Introduction
The structure of global supply chains has been undergoing continuous transformation, driven by nations’ economic development, evolving economic policies, technological advancements, and, more recently, domestic and global geopolitical dynamics. Managing these supply chains is inherently complex, encompassing upstream activities like product design, research and development, midstream manufacturing and production, and downstream processes such as sales and post-sales services for consumers. Effective coordination of logistics, capital flow, and information exchange among the various stakeholders along the supply chain is crucial. In his seminal article, The Triple-A Supply Chain, Lee (2004), a renowned global supply chain expert from Stanford University, highlights that optimal supply chains must be agile in responding to short-term shocks, adaptive to medium-term changes, and aligned with the incentives of all partners.
Historically, Hong Kong has played a pivotal role as an international trade hub. However, its position has faced increasing challenges over the past two decades for three key reasons. First, the significant expansion of cargo ports across Asia, particularly in nearby mainland Chinese cities, has gradually reduced Hong Kong’s role in handling maritime trade. This shift is especially notable as 99% of Hong Kong’s exports are re-exports for producers worldwide.
Second, the rise of cross-border e-commerce has diminished the need for traditional trade intermediaries, weakening Hong Kong’s significance as a global trade intermediary.
Third, global supply chains have faced significant disruptions due to the COVID-19 pandemic (2020–2023) and heightened geopolitical tensions. In response to the growing prevalence of protectionist policies among major nations, characterized by inward-looking industrial strategies, companies worldwide, including those headquartered in China, have increasingly adopted the “China+N” strategy. This approach aims to expand and diversify production networks across multiple countries beyond China. In the United States, both the Trump and Biden administrations have advocated for reshoring manufacturing production, while governments in advanced economies have prioritized enhancing self-sufficiency in critical sectors such as semiconductors and minerals. In Asia, the Indian government has introduced initiatives to balance local manufacturing with foreign direct investment in the semiconductor industry. Meanwhile, Indonesia is striving to establish itself as a hub for electric vehicle and battery production and has proposed tariffs on Chinese imports to protect small local businesses.
The evolving economic and geopolitical landscape suggests a future where China and its neighboring nations will continue to play a dominant role in driving industrial and supply chain development across Asia. Many Chinese enterprises have shifted from exporting goods through Hong Kong to redirecting intermediate products to other nations for further processing and eventual export to major markets, particularly the U.S. and Europe. This strategy not only helps bypass tariffs targeting direct Chinese exports but also mitigates the challenges of shrinking profit margins caused by intense domestic competition. Amid these shifts, Hong Kong must identify new opportunities and redefine its strategic position as a consolidated international commercial and supply chain hub. To adapt to these emerging opportunities and challenges, Hong Kong should explore four broad directions:
- Hong Kong must redefine its role as an international center. Relying solely on its position as a bridge between China and the traditionally defined West is increasingly risky and unsustainable. Instead, Hong Kong should position itself as a gateway between China and emerging economies—both affluent and developing—in an increasingly interconnected and multimodal world.
- To strengthen its status as an international hub for trade, finance, and corporate headquarters, Hong Kong should identify segments of regional supply chains where it holds a comparative advantage. Leveraging its financial expertise, the city can support and stimulate new economic activities. A key strategic focus should be on integrating into upstream and downstream activities within regional supply chains anchored in manufacturing across other Asian nations. Notable upstream opportunities include trade finance and logistics management for both onshore and offshore trade, which will be further discussed in the next section.
- Hong Kong must adapt to escalating geopolitical tensions and the ongoing regionalization and fragmentation of global supply chains. It should strategically identify opportunities arising from new globalization trends. A key role for Hong Kong is to serve as a professional and financial hub, supporting Chinese enterprises in their efforts to “go out” by establishing export platforms and exploring foreign markets as part of the “China+N” production expansion strategy. This is particularly relevant in the Global South, including Southeast Asia and Latin America, as well as Eastern Europe. Hong Kong’s banking, consulting, accounting, legal, and accreditation sectors should play a vital role in facilitating legal and sustainable outward direct investment by mid-sized Chinese companies.
The “Smiling Curve” in Supply Chain Management
The “Smiling Curve” theory illustrates a common characteristic of production chains. The upstream and downstream stages typically yield a higher value-added-to-sales ratio or greater profitability, compared to the middle stages. For instance, upstream activities like research and development (R&D) generate substantial value-add, surpassing the contribution of midstream production and distribution phases. In the context of mobile phone production, the R&D phase significantly boosts profitability, while the midstream production stages contribute relatively less. Similarly, downstream activities, such as retail, marketing, and mobile application development, offer additional opportunities for profit generation.
In the 21st century, international trade extends far beyond the physical transportation of goods between nations. It encompasses a range of critical components, including insurance, trade finance, banking, and risk management—areas where Hong Kong has historically held a competitive edge. With a rich pool of internationally experienced talent and a robust network of companies providing high-quality professional services, Hong Kong is well-positioned to meet the evolving demands of global trade.
Hong Kong must develop a new economic model that focuses on high-value segments of industrial and other value chains, enabling better integration of business value chains with regional resources. The city’s highly transparent and rigorously regulated financial system offers distinct advantages that are difficult for other cities to replicate. Furthermore, the “One Country, Two Systems” framework and a strong common law system reinforce Hong Kong’s position as a rising hub for supply chain management. Considering the increasing fragmentation and volatility of global supply chains, Hong Kong must enhance its resilience and risk management capabilities. One strategic direction is to expand the general business segment of the insurance sector, including offering climate risk-related insurance and risk management services to support local and foreign companies in their overseas ventures.
