Hong Kong Soars

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Ever since the British founded the city in 1841, its harbor has made Hong Kong a major stop on trade routes, its dockside warehouses stuffed with silks and other valuable wares of Asia. Hong Kong prospered as China's entrepôt, and traders like Li & Fung had tight links to the Chinese market. But when the Communist Party took power in China in 1949, exports from the mainland slowed to a trickle. Hong Kong then became a formidable manufacturing hub in its own right, until the colony's growing wealth (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 compared with manufacturers in newly emerging economies elsewhere in Asia.

Geography again saved the day. In 1979, Communist Party boss Deng Xiaoping began opening China to foreign investment, and Hong Kong manufacturers decamped to the mainland to take advantage of the vast supply of cheap workers. The trading firms stayed behind. In fact, as more work moved into China, locating a headquarters in Hong Kong, on the doorstep of southern China's industrial parks, became imperative. 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 his firm 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. With 72 sourcing offices in 41 countries, Li & Fung can tap into more than 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.

Where Hong Kong companies have truly distinguished themselves is in the growing field of supply-chain management. Rather than merely sourcing, they can supervise the entire production process, handling everything from design to quality control to transportation. Some firms even conduct investigations of factories to ensure that they comply with labor and safety regulations, thereby protecting U.S. companies from attacks by human-rights groups. "We're doing more in terms of services than we ever comprehended," says Cicetti.