LI & FUNG CONTINUES TO STRUGGLE

Li & Fung should transform to being a supply chain service provider to meet velocity and time requirements of businesses--to hold present customers and gain new ones.

     
       Hong Kong’s Li & Fung faces dilemma of ‘innovate or die’
     
 
       Fall from grace of world’s top sourcing group underlines China’s manufacturing evolution
 
 

       © FT montage
    
      
    
       April 11, 2017
       by: Ben Bland in Hong Kong
    



     
       Its market capitalisation has shrunk by more than 80 per cent since its 2011 peak, it failed to meet the targets in its last turnround plan, and its core customers have been hit hard by a recession and the rise of nimble retailers from Amazon to Zara.
       
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       No wonder Spencer Fung, chief executive of Hong Kong-listed sourcing group Li & Fung, has called in Ram Charan, a management guru who has advised top executives including Jeffrey Immelt of GE and Alan Mulally, formerly at Boeing and Ford.“If I have to give ourselves a report card on execution, we haven’t been the best,” admits Mr Fung, the great-grandson of the co-founder of the company, which helps retailers from Walmart to Kohl’s source their products in factories from China to Bangladesh. “We thought we were pretty good. [But] when we compare ourselves to the GEs of this world, we realise we’re only in high school and these guys are the PhDs.”Chelsey Tam, an analyst at Morningstar, an investment research house, puts it more bluntly: the world’s biggest sourcing company by revenue must “innovate or die”, she says.The fall from grace of the 111-year-old Hong Kong group underlines the transformation of China’s manufacturing sector, the changes roiling the global retail industry and the challenge of keeping a family business on track through the generations.Founded in the neighbouring Chinese city of Guangzhou in 1906, Li & Fung started out as a trading house selling handicrafts, porcelain and fireworks to the west.As the Chinese manufacturing industry grew rapidly from the 1980s, the company developed into a powerful middleman connecting US and other western retailers with the factories that could produce their goods at low cost.But after more than a decade of rapid growth, it ran into what Mr Fung calls a “perfect storm” starting in 2010. The global financial crisis drove the US retail sector into a long cyclical downturn, while the rise of fast-fashion brands such as Zara and Hennes & Mauritz, as well as internet retailers including Amazon, was undermining the very foundations of the industry.Meanwhile, with Chinese manufacturers having drastically improved their production and quality-control processes, more of Li & Fung’s customers were working with factories directly.At the same time, Li & Fung, which is still 33 per cent-owned by the family, has struggled to digest dozens of acquisitions, which analysts say papered over the company’s fundamental problems and proved difficult to integrate.“Like many family-run businesses in Asia, they did well and got big but the older generation hung on for too long, making it hard for the next generation to come in and turn it round,” says one person who knows the family.Spencer Fung, chief executive of Li & Fung © BloombergSince 2011, the company’s turnover has fallen 16 per cent, to $16.8bn last year, while pre-tax profits slumped 60 per cent to $306.8m over the same period.After hitting a peak market capitalisation of HK$205bn ($26bn) in 2011, the company’s equity valuation has slumped 86 per cent to HK$28bn.Investor confidence evaporated after Li & Fung failed to meet the targets in its last turnround plan and the company, once seen as a stalwart of Hong Kong’s industrial sector, was removed from the benchmark Hang Seng index in February because of its tumbling share price.“The company’s weak operational results over the past few years suggest a deterioration in its competitiveness and capability to adjust to disruptions in the global retail industry,” says Lillian Chiou, an analyst at Standard & Poor’s.Mr Fung, who took over as chief executive in 2014 when the company spun off its branded goods division into a separate listed company, has promised to address these problems, using technology to make the group faster, more efficient and more responsive to fast-changing consumer trends.Demonstrating new software that can help retailers make computerised three-dimensional designs of handbags, shoes and dresses — cutting out the lengthy sampling process and allowing them to sell products online before they have ever been produced — he says: “In the last 40 years, the whole supply chain was optimised for cost. Today, most customers are optimising the supply chain for speed.”But Spencer Leung, an analyst at UBS in Hong Kong, warns that factories and retailers are just as well equipped to adopt the latest design technology.He argues that the need for sourcing companies will continue to fade as the retail market bifurcates, leaving cut-price groups that will work directly with factories to reduce costs and those with unique brand or style offerings that will want more control over the production process.“The trend of more brands teaming up with factories will continue,” he says.Mr Fung retorts that many retailers do not want to do everything in-house. He insists that by investing $150m in new technology over the next three years and working with new partners from software start-ups to a Hollywood animation studio, he can make Li & Fung an indispensable partner.Anson Chan, an analyst at Daiwa Capital Markets, says Li & Fung’s decades of experience are still valuable in this regard.“Anyone can buy this new technology but Li & Fung’s strength is that they know their customers well so they can customise it,” he says.At Li & Fung’s headquarters in an industrial district in Kowloon, Mr Fung is taking some of Mr Charan’s ideas about breaking down corporate silos literally, having removed cubicles from the main office and put wheels on the desks.That is merely a baby step in his efforts to, as he puts it, “drag an analogue and backward industry into the digital world”.