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Following is a speech by the Financial Secretary, Mr Donald Tsang, at the APEC Business Advisory Council Roundtable on Electronic Commerce this (Tuesday) morning:

Ladies and gentlemen,

It gives me great pleasure to welcome you here today. I am heartened that, despite the distractions which have occurred throughout the region and what some commentators immodestly label as the "Asian turmoil", the immensely valuable work of the APEC Business Advisory Council continues apace. We all know that Asian economies will recover from the current setbacks and those economies that were in good shape in any event, such as Hong Kong, will recover fastest. By continuing uninterrupted your deliberations in the APEC Business Advisory Council you will be ensuring that the Asian APEC economies that will emerge stronger than ever in the years ahead will have before them relevant advice on the most relevant issues facing tomorrow's business world.

The second reason I am pleased to open this Roundtable concerns the very topic you have before you today - Electronic Commerce (E-commerce). From time to time as one scans the horizon to detect issues of a strategic nature one might come across an ill-formed development of uncertain dimensions - yet one intuitively feels it is important and it sets off bells in one's head. For me E-commerce has come up on my radar as one of those issues. I cannot wax lyrically on it because I do not profess to be an expert in E-commerce and I am, therefore, not able to contribute greatly to the deliberations of the experts gathered at this Roundtable. But from the little I know I do sense that E-commerce has the potential to massively reform the way we do business and the way our communities function. Its impact could well prove to be seismic in proportion yet I trust that well managed its impact can hopefully not be cataclysmic.

Certainly the predictions of the market growth for E-commerce are staggering. As Business Week reported recently, International Data Corp. is expecting US Internet sales to explode from about US$4 billion per annum currently to US$200 billion by 2002. Here in Asia (excluding Japan) it estimates Internet commerce to zoom from US$160 million to US$16 billion in three years. These are the sorts of figures which are bound to demand the attention of any Financial Secretary.

I believe that for Hong Kong the stakes are particularly high. We have a long history as a trading community; trade and commerce is in our blood. Yet, our services sector already accounts for more than 84% of our Gross Domestic Product. This shows that inexorably Hong Kong has moved higher and higher up the value chain. Seizing the opportunities that new technologies such as E-commerce present would, therefore, represent both a natural evolution and a mandatory step if we are to retain our leadership position in the region.

But I would not wish to leave you with the impression that taking this step will be effortless even for Hong Kong. Let me share with you some insights on the particular business environment we have to consider here in Hong Kong before we formulate policies on facilitating E-commerce. Ninety percent of Hong Kong businesses are classified as Small and Medium Enterprises (SMEs). SMEs are those companies employing less than 100 people in the manufacturing sector or 50 people in the service sector. These are very small companies; often family owned and highly entrepreneurial. And there are a lot of them in Hong Kong - approximately 300,000. This profile is very different to that in the US, Europe and even many of our Asian neighbours.

A survey by the Chinese Manufacturer's Association of Hong Kong recently indicated that 82% of the survey respondents said they used computers in some form in their operations. However the average number of employees for those SMEs with computers installed was about 27 and the average number of employees for those SMEs without computers was about 11. This shows the extent to which it is the smallest businesses which are running behind. Unfortunately only about 20% of SMEs using computers reported that they had a local area network installed. Also disturbing is that only 23% of respondents reported using e-mail as a tool for external communications whereas 77% never used e-mail! Clearly our particular business profile in Hong Kong presents us with challenges in improving on those figures dramatically - but I have no doubt we will succeed.

In this respect, the APEC Business Advisory Council has a role to play in helping Governments to learn about E-commerce, come to understand it and to work through rationally the steps that we must all take to manage properly the introduction of this phenomenon. Looking down the proposed programme you have before you, I see that you are asking the very basic questions that confront me and my colleagues in Government right now:

what is E-commerce?

what do we want out of it?

what are we doing about E-commerce now?

what do we want to do about it tomorrow?

These are not rhetorical or idle questions. Personally, I will be very interested in learning from your answers to these questions. I would be particularly interested in specific, concrete examples of what Governments can and should do to promote and facilitate E-commerce especially in an environment where we have so many SMEs. But one should not expect the Government to do everything itself: we must strike a balance between the Government's role and the business sector's role. Where we should strike that balance is a question I trust you will consider in your discussions today.

It is often the case that new developments such as E-commerce put Governments into a reactive mode. It can take time for bureaucracies to react appropriately and even longer to suitably amend, revise and streamline legislation and administrative processes to facilitate these new developments. In today's fast paced world of globally mobile capital Hong Kong is acutely aware that those Governments that find themselves too slow to react will concede competitive advantage. We in Hong Kong do not wish to fall behind and we are being pro-active in our attempts to facilitate the transformation of Hong Kong into an Information Economy.

