Legislative Council

LC Paper No. CB(1) 394/98-99
(These minutes have been seen by the Administration)

Ref: CB1/PL/TI/1

Panel on Trade and Industry
Minutes of meeting held on Saturday, 10 October 1998, at 9:30 am in the Chamber of the Legislative Council Building

Members present :

Hon CHAN Kam-lam (Chairman)
Dr Hon LUI Ming-wah, JP (Deputy Chairman)
Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Hon Cyd HO Sau-lan
Hon NG Leung-sing
Prof Hon NG Ching-fai
Hon Mrs Selina CHOW LIANG Shuk-yee, JP
Hon MA Fung-kwok
Hon CHEUNG Man-kwong
Hon HUI Cheung-ching
Hon CHAN Kwok-keung
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon SIN Chung-kai

Members attending:

Hon LEE Wing-tat
Hon LEE Cheuk-yan
Hon Fred LI Wah-ming
Hon Christine LOH

Members absent :

Hon David CHU Yu-lin
Dr Hon Philip WONG Yu-hong

Public officers attending :
For Item I

Mr CHAU Tak-hay,
Secretary for Trade and Industry

Mr TAM Wing-pong,
Deputy Secretary for Trade and Industry

Mr Eddie POON,
Principal Assistant Secretary for Trade and Industry

Mr Alan LAI,
Director-General of Trade

Mr Francis HO, JP,
Director-General of Industry

Mr Stephen Selby, JP,
Director of Intellectual Property

Mr Raymond LI,
Deputy Commissioner of Customs & Excise

Mr Kenneth MAK,
Secretary of the Chief Executive's Commission on Innovation and Technology

For Item V

Mr TAM Wing-pong,
Deputy Secretary for Trade and Industry

Mr Alan LAI,
Director-General of Trade

Mr Edward YAU,
Assistant Director-General of Trade

For Item VI

Mr Stephen Selby, JP,
Director of Intellectual Property

Mr Raymond LI,
Deputy Commissioner of Customs & Excise

Mr Eddie POON,
Principal Assistant Secretary for Trade and Industry
By invitation :
For Item VI

KPS Retail Stores Ltd.

Ms Olivia KAN,
Marketing Director

Ms Kerry LEE,
Operations Director


Mr Colin Grant
Mr Adrian J Halkes

International Federation of the Phonographic Industry (IFPI)

Mr GIOUW Jui-chian,
Regional Director, IFPI Asian Regional Office

Mr Sean MOK,
Deputy Director, IFPI Asian Regional Office

Mr Ricky FUNG,
Chief Executive Officer, IFPI (HK Group)

Motion Picture Association

Mr Jeffrey J Hardee,
Vice President, Asia/Pacific

Mr Sam HO,
Director, Anti-Piracy Operations, Hong Kong Film & Video Security Ltd

Hong Kong Kowloon & New Territories Motion Picture Industry Association Ltd (MPIA)

Mr Peter LAM Yuk-wah
Mr Andrew LEUNG
Mr Crucindo HUNG
Mr Woody TSUNG
Clerk in attendance :
Ms LEUNG Siu-kum,
Chief Assistant Secretary (1)2
Staff in attendance :
Miss Becky YU,
Senior Assistant Secretary (1)3
I.Briefing by the Secretary for Trade and Industry on the Chief Executive's Policy Address 1998

At the invitation of the Chairman, the Secretary for Trade and Industry (STI) briefed members on the key result areas (KRAs) necessary to achieve the policy objectives of enabling Hong Kong to become one of the most competitive economies in the world and of strengthening Hong Kong as an international trade centre.

First Report of the Chief Executive's Commission on Innovation and Technology

2. STI advised that one of the KRAs in enhancing the competitiveness of Hong Kong was the promotion of innovation and improved technology in manufacturing and service industries. The Administration's vision was to make Hong Kong a centre of innovation and technology in the twenty-first century. To this end, the Chief Executive appointed a Commission on Innovation and Technology (CIT) in March 1998 to study and advise on the measures and institutional arrangements necessary to realize this new vision. The First Report of CIT set out its recommendations made in the six months of its establishment was published on 9 October 1998. The Administration welcomed any views which members might have on the Report.

