Can Li & Fung recast itself to catch up with the Internet age?
Li & Fung, now run by fourth-generation CEO Spencer Fung, has packed more ambition and change into its current transformation plan. Will it work?
Li & Fung will forever be known as the company that refused to invest in Alibaba - three times, actually. For a company that, for over a century, was a dominant trade middleman for sourcing, its business model has not just been overtaken, as much as subverted and made irrelevant by Alibaba. Many analysts regard it as a company with a dead business model.
Despite being international thought leaders, MIT and Harvard Business School graduates, the brothers Victor and William Fung were happy with their traditional and profitable business. They could not comprehend that innovation doesn’t just create an alternative form of business that would coexist alongside Li & Fung.
Instead, a sea change would overturn most of their current business and industry practices. Their inability to grasp e-commerce and the internet was catastrophic.
It’s almost as disastrous as RIM’s 2007 declaration that smartphones would not overtake Black Berries because “why would anyone want computing power in a phone?”
Or, as surprising as the fact that Tesla’s market capitalization today exceeds Ford Motor Co, another fourth-generation company.
Li & Fung’s turnover continues to decline. Between 2015 and 2016, revenue declined by 11 per cent from US$18.8 billion to US$16.8 billion. Core operating profit declined 19.6 per cent from US$512 million to US$412 million. However, the company was able to raise US$1 billion through strategic divestments, which they can use to fund technology and business development.
Traditional business practices, especially in a fourth-generation company, die hard.
Li & Fung’s troubles cast a shadow on the ability of Hong Kong’s Chinese family-owned companies to adapt in industries where change is thrust upon them by technology.
The ambition and possibilities of e-commerce were already laid out by eBbay in the 1990s. Today, the real value in an e-commerce auction site like eBay or Taobao lies in the payment processing businesses: PayPal and Ant Financial. PayPal was a wholly owned eBay subsidiary until 2015, while Alibaba’s owners still control Ant Financial.
Payment processing not only launches you into financial services, but also provides a volume of data analytics from all the transactions generated through the counterparties. Thus, the transformation of what constitutes trade was completely redefined in function and value by opening up entirely ancillary and substitute industries.
To be fair, Li & Fung has been restructuring itself through the 1980s and 90s. They reduced from 40 family shareholders down to two family members in 1989. They focussed and narrowed their business lines to try to solve the dilemma of trying to offer too many services to customers. It still was not enough to address the issue of game-changing technology.
In the 1990s, the joke about Microsoft was that its secret mission statement was to prevent the formation of other Microsofts. That’s how dangerous inventors in a basement or dorm can be. But a company can’t look back and wish that decisions were made differently.
Li & Fung is run by the new CEO Spencer Fung, who is embarking on a grand experiment that seeks to answer the big tech question: can you reinvent a business with 22,000 employees from the inside, or must it be destroyed and reinvented by outsiders?
Li & Fung’s new three-year plan has more ambition and change packed into it than its previous schemes. It believes that logistics in Asia will not succumb to automation or robotics anytime soon. Functions like quality control of garments need humans to touch and feel to assess their subjective standards.
And in other countries or product segments it is still too expensive to automate or robotize as labour costs are very low, or scale is too small. This segment of the logistics value chain is inefficient, but necessarily be performed by thousands of small companies. Using technology to extract value from that segment represents the company’s salvation.
Their new three-year plan explains how it will refocus the entire business around: “speed, innovation and digitalization.”
Altogether, they are supposed to solve the challenge that the logistics industry is highly fragmented into thousands of verticals - suppliers, quality control and operators multiplied across different geographies with different cost structures and manufacturing scales.
The tangible goal of digitalization is that it’s supposed to increase the speed of fulfilment in a supply chain. And Li & Fung’s customers in fashion, for example, value speed more than costs. Speedy function means fewer mistakes, the ability to make smaller quantities and delivering them to stores more quickly than ever.
Li & Fung may even need to go private in order to rebuild, without needing to meet the near-term performance demands of investors.
That may be necessary if outside shareholders become sceptical of management’s ability to deliver not just a business turnaround, but a new world for Li & Fung.
Peter Guy is a financial writer and former international banker