GREEN MACHINE: Workers in Nanhai, Guangdong, assemble dolls for Jeffrey Lam's Hong Kong?based toy company. Its mainland staff has grown from 50 workers in 1979 to a seasonal high of 20,000 today
Thirteen years before Chinese leader Deng Xiaoping made his famous Southern Tour, Jeffrey Lam made one of his own. Just five years out of college, Lam traveled to the city of Dongguan in Guangdong province to set up a small factory to produce parts for his family's Hong Kong toy company. The year was 1979, and China had just begun to open up its economy. Unlike Deng's 1992 trip, which revitalized a wavering reform program, Lam's voyage won't make it into the history books. But his efforts, and those of thousands of other Hong Kong businessmen like him, helped turn neighboring Guangdong—and hence China itself—into an economic giant. "If it hadn't been for Hong Kong," says Guan Zhisheng, an economist at Sun Yat-sen University in Guangzhou, "then there wouldn't have been any reform and opening up in Guangdong."
As Hong Kong marks the 10th anniversary of the end of British rule, there has been no shortage of debate over the question of China's influence over its reclaimed territory. What about the opposite? When Deng put the mainland on the path that led to the end of its self-imposed isolation, Hong Kong became the example China followed as it groped for a way forward in the transition from communism to capitalism. And Hong Kong quickly established itself as a conduit for foreign technology, culture, business know-how and investment. Now, as the mainland grows richer, what's striking is the degree to which the flow of ideas, influence and investment has started to reverse. "China has learned from Hong Kong," says Michael DeGolyer, a political-science professor at Hong Kong Baptist University. "China has learned how to compete. Now it's competing with Hong Kong and forcing Hong Kong to improve."
Three decades ago, it was Guangdong province that needed a jump-start. Although it was a backward region in a backward country, Guangdong did have several advantages. Its people were eager to work hard. Its politics were removed from the power centers of Beijing and Shanghai, so Deng considered it a safe place to begin reforms. In 1980 three of China's first four special economic zones (SEZs) were set up in the Guangdong cities of Shenzhen, Zhuhai and Shantou. These experiments in capitalism attracted foreign capital through liberalized regulations and tax exemptions.
As the SEZs' market-oriented policies spread across Guangdong, the possibilities became obvious to Hong Kong businessmen. After years of remarkable growth, the city's economy in the late 1970s was in danger of stalling. Land and labor prices were climbing, making light manufacturing increasingly unaffordable. Guangdong, meanwhile, had millions of able-bodied citizens who shared language, culture and often family ties. Hong Kong entrepreneurs "just thought about bringing factories here because the production costs were lower and they could be more competitive," says economist Guan. "They didn't know they would influence Guangdong. They didn't know they would influence China."
At its crudest, this influence took the form of cash, bucketloads of it. Since 1978, Hong Kong has contributed more than $273 billion in foreign direct investment to China, nearly as much as the total from all countries combined; southern China got the lion's share. The Pearl River Delta, the part of Guangdong province closest to Hong Kong, is now home to 57,500 factories established by or producing for Hong Kong enterprises. But investment did not just mean building factories. When Lam first visited Dongguan, the trip required two ferry rides and took up to four hours. Today his factory is a two-hour drive from Hong Kong. Travel time has been vastly reduced in part because of the infrastructure investments of Hong Kong companies. Hong Kong tycoon Sir Gordon Wu's Hopewell Group built the mainland's first expressway, the 120-km Guangzhou-Shenzhen Superhighway, and more than 160 km of other key roads in Guangdong. Hong Kong companies like Hutchison Port Holdings and Swire Pacific helped develop critical Guangdong ports.
Projects like these turned the region into a manufacturing force on a global scale. From 1980 to 2002 the Pearl River Delta was, according to the book Regional Powerhouse, "the fastest-growing portion of the fastest-growing province in the fastest-growing large economy in the world." Hong Kong didn't just bankroll this party. It also supplied management expertise and knowledge of foreign markets. In the mainland's planned economy, meeting customer expectations wasn't a priority. For Hong Kong's entrepreneurs it was a matter of survival. "These small businesses were exporters of course," says Joseph Cheng, a professor at City University of Hong Kong. "They all knew that Christmas delivery was a matter of life and death. They had to deliver for a particular ship, 14 weeks before Christmas. If they couldn't make it, it was bankruptcy." At Lam's first operation in Dongguan—25 sewing machines and some paint sprayers set up in a converted municipal building—lessons were sometimes as painful for the teachers as they were for the students. Once, when the shop ran short of black paint needed to complete a run of pieces for a toy mirror set, local employees bought an extra can at a market and finished the job. The only problem was the paint was toxic, and unsuitable for use in a toy. The unsafe parts had been mixed in with the safe, so Lam had to scrap thousands of pieces. "They had no clue in making anything," Lam says of his Dongguan employees.
But they learned. Just ask F.C. Lo, once known as China's "king of cans." The Hong Kong entrepreneur shipped the first aluminum cans to the mainland in the early 1980s from a plant in Hong Kong's New Territories. In 1985 he built his first factory on the mainland in Guangzhou, an $18 million investment. With the help of foreign stakeholders, his company expanded to 20 plants, and at one time controlled about 60% of China's can market. (Lo split the company's assets with its American investors in 2001 and now runs four plants on the mainland.) In the beginning, working with mainlanders was "one-way traffic," Lo says. "We would tell them what to do because we were so strong and they didn't know anything." Today Lo competes with homegrown manufacturers. "The local guys are so good," he says. Lam, the toy manufacturer, agrees: "They are teaching us. That's the way it should go. We should not be jealous of somebody who worked for us for $34 a month who is now making $34 million a year. If they are good, they deserve it."