11/F LiFung Tower
Global Supply Chain Management is our business. Working in partnership with our customers, we cater for their needs of competitive pricing, quality, on-time delivery, as well as ethical sourcing. We manage the logistics of producing and exporting goods across many producers and countries.
A one-stop-shop service--Small, dedicated teams of product specialists focus on the needs of particular customers and organize for them. We provide the convenience of a one-stop shop from product development, through production management, to customs clearance and delivery when required.
During the course of its nearly 100-year history, Hong Kong-based Li & Fung Limited has grown from a simple exporter to an expert in "global supply chain management." The company coordinates product design, raw material and factory sourcing, production management, and quality assurance for clients that have included The Limited, The Gap, Coca-Cola, and Kohl's Corporation. Li & Fung deals primarily with garments but is increasing its focus on promotional items, toys, sporting goods, and housewares.
When one of its clients needs a product, Li & Fung does much more than just find the lowest-price source. The company breaks apart the manufacturing process to find the best supplier for each stage of production. For example, if a client orders a polo shirt, Li & Fung might buy American cotton, have it knitted and dyed in China, and send it to Bangladesh for sewing. The company's 65 sourcing offices in 38 countries give it the global connections it needs to pull off this "borderless" manufacturing process.
Founded in 1906 as an exporter in Guangzhou, China, Li & Fung has survived World War II, China's move to Communism, and eventual reopening of China for trade. More recently, the company has adapted to the transition from a manufacturing to a service-based economy in Hong Kong and the emergence of the Internet. The company is now led by Victor and William Fung, the third generation of the Fung family to deal in exports. Li & Fung's flexibility and its expertise in East Asian and global manufacturing have allowed it to move beyond the role of a simple trading intermediary and develop a range of services that are still in demand in the 21st century.
Basic Exporting: Early 20th Century Through World War II
In 1906 Fung Pak-liu and Li To-ming founded an exporting company in the southern Chinese city of Guangzhou. The company was the first Chinese-owned exporter in a field controlled by foreign merchants. As a former teacher of English, Fung Pak-liu was able to act as an intermediary between Chinese-speaking factories and English-speaking buyers. He received a 15 percent commission for his interpreting services. In the first few years, Li & Fung dealt primarily in porcelain and silk, and later moved into bamboo and rattan ware, jade, ivory, handicrafts, and fireworks. The company came up with a new way to make fireworks in 1907, using a paper rather than a mud seal. The new product produced less dust and, because it was lighter, saved tariff costs since the U.S. import duty was based on weight. The design became the industry standard.
Because the river port in Guangzhou was too shallow for oceangoing clippers, the British colony of Hong Kong served as the deep water port for South China. So Fung Pak-liu's son Fung Hon-chu went to Hong Kong and established a branch to handle the shipping of goods. On December 28, 1937, Li & Fung was formally established as a limited company in Hong Kong.
World War II put a halt to trading for several years. Fung Pak-liu died in 1943 and control of the firm moved to the second generation. Li To-ming, who had been a silent partner, sold his shares to the Fung family in 1946. After the war, China became a Communist country and a flood of refugees came to Hong Kong. Li & Fung was now cut off from its factory sources in China and needed to find a new way of doing business. Fung Hon-chu reinvented Li & Fung as an exporter of the labor-intensive consumer goods that began being produced in Hong Kong during the postwar period. The company dealt in garments, toys, electronics, plastic flowers, and wigs. Its primary customers were retailers in the United States. As Hong Kong's manufacturing economy grew, Li & Fung grew with it.
The Third Generation: Modernization in the 1970s
Fung Hon-chu's sons Victor and William attended universities in the United States. The older son Victor attended the Massachusetts Institute of Technology, then got a Ph.D. in applied mathematics from Harvard, while his younger brother William studied computer science at Princeton and got his M.B.A. at Harvard Business School. The two might have pursued careers in the United States, but in 1972 their mother called and pleaded with them to come home and help their father so he would not have to work so hard. Having been exposed to Western business practices, the two were hesitant to go back to a traditional family-owned enterprise. "Trading is a sunset industry," their friends in the United States warned them. But their father suggested that they come back and show him how to run the business better. William returned in 1972 and Victor in 1974.
By the 1970s, competitive pressure was pushing Li & Fung's profit margins down to 5, or even 3, percent. Taiwan and Singapore had cheaper labor and were developing enough manufacturing capacity to vie with Hong Kong. Meanwhile, buyers were more inclined to bypass the middleman and deal directly with the manufacturer. If Li & Fung had nothing to offer beyond the ability to connect buyers with factories in Hong Kong, the company would have trouble surviving. Hong Kong as a whole was moving from a manufacturing to a predominantly service economy, and Li & Fung's best prospect was to find a way to make that transition itself.