The Competitive Advantages of Hong Kong as a Supply Chain Management Centre
Hong Kong’s competitive advantages in supply chain management can be summarized in three key areas:
1. A robust and stable financial system offering diverse financial products and services for businesses
Hong Kong’s well-regulated financial system and extensive track record in financial services make it an ideal hub for trade finance and cross-border payments. The Hong Kong Monetary Authority (HKMA) is actively modernizing the financial landscape by exploring Central Bank Digital Currency (CBDC) initiatives and collaborating with central banks in the UAE, Thailand, and Mainland China to develop cross-border CBDC payment systems. Additionally, major banks in Hong Kong are leveraging advanced technologies such as artificial intelligence and blockchain to deliver innovative solutions, including digital guarantees and enhanced frameworks for trade, supply chain, and cross-border financing.
2. A comprehensive professional services ecosystem
Businesses and investors rely on a range of trade and management services in Hong Kong that have made the city a strategic base for supply chain operations. Hong Kong’s adherence to global legal and commercial standards positions it as a leading choice for international arbitration, trade compliance, and standards certification. The Hong Kong International Arbitration Centre (HKIAC) handles a significant volume of international cases, further cementing its reputation as a key trade arbitration hub in Asia. Moreover, Hong Kong is home to over 900 institutions providing globally recognized certification services in more than 100 countries. This emphasis on professional standardization and certification remains a distinct advantage for Hong Kong in the global marketplace.
3. A robust business environment and world-class educational system ensuring a steady supply of talent
Developing strong professional service sectors requires continuous efforts in talent cultivation and attraction—a goal that Hong Kong’s tertiary education institutions and regional headquarters are actively pursuing (see Figure 1). While expertise in finance, business, and law is widely available globally, professionals with multilingual proficiency, adaptability to diverse cultural contexts, international exposure, and a global career trajectory remain rare. Hong Kong’s educational institutions focus on fostering these multifaceted skills, highlighting the unique strengths of its workforce in supply chain management. This emphasis on nurturing diverse and versatile capabilities reflects Hong Kong’s strategic approach to sustaining its competitive edge in the evolving global trade landscape.
Figure 1. Employment in Professional and Financial Services
Source: Census and Statistics Department
More Specifics about Developing Hong Kong into a Multinational Supply Chain Management Center
While the prominence of European and American markets has been gradually diminishing for mainland exports and Hong Kong’s re-exports, they remain the primary final destinations for goods originating from Mainland China. ASEAN, as the primary and secondary direct export destinations for Mainland China and Hong Kong respectively, holds considerable potential with a projected middle-class population exceeding 400 million. Despite this, many regional companies view ASEAN’s highly industrialized economies as ‘connector’ countries, linking Chinese goods and services to end consumers in Europe and North America, which collectively account for over half of global consumption. Hong Kong businesses and the government should seize this opportunity presented by the global trade rerouting.
Utilizing the global input-output tables supplied by the Asia Development Bank, Tang, Yan and Zheng (2024) discovered a continuous rise in domestic value-added exports (DVAX) from China to the U.S. This increase occurred despite a decline in direct gross exports from China to the U.S., a result of U.S. tariffs imposed on 60% of Chinese goods (Figure 2). Specifically, approximately 24% of China’s DVAX to the U.S. in 2022 was routed through third countries such as Mexico, Vietnam, and Korea.
Figure 2. China’s Gross Exports and DVA Exports to USA, All Sectors Included
Given the shifting dynamics of global supply chains, China’s preeminence in providing crucial products—such as new energy vehicles, lithium, renewable energy solutions, electronics, and infrastructure projects—offers prospects for the growth of manufacturing centers in other areas. A recent illustration of this is the decision by battery manufacturer CATL to establish a technology innovation R&D center at the Hong Kong Science Park. As Chinese businesses strategically broaden their global presence, Hong Kong is primed to exploit its competitive edge in infrastructure and professional services, potentially transforming into a top-tier supply chain management hub. The city is especially equipped to offer extensive professional services to Chinese enterprises looking to extend their market reach internationally.
A recent survey conducted by the Hong Kong Trade Development Council in the third quarter of 2023 showed a substantial surge in mainland companies intending to “Go Global.” Nearly 90% expressed plans to expand internationally within the next three years. Significantly, 62.1% of these companies aim to use Hong Kong’s professional services, underscoring an escalating demand in the service sector.
Likewise, Hong Kong-based businesses can play a pivotal role in drawing foreign investments into the mainland and aiding outbound investments by mainland funds. Beyond financial services, professionals in legal services, risk management, and accounting within the city can offer specialized expertise sought by both mainland and foreign companies.
By using Hong Kong as a base for managing transnational supply chain processes, companies can effectively supervise their production flow remotely. Hong Kong’s strengths—such as a straightforward tax system, a conducive business environment, an efficient and transparent market, and regulations meeting international standards—make it an ideal location. These advantages uniquely position Hong Kong as a bridge between international markets and China. Consequently, the city is an appealing destination for mainland production companies looking to establish regional headquarters and streamline their supply chain management operations.
References
- Lee, Hau (2004) ‘The Triple-A Supply Chain”, Harvard Business Review.
- Tang, H., Yan Y., and Zheng X. (2024) “Trade Rerouting under the US-China Trade War”, HKU Business School Working Paper.