3. On the new vision, Mrs Selina CHOW expressed concern that too much emphasis on innovation and technology would mean that traditional manufacturing industries would be neglected. She considered that manufacturing sector was an important pillar of Hong Kong economy, and that adequate resources should be allocated to industries in this sector. Consultation with the industries should also be conducted to ensure effective use of resources to meet their individual needs. STI replied that CIT recognized the importance of the manufacturing sector. In formulating its First Report, CIT had reached out to over 300 trade and industrial organizations and other interested parties to gauge their views on the new vision of Hong Kong. Workshops and seminars had also been held to facilitate exchange of views.

4. As regards consultation with industries, the Director-General of Industry (DG of I) said that seven industry-specific standing committees were established under the Industry and Technology Development Council to give advice to the Administration on issues relating to industrial development. These committees comprised representatives from the relevant industrial associations and industry support organizations, such as the Hong Kong Productivity Council, which articulated the needs of industries. On assistance for industrial development, DG of I advised that there were currently three government funding schemes for projects contributing to innovation or technology upgrading in both the manufacturing and the service sectors, namely, the Industrial Support Fund (ISF), Services Support Fund (SSF) and Applied Research Fund (ARF). To optimize the utilization of ARF, the Administration was about to contract out the management of ARF to private venture capital firms. This would facilitate a more proactive approach in respect of project identification. Mrs CHOW remarked that the Administration should increase the transparency of application procedures of these schemes to encourage more applications.

5. On building up human capital, Mr CHEUNG Man-kwong agreed that human resources were essential in the pursuit of the new vision. He asked if measures were in place to ensure adequate supply of technological talents to undertake research and development (R&D) work in Hong Kong. STI responded that this was an important and yet difficult issue. Despite the expansion of tertiary education over the past decade, there were still shortages of local quality research scientists and engineers. These were due to the fact that many of the graduates in science and engineering chose to work in other fields that were perceived to offer better career opportunities. On the other hand, Hong Kong was constrained by the existing restrictions on importation of labour to tap the rich pool of scientists and engineers in the Mainland. Mr CHEUNG however did not agree that the incoming of technological talents should be regarded as importation of labour in view of their distinct differences. He was of the view that a more flexible approach should be adopted to attract high-calibre scientists and engineers from other places to Hong Kong. STI welcomed the suggestion and assured Mr CHEUNG that CIT would take into account his views when the issue of building up manpower for technology development was discussed in the next phase of work.

6. On the Innovation and Technology Fund (ITF) of $5 billion, Mr SIN Chung-kai emphasized the need to minimize the management cost for ITF to ensure that the majority of the Fund was used to finance projects contributing to innovation and technology upgrading. STI acknowledged Mr SIN's concern and advised that CIT would examine means to streamline the organizational structure of ITF and develop guidelines for the use of ITF as well as measures to assess the effectiveness of ITF in due course. The Administration would also review the role of ISF and SSF in relation to ITF in the light of CIT's findings.

7. As regards the accountability of ITF which was supported by public money, Mr SIN expressed worries that loss resulted from ITF projects would be borne likely by the Government while private enterprises would benefit all financial gains or income generated from ITF projects. He asked how the Administration could ensure a reasonable financial return for successful commercialization of ITF projects. STI clarified that the majority of ITF funding would be earmarked for the proposed Applied Science and Technology Research Institute (ASTRI) to undertake midstream R&D, focusing on developing concepts and innovative ideas into generic and pre-competitive technologies for eventual commercialization by firms. It would therefore be inappropriate to expect financial return for this type of R&D within a short time. He also pointed out that it took a long period of time for the Industrial Technology Research Institute (ITRI) in Taiwan to start to yield results from its R&D work. The Administration would study the past experience of Taiwan with a view to optimizing the effectiveness of ASTRI.

