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Can Hong Kong Become a World Leader in Digital Infrastructure?

By Michael Bruck

Hong Kong’s tech innovation scene has evolved and developed into a thriving community and a lot has already been written about its successes and challenges. One recurring question is what will it take for it to hit a tipping point that catapults it into the realm of a true global tech center? Hong Kong already is a global leader in finance and logistics, and does not lack for entrepreneurial spirit, having been built on it. However, it still hasn’t reached a critical mass and I believe that the missing element is a “big bang” type of event, with a substantial investment to boost the ecosystem to new levels. That was what created major tech centers in Silicon Valley, Israel and China. So what could that catalyzing event be for Hong Kong? I believe it should be Digital Infrastructure. In the 20th Century, Hong Kong built a physical infrastructure that became the envy of the world. Now it needs to build on that and create a 21st century Digital Infrastructure.

 

So where to start? As advanced as Hong Kong is, one area that has remained mired in the past is plain old paperwork. The plague of paper, such as physical forms and letters, used in Hong Kong has remained unchanged for decades. How is it when so much of the world has switched to digital payments, that paper checks still remain a major payment system in Hong Kong? In most of the world digital signatures are legally binding, in Hong Kong, legal documents — such as contracts and company documents — still need to be signed with a pen, and in duplicate no less. And lest I forget, there’s that uniquely Hong Kong thing, the “chop” for stamping that little blue circle on business documents.

 

My frustration with all this reached its boiling point recently when I wasted almost my entire day on a literal paper-chase. In one case, I had to make a minor change in my mobile phone account with the mobile phone service I use for business, and to do that, I needed to go to a China Mobile shop and bring a printout of the company’s Business Registration Certificate which had to have the “chop” stamped on it, the actual physical chop to stamp the form and my Hong Kong ID card. Right after that, at HSBC, in order to trace a wayward wire transfer, I had to fill in and sign a form, which was then physically mailed to another location to be processed. At least HSBC is trying with their new Mobile Banking and PayMe apps and eCheques, although I have found that not every business will accept the new digital eCheques. So much of HSBC’s business processes remain mired in paper forms. Then, on that same day, I had to call and wait on hold for nearly an hour to verify that a form that I had sent to a brokerage firm was really sent by me answering interminable security questions (mother’s maiden name, date of birth, name of first pet, favorite food, and on and on). Finally, I had to send off a bunch of signed board and shareholder resolutions to my CPA firm and ask them to prepare certified copies of company documents that the bank requested for one of their many compliance checks which, of course, had to be sent by mail.

 

This situation will only get worse. Banks now have to comply with regulations such as KYC (Know your Client), AML (Anti-Money Laundering) and CRS (Common Reporting Standard) regulations. Mobile phone carriers need to verify their customers’ identities. Professional service firms have to verify clients’ identity and proof of address. The list goes on. But yet it’s all still done with paper based documents.

 

These examples are a symptom of a much larger problem that exists in Hong Kong and that is the divergence between the physical and digital worlds. In the physical world, things are made of atoms, but in the digital world it’s bits that matter. Value creation in the new economy is in bits, not atoms. And with emerging technologies such as AI, information and the ability to deal with it will become increasingly more important.

 

Today the biggest global companies are all digital. Google, Microsoft, Amazon, Facebook, Tencent, and Alibaba. Even Apple is mostly a software company. Even Uber and Airbnb have transformed physical industries (atoms) through their digital algorithms (bits). So bits are winning.

 

However, Hong Kong’s largest companies are all still based on atoms: logistics, property developers, airlines, shipping companies, retailers, hotel operators. The top five companies listed on the HK stock market by market cap are banks, except for Tencent, which is a Shenzhen based company.

 

Hong Kong’s physical infrastructure is unparalleled in the world and one of its major selling points. Take logistics for example: HKIA is the world’s largest airport for cargo shipments. Hong Kong’s ports. MTR, airport express (two downtown check-ins — most other places don’t even have one). Bridges and tunnels and incredibly efficient public transportation. More skyscrapers per capita than anywhere and on and on.