In his Inaugural Policy Address last October, the Chief Executive of the Hong Kong Special Administrative Region spelt out his vision of Hong Kong in the Information Age. Several initiatives he mentioned are now in train. Earlier this month we re-ordered the relevant policy responsibilities within Government and established a Bureau for Information Technology and Broadcasting. This step puts under one Policy Secretary responsibilities for the three sectors of telecommunications, information technology and broadcasting - responsibilities that various Bureaux shared out in the past.

Our intention is that by putting these responsibilities together we can harness synergies which arise from the convergence of these sectors and also that we might be able to take a more holistic approach to information infrastructure issues across the entire economy. Consequently we will be examining:

Hong Kong's physical information infrastructure

Applications for use of the physical information

infrastructure

Support facilities needed to sustain an information

infrastructure

Our current view is that Hong Kong is in good shape with respect to our physical information infrastructure. Our policies of liberalising telecommunications and introducing competition are now paying dividends in the market. The recent historic, early surrender of the Hong Kong Telecom's monopoly external services licence will mean that all parts of Hong Kong's telecommunications industry will face competitive supply in the near future.

We recognise, however, that we could do more at the applications level. While we are witnessing the world's first commercial development of Video on Demand here in Hong Kong, our expectation is that there is great potential for more applications in the fields of education service delivery, for health and social welfare purposes and, of course, for the development of trade and commerce - hence our interest in E-commerce.

We also envisage that we require to put in a great deal of effort in building the appropriate supporting services. These range from ensuring a relevant and well trained work force for the needs of an Information Economy to issues such as technical standards, security systems, Certification Authorities, protection of privacy and intellectual property rights. Indeed the list of issues can be so long that there is a danger of stifling our efforts by inadvertently omitting some key issues or placing incorrect priorities on them. Your feedback on what Government should be doing and the relevant priorities would be valuable input to our decision making processes.

Finally, I think I ought to conclude these remarks by calling for the maintenance of a proper sense of perspective in discussions on E-commerce. Over the centuries mankind has adapted well to numerous innovations which in their day have rivalled established ways of doing things - just think of the introduction of the telegraph , the telephone, the motor car, civil aviation, containerised shipping, paper money, or payments by cheque instead of cash. In each case we needed to amend existing or develop new legislation and the community took time before it could come to place its trust in these innovations.

Likewise with E-commerce, there will be delays and various barriers to impede its fast introduction - but many of these are beyond Government control. Establishing a large enough base of users, making the required investments in telecommunications networks and user equipment, overcoming people's initial scepticism and weaning them away from the security they have in paper based records, contracts and written signatures are examples of the significant barriers which face E-commerce.

It is, therefore, not a great surprise that E-commerce will come to dominate business to business commerce first. After all it is in these common interest groups, or closed systems, where trust is likely to establish quickly, where the terms and conditions and contractual obligations of a transaction can be readily established and where the psychological barriers must be broken down if a business wishes to be a supplier in a vertically integrated, just-in-time manufacturing process such as in the automobile or computer industries. It is instructive to note the very real progress E-commerce is making in business to business applications without the need for concerted governmental intervention.

Taking E-commerce beyond these closed systems and into the mass market brings other dimensions. It will require the engagement of ordinary citizens and will probably call for greater governmental involvement if for no other reason than that governments have much to gain by utilising E-commerce to deliver their services more efficiently to the community. However ordinary citizens are unlikely to react as promptly or as favourably to E-commerce as business users. Ordinary citizens are not as "bottom line" focussed and find change harder to embrace. The diffusion of innovations such as cheque accounts, credit cards and even mobile telephones into the mass market has taken considerable time and a great deal of learning by ordinary citizens. The diffusion of Internet access, even in an advanced economy like Hong Kong, is still in its infancy and is unlikely to support much viable mass market E-commerce at this stage. This leads me to conclude that we will witness an evolution rather than revolution with the introduction of E-commerce. The market conditions for mass market E-commerce will ripen progressively over the coming years and during this time governments will have some precious breathing space in which to address the relevant issues which are appropriately their responsibilities in the promotion and facilitation of E-commerce. Simultaneously business will experiment and learn what will, and will not, lend itself to profitable enterprise on this new medium. On that hopeful note I wish the APEC Business Advisory Council a productive Roundtable discussion on E-commerce.

End/Tuesday, April 28, 1998

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