The Fung brothers of the third generation brought a new perspective on the company's future, but they encountered a difficult environment for making drastic changes. Li & Fung was still run like a traditional patriarchal Chinese family conglomerate on the idea that the purpose of the company was to serve as the family's livelihood. More than 30 cousins had stakes in the company and, even if they were not particularly skilled at business, they were hanging on to management positions in order to retain shareholder benefits. So William and Victor's first initiative was to convince their father to take the firm public. In 1973 Li & Fung was listed on the Hong Kong Stock Exchange in an issue that was oversubscribed 113 times. "It was the only way to get a lot of disgruntled relatives off our backs and attract professionals into management," William Fung told the Far Eastern Economic Review in 1992.
Now that the roles of ownership and management were separated, it was easier to make changes at the firm. The brothers established offices in Taiwan, Korea, and Singapore in order to diversify their manufacturing sources. As more and more East Asian countries industrialized, Li & Fung developed a buying network throughout the region. In 1979 China opened up for trade as well. Many Hong Kong manufacturers relocated to China, and China once again became a key sourcing point for Li & Fung as it had been in the first decades of the company's existence.
By expanding geographically, Li & Fung acquired broader regional expertise and a more substantial base of manufacturing contacts, and thus was able to offer its clients a more valuable service. For example, the company knew that Taiwan did better work with synthetic fabrics but Hong Kong was the best choice for cottons. Li & Fung was also well-practiced at negotiating the system of quotas that governed world textile trade and knew how to move orders between countries as quotas filled up. With expanded knowledge and resources, the company could expertly source large orders by putting together a package from the entire region.
From Middleman to Manager in the 1980s
Still, regional familiarity was a basic service without much potential to lift Li & Fung's profit margins out of the single digits. The company's trade margins were squeezed throughout the 1980s, exposing the need for a more sophisticated business strategy. The answer was to become more involved in the entire production planning process. The traditional way of operating was that a customer requested a specific product and Li & Fung found the best supplier. By the late 1980s, though, Li & Fung was offering a broader range of services. Once a company had an idea of the product it needed, it would send design sketches to Li & Fung. Li & Fung would find the right type of yarn and fabrics, create prototypes for the customer, set up contacts for each step of the supply process and develop a production schedule that covered the entire fashion season. Li & Fung was gradually making the transition from middleman to program manager.
The company also branched out into the area of retail in the mid-1980s. It acquired 50 percent shares in Circle K convenience stores and Toys 'R' Us chains in Hong Kong. In addition, Li & Fung established a venture capital enterprise in the United States in 1984, in part out of chagrin for not having taken advantage of an early chance to invest in its successful client The Gap, Inc. Known as LF International, the investment company's purpose was to identify companies that had good design ideas but could benefit from Li & Fung's experience in sourcing materials. LF International made modest investments in about four to five enterprises a year.
In 1981 Victor Fung succeeded his father as managing director, but in 1986 he left the executive position to set up an investment bank. William Fung took over as managing director and Victor continued to guide the company as a nonexecutive chairman. William Fung saw the need for more changes at the firm but was hampered by the fact that 75 percent of Li & Fung was still held by a family trust. There were disagreements with the older generation, who remembered the difficult postwar transition, over whether Li & Fung should trust Communist China. To resolve the impasse, William and Victor formed a holding company, acquired the outstanding family shares, and privatized Li & Fung in a management buyout in 1989.
As a private company, Li & Fung had the flexibility to make drastic structural changes. William Fung refocused the company on its core trading business, selling off unrelated shipping, insurance, and real estate enterprises. He organized the company into two divisions: export trading and retail. Instead of assigning responsibilities by country, he organized services by customer. Each division was free to cross borders to find the best way to serve its client. For large clients like The Limited or Gymboree, an entire division at Li & Fung would devote itself to the product line and sourcing needs of one company.
By the beginning of the 1990s, the Fung brothers' changes were bearing fruit. Li & Fung was well established with 900 suppliers in the East Asia region in countries that included Indonesia, Singapore, South Korea, Taiwan, Thailand, and China. Retail clothing stores in the United States continued to be its major customers. The company began a period of exceptionally rapid growth in 1991, when net revenue grew 56 percent to HK$2.8 billion and net profit reached HK$86.9 million.
In order to acquire funds for further expansion, Li & Fung relisted its export trading division in 1992. The company issued 25 percent of its equity, raising HK$275 million. The now public trading division became known simply as Li & Fung Limited, while the retail division, with the profitable Toys 'R' Us and Circle K branch stores, remained a wholly owned subsidiary of the Li & Fung Group.
