Li & Fung: A source to be reckoned with

Li & Fung is the world's biggest supplier to the West's retail giants and a component of the Hang Seng Index, but it's still very much a family firm

PUBLISHED : Saturday, 31 August, 2013, 12:00am
UPDATED : Saturday, 31 August, 2013, 4:00am

William Fung Kwok-lun was not always destined for the glossy pages of Forbes Magazine. A quiet life in academia was where the 65-year-old once envisioned himself, despite being one of only two heirs to Li & Fung, arguably Hong Kong's oldest and best-known local trading company.

At the Cheung Sha Wan nerve centre of the listed empire that his grandfather, Fung Pak-liu, co-founded in 1906, the company's chairman spoke with the South China Morning Post about himself, the family and the business.

"There was an academic streak in both my elder brother Victor [Fung Kwok-king] and me. After graduating from Harvard Business School, I was accepted into the University of California, Berkeley, for a doctorate in economics," Fung says.

"This was the early '70s, during the Vietnam war, and getting a work visa [as a foreigner] wasn't an easy task. I wanted to get a job in the United States, but it was my mother who called us up and said one of us had better come back and help father as he was working himself to death."

So the Fung brothers devised a plan: Victor would stay in the US to teach and William would go back to join the family business. After two years, they would swap places. "Unfortunately, after two-years of working, I found out I had lost a lot of the skills I needed to become an economist," Fung says with a chuckle.

The man comes across as modest and frank despite having an estimated net worth of US$2.6 billion, making him 17th on Forbes' list of Hong Kong's richest people.

Three weeks into a doctoral programme, Fung decided it was not his cup of tea. After about a year, he returned to Hong Kong to join the family business.

Fung's decision to return to Hong Kong - his brother would join him a few years later - was one that would fundamentally alter the prevalent local business model, operating at a time when the city was still a hub for the manufacture of low-cost, labour-intensive consumer goods.

Together, the two US-educated twentysomethings injected a dose of much-needed modern, Western management into what was essentially an outdated, Asian-style family business operation. They recommended that their father, Fung Hon-chu, take the company public.

"I had all the rebellious thoughts that any twentysomething would have, having come back from America," Fung says.

"I brought in all the Harvard MBA-style case studies to the business. I talked to Victor and we agreed that Hong Kong's family companies just didn't have the right structure. Large companies need professional management."

Most businesses go public simply to raise capital, but the Fung brothers pushed for a listing to bring in more rigorous corporate governance and transparency - a move that would oblige the company to employ a board of directors from outside its own ranks; to issue regular dividend announcements, and to meet other governance requirements. The company was listed on the stock exchange in 1973.

The Fung brothers had in mind a Western corporate model, yet they intended to keep the company's familial roots intact.

"In the West, there's too much emphasis on the shareholder as the only stakeholder," says Fung.

"This model is too lopsided. What we take from a family tradition is that there are many stakeholders in a company - especially your colleagues and long-time suppliers, buyers and customers. We treat them as if they were family.

"We wanted to create the right balance between a publicly-listed company with many public shareholders and a family company with long-term shareholders with long-term interests at heart," he says. "This was very different from a cold-blooded, maximise-profit, western-style PLC run by professional managers."

The family aspect of the company is still very much intact, and Fung says it will remain so for the foreseeable future. He points to good relations between family members and the fact that nearly all of them live under the same roof.

In the early 20th century, Fung's grandfather built a family home at Magazine Gap Road in Mid-Levels. He later tore it down and built a four-storey block of flats for his growing family, which included a wife and 11 children. That block was then demolished, and in its place a 12-storey block was erected. The current 30-storey block was built decades later.

"Other tenants live there too, now, but we do encourage our kids to stick around … We're very close-knit. We're a bit like the Harilelas in Kowloon Tong," Fung jokes, referring to the family that owns the eponymous hotel group, more than 100 of whom live in a compound in Kowloon Tong.

The family business is now in its fourth generation. Victor's son Spencer, 39, was promoted to group chief operating officer last year, and William's son is working in the ranks of the company's management. "He prefers doing back-office stuff," Fung says.

Li & Fung's roots stretch back to the final years of the crumbling Qing Dynasty (1644-1911). When Hong Kong was set up as an entrepot to the mainland in 1842, it attracted mainland merchants such as Fung Pak-liu who worked in the "China trade" - the export of Chinese goods such as porcelain, silk, bamboo ware, tea, porcelain and fireworks to the West.

"We exported everything made in China that the West wanted," says Fung. "This was the era of my grandfather, an era which lasted up to 1949, when China closed itself off from the world and went into isolation. Hong Kong essentially lost its hinterland and had to re-invent itself by producing local goods rather than China goods."

The Fungs and countless other trading companies rushed in to fill the new gap in the market. For decades, manufacturing was Hong Kong's bread and butter, and Li & Fung was at the forefront.

When manufacturing migrated to southern China, chasing lower labour costs, the Fungs once again re-invented their business model to suit the rapidly changing economic climate.

From manufacturing for export, the company moved into export sourcing - helping multinational retailers such as US giants JCPenney and Macy's access low-cost production in emerging economies - as well as logistics and retailing.

It scooped up the Hong Kong franchises of convenience store chain Circle K and retail giant Toys 'R' Us. The Fung brothers officially took control of the company in 1989 and delisted it for reorganisation. In 1993, they took it public again.

Today, the sourcing giant operates globally with 15,000 suppliers spread out across more than 44 countries. It is the world's largest supplier of goods to multinational retailers such as Wal-Mart and Target. The company operates on an "asset-light" model, under which it owns not a single factory, but subcontracts manufacturing to third-party vendors in its network.

That model, despite its obvious success for the company, has been linked to labour abuses and at least 140 deaths among workers at the suppliers Li & Fung works with in its role as a matchmaker between rich-country buyers and contract manufