A century on, Hong Kong's Li & Fung is an increasingly vital bridge between East and West. The Fung brothers are at the top of their game.
Tucked away in an anonymous building in what's left of Hong Kong's garment district is a pretend American shopping mall: There's a mock Disney store next to the Bed, Bath & Beyond shop and a Restoration Hardware storefront down the hall from the Cracker Barrel Old Country Store.

All these and many more mainstream mall brands are on display halfway around the world from American shoppers because the faux mall serves as a customer showroom for Li & Fung, the $6 billion Hong Kong trading and logistics firm that has become the go-to company for globalization. Brothers Victor and William Fung have propelled a family company into a professionally managed, behind-the-scenes behemoth linking American and European consumers to factories in 40 countries. A stellar 2005 has made them FORBES ASIA's Businessmen of the Year.

"After 100 years, we have become the example of the next generation of companies, coming from Asia with a Chinese heritage, that are able to operate in the new globalized world," says Victor, 60, the chairman. "Asia is coming in a big way, and we happen to be at the right place at the right time."

Net income in the first half of 2005 rose 23% to $79 million. Revenue rose 19% to $3 billion. Since 1992 the company's compound annual rate of growth has averaged 22% for revenue and 23% for net profit. Yet 2004's dividend yield was 3%--unusually high for such a fast-growing company.

"They've ridden the tide of the interconnectedness of today's world," says HSBC Holdings' chairman, Sir John Bond, who has long known both Victor and managing director William--who is on the HSBC board--and knew their father when he ran the company. "They've transformed it from the quintessential family business to a world-class company."

Other Hong Kong business leaders admire the Fungs' deeds. "Supply-chain management with China as the focus has remade the face of world trade," says David Li, chairman of the Bank of East Asia.

Once a simple trading outfit paid to connect buyers and sellers, Li & Fung is now at the crossroads of global trade. In the past ten years it has grown from $1.2 billion to $6 billion in revenue, and analysts are banking on its $10 billion goal by the end of 2007. With sophisticated practices the Fungs have been able to boost commissions as a supply hub from 3% to between 5% and10% even as volume rose dramatically.

"A decade ago we were order-takers," Victor says. "Now, as retailers increasingly use private labels, we advise them what items to add at what price points and how it is displayed. We help flesh out the alternatives to realize their goal. We were a small part of their import department before, and we are now a part of their merchandising and product development and their management thinking."

The Fung brothers leave it to other companies to create and manage brands and to own factories that churn out goods. The Fungs don't own the outlets where goods are sold, either. But Li & Fung is well on its way to doing every step in between for its clients: designing a product, sourcing the materials and parts for the product and choosing the factories where it will be built, transporting the goods across borders and arranging customs clearance for wares packed so they are ready to put on store shelves. In other words, a virtual factory, virtual warehouse and virtual distributor, with the fee depending on the level of involvement.

But it is going one step further. Part of its evolution from middleman to supply-chain cog is a big push into the brand licensing business. Li & Fung licenses Levi Strauss Signature, Levi's Red Tab, Cannon, Royal Velvet and Disney plush toy brands. It designs, produces and delivers their products. The idea is that Li & Fung will produce those brands under license and sell them directly to only the biggest big-box retailers in the West--the Wal-Marts, Targets, Kohl's and other hypermarkets. For example, Li & Fung hires factories to make Royal Velvet towels and sells them to department stores in the U.S. The company is counting on this licensing business growing by 2008 to 10% of revenue--$1 billion--up from $80 million in 2004 and zero in 2002. It may hit those goals fast: Li & Fung has partnered with one of the bidders for Tommy Hilfiger Corp., estimated to sell for around $1.7 billion. The Fungs would source Hilfiger-branded goods and perhaps license the brand from the new owners. "We've remade the exporters' business" by acting as a virtual factory, Victor says. "Now we want to remake the importers' business."

And that is just the listed arm of the company, called Li & Fung Ltd. The two brothers, both billionaires, each own 20% of it. (Victor is a U.S. citizen and also appears on the Forbes 400 list of richest Americans; William holds British and Hong Kong passports.) They own equal shares of the parent, a holding company called Li & Fung (1937) Ltd. The private company has a range of other projects. For instance, while the listed company focuses on exports from China, the private company sells goods in China--including toys through the Toys "R" Us Asia franchise and sundries through the Circle K franchise it owns in China.

While Li & Fung is still hardly a household name in the U.S., 3.7% of America's clothing imports--$2.7 billion worth--come through it alone. China is a huge part of the sourcing (see chart, p. 41), but the company's presence is felt acutely elsewhere as well. It is Turkey's largest clothing exporter. A quarter of Vietnam's apparel exports flow through Li & Fung. The far-flung empire entails connections that can have spinoff virtues. During the SARS epidemic the company kept Chinese shipments going by using advanced video hookups instead of in-person meetings, something Li & Fung's 7,000 employees plan to repeat if there is a bird flu outbreak.

While clothing makes up 65% of the exports Li & Fung facilitates, it sources "anything you see in a department store," says Bruce Rockowitz, president of Li & Fung Ltd. He was chief executive of competitor Colby International, which the Fungs bought in 2000. "There's nobody else where you can get one-stop shopping for all product categories in all countries," he maintains.