Hong Kong is still obsessed with physical infrastructure and continues to pour billions of investment dollars into it. In the 2017–2018 budget, HK$100 billion has been budgeted for infrastructure projects which represents the biggest part — 18.1% — of total government expenditure for next year. Some of the major projects include the Hong Kong — Zhuhai — Macau bridge, the Express Rail Link to Guangzhou and Shenzhen, a third runway at HKIA, (and an upgraded Terminal 2), the West Kowloon Cultural District, and more. Even the Belt and Road initiative is primarily an infrastructure play. Public/Private investments go into massive real-estate developments. E.g. MTR extending lines to new areas which create mini-booms in construction.

 

So why has Hong Kong invested so little in digital infrastructure compared to physical infrastructure? This is especially surprising when you consider two wonderful innovations that Hong Kong pioneered: The Octopus Card and the HKID.

 

The Octopus card was introduced in 1997, two years after the Upass card, the world’s first smart card for electronic payments was launched in Korea. It replaced cash fares on the MTR and now is also used for small payments at places like convenience stores, coffee shops, the post office. Yet, in spite of it’s early lead, it is now falling behind other mobile phone based payment systems as it’s still not possible to use an iPhone as a virtual Octopus card and you still need to carry around the plastic card.

 

The Hong Kong ID Smart Card, introduced in 2003 was another major technology milestone for Hong Kong. By 2007 all HK identity cards were replaced by the smart card which has a chip in it and stores the bearer’s biometric information for digital verification. However the digital use of the card’s biometric verification is only used when crossing through one of the border control points. When used at banks and other places, it’s back to someone eyeballing the photo on the card to make sure it matches the holder.

 

Since then, it seems that time froze over and there hasn’t been a similarly groundbreaking innovation coming out of Hong Kong. Hong Kong has also been slipping in the Global Innovation Index from the top position for Asia (7th globally) in 2013, down to fourth position (16th globally), behind Singapore, Korea and Japan.
 

Hong Kong needs a new paradigm to compete in this new world. Recent initiatives like smart city, IoT and FinTech are a good start, but remain relatively small silos of innovation. These are necessary but not sufficient conditions for the development of a thriving world-class technology ecosystem. Hong Kong needs to do something on a far bigger scale. It needs a unifying theme and I would like to propose that what is needed is a Manifesto for the digital future of Hong Kong. Otherwise, at worst, Hong Kong will slip into irrelevance in the future digital world, or at best be a smaller player in the shadow of Shenzhen.

Investments into digital infrastructure will substantially benefit the Hong Kong innovation and startup scene. Behind the success of every innovation ecosystem were large amounts of government investment. In Silicon Valley, it began in the cold-war with massive spending on radar and missile systems followed by NASA’s Apollo mission. The Defense Advanced Research Projects Agency continued to funnel funds into Berkeley and Stanford Universities and institutions like SRI continue to receive most of their funding from the US government. In Israel, the Startup Nation, the defense industry has been investing heavily into technology for decades. We are also seeing heavy investments going into technology and digital infrastructure in the Mainland, first in Beijing and more recently Shenzhen has emerged as a global technology powerhouse with companies like Huawei, Tencent and DJI.
 

Government spending on digital infrastructure in Hong Kong will also attract more private sector investment by global tech companies which will have to participate in building out parts of the digital infrastructure. This will create more demand for technology jobs and reduce the exodus of the best technology students graduating from Hong Kong’s universities. Hong Kong has proven it is willing and able to invest heavily into physical infrastructure, but it now needs to start investing into digital infrastructure. Hong Kong has also been very successful in public/private cooperation in creating its world-class physical infrastructure.

 

In my next post, I will look at how new technologies like blockchain and digital signatures can be used to transform Hong Kong into a world leading digital infrastructure hub.

This article was first published on Medium.

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