ISE02/16-17

• Nowadays more and more business transactions are conducted through the Internet (including mobile networks) or other computer-mediated networks. Such new mode of doing businesses in which the parties interact electronically rather than by face-to-face interactions is generally called electronic commerce ("e-commerce"^{1Legend symbol denoting E-commerce is a subset of e-business. The latter refers to all business activities conducted through electronic means, including all business activities involved in various stages of the business cycle from marketing, advertising, ordering, delivery, payment to stock replenishment.}). According to the United Nations Conference on Trade and Development, business-to-business ("B2B") and business-to-consumer ("B2C") e-commerce sales are one of the fastest growing segments of global trade totalling over US$22 trillion (HK$171 trillion) in 2015.^{2Legend symbol denoting See United Nations Conference on Trade and Development (2016).}

• The flourishing global e-commerce markets reflect the many advantages e-commerce can offer over a traditional brick-and-mortar business. Among them are wider market reach and lower operating costs as it is not necessary to maintain a physical store to sell the products. E-commerce also provides a lower risk, faster avenue for local companies to penetrate international markets, which boosts the export capacity of local companies and by extension the trade performance of the economy.

• While the above advantages may drive the private sector to actively develop e-commerce business, the government may still have a facilitation role to play in promoting the e-commerce growth. This is particularly the case as small- and medium-sized enterprises ("SMEs"), being the backbone of the economy, are generally lagging behind large companies in the adoption and usage of e-commerce for the lack of the required resources and technical capabilities to manage their own e-platforms.

• In Hong Kong, the Government mainly assists SMEs in exploring business opportunities in e-commerce through organizing different events and providing funding support for export promotional activities on e-commerce platforms. Yet, the industry views that the Government can do more by measures such as strengthening SMEs' know-how on e-commerce applications and encouraging SMEs to trade online. This issue of Essentials depicts the current e-commerce landscape in the SME sector in Hong Kong, followed by the discussion of the measures adopted by Germany, Singapore, and the United Kingdom ("UK") to establish a more strategic approach towards improving SMEs' digital ability and expanding their online markets.^{3Legend symbol denoting The definition of SMEs varies between Hong Kong, Germany, Singapore and the UK. In Hong Kong, SMEs are defined as manufacturing firms which employ fewer than 100 persons, or non-manufacturing firms which employ fewer than 50 persons. In Germany, SMEs are businesses with an annual turnover of less than €50 million (HK$435 million) and with fewer than 500 employees. In the UK, SMEs are usually defined as businesses with fewer than 250 employees. In Singapore, SMEs are defined as firms with an annual sales turnover of not more than S$100 million (HK$564 million), or those with an employment size of not more than 200 employees.}

Adoption of e-commerce by SMEs in Hong Kong

• The usage of e-commerce is not so popular in Hong Kong as indicated by the survey conducted by Census and Statistics Department ("C&SD").^{4Legend symbol denoting See Census and Statistics Department (2016).} In 2014, e-commerce sales amounted to HK$401 billion in 2014, representing just 4.7% of the total business receipts. The limited usage of e-commerce was particularly evident in SMEs. In 2015, only 6.6% of them had carried out e-commerce sales activities through receiving goods or services orders online in the past 12 months before enumeration, and just about 15.3% had conducted e-commerce purchases through placing goods or services orders online over the same period. The corresponding online sales and purchase figures were much higher for large enterprises, at 18.1% and 25.6% respectively.

• The lower uptake of e-commerce in the SME sector is likely related to their weaker web presence. While more than three quarters of small-sized enterprises used Internet, only 28% owned a website/webpage or had a presence on another entity's website. The proportion of medium-sized enterprises having a web presence was remarkably higher (62%), but still fell behind large-sized businesses (91%).

• From an enterprise perspective, the shift from traditional brick and mortar to e-commerce operation involves, among others, revamping existing business models and/or business strategies. As revealed in the C&SD survey, of all the businesses in Hong Kong which did not sell online, almost 90% cited that they were inclined to maintain the current business model, e.g. face-to-face interaction, and over one-third considered their goods and services not suitable for e-commerce sales. On the other hand, those businesses adopting e-commerce sales found the benefits of increasing sale volume and customer base (71%), strengthening business agility and competitiveness (62%), and improving efficiency and streamlining workflow (55%).^{5Legend symbol denoting ibid.}

