HONG KONG — Sourcing giant Li & Fung revealed its intentions to spin off its logistics business into a separate entity on the Hong Kong Stock Exchange in the first half of 2019, another slimming down of the conglomerate, which is navigating a challenging retail environment and an intensifying U.S.-China trade war.
While the company, a key partner for global retailers such as Wal-Mart and Kohl’s, ended the six months to June 30 with profit attributable to shareholders on a like-for-like basis down 19 percent from a year ago, and guided a tough outlook in the coming half, chief executive officer Spencer Fung downplayed the impact of trade tensions at an earnings conference held Wednesday.
The potential $200 billion tariffs, if realized, would impact less than 2 percent of Li & Fung’s turnover, the ceo said. While acknowledging that there had been “a knee-jerk reaction” to the protectionist measures coming out of the White House, he assured that the firm’s approximately 8,000 customers were not rushing out of China, and the country remained competitive for a number of reasons, including because other countries lack production capacity.
“We have 20 to 30 years of relationships with [the business community and vendors in] over 50 countries so we are actually the best positioned to get a hold of that little capacity that’s left in those countries,” Fung said.
For the six months ended June 30, the company reported profits of $50 million, down from $91 million the same time a year ago excluding the divestment of its three product verticals in beauty, sweaters and furniture. Turnover decreased 9.6 percent to $5.86 billion.
The executive believed the current tensions would likely result in geographic rebalancing of production rather than a decrease of capacity in China. If U.S. firms were to rush to a country such as Vietnam, he said, the company that “provides the best volume and price will win [the factory]. That might crowd out some European retailers — so China may not reduce capacity because other people would fill the [China] production that would be pushed off of somewhere else.”
He noted China’s domestic consumer market was growing very fast as well. “A lot of our factories have started or actually turned into domestic [Chinese] factories because the demand is so high.”
While there was an undeniable trend to diversify supplier base overall — in large part due to rising costs in China — he warned that a move to a different country could affect quality which may take up to two years to stabilize.
“So yes, you may avoid a temporary 10 to 25 percent tariff, but if the quality of the product is not good, the customer may not buy it or they may return it so that will come back to hit you after a while,” he said.
Li & Fung’s total sourcing business from China has dropped to 49 percent this year compared with 54 percent in 2016. By category, apparel was moving faster out of China than hard goods as there are fewer countries that had the capability, Fung noted. Apparel destinations included Bangladesh, Vietnam, India, Pakistan, Jordan, Philippines, Turkey and parts of Central America. While in footwear, top alternatives included Vietnam, India, Indonesia, Italy, Spain and eastern Europe.
Li & Fung’s logistics business, which has been a fast-growing segment for the company since its launch, saw turnover increase 10.9 percent to $543 million for the six months ended June 30. Core operating profit grew at 15.1 percent to $38 million. China has been its main driver, accounting for 57 percent of the business while the rest of Asia is 33 percent, and other markets 10 percent. It operates 235 distribution centers and moves 500,000 20-foot equivalent units every year. The proposed public float would still retain Li & Fung as a controlling shareholder.
The spin-off would follow an overarching plan of simplifying the business. Li & Fung’s turnover in 2017 was $13.5 billion, down from $20.7 billion in 2017, after shedding Global Brands Group, its Asian consumer and healthcare business, and most recently, three product verticals.
The company also detailed it was seeking changes in leadership with recruitment ongoing for a new chief operating officer, as well as a chief digital officer, a newly created role. Fung shared that it was looking globally for a candidate that had both large company and start-up experience, who could “speed up the development of our digital platform, which is already in place.”
Li & Fung has earmarked $150 million for its three-year strategy to devote to the digitalization process, with under a third of those funds spent in the first year.