Li & Fung sees opportunity in the ongoing trade battle between the U.S. and China.
“This is the biggest opportunity for Li & Fung in the last 20 years,” said Spencer Fung, the company’s chief executive officer, speaking at a press briefing Monday after the firm’s investor’s day.
The company stressed that production would diversify out of China regardless of any trade agreement, but as retailers begin to rethink their entire global sourcing strategy and look outside of China, the company believes its global network of more than 50 production countries, decades-long relationships with factories outside China and ability to move quickly among production countries will put it in a unique position to aid the transitions.
Citing a U.S. women’s wear retailer as an example, Li & Fung said it was able to reduce the retailer’s China penetration from 70 percent in 2019 to 20 percent in 2020 by exploring new production countries with existing vendors, introduce new non-China vendors with available capacity and phase out Chinese vendors that had no offshore production.
Li & Fung has itself been diminishing its total sourcing business in China from 59 percent in 2015 to 51 percent in 2018 with percentage projections to be in the upper 40 percentile in 2019. Outside of China, Li & Fung’s production volume counts $1 billion to $2 billion in Vietnam, India and Bangladesh, with $250 million to $1 billion in Indonesia, Cambodia and Latin America.
In addition, as part of its three-year plan, of which 2019 is the final year, the company has restructured upper management since August 2018 to improve efficiencies, removing a prior structure of business silos where business units oversaw all elements of supply chain solutions, instead consolidating operations into four parts, each reporting to one central overseer — account management, business development, quality assurance and sourcing and production.
Digitization is a key element in Li & Fung’s diversification strategy with Darren Palfrey hired in the newly created position of chief digital officer to oversee the company’s commitment to becoming a digital solutions provider to its retailers across sourcing, onshore wholesale and logistics as well as improving efficiencies.
Central to the digitization strategy is the company’s investment into 3-D virtual design into which $150 million has been funneled. “This is not only disrupting the traditional industry but it’s allowing our customers to completely change their business model,” said Fung, who attributes the decision as a reaction to competition posed by advancing technologies. “I can’t even put a price on this because it is changing the way they make decisions.” Though Fung is unable to disclose profitability, the company’s 3-D virtual design venture has seen a 25 percent penetration rate of customers.
Li & Fung has paused plans to list its logistics arm LF Logistics until more favorable market conditions. “We have done all the preparations already. We are just waiting for the right moment to press the button,” Fung said. “We are looking at the whole environment and we know what’s happening in the market but all the preparation is on target and we’re ready.”
Despite China’s changing relationship with American brands, Li & Fung said the country will remain attractive to retailers in the U.K., Japan and Europe as American firms move out and space becomes available.
“China’s role for American retailers will definitely change over the next two decades. Long before the trade war back in 2011 to 2013, China was already pushing production out of China by raising the minimum wage to move into tech investment,” Fung said. “Things in apparel have been moving out of China for the last six, seven years and now that will accelerate.”
As for the mass protests against the extradition bill in Hong Kong, Fung said the impact on the company will be minimal. “For the moment, I don’t think there will be any direct impact because our business is headquartered and listed in Hong Kong but all our customers are outside of Hong Kong, all of our suppliers are outside of Hong Kong so Hong Kong is almost like an administrative office. So I think whatever happens to Hong Kong, is very important to us, but it doesn’t affect our business directly because our business lies outside of Hong Kong.”