8. On ASTRI, Mr SIN questioned if the Government could support R&D undertaken by ASTRI in the long run, given that R&D in some overseas countries consumed substantial public expenditure. For example, the Taiwanese Government spent an annual expenditure of about $2 billion on ITRI. In reply, STI considered a direct comparison between ASTRI and ITRI inappropriate as Hong Kong being a smaller city did not require a research institute of the size of ITRI. In response to Prof. NG Ching-fai's question on the need for consultancy study regarding the establishment of ASTRI, STI explained that as CIT only focused on macro issues, operational details such as physical and staffing requirements of ASTRI had yet to be worked out. A consultancy study was therefore necessary for the planning of ASTRI.

9. Mr LUI Ming-wah considered it inappropriate to confine the remit of ASTRI to midstream R&D. Instead, the Administration should look for more diverse areas of technology development taking into account the economic development of Hong Kong and the world. DG of I said that ASTRI might undertake some downstream R&D, particularly in the early stages of establishment. He added that the Administration was committed to promoting innovation and technology in both the manufacturing and the service sectors. However, it should be noted that the distinction between manufacturing and service had become blurred, partly as a result of the nature of the activities involved, such as software development and partly the structural shift within the manufacturing sector from production to manufacturing-related services. DS of I stressed that the factor constraints had dictated that manufacturing activities in Hong Kong must be high value-added and technology intensive.

10. Mr LUI was of the view that the most effective way to commercialize innovative ideas or scientific research results was to encourage downstream R&D within the industry. He asked if financial assistance was available to support research projects of this nature, in particular those undertaken by small and medium enterprises (SMEs). DG of I advised that apart from ARF funding and the $2.5 billion Special Finance Scheme for SMEs, the Administration also had in place a comprehensive range of programmes to support SMEs through ID and other institutions. For example, the incubation programme of the Industrial Technology Centre which helped nurture business ventures in technology. Furthermore, a Small and Medium Enterprise Office would be set up within ID to strengthen the co-ordination and development of the available services and to help ensure that SMEs could make use of these services. A delegation of ID would also be visiting the United States to study their experience in promoting innovation and technology among SMEs.

11. As raising capital was essential for successful commercialization of research results, Mr CHEUNG enquired about the time-table for the establishment of a second stock market through which enterprises could raise capital. STI advised that the subject fell within the remits of the Financial Services Bureau and the Stock Exchange of Hong Kong. Nevertheless, he undertook to relay Mr CHEUNG's concern to the relevant authorities for consideration.Admin

12. Mr NG Leung-sing expressed concern about the possible duplication of R&D work between ASTRI and universities since the latter also spent some $3.2 billion annually on research. STI said that the $3.2 billion for research referred to in the Policy Address included research staff remuneration and overhead costs. There should not be any duplication as far as R&D were concerned since the universities focused mainly on basic and upstream applied research while ASTRI on midstream R&D. On the suggestion for the Administration to provide guidelines to co-ordinate R&D work between universities and ASTRI, STI considered it inappropriate to interfere with academic autonomy.

Assistance to SMEs

13. On providing support for SMEs, Mr HUI Cheung-ching asked if the Administration would take the lead to open up potential new markets for entrepreneurs. In reply, STI stressed that market exploitation was entirely a commercial decision which had to be made by entrepreneurs. As regards exportation of Hong Kong products to the Mainland, STI advised that under the "One Country, Two Systems" concept, Hong Kong, being a separate customs territory, had the same obligations and responsibilities as its fellow World Trade Organization (WTO) members. Since China was in the process of negotiating her entry into the WTO, any favourable treatment accorded to Hong Kong products in the Mainland market might create additional pressure on China to accord the same treatment to products from other WTO members. In reply to a related question, STI assured members that senior Government officials would take every opportunity to promote Hong Kong products during their visits to overseas countries.

14. Mrs Sophie LEUNG remarked that the Hong Kong Productivity Council should take a more active role in advising SMEs on pollution control measures with a view to reducing their costs in this aspect.