The Fung brothers have to be experts in the increasingly complex dance of factories, shippers and merchandisers. Add to those some often unwelcome partners--government officials of both consumer and producer nations who persistently enact and revise the rules under which global suppliers must operate.

Because of its size and track record Li & Fung typically benefits from such uncertainty--as happened last year when global clothing and textile quotas were scheduled to be eliminated for WTO member nations. Li & Fung advised its clients to keep shipments from China stable, just in case countries alarmed by a surge in clothing exports from China slapped restrictions on imports. Sure enough, Europe and America got into spats with China that took months to resolve, stranding boatloads of clothing at sea. Li & Fung's clients were mostly unscathed.

Li & Fung was formed a century ago in Canton--today's Guangzhou--by Victor and William's grandfather Fung Pak-liu, whose portrait hangs in the headquarters lobby. Because Fung spoke English, he and a partner, Li To-ming, were able to start selling porcelain, antiques and handicrafts for export. Most of the family, and the company, moved back and forth between China and Hong Kong, first when trade was interrupted by the Japanese occupation of Canton, then with the Japanese occupation of Hong Kong and the end of World War II. Co-founder Li retired and sold to the Fungs in 1946.

When the Communists won China in 1949, the Fung family lost its Chinese property, and the company--then run by Victor and William's father, Fung Hon-chu--lost its role as the go-between to the West as China turned inward. "My father had to reinvent the company," William says. "We lost our raison d'être." With Chinese refugees flooding across the border, factories sprang up all over Hong Kong, and the then British territory replaced China as the source of Li & Fung's wares--firecrackers, plastic flowers, rattan furniture, toys and clothes.

Victor and William had been sent off to college in the U.S.--Victor earning bachelor's and master's degrees in electrical engineering from MIT and a Ph.D. in business economics from Harvard, and William earning a degree in engineering from Princeton and an M.B.A. from Harvard. When his father was 61 years old, "there was a frantic phone call from my mother, saying if one of you guys doesn't come back and help, your father is going to kill himself working," William remembers. That was in 1972, when dad was immersed in public affairs in the colony and the company had sprawled into a family-run conglomerate.

Both brothers wanted to stay longer in the U.S., but William headed home: "Victor talked me into it by saying, ‘You really should test all the theories you learned as an M.B.A.'" Victor stayed in the U.S., teaching at Harvard Business School before returning to Hong Kong in 1973.

Their father, who never had a chance to go to college, had a reverence for education and asked William and Victor to study the company and tell him how it should be run. They treated it as a Harvard case study. "The first thing Itold my dad was that Harvard Business School told me all about family companies. I looked around and saw all my aunts and uncles," William says, shaking his head. (He and Victor have 35 cousins.) "Here was this 23-year-old brash punk of a kid, and I was telling him I didn't like the business." Yet his father bought into William and Victor's plan to professionalize by taking the company public in 1973, allowing nonactive family members to cash out. In 1989 the brothers led one of Hong Kong's first management buyouts. They relisted the company in 1992 in Hong Kong, paying down debt from the leveraged buyout.

Both brothers had read In Search of Excellence, the seminal management tract of the 1980s, and resolved to sell off various unrelated businesses the company had acquired. There was insurance, real estate--even chartered boats. It was all sold off with this goal in sight: "We wanted to reinvent the trading company," William says.

Victor has focused on strategy and William on operations. "V is for vision, W is for work," William jokes. "There's a lot of give-and-take and back-and-forth," says Victor, but "I can think of no better partner than William. He's fantastic in execution." The Fungs live in the same apartment building and follow the Chinese tradition of gathering for lunch every Sunday.

The company remains a Chinese company with Western characteristics. "We really have developed a unique approach to business, which combines East and West," Victor says. "Our methods are very Western--what we learned at Harvard Business School--but our values are very Eastern. We value relationships and entrepreneurship." It uses three-year plans to lock in goals for managers to meet. When travel schedules permit, the brothers meet together with important customers, to get to know them.

One is hip-hop clothing company Ecko. It had struggled with shipping times for two years as it tried to satisfy a fickle clientele demanding the freshest fashions. Li & Fung helped speed that process after Ecko outsourced its purchasing office to the Hong Kong company, but first Victor and William had to get acquainted with the edgy founder, Marc Ecko. "What influences your designs?" Victor asked.

"It is music, it is Eminem," Ecko said.

"Really?" Victor said skeptically, after a long pause. "M&M?"

William began to laugh.

The professorial Victor is the more serious of the two. He prefers to be called Dr. Fung, is chauffeured around Hong Kong in a black Mercedes S-Class sedan and holds a number of prestigious civic appointments. William drives himself in a silver Mini and trains for marathons by running on a bamboo-and-palm-lined jogging path with a view of Hong Kong's harbor--where container ships loaded with made-in-China goods start their journey to Li & Fung's customers.

In a rough-and-tumble business their company has kept its integrity intact. That's vital when so much commerce relies on trust. And that's not the only way in which Li & Fung can boast of a good name. In Cantonese it is pronounced "Lay Fung," without the ampersand. That's because the Chinese characters for the two family names translate to "plentiful profit."