Shoes, clothes, toothbrush – there’s a good chance that at least some of the products the average consumer uses each morning have passed through the supply chains of Li & Fung. The world’s largest supply chain company, Li & Fung has spanned more than a century of history and 40 countries around the world. The company has been instrumental in sourcing products quickly and cheaply, helping chains such as Wal-Mart offer the cheap prices to which US customers have become accustomed.
CHINA ECONOMIC REVIEW spoke with Bruce Rockowitz, Group President and CEO of Li & Fung Limited, about his career in Asia, how rising costs are changing Chinese manufacturing, and his vision of the supply chains of the future. Rockowitz is famous in the business world for his instrumental role in building what might otherwise be a Hong Kong family empire.
Tell us about your career in Asia. How did you get involved in Li & Fung, which has been a family business?
I came out here when I was 19, when I took a semester off college to play professional tennis. So I’ve been in Asia 33 years – [laughs] it’s getting so long it’s embarrassing. Then I went into business with Allan Zeman, who started Lan Kwai Fong in Hong Kong. We built a supply chain management company called Colby International to become the second-largest company in this sector, then in 2000 we merged with Li & Fung. I became president of the company in 2004 and I’ve been the head of the company since then. Before me the company was run by three generations of Fungs, and I still work very closely with the family. So I’m the fourth generation that is sort of bridging the gap between the next generation of Fungs and the last generation, Victor and William. It’s unusual, but it’s gone very well.
Li & Fung has a long history in supply chain management. How has your company evolved into what it is today?
The company started in 1906, and at that time it was an unsophisticated supply chain management company based on the ability to translate Chinese to English and Chinese to English. The company at that time did all the typical Chinese products, such as silk flowers and porcelain. In the old days, supply chains were very much vertical operations where everything was done under one roof. Supply chains today are very global. A jacket could be made in China, but the zippers come from Japan, the design is done in our New York office, the fabrics come from Taiwan, some of the accessories come from Hong Kong.
How do you expect the industry to change going forward?
The future of supply chains is speed: the ability to bring what the consumer wants to them faster and faster. Supply chains have already been looking for speed in production. But now the next rung will be speed in design, getting the design to the factory and producing it right away, and in logistics, getting the product to the consumer or the retailer. Where you base your design is going to be key. The reason is that prices will be going up, not just in China but everywhere. China in the last 30 years was an anomaly, because you had the largest country in the world in terms of population that added its labor force to the world, so that kept prices low for a long time. Going forward, the only way to mitigate higher prices is to make sure you have the right design at the right time, and you limit inventory and produce what people want – as opposed to what you think they may want.
How are rising costs in China changing supply chains?
China’s five-year plan is to increase wages 13, 14, 15% [per year]. That will more than double wages over the next four to five years, so it is a concern. In some cases this is pushing production outside of China, to countries such as Vietnam, Indonesia or Bangladesh, or to other parts of China that are not as developed as the coast. But at the same time, China is going to become much more efficient. There’s a number of levels they can move up by using machinery to make factories more efficient and save labor costs. And China is still generally the most efficient and easiest country to deal with. It has all the components, fabric and accessories, and the infrastructure is good. When you get to places like Bangladesh, many of the raw materials you need are not from Bangladesh. You have to bring many raw materials in through customs and get them to the factory, and that slows down the supply chain.
Li & Fung completed 19 acquisitions last year. What’s the strategy behind this rapid expansion, and is it going to continue?
We’ve always used acquisitions to fill in areas of the company where we lack expertise. Each one of the acquisitions fills in part of the mosaic. We want to be the one-stop shop for all non-durable consumer goods and produce and sell globally, so there are a lot of holes to fill. We’ll continue to acquire, but it really depends on the market. When the world is impaired, like it is today, there are more opportunities for acquisitions. So we’ve done a lot more acquisitions than we normally would in the last few years because of the macro state of the world. I see that continuing over the next few years.
With these acquisitions, how have you dealt with the challenges of post-deal integration?
Acquisitions generally are not successful, if you look historically at most companies. But Li & Fung has been very successful in our acquisitions. We have certain principles for integration that are non-negotiable. We typically do all our integration in the first 100 days, because companies that are acquired are expecting change. We always co-locate, so we will only buy a company if we can move their people to our offices. We retain all the management, because we are acquiring companies for their expertise and people. We generally pay over a multi-year timeframe, so people stay. We free them up from the back-of-the-house issues and allow them to focus on growing the business.
How much of your business is purchasing and licensing brands? What’s the potential for this in China?
That’s the newest part of our business. We have hundreds of brands in our portfolio that we’ve licensed, mainly in the US and Europe. We do see an opportunity to bring Western brands with history and heritage to the China market. Outside the luxury space, the quality and design of brands on offer in China could be improved a lot. We see that as an opportunity over the next few years.