International trade centre

15. On product standards, both Mr LUI and Mrs LEUNG considered that the Administration should render assistance to enterprises in product testing and certification since the various tests involved for registration was very costly due to different standards set by different countries. While acknowledging the members' concern, DG of I explained that since there were private companies in the market providing testing services on a commercial basis, it would be inappropriate for the Administration to compete with these companies. However, the Government would fill in any gap as and when necessary and the Electromagnetic Compatibility Testing Centre funded by ISF and operated by the Hong Kong Productivity Council was a case in point.

16 As to whether the Administration would review the existing patent registration system in Hong Kong to ensure compatibility with the arrangements for international applications, the Director of Intellectual Property (DIP) explained that there were two major international systems for certification, namely the Patent Co-operation Treaty and the Madrid Agreement. The former was already applicable to Hong Kong. The Administration was working on some technical problems regarding the application of the latter to Hong Kong.

17. On enhancing consumer protection, Mr Kenneth TING expressed concern on the introduction of multiple safety standards for all 13 categories of children's products within such a short period from now to the year 2000. He asked if the trade had been consulted of the legislative time-table since the compliance with the standards might increase their production cost which would inevitably pass on to the consumers. The Principal Assistant Secretary for Trade and Industry clarified that of these 13 categories, seven had already been introduced; four would be introduced in 1998 and the remaining two by 2000. Consultation with relevant commercial chambers had been conducted before each safety standard was introduced to ensure that the trade would have no difficulties in employing these requirements. He stressed that the introduction of multiple safety standards for more types of children's products would not only contribute to the safety of these products on sale in Hong Kong, but also provide clearer standards and more choice for traders.

II Confirmation of minutes of previous meeting
(LC Paper No. CB(1) 297/98-99)

18. The minutes of the meeting held on 7 September 1998 were confirmed.

III.Information paper issued since last meeting

19. Members noted that a progress report on the Special Finance Scheme for Small and Medium Enterprises had been circulated vide CB(1) 171/98-99.

IV.Date of the next meeting and items for discussion

20. Members agreed to postpone the next meeting originally scheduled for 2 November 1998 to Tuesday, 3 November 1998, at 2:30 pm in order to receive a briefing by Heads of the Overseas Economic and Trade Offices.

(Post-meeting note: Two additional items on "Parallel importation of copyright articles" and "Tradelink" were subsequently included in the agenda for the meeting.)

V Sale of textile quotas
(LC Paper No. CB(1) 149/98-99(03) and (04))

21. At the invitation of the Chairman, the Director-General of Trade (DG of T) highlighted the salient points in the information paper.

22. Mr James TIEN and Mrs Sophie LEUNG declared that they were holders of textile quotas and had been involved in quota transactions.

23. Some members were of the view that speculation of textile quotas had increased the production cost of the textile industry, in particular those non-quota holding SMEs, and hence reduced their competitiveness. To facilitate a better understanding of the situation, the Administration was requested to provide information on the distribution of quotas by the number of workers employed by individual quota holders. DG of T replied that the Trade Department (TD) did not compile such statistics as textile quotas were allocated according to past performance rather than the size of companies. He added that although the Administration did not encourage quota transactions, it did not prohibit such commercial activities as the transfer of quotas operated under market forces was a more flexible and efficient way to meet the needs of the trade and to optimize the utilization of the limited amount of quotas in Hong Kong. To guard against the improper use of quotas and excessive quota transfer activities, TD had introduced a number of rules regarding transfers. For example, any quota holder who transferred out quotas in any group of categories on a temporary basis by 50% or more of its quota holdings in that group within a year would be liable to have its quota allocation in the following year reduced. A member however pointed out that unscrupulous quota holders could get round the 50% limit by asking transferees to use the transfer-out quotas in their names. In response, DG of T stressed that the spirit of the quota allocation system was to provide a stable yet flexible mechanism under which the trade could operate. Any contravention to the conditions of use of textile quotas would be subject to prosecution.

