Family Affair: Rise of the Mittelstand

Family businesses in this city are suffering

Tomohiro Ohsumi | Bloomberg | Getty Images

Family-run businesses in Hong Kong significantly underperformed their global peers in the past year, according to a new survey, and could face slower growth ahead if protests in the city continue.

Only 37 percent of family businesses in the city recorded growth in the past twelve months, compared with the global average of 65 percent, PwC's '2014 Family Business Survey' showed. The survey covered family firms with sales turnover of between $5 million to $1 billion in over 40 countries.

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Slowing growth in China, foreign exchange volatility and a mild economic recovery in the West were all to blame for poor performance, Kitty Chung, assurance and business advisory services partner at PwC Hong Kong, told CNBC.

Much has been written about the impact of the city's four-week old pro-democracy movement on the economy and PwC said that while the full impact from the protests won't be known until much later, the tensions will affect city-wide businesses.

Earlier this month, Societe Generale economist Wei Yao wrote in a note that "social discontent and its aftermath are likely to cast a long shadow over the city's long-term economic potential."

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The China factor

Many of the firms surveyed by PwC are in the manufacturing and retail sector with bases in China, so economic performance in the mainland is their key driver of growth, Chung said.

As China faces increasing labor costs due to government measures to boost living standards and a cooling retail market, Hong Kong firms operating there have seen production costs spike in recent years. On Tuesday, data showed China's third-quarter gross domestic product (GDP) growth falling to its lowest level in nearly six years.

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"Hong Kong is an export-oriented city, and is still very much dependent on global demand. Our interviewees felt impacted by slow growth in China, as well as the U.S. and Europe, where the economic recovery has been mild," Chung added.

The tough global environment means Hong Kong firms are sticking to a "business-minded" focus, rather than focusing on family or community issues. Fifteen percent of respondents said their top priority was to improve profitability, versus the 4 percent who listed community contributions and leaving a positive legacy as important.

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Gloomy domestic fundamentals also contributed to weak sales growth for family firms. Hong Kong's total retail sales fell 1 percent from a year earlier in first eight months of 2014 and private consumption, which accounts for two-third of the city's GDP, contracted 0.9 percent in the April-June quarter.

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Becoming more 'professional'

Professionalizing family businesses was identified as a key challenge over the next five years, PwC said. This means embracing more formal organization, such as establishing an infrastructure for decision-making and official channels for communication.

"If they want to survive, family businesses [in Hong Kong] have no choice but to look into adapting faster, innovating earlier and becoming more professional in the way they run their operations," said Richard Sun, head of entrepreneurial group, PwC Hong Kong and China South.