Borderless Manufacturing in the 1990s
After the public listing, Li & Fung's services evolved further toward truly borderless supply chain management. In a 1998 interview with the Harvard Business Journal, Victor Fung explained how Li & Fung reached the stage of "dispersed manufacturing." As manufacturing in Hong Kong became increasingly expensive, he said, almost all labor-intensive work moved across the border to China, while design, packaging, and other technically advanced manufacturing techniques were still done in Hong Kong. Eventually the whole East Asian region was pulled into the manufacturing process, depending on each country's particular industrial strengths. A garment labeled "Made in Thailand" might contain Korean yarn that was woven and dyed in Taiwan, sewn at five different factories in Thailand, and fitted with zippers made in China by a Japanese company. Li & Fung became expert at finding the best solution for each step in the manufacturing process. Fung told the Journal, "This is a new type of value added, a truly global product that has never been seen before ... We're not asking which country can do the best job overall. Instead, we're pulling apart the value chain and optimizing each step--and we're doing it globally."
This global array of services supported rapid growth and acquisitions at Li & Fung throughout the 1990s. Net profit in 1993 reached HK$185 million on revenues of HK$5.38 billion. Then the firm nearly tripled its size with the HK$475 million acquisition of Inchcape Buying Services (also known as Dodwell) in 1995. Inchcape was a British trading company with a network of offices in India, Pakistan, Bangladesh, and Sri Lanka. The acquisition of Inchcape, with its European customer base and sourcing points across the Indian subcontinent, balanced Li & Fung's American customer base and East Asian sourcing network.
Now that growth had taken off, William Fung began using three-year plans to set ambitious growth targets. In 1998, despite some instability caused by the Asian financial crisis, the company achieved its goal of doubling profits from the 1995 level. Net profit reached HK$470 million on revenues of HK$14.3 billion, compared with HK$242 million and HK$9.21 billion in 1995, respectively.
In the following years Li & Fung continued to diversify geographically, moving into emerging centers of production in northern Africa such as Egypt, Tunisia, and Morocco. By 2000, the company was making an effort to move production closer to its North American and European end markets and began sourcing from factories in Central America, the Caribbean, and Turkey. Li & Fung also was courting new end markets with forays into Japan and Australia. Although the Fung brothers still took pride in their company's Chinese heritage, Li & Fung was becoming a multinational company with a workforce based in dozens of countries.
With the rise of the Internet in the late 1990s came predictions of a "frictionless economy" where companies would bypass middlemen like Li & Fung and buy all their parts online. Li & Fung, however, capitalized on the Internet to strengthen communications with customers and branch offices. In areas with less developed telecommunications, personal visits, phones, and faxes were still necessary to ensure that manufacturers delivered the product on time. Li & Fung's decades-long personal relationships with suppliers, as well as their practical expertise in things like textile quotas and quality assurance, kept their business relevant in the digital age.
In 1999 Li & Fung acquired the export trading firms Swire & Maclaine Limited and Camberley Enterprises Limited, adding to their U.S. and European customer base. The following year the company acquired Colby Group Holdings Limited, its main competitor, in a deal valued at almost HK$282 million. Revenue continued to grow, but 2001 net profit was hurt by the closing of an e-commerce venture in the United States known as StudioDirect. The company was set up in February of that year to let smaller enterprises build their own brands on a web site without having to place large orders. But the site failed to catch on, and Li & Fung shut down the venture after less than a year. The year 2001 marked the end of another three-year plan. The company announced that it had met its goal of doubling continuing operating profits over the period and reported 2001 net profits of HK$667 million on revenues of HK$33 billion.
Although Li & Fung was posting strong results, the company was vulnerable because nearly 80 percent of its revenue came from U.S. clothing retailers. The company began pursuing customers in the hard goods sector in order to develop a more balanced clientele. In 2002 Li & Fung landed a deal to make promotional items for Coca-Cola. That year it also acquired Janco Overseas Limited, a Hong-Kong based company that supplied nonfood hard goods to supermarkets in the United States and Canada. In 2002 hard goods accounted for 32 percent of Li & Fung's turnover. The company remained heavily focused on the United States, with North American customers contributing 76 percent of turnover.
Li & Fung got off to a slow start on the 2002-04 three-year plan due to an economic slowdown and the terrorist attacks of September 11, 2001, in the United States. The company was about half a year behind on its goal but was still optimistic that it would once again double continuing operating profits over the three-year period. Such feats were more difficult now that Li & Fung had grown to be a relatively large company. Yet whether or not the company was able to sustain the rapid growth of the 1990s, it had shown it had the flexibility to continue playing a key role in the global market of the 21st century.
Principal Subsidiaries: Basic & More Fashion Limited; Camberley Enterprises Limited; Colby International Limited; CS International Limited; Dodwell (Mauritius) Limited; Janco Overseas Limited; Li & Fung (Exports) Limited; Lloyd Textile Trading Limited; Maclaine Limited; Shiu Fung Fireworks Limited; Toy Island Manufacturing Company Limited; Verity Enterprises Limited; LF International Inc. (U.S.A.).
Principal Competitors: APL Logistics, Ltd.; William E. Connor & Associates, Ltd.
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