24. While acknowledging the need for stability, Mr CHEUNG Man-kwong did not agree that textile quotas should be acquired by inheritance or be held inherently in the hands of existing quota holders. He considered that if quota holders could not fully utilize the quotas allocated for two consecutive years, the unused quotas, including those which had been transferred out on temporary basis should be returned to the Administration for re-distribution to other companies. This would provide an opportunity for companies with insufficient quotas such as newcomers to obtain quotas. Mr LUI Ming-wah also considered that there were weaknesses in the existing quota allocation system such as inheritance and monopoly of textile quotas. He asked if the unused quotas could be re-distributed by way of auction. Mr TIEN however pointed out that under such circumstances, quota holders might have no choice but to utilize the quotas all by themselves. As a result, the amount of quotas in the market would be reduced and SMEs would not benefit too.

25. DG of T noted Mr CHEUNG's concern but advised that under the current quota allocation system, if a quota holder used less than 95% of his quota holding in a particular year, the unused portion would become free quota for re-allocation to other traders under the free quota scheme. On the suggestion of replacing the existing quota allocation system by auction, DG of T advised that similar proposal had been considered and ruled out by TD on the ground that this would present operational difficulties. It was also questionable whether quotas should be given to the highest bids if re-distribution by auction was adopted. Furthermore, as the quota restrictions under WTO Agreement on Textiles and Clothing would phase out by the year 2005, it would be inappropriate to introduce substantial changes to the current allocation system now.

26. Mr CHAN Kwok-keung concurred with the Administration that the current quota allocation system was effective and had been the model for many overseas countries. He considered that the system should be retained, and that speculation of quotas would not occur if manufacturers acquired the necessary quotas upon receipt of production orders. Mrs LEUNG also remarked that the existing quota allocation system based on past performance provided Hong Kong manufacturers with certainty and stability so that they could explore proactively new overseas markets and focus on developing value-added textile products instead of competing on price with foreign rivals, in particular with those in Southeast Asia. She cautioned that the Administration would have to compensate the existing quota holders in the event of substantial changes to the existing quota system as many of them had bought the quotas from the market.

VI Parallel importation copyright articles

Meeting with the KPS Retail Stores Limited (KPS)
(LC Paper No. CB(1) 298/98-99(01))

27. In response to the Chairman, Ms Olivia KAN highlighted the difficulties encountered by retailers in product procurement after the enactment of the Copyright Ordinance. She said that tremendous time and resources had to be spent on identifying distributors or exclusive licenses before any products could be imported. Ms Kerry LEE was of the view that the restrictions on parallel import under the Ordinance had not been effective in stamping out piracy as evidenced by the rampant sale of pirated goods at notorious black spots. Instead, these restrictions had limited the consumer choice of titles.

Meeting with the Movieland
(LC Paper No. CB(1) 298/98-99(02))

28. Expressing similar concerns, Mr Colin Grant said that retailers were not willing to take the risk of sourcing special niche titles in videos and sound recordings in view of the possible infringement of the Copyright Ordinance under which criminal sanction against parallel importation of copyright articles was provided. Mr Adrian Halkes added that the supply of products through licensees was slow and the products were expensive. Consumers who were fed up with waiting for products to appear on shelves and were dissatisfied with the prices of these products would turn to pirated products which were easily available and a lot cheaper. Mr Halkes considered that the Administration should focus its attention on pirated goods rather than parallel imports, and that the criminal sanction in relation to the latter should be lifted and rights owners should seek civil remedies against the parallel importation of copyright articles.

Meeting with the International Federation of the Phonographic Industry (IFPI)
(LC Paper No. CB(1) 298/98-99(03))

29. Mr Ricky FUNG was of the view that the existing regulations on parallel import were essential so that IFPI members were able to conduct their businesses in a less hostile environment and continue to invest on and release titles of local and international talents. On retailers' concern on product procurement, Mr FUNG said that IFPI established a special division to handle enquiries from retailers about information on exclusive licences after the Ordinance had commenced. IFPI members had significantly improved the availability of titles through catalogues since then. An electronic indent system had also been developed by major record companies to further improve the efficiency of product supply to consumers.

Meeting with the Motion Picture Association (MPA)
(LC Paper No. CB(1) 298/98-99(04))

30. At the invitation of the Chairman, Mr Jeffrey J Hardee highlighted the salient points in the submission. He did not agree with the allegations that the control against parallel import had fuelled piracy in Hong Kong. On the contrary, he considered that piracy would only get worse if such controls were lifted since importers would import pirate products under the disguise of parallel imports.

