Supply chain leader Li & Fung works hard at dealing with tragedy

Li & Fung is working to improve safety at its supplier factories after a deadly 2012 fire, but its chairman insists it is no public relations gimmick

PUBLISHED : Monday, 13 January, 2014, 12:27am
UPDATED : Monday, 13 January, 2014, 1:46pm

"Nobody needs to die to do business," says Li & Fung chairman William Fung Kwok-lun. "When people die, that is the bottom line."

It's a fairly stark pronouncement in the early stages of an hour-long interview in the boardroom at the Hong Kong headquarters of the world's biggest supply chain management firm.

And it gets to that point quickly when Fung hears himself uttering the words "supply chain sustainability" and decides to make clear to any potential cynics in the room exactly what the phrase really means.

"That is a very mild term that doesn't convey the seriousness and human tragedy side of this whole thing - because we're talking about factory safety and worker safety and we're talking about worker deaths," Fung says.

Our conversation is taking place 48 hours after Li & Fung announced what it described as a corporate reorganisation to create a new vendor support services business unit that will ramp up its offering to the 15,000 factories it works with in a bid to improve their safety and efficiency.

Ultimately it is a response to the November 2012 blaze that killed 111 workers at the Tazreen garment factory in Bangladesh, which was a supplier to Li & Fung.

But it is no public relations gimmick.

Fung reacts visibly to the suggestion it might be seen that way. As well as to criticism that it is firms like his that profit from sweatshop conditions that thrive in emerging economies and thus have a vested interest in inhibiting any escape from the cycle of agrarian poverty and aid-dependency which dog them.

He's certainly an easy target for the sceptics.

A billionaire ranked the 10th wealthiest in Hong Kong alongside his brother Victor with a combined fortune of US$4.7 billion, Fung runs a global business empire which had turnover of US$20.2 billion in 2012.

Bangladesh, on the other hand, is one of the world's poorest countries with per capita GDP of just US$747 in 2012 in an economy worth US$115.6 billion, according to World Bank data. Adjusted for purchasing power, the country sits 156th on the International Monetary Fund's league table of 187 economies.

Criticism of the firm's motives clearly rankles Fung, who says that at the time of the Tazreen fire, the value of the company's contracts there were worth only around US$175,000 - a tiny fraction of the US$20 billion global total - which has been dwarfed by millions of dollars in contributions made since to a variety of safety, education and compensation funds set up in response.

He's also at pains to point out that the Tazreen fire and the Rana Plaza factory collapse - where he says Li & Fung had no orders or operations - in April 2013 that killed over 1,100 people and injured many more, were events of global significance.

The outcry that followed the successive sweatshop disasters, sparked by the realisation that many of the dead were making clothes for the world's wealthiest companies selling to some of the planet's most affluent consumers, has changed the way all businesses work, Fung says.

"We're sincere about this, but I tell you that in terms of hard business reasons about why this should be important to anybody - not just the Fungs - very simply, if I look at what's happening in the next three years, Bangladesh has redefined the standards of business conduct.

"In the future if you don't have factory compliance and worker safety in mind, you can't get the ticket to entry to work with the major brands in the world because they will all be under pressure after this.

"It's the right thing to do, but this is in fact essential to our business to work with compliant factories. That stands out as something that we really need to get hold of in the next three years."

The vast majority of the factories with which the firm works are in emerging markets. Li & Fung sources products from them to supply to its high street retail clients.

Fung concedes that in years gone by, the effort in its relationship with customers versus vendors was 90-10. Now it is closer to 60-40 or 70-30.

Safety has been a major driver in shifting that dynamic, but so too has been productivity. Especially because there is a major exogenous factor at play to which Li & Fung, and other companies, must respond - China.

Beijing's rebalancing of the mainland economy towards one which is driven more by consumption than by investment and exports is, in Fung's analysis, being delivered by a state-directed raising of wages.

Minimum wage increases are stipulated at 13 per cent annually in the mainland's current five-year plan. Many private sector firms say the increases they pay are closer to 20 per cent a year.

That is driving labour-intensive industries inland away from China's export-oriented east coast into the interior of the country and poorer neighbours like Bangladesh, Vietnam, Cambodia and Myanmar - all places with less experience of running production lines than where goods are presently produced.

It is also driving up wages at a pace that global industry has not seen since China began opening up to the world in 1979, effectively flooding the market with cheap goods and cheap labour.

"In 1979 to 2009, China was the factor that kept the lid on wages all around the world. Now that the lid is lifted off, what has happened? Cambodian people want double their wage, Bangladesh wants a 50-60 per cent increase. So we are bracing ourselves for that," Fung said.

"We've got to help the factories get up to speed to supply the markets quicker otherwise our business will suffer. So this is very clearly in the interests of the business. It is not just a matter of us trying to look good and do the right thing."