HONG KONG -- Michael Kao spent 23 years -- and earned a small fortune -- making plastic Christmas trees in China and selling them to Wal-Mart Stores Inc. and other big retailers. Then his son, Francis, came home from college in the U.S. eight years ago and persuaded his father to trade in 10,000 factory workers for 350 computer animators and a long shot at Hollywood glory.

Today, the company that once was the world's biggest artificial-tree maker has morphed into one of Asia's biggest digital-animation studios. It is now halfway through making a new, $35 million "Teenage Mutant Ninja Turtles" movie, which Time Warner Inc.'s Warner Bros. and Weinstein Co. are set to distribute in spring of 2007.

The Kaos' radical business makeover reflects the economic pressures facing China's manufacturers: Many are flush with cash from years of dominance in low-cost industries, but they are being squeezed by low-cost global retailers, forced to cut prices even as their labor and other costs rise.

How 29-year-old Francis Kao, who works in a T-shirt and torn jeans, persuaded his 61-year-old, suit-and-tie-wearing father to let him reinvent the family business also is a story of the choices awaiting the next generation of Chinese entrepreneurs. For the Kaos, change happened because a father and son concurred that a business built from scratch by one generation wasn't right for another.

"If you try to say to somebody, 'I will give you this factory if you dedicate your life to it like I have' -- this is not going to work," says Malcolm Brocklebank, founder of Marketing & Management Solutions, a consulting firm working with Hong Kong manufacturing companies. "The next generation has to find what they and the company are good at. This is a critical and difficult thing -- you have to stand back, and (often) you and dad cannot stand back far enough to be able to see it."

Francis felt certain his father's Hong Kong-listed company, then called Boto International Holdings, was in a sunset industry when he visited its southern China tree factory after graduating with a finance degree from Sacramento State University in 1998. Next to it was the shiny, new, campus-like plant of a Chinese telecommunications-equipment maker. "Comparing that to our Christmas tree factory, it was two different worlds," the younger Mr. Kao says. "Everyone is moving up the value chain -- and that's going to drive up labor costs."

Francis's advice to his father was blunt. "He said, 'You have to destroy your business,' " the senior Mr. Kao recalls. "I thought that he may be wrong. We had large profit. Business was very good."

The senior Mr. Kao had dealt with cost pressures before. He began making trees in 1983 in Hong Kong, then moved to China two years later to ratchet costs down. In the 1990s, Wal-Mart, Kmart Corp. and Target Corp. -- which together accounted for 60 percent of Boto's sales -- cut the price they would pay for trees. Mr. Kao began making the trees' plastic and metal components in-house to prop up profit margins.

Francis sat his father down for a few PowerPoint presentations outlining the company's problems and showed him spreadsheets that projected profit margins would continue to shrink. His father wasn't entirely sold. Still, he gave his son a desk and a "special assistant" title, allowing him to drum up ideas on how to improve returns.

Francis's first thought was to get Boto online, build a brand name and then expand into manufacturing other holiday items, such as Halloween trinkets. His dad saw the logic. So Francis hired some animators and techies to build a Web site.

Consumers logged on, but the effort didn't help sales. It did, however, get Francis excited about digital animation. He pitched his father on the idea of setting up an animation unit. "I realized what I really wanted to do was animation," Francis says. "I didn't have to force it to tie in with my father's products."

To convince his father that fundamental change was needed, Francis knew he would have to relate his plan to his dad's own experience. Mr. Kao had fled Shanghai at the age of six with his family to escape China's Cultural Revolution and began working as a tailor at 13. Like many Hong Kong entrepreneurs, he had learned to adapt quickly to survive.

"I told him the Christmas tree and animation businesses are the same. We have cheaper labor costs here, the same as when he started the tree business," Francis recalls. "These businesses will come East (to Asia). I told him this is the second wave."

In 2000, Francis persuaded his father to issue a batch of new Boto shares to an outside investor to raise about $6.5 million to fund a fledgling animation studio called Imagi. "I fully supported him, but still in the beginning I worried," the senior Mr. Kao says.

The new venture put Francis on a steep learning curve, and the business faltered at times. He hired a group of animators and began work on "Zentrix," an anime-style cartoon about a red-hair princess, her pet dinosaur and her robot companion. Francis remembers setting off in 2001 for a television industry show in Cannes, France, with just six minutes of animation to exhibit. He set up a booth -- and no one stopped by. Nobody even asked for his card.

"I had no experience on how it worked. It turned out you have to make appointments with all the different buyers ahead of time," he says. "We didn't even have a script to show."

The next year, Francis returned with a full pilot of "Zentrix" and booked appointments in advance: The show was picked up by distributors in France, Germany, England, Hong Kong and Japan.

That was a pivotal year for the company. In 2002, the Kaos sold Boto's tree business to Carlyle Group, of Washington, for about $155 million. After shareholders were paid, and an overdue tax bill settled, the Kao's publicly traded company -- renamed Imagi International -- had about HK$90 million left for its fledgling animation studio.

Francis bought a controlling stake in a financially troubled Japanese computer-animation studio specializing in anime. He quickly parlayed that company's contacts at DreamWorks SKG to promote Imagi's capabilities to the U.S. movie company.

DreamWorks invited Imagi to vie with a dozen other animation studios to work on "Father of the Pride," a prime-time TV show. Imagi won the gig. Soon, Francis's animators were working on the assignment, soaking up techniques from the half-dozen experts DreamWorks sent to Hong Kong. Meanwhile, Francis, who wanted Imagi to start creating its own characters for its films, began hiring a team of executives in the U.S. to market the feature-length films he hoped to make.

Francis hired Tom Gray, the former vice president of production at Golden Harvest Entertainment Co., of Hong Kong, to be chief executive of Imagi's U.S. unit. Mr. Gray had worked on the first three "Teenage Ninja" movies, which featured live-action and actors in turtle costumes, in the early 1990s. He led Mr. Kao to Mirage Group, the turtles' creators and copyright holders, and later to Mr. Weinstein and Warner.

"I looked at the work they had done, and we felt it was a risk worth taking," said Dan Fellman, president of domestic distribution at Warner Bros Pictures.

Imagi's relatively low production cost was a big selling point. The $35 million Turtles film will be one of the most expensive movies ever made in Hong Kong, but it will cost far less than what a U.S. animation studio would spend. Imagi, which has a director and scriptwriters and artists in Hollywood, is backed by a team of 350 animators in Hong Kong, who can crank out the work for one-fifth the cost of U.S. animators, Imagi says.

The results are far from bargain-basement, Mr. Fellman says. "When I made the deal, we only saw like a minute of animation," he says. "I've seen about 45 minutes in the last couple of weeks, and I'm really pleased with what they have done."

Imagi still isn't out of the woods. After posting an almost $33 million profit in 2003, the year after the Carlyle sale, Imagi slipped to an nearly $17 million loss for the year ended March 31, 2005 -- largely the result of a tax-penalty charge from its tree-making days and a decline in revenue from its residual stake in Boto.

The Boto operation had a $29.3 million net loss for 2005, compared with profit of $20.2 million in 2002, when it was sold to Carlyle, according to Imagi, which has a 22.4 percent Boto stake. Carlyle, which still controls Boto, declined to comment.

Michael Kao reckons the family's gamble on animation will pay off. Either way, he says, the company had to change. "Today, if you are still doing manufacturing for Christmas trees, you die," he says.