Unpaid bills, talk of writs test supply chain
Six months after shipping containers of toys to now-bankrupt United States retailer KB Toys, Hong Kong supplier John Ko is still chasing HK$1.1 million in overdue payments.
Mr Ko, who did not wish to give his real name, expressed frustration after making repeated requests to trading giant Li & Fung, the sourcing agent on behalf of KB Toys, to recoup the outstanding payment the company should have settled 90 days after the goods were delivered in July.
Calling themselves 'victims of Li & Fung' rather than KB Toys, he and two other manufacturers said they were filing separate writs in Hong Kong against Li & Fung for a combined HK$3.7 million in overdue payments for goods delivered.
'We have done business with Li & Fung for more than 10 years and trusted it because it is a blue-chip company with more than 100 years of history,' Mr Ko said. 'From placing orders to shipments of toys, every procedure is executed according to Li & Fung's menu, but it can't just walk away from unpaid bills.'
Li & Fung president Bruce Rockowitz yesterday said Li & Fung's role as an agent meant the responsibility rested with KB Toys.
He added that Li & Fung had so far met about 100 out of 135 suppliers on a one-on-one basis to 'try to work out a way forward'.
'We don't know who the suppliers are who want to sue us, and encourage them to sit down and discuss,' he said, pointing out that Li & Fung had also lost money in the collapse. 'Otherwise, we will fight and protect our rights.'
KB Toys, which filed for bankruptcy protection last month for the second time in four years, left 135 Hong Kong manufacturers unpaid, creating a US$5 million exposure for Li & Fung.
The dispute has also raised serious concerns about the global trade financing system.
Lewis Luk Tei, a legal adviser to about 40 Hong Kong manufacturers affected by KB Toys, warned that the situation would have a serious impact on the Pearl River Delta manufacturing centre and Hong Kong as a financial centre.
'On the surface, the issue concerns the collapse of a toy retailer affecting 130 manufacturers,' Mr Luk said. 'In reality, the whole supply chain suffers. Manufacturers source components and raw materials from hundreds of suppliers and are closely associated with the service sector, including banks, legal and accounting professions, and logistics.'
Ironically, the person who sent the wake-up call on the collapsing trade finance system was Li & Fung non-executive chairman Victor Fung Kwok-king. About a month ago, Mr Fung, as the head of the International Chamber of Commerce, voiced concern about the rising number of failed payments under letters of credit, and cash against delivery or open account - conventional methods of trade finance.
In Mr Ko's case, he was trading with KB Toys through Li & Fung on an open-account basis, but Li & Fung said it was unable to pay him as it had yet to receive payment from KB Toys.
Mr Rockowitz (above) said the trade finance crisis was a global issue that had seen a big swing in financing from open account to letter of credit, which gives greater protection to suppliers and buyers through bank guarantees.
HSBC Holdings recently earmarked HK$4 billion for the funding needs of smaller companies. The Hong Kong government drew up a scheme under which it will guarantee as much as HK$100 billion in loans.
As of Monday, 718 applications had been approved with HK$1.9 billion in government-backed funding while 168 were pending approval. Under the scheme, the government will guarantee 70 per cent of the loan to ease cash-flow problems.
In the meantime, a question mark hangs over the future of tens of thousands of Hong Kong manufacturers operating across the border and the city's role in financing them.