- City’s classic get-rich-quick trading recipe hits a snag
- Differing cultural attitudes to earning money are in the spotlight
- International retailers say customers are in spending mood
HONG KONG IS literally the easiest place in the world to make money: surveys of economic freedom continue to place us at number one on that ranking. While not every local business succeeds, the city’s top two industries, trading financial products and trading physical ones, have enjoyed an unbroken record of success for decades, turning a poor, refugee-filled port town into one of the wealthiest communities on earth.
Yet this year, Hongkongers face a raft of issues, and have had to find creative ways to surmount them. The story teaches us about international cultures and provides tantalizing clues to the future of business.
But first, the issue at hand: Underpants.
All money-minded Hongkongers know how to make an income out of nothing, like, for example, starting with a verbal IOU to your cousin’s friend’s underpants factory across the border in mainland China. It’s a key part of our culture. While the supply-and-demand process is the same everywhere; the difference in Hong Kong is a willingness to take a chance, a naturally ability to bridge borders, and a matter of scale.
So, for example, if you live in, say, France, you might buy a bag of flour cheaply from a wholesaler next door to make 100 croissants which you sell for one euro each, doubling your money.
It’s the same process in Hong Kong, yet at an astonishing scale, arbitraging the difference in prices between our mainland China factories and our New York Fifth Avenue retailer partners.
So, for example, Hongkongers spend our summers organizing the manufacture of a billion toys, and our reward is a large chunk of the US$20 billion global toy market at Christmas.
EXAMPLE WITH NUMBERS
Here’s a real-life example, with costs included.
1) A Hongkonger can get a pair of Christmas themed underpants made by his friend in Guangdong or Xiamen for 50 US cents each, intending to sell them for six times the price.
2) The underpants are then shipped to the US in a container for as little as 20 US cents each, taking two weeks to arrive at a port in Los Angeles.
3) The boxes of pants are trucked to distribution centers which pay a US$3 wholesale price, but they end up in fancy stores marked up to US$9.99 per item, with slow-selling stock eventually being discounted to US$5.99: still a fat profit.
4) Meanwhile the Hongkonger does the math: 3,000 units of each of three designs of Christmas underpants, at US$2.50 profit per item, makes HK$175,500. And that’s just one product out of 20 product lines he or she is running. Easy money. Which is why Hong Kong is filled with luxury cars and has the world’s most expensive parking bays.
But this year, there’s a snag.
First, China has set itself tough climate change targets, which means that factories have off-days where operations are halted by power cuts. Result: a longer wait for fewer underpants.
Second, transport fees have fluctuated widely, thanks to the uneven recovery from Covid. After hitting highs in early autumn they fell back in October to about US$6,500 to purchase a container and US$1,800 to rent one, but transports costs in general are expected to be far higher than in the past.
But third comes the biggest problem: a huge backlog at ports in the West. Covid challenges mean that everyone has to make allowances, but dockworkers (“longshoremen” is the traditional term) in some Western countries are highly unionized, which tends to make them inflexible: so there’s a huge backlog of container ships floating outside ports, waiting to be unloaded.
After a two-week journey, the Christmas underpants wait for several more weeks out at sea. When they are finally unloaded, a shortage of truck drivers in some countries, the UK in particular, means there’s another long wait before they get to the stores.
Average delivery schedules now run to 70 days. Result: the Hongkongers’ Christmas underpants wouldn’t arrive until January. Disaster.
But wait – logistics people in Hong Kong are smiling again: they have found extraordinary ways around the problem. Aircraft are empty, right, as hardly anyone is flying? So why not use them as freight carriers?
Lorries have been pouring into Hong Kong International Airport and workers have been filling empty passenger planes with boxes. They simply stack them into the seats. No need to load food carts, and the flight attendants can stay at home. This has not just been happening in Hong Kong: similar trends can be seen in Japan, the middle east, and Europe.
TEN TIMES THE PRICE
Of course, air transport is far more expensive than ship transport – more than 10 times the price. In the past, this meant that only high value, time-sensitive products went by air: shipments of iPads, for example.
“But it’s different this year,” a logistics specialist told this reporter at the weekend. “After almost two years of Covid, people in the West are in the mood to treat themselves and are paying full retail prices.”
That means the Hongkongers’ Christmas underpants, costing between US$0.38 and US$1.50 to make, are flying first class to Los Angeles and being sent at high speed to shops where customers are paying US$9.99 or more for them.
STILL THE FACTORY
Journalists tend to highlight stories saying that China is no longer the factory of the world, as production has shifted to cheaper nations. While there have been some transfers of operations to places such as Vietnam, the data shows that China remains far ahead as the world’s favorite workshop. Chinese workers alone produce a third of the planet’s manufacturing output. Statistics for 2020 put the figure at US$3.85 trillion and growing.
There are at least three issues which suggest growth will continue.
- First, decades of investment in manufacturing machines in China, such as injection molding devices, means that rival countries will take a long time to catch up.
- Second, the move towards higher quality products, more technology, and incorporation of artificial intelligence in manufacturing, means that China will retain its lead over other Asian nations for at least a while—and may even steal a lead over Western ones.
- And third, Hong Kong’s particular skill with finance is another big advantage, with an increasing number of major firms choosing to list in the southern Chinese city’s stock exchange. Cross-border deal-making is a strong skill among Hongkongers. The business culture here is unlikely to change.
NOW THE BAD NEWS
But there are challenges. The Chinese government likes to claim that their “go fast and go hard” policy on Covid means that the disease is less of a problem there. This is true – but the sweeping containment strategies themselves can be the problem, with factories instantly shut down for days or weeks after a single covid infection.
Furthermore, China’s lack of support in the international media arena means that a huge percentage of the news published about the country is negative; and while some of the criticism may be accurate, a great deal of it is overly sour, with reports bordering on demonization, leading to “boycott” calls.
OUR PANTS GET WINDOW SEATS
Still, Hongkongers have survived worse, and people everywhere are rapidly losing trust in the media’s over-politicized take on every bit of news.
For Hong Kong people, the revised logistics recipe still works. This year, our underpants have window seats as they fly first class across the world. And if everything goes to plan, they may even enable us to fly first class ourselves before long.
LINKS: Like business stories? Try this one, which reports on why the world’s carmakers are looking to a small town in China
Or this one, about a US gambler who bet against Hong Kong and looks to be losing big
Image at the top: Monstera/ Pexels