At the Center of the World

Sea

ted in cubicles in a nondescript office in Hong Kong, 1,500 workers are turning the wheels of the global economy. Employing e-mail and the telephone, these merchandisers at Hong Kong-based trading outfit Li & Fung connect the far-flung dots of today's international manufacturing system. Without leaving their desks, they make sure that Victoria's Secret gets its bras, American Eagle Outfitters its T shirts, and Disney its stuffed Winnie the Poohs. One moment, the workers in Hong Kong are haggling over the phone with fabricmakers for the best price on denim; the next, they're ensuring that a shipment of teddy bears gets to U.S. stores on time or searching for the right factories to sew up a hot fashion line. Thousands of transactions for customers in Chicago, New York or London flow through their computers each day to be relayed to suppliers in Bangladesh, Vietnam and South Korea.

William Fung, Li & Fung's group managing director, calls this intricate logistical dance "borderless manufacturing." You might think that an activity without borders could be managed from anywhere, and maybe it could. But in practice, the global supply chain has a headquarters, and it is in the Chinese Special Administrative Region and former British colony whose economic demise has been trumpeted more times than Paris Hilton has hit a party. Hong Kong's air may be foul and its public-education system may lag that of competitors like Singapore, but somehow or other, it continues to reinvent itself. Almost 10 years after Hong Kong was returned to China by the Brits, the city remains a top regional base for scores of international companies as well as a magnet for overseas capital. Foreign direct investment in Hong Kong totaled $33.5 billion in 2005 (the most recent figures available); in Asia, only mainland China has attracted more FDI in recent years. Close ties to the booming mainland continue to drive Hong Kong's economy, which grew 8.6% in 2004 and 7.3% in 2005. (For 2006, the final figure is expected to be 6.5%.) That success is partly due to the fact that Hong Kong is home to a major concentration of firms such as Li & Fung, which help orchestrate the production and flow of goods supplied by factories in the developing world to multinational retailers. Hong Kong, says Dennis Cicetti, group managing director of product-sourcing firm William E. Connor & Associates, is "the command and control center" for much of world trade, particularly for thousands of factories in southern China that gush forth consumer goods. Although Hong Kong has relatively few factories on its own soil and a population of just seven million, only 10 nations see more trade travel across their borders. The city is "totally underappreciated," says Merle Hinrichs, chairman of Global Sources, a Hong Kong company that publishes trade magazines and provides Internet-based product-sourcing and marketing services. "It is important for reasons that have been taken for granted."

What accounts for Hong Kong's importance? Ever since the city was founded by the British in 1841, its harbor has been a major stop on trade routes, its dockside warehouses stuffed with silks and the other valuable wares of Asia. Hong Kong prospered as China's entrepôt, and its traders had tight links to the Chinese market; Li & Fung, for example, was founded as a trading company in Guangzhou in 1906. But when the Communist Party took power in China in 1949, exports from China slowed to a trickle. Hong Kong then became a formidable manufacturing hub in its own right?until the colony's growing wealth (its per-capita income is second only to Japan's in Asia) began to impede growth. By the 1970s, costs were rising so quickly that Hong Kong became uncompetitive in basic manufacturing compared with newly emerging economies elsewhere in Asia. Geography saved the day. In 1979, Deng Xiaoping began opening China to foreign investment, and Hong Kong manufacturers decamped to the mainland to take advantage of the country's vast supply of cheap workers. The trading firms stayed behind. In fact, as more and more manufacturing moved into China, locating a headquarters in Hong Kong, on the doorstep of southern China's industrial parks, became imperative. William E. Connor & Associates, for example, was originally founded as a purchasing office for foreign companies in Japan but changed its headquarters to Hong Kong in 1985.

The trading firms quickly devised a new, cross-border manufacturing system. With poor technology and training, Chinese workers could complete basic product assembly, but not the more complicated parts of a manufacturing process. So traders like the Fungs kept functions such as quality control and packaging in Hong Kong while outsourcing the assembly to factories in China. The next step came as the spread of communications technologies, improved transportation networks and freer international trade enabled trading companies to begin sourcing supplies and products from Korea, Indonesia, India?wherever they could get the best price and quality. Victor Fung, Li & Fung's group chairman, says they had hit on the "idea that you can take work apart and allocate it to other parts of the world. We took the whole thing and disaggregated it."

Think of Hong Kong's traders as the world's matchmakers. "We're the search engines to find the best place in the world" to buy a product, says Bruce Rockowitz, president of Li & Fung's sourcing business. Let's say you're an executive at a major U.S. fashion retailer looking to fill its racks with a spring collection. Stop by the offices of Li & Fung in Hong Kong's Kowloon district and its staff will track down the best fabrics, buttons and other components at the best prices and hire the right manufacturers to sew the clothes together. With 72 sourcing offices in 41 countries, the company delivers more than cheap sweaters. Li & Fung can tap into over 8,000 factories making anything from carpets to dog brushes. In 2006 alone, the company was involved in the production and shipment of some 2.4 billion shirts, toys and other consumer goods?an amount that has quintupled since 1999. "We're creating a world that is flat," says Rockowitz.