HONG KONG — Sourcing company Li & Fung has linked with Silas Chou’s South Ocean Knitters to form a $700 million joint venture, Cobalt Fashion Holding Ltd., creating one of the largest knitwear suppliers in the world.

The agreement was signed Thursday by William Fung, group chairman of Li & Fung, and Silas Chou, president and chief executive officer of Novel Enterprises, the parent company of South Ocean Knitters, the same day that Li & Fung released its first-half earnings data, which saw core operating profit rise 11.9 percent.

Chou is known for his role in building Tommy Hilfiger and Michael Kors. Li & Fung owns a 62 percent stake in Cobalt Fashion, its first joint venture, and the remaining 38 percent is held by South Ocean. The partnership is expected to leverage South Ocean’s yarn development and manufacturing know-how with Li & Fung’s product design and supply chain innovation, serving a range of price segments across all markets.

“With that scale we’re going to strive toward dominance not just in size but in innovation, we will be able to do a lot of things, such as digital sampling and so on,” said William Fung.

He added, “It didn’t require any investment on our part, we just pool our resources and say hey, let’s try to create the largest sweater vertical in the world.”

The entity will help combat some of the margin pressure the business has seen, in a macro-environment that ceo Spencer Fung described as still very tough and full of headwinds.

Li & Fung’s core operating profit for the six months ended June 30 was $170 million, versus $152 million the previous year and excluding the impact of the divestment of its Asia consumer and health-care distribution business. Turnover slipped 2.1 percent year-over-year to $7.26 billion from $7.42 billion. The U.S. accounted for most of its business, contributing 65 percent of its top line, although it decreased 3.7 percent from customers destocking and taking a more conservative approach to buying. Europe and Asia accounted for 19 percent and 10 percent of revenues, respectively.

Li & Fung is driving its latest three-year strategy to reform the supply chain according to speed rather than cost, and has started offering digital samples to select customers, which the company says can cut processes that once took weeks into days.

“The biggest roadblock is mind-set, culture and legacy. Most people along the supply chain have done certain processes for many years and it hasn’t changed….It’s very tough. But now we are really adopting a new digital mind-set to move fast into the future,” Fung said.

That being said, full automation in the garment industry is still some time off.

“We see a lot of automation on the production of products that are hard rather than softer like a garment,” Fung said. “When you use robotics on a piece of garment it moves, [so] it’s hard to get the consistency on a piece of garment. Many people have tried it. There is semi-automated, but totally automated factories — we haven’t seen it. And even if someone was to discover it, we are probably years away.”

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