Chapter 74

The front-page headline of the latest issue of the *Xinbao* newspaper, "Investing 50 Million to Support Education and Research, a New Giant Emerges in Hong Kong's Electronics Industry," has caused quite a stir in Hong Kong's industrial circles.

The *Xinbao* is officially known as the *Xinbao Financial News*. It was founded in 1973 by Mr. Lin Xingzhi, the former head of the finance section of the *Ming Pao Evening News*, making it the first financial news publication in Hong Kong. Although the *Xinbao* has only been in operation for seven years, it is still considered a young player in the Hong Kong newspaper industry. However, its focus on financial news has increasingly gained recognition in Hong Kong's business and industrial circles.

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Oriental Technology, an electronics company established less than half a year ago, has rapidly risen to prominence thanks to two arcade games, *Hong Kong Blocks* and *Tank Battle*.

Last Christmas, a thousand people gathered at the Lisheng Cinema due to the trial play of these two new arcade games, which caused a sensation among players. Since then, these games have swept through Hong Kong, and from the second half of last year, nearly a hundred new arcade game centers have opened in Hong Kong and Kowloon. The recent shortage of five-cent coins in Hong Kong is also a result of the popularity of these two games.

In addition to its success in Hong Kong, Oriental Technology's arcade games have also become a hit in the American and Japanese markets. According to an unnamed employee from the company, the large number of overseas orders has already scheduled Oriental Technology's production plans until the end of the year.

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This time, Oriental Technology's generous investment of 50 million Hong Kong dollars to collaborate with the Chinese University of Hong Kong (CUHK) and establish the CUHK-Oriental Electronics Laboratory and the CUHK-Oriental Semiconductor Laboratory, demonstrates the company's ambition to expand beyond the narrow confines of the gaming industry and fully enter the electronics sector.

Although Hong Kong's electronics industry has rapidly developed in recent years and has become the second largest pillar supporting Hong Kong's economy, it still suffers from low technological content and low product value-added, remaining at the lowest level of the entire industrial chain, relying on labor-intensive assembly processes, which yield low profit margins.

In recent years, forward-thinking individuals in Hong Kong have been lobbying the government to increase policy and financial support for emerging industries. However, the government's actual actions have been extremely limited. The long-awaited special research and development fund for the electronics industry was ultimately only allocated 3 million Hong Kong dollars, with CUHK and the University of Hong Kong each receiving half, much to the disappointment of industry professionals.

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This time, Oriental Technology, a company established just a few months ago, has boldly invested 50 million Hong Kong dollars to collaborate with CUHK on research and development, clearly challenging the government's inaction. The government collects tens of millions of dollars in taxes from the large and small electronics factories in Hong Kong each year. How can it justify its inaction with the excuse of non-intervention, shirking the responsibilities it should bear!

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In addition to the *Xinbao*, major Hong Kong newspapers such as the *Oriental Daily*, *Ming Pao*, and *Sing Tao Daily* have all prominently featured the news of Oriental Technology's 50 million Hong Kong dollar investment in collaboration with the University of Hong Kong on their front pages. The name of Oriental Technology has now truly become known to the general public in Hong Kong.

In fact, in addition to the recently announced collaboration with CUHK, Oriental Technology is also in detailed negotiations with the University of Hong Kong and the Hong Kong Polytechnic University. The investment amounts will be 30 million and 10 million Hong Kong dollars, respectively, and these collaborations will be finalized over the next few months.

The public relations department of Oriental Technology has already received a thick stack of fax applications for exclusive interviews from various newspapers. To address this, the company has prepared a comprehensive and detailed corporate image promotion plan spanning six months.

After screening, the public relations department will, over the next few months, selectively allow the current CEO Han Peng, the R&D Vice President Du Wenqiang, and Liang Ning, one of the company's earliest employees and now the head of the arcade game development department, to be interviewed by various newspapers.

Some will talk about the company's founding story, others will discuss the marketing strategies for expanding the arcade games in overseas markets, and still others will share the company's future plans and ambitions. In short, they will systematically and orderly present the image that Oriental Technology wants to showcase to the people of Hong Kong.

Oriental Technology will soon establish itself as a vibrant, ambitious, and dynamic high-tech enterprise in the hearts of five million Hong Kong citizens.

However, the company's major boss, Li Xuan, has quietly retreated into the ivory tower of CUHK, leaving the spotlight to Han Peng and others. His philosophy is to be high-profile in actions but low-key in personal matters.

The *Xinbao* editors may not have noticed that the entity signing the cooperation agreement with CUHK is Oriental Technology Holdings, not Oriental Electronics Technology Limited. Oriental Technology Holdings is a shell company registered in the Cayman Islands, established solely for tax avoidance.

After the finance department of Oriental Electronics was officially set up, the financial director Luo Zhiping, who was recruited from the East Asia Bank, quickly noticed the company's extremely high profitability. The gross profit margin for ordinary electronics factories in Hong Kong is considered very good if it reaches 20%, and many small contract manufacturers have gross profit margins below 10%. In contrast, Oriental Electronics' gross profit margin is as high as 200%, which is extremely high.

Such a high profit margin, if not properly managed for tax avoidance, would result in a significant portion of the profits being taken by the Hong Kong Inland Revenue Department. Tax avoidance is not tax evasion; it is entirely legal. Li Xuan had previously considered tax avoidance and even established Oriental Technology Holdings in the Cayman Islands to fully control the Hong Kong-registered Oriental Electronics. However, as a non-expert, he did not know how to proceed.

Under Luo Zhiping's management, the American distributors, who originally signed procurement agreements directly with Oriental Electronics, have all re-signed their contracts with Oriental Holdings. Oriental Holdings then marks up the actual production cost of the arcade games by 20% and signs a manufacturing contract with Oriental Electronics.

This way, most of the profits from the sale of arcade games are retained under the name of Oriental Holdings in the Cayman Islands. According to Hong Kong tax law, this part of Li Xuan's assets does not need to be reported to the Hong Kong government.

The comprehensive cooperation agreement between Oriental Technology Holdings and CUHK actually consists of three main parts. The first part involves the joint establishment of the CUHK-Oriental Semiconductor Laboratory and the CUHK-Oriental Electronics Laboratory. Oriental Technology will fully fund the equipment and research funds for both laboratories and collaborate on projects of mutual interest.

Oriental Technology has the right to screen and approve projects proposed by CUHK. Once a project is approved, Oriental Technology will provide the necessary equipment and funding based on the research plan. The project team is obligated to accept financial supervision and progress checks from Oriental Technology, and Oriental Technology Holdings will have full ownership of the patents resulting from the research.

The initial research funding for the semiconductor laboratory is 20 million Hong Kong dollars, primarily for research in areas such as integrated circuit design, semiconductor device development, and processor design. The initial research funding for the electronics laboratory is 25 million Hong Kong dollars, with priority given to research applications in computer hardware and software. After the contract was signed, Oriental Technology immediately transferred 10 million Hong Kong dollars to the designated bank accounts for each laboratory to ensure they could start operations as soon as possible.

The second part of the collaboration includes the establishment of multiple scholarships under the name of Oriental Electronics, primarily for students in electronics-related fields. Additionally, over the next three years, Oriental Technology will sponsor various campus competitions at CUHK, such as computer software design contests, operating system development contests, and electronic game development contests. There is also a research incentive program for CUHK faculty, to which Oriental Technology will contribute 5 million Hong Kong dollars.

The third part of the collaboration involves CUHK providing information and intelligence support to Oriental Technology, particularly in patent searches, as well as employee training and internships for CUHK students in the company.

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