federation to providing its traditional leadership to our industries.

Thank you very much.

End/Thursday, March 23, 2000

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