Hong Kong Soars

By Michael Schuman

Seated in a nondescript office in Hong Kong, 1,500 workers are turning the wheels of the global economy. Without leaving their desks, these merchandisers at Hong Kong--based trading outfit Li & Fung connect the far-flung dots of today's international manufacturing system. 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, workers in Hong Kong are haggling with fabricmakers for the best price of denim, and 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 may still be polluted, cramped and expensive, but somehow or other it continues to reinvent itself. Almost 10 years after the Brits returned Hong Kong to China, the city remains a top regional base for scores of international companies as well as a magnet for overseas capital. Foreign direct investment (FDI) 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 the 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 cluster 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 and a population of just 7 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 publisher and provider of Internet-based product-sourcing and marketing services. "It is important for reasons that have been taken for granted."

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 entrepot, 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.

Hong Kong's trading companies have moved beyond consumer goods. Noble Group, founded in 1987 in Hong Kong by a former steel trader named Richard Elman, sources commodities ranging from soybeans to petrochemicals to aluminum. A Chinese steel mill searching for a reliable supply of iron ore can hire Noble to find it, deliver the ore and then market the steel made from it. For some products, Noble controls the entire supply chain--for example, it grows oilseeds in Argentina, stores them in Noble-owned warehouses, ships them to China from Noble-controlled Argentine ports, processes and refines them in Noble factories on the mainland and delivers the oil to customers. With 72 offices in 42 countries, Noble is the second largest coal merchant in the world and a major exporter of Asian-grown coffee. One of its latest lines is ethanol, an alternative fuel made from agricultural products that is becoming more attractive as oil prices rise. Noble is a large investor in ethanol factories in the U.S. "We have to constantly reinvent ourselves since markets are always changing," says Elman.

Similarly opportunistic, some Hong Kong--based manufacturers are now remaking themselves by providing supply-chain-management to big customers. TAL Apparel, which makes 1 out of every 7 dress shirts sold in the U.S. at its factories in Asia and North America, nimbly adjusts production for major customers like JCPenney based on weekly sales results. In a practice linked to the "fast fashion" trend, retailers can send orders to TAL each week. TAL then ships out the product in four days or less--emergency orders can be rushed through in a mere four hours. TAL sorts the goods into boxes for shipment to each individual retail store, rather than to a warehouse. "We don't call ourselves a manufacturing company," says TAL managing director Harry Lee. "We call ourselves a service provider."

Nimble isn't cheap. Firms such as Li & Fung and Noble have invested millions in computer systems that make it possible to micromanage logistics as never before. Noble has a ship-management division that oversees the operations of 150 vessels from the comfort of a Hong Kong office. Software tracks the fleet on an onscreen map, with the position of each vessel marked by an icon. Click on one, and the computer calls up every scrap of data you can imagine--the ship's current route and historic movements, its cargo, entire crew roster and maintenance schedule. One ship, the program tells you, is dropping off 6,000 tons of fruit in Rotterdam, another is discharging steel products in Tanzania, while yet another is loading methanol in Malaysia. Port operator Hutchison Whampoa has an equally impressive system to help run its Hong Kong port. Incoming ships send data on their cargoes to Hutchison's operations center onshore. That information then gets fed through computers that optimize the loading and unloading. Hutchison has spread the technology. With 44 ports in 22 countries, including Panama, Germany and Egypt, it is now the world's largest port operator. Hong Kong outfits "are exporting expertise and management to other countries," says John Meredith, group managing director of Hutchison's port business. As Hong Kong's economy becomes increasingly knowledge-based, transferring know-how globally is "Hong Kong's fastest-growing occupation," he says.

It's the combination of lessons from the old-style China trade coupled with modern high technology that has helped Hong Kong remain a force in international commerce. "Rather than being a follower, we're leading the trends," says Peter Solomon, chief executive of Linmark Group, a Hong Kong-- based supply-chain-management company. Someone--someplace--has to be globalization's enabler. Turns out, it's that famous barren rock in the South China Sea.

TRADE WARRIOR

Thanks to its links to China, Hong Kong punches above its weight in international commerce Hong Kong's largest trading partners (2005) Rest of world 27.5% Singapore 4% Taiwan 4.8% Japan 8.2% U.S. 10.5% China 45% Hong Kong's GDP growth rate (2001-06) * Projected [This article contains a table. Please see hardcopy of magazine.] Initial publc offerings (2006) Stock exchange Capital raised ($ millions) Total IPOs Hong Kong 41133 54 London 40191 46 New York 28724 67 NASDAQ 17257 1387 Euronext Ams 12401 10

Sources: WTO; Census and Statistics Department (Hong Kong); Thomson Financial