Promotion of e-commerce adoption in SMEs

• In Hong Kong, the Government promotes e-commerce adoption in the SME sector broadly through the organization of different events, and support of online marketing activities. For example, a number of workshops were held by the Hong Kong Trade Development Council in 2015-2016 to help SMEs take advantage of business/marketing opportunities arising from social media and mobile communication. Since 2015, the Government has expanded the scope of the SME Export Marketing Fund to cover export promotional activities on e-commerce platforms and electronic media, in addition to the traditional promotional means.^{6Legend symbol denoting See Office of the Government Chief Information Officer and Commerce and Economic Development Bureau (2015), Commerce and Economic Development Bureau (2016) and Trade and Industry Department (2015).}

• Nevertheless, many SMEs tend to adhere to the traditional way of doing business. According to the Small and Medium Enterprises Committee^{7Legend symbol denoting The Small and Medium Enterprises Committee is an advisory committee, tasked to advise the Government on issues affecting the development of SMEs in Hong Kong, and suggest measures to support and facilitate the development and growth of SMEs.}, SMEs in Hong Kong have the awareness on the advantages of digital and e-commerce adoption. Yet many of them lack the capability and knowledge on the practical application and associated management, and barely have an idea on what kind of digital solutions are relevant to their business. These barriers probably lessen their willingness to invest in digital infrastructure and move on to e-commerce. Among others, there are also views that the Government should provide more support to facilitate SMEs' business transformation in view of the growing popularity of trading online.^{8Legend symbol denoting See中小型企業委員會(2015).}

Promotion of SMEs e-commerce adoption in overseas places

• In overseas places such as the UK, helping SMEs go digital and trade online have been part of the national strategy to grow the digital economy. Under the UK's Information Economy Strategy, a series of awareness-raising and skills improvement sessions were held for SMEs with little or no online presence, with a view to enabling them to use technology more confidently in the first place, with a longer-term ambition to get these businesses to trade online.^{9Legend symbol denoting See Department for Business Innovation & Skills (2015a) and Department for Business Innovation & Skills (2015b).}

• Similarly, to sharpen the competitiveness of SMEs, Germany has made concerted effort to promote SMEs' digitalization and the use of advanced applications under its national "Digitalizing SMEs" initiative. Specifically, it has established dedicated agencies to share the digital know-how with trade associations and SMEs by measures such as providing support on the application of cloud computing technologies and offering SMEs ideas on how to design an online shop for B2B trade. In addition, the government has also set up a number of SME competence centres to provide more structured and practical information on digitalization and relevant training to SMEs.^{10Legend symbol denoting See Federal Ministry for Economic Affairs and Energy (2016b) and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH (2016).}

• While the online retail market in Singapore is not as sizable as other places like China and the UK,^{11Legend symbol denoting In Singapore, the size of the online retail market accounted for about 4-5% of the total retail sales in 2015, whereas in China and the UK, over 10% of total retail sales were derived from online business.} its government has introduced various facilitation measures to enable SMEs to tap the online opportunities. One of the notable measures is the partnership of the International Enterprise Singapore with major e-marketplaces such as United States-based Amazon and China's T-mall to help SMEs list their products on the global online platforms more easily.^{12Legend symbol denoting See International Enterprise Singapore (2015).} Likewise, the UK, through the Department for International Trade, has put in place an e-Exporting Programme to provide local retailers with access to some large e-marketplaces on better-than-commercial terms, including lower commission fees with "try for free" periods. Since its launch, over 500 businesses have benefited from the specialist e-commerce advice with the generation of incremental business of over £300 million (HK$3.56 billion).^{13Legend symbol denoting See UK Trade & Investment (2015) and GOV.UK (2016).}

Concluding remarks

• In Hong Kong, the Government promotes e-commerce adoption in the SME sector broadly through the organization of different events, and support of export promotional activities on e-commerce platforms with subsidies. However, the low uptake of e-commerce by SMEs is probably due in part to their lack of capability and knowledge on the application of digital solutions. In overseas places like the UK and Germany, their governments have taken a more strategic approach in promoting e-commerce adoption by providing targeted training, knowledge sharing and support to SMEs to strengthen their digital awareness and competence, with a view to enabling them to be more confident to use technology in the first place and more prepared to trade online in the future. Meanwhile, they have provided facilitation measures to encourage cross-border e-commerce through partnership with major e-marketplaces around the world to enable SMEs wishing to expand their markets to trade on these platforms with ease.

Prepared by Tiffany NG
Research Office
Information Services Division
Legislative Council Secretariat
25 October 2016