Meeting with the Hong Kong Kowloon and New Territories Motion Picture Industry Association Limited (MPIA)

31. Mr Woody TSUNG did not agree that the restrictions on parallel import should be responsible for high-level of piracy in Hong Kong. The recent seizure of large quantity of pirated goods was only a result of enhanced enforcement actions taken by the Administration. As regards enquires from retailers, Mr TSUNG said that efforts had been made by MPIA to facilitate product procurement by retailers. For example, some MPIA members had issued blanket authorization to major retailers to import their products from overseas countries direct.

Discussion session

32. Mrs Selina CHOW asked whether parallel imports were usually allowed if local exclusive licensees or copyright owners could not fulfil orders from retailers. Ms LEE/KPS replied that under such circumstances, retailers would have to obtain written authorization from the exclusive licensees or rights owners concerned to parallel import the products into Hong Kong. According to past experience, about 20-30% of such requests for parallel import were acceded to. The situation became however more complicated if no one in Hong Kong had the exclusive licence for the titles. Retailers had to go through the clearance process which would take months to complete. She also shared Mrs CHOW's concern that pirates would take advantage of the vacuum created by the "windows system" for the sequential release of video products and restrictions on parallel import. The rampant sale of pirated video compact discs of Japanese television series was a case in point.

33. Mr Crucindo HUNG/MPIA however considered the example referred to irrelevant as Japanese television series had never been released in other formats. Mr TSUNG/MPIA added that even if parallel imports were allowed, these could never compete with pirated goods as they were also subject to the control of the "windows system". Mr Hardee/MPA also remarked that the major cause for the widespread of piracy activities was the substantial marginal profit. It was therefore inappropriate to equate piracy with parallel import. By way of illustration, piracy was not a problem in both Korea and Taiwan despite they adopted opposite approaches in respect of control against parallel import. However, in Malaysia where parallel import was open, the sale of pirated optical discs was rampant.

34. While appreciating the difficulties experienced by distributors, Ms Christine LOH considered that there was a need to strike a balance between the interest of distributors' and the desire of consumers to have access to new releases which had stimulated copies and piracy. She asked if the trade would agree to a review on the Copyright Ordinance, in particular on provisions relating to the criminalization of parallel import. Mr MA Fung-kwok and Mr Hardee/MPA considered that criminalization was necessary to prevent the importation of counterfeit products under the mask of parallel import. Mr Hardee/MPA added that although consumers would want to get a movie on video tape as soon as it was released in the theatre, this was not possible under the existing "window system" established to protect the interest of exhibitors who had put in substantial investment on movies. Mr Hardee cautioned that there would not be any market for videos if the movie industry released movies simultaneously on video, cable television and free television.

35. Mr Halkes/Movieland however pointed out the industry had made use of the window of 18 months to exclude competitive imports and keep prices for products artificially high. Mr Hardee/MPA clarified that the 18-month period referred to the period within which parallel importation of copyright articles would be subject to both criminal and civil remedies. Nevertheless, retailers would not be liable to criminal prosecution if they had made efforts to identify distributors and rights owners or obtained authorization from exclusive licensees to parallel import products.

Meeting with the Administration
(LC Paper No. LC Paper No. CB(1)298/98-99(05))

36. Since it had been 12 months after the implementation of the Copyright Ordinance, Mr James TIEN asked if the Administration could provide the latest assessment on the effect of the Ordinance on the distributors, retailers and consumers as a whole. DIP responded that it might not be feasible for the Intellectual Property Department (IPD) to make such an assessment since it did not have the requisite professional skills nor the legal power, in particular when there were conflicting views between the distributors and the retailers. Members were unconvinced of the Administration's response as the subject fell within the remit of IPD.

37. In view of time constraints, members agreed to continue discussion of the subject at the next meeting.

VII Any other business

38. There being no other business, the meeting ended at 1:10 pm.

Legislative Council Secretariat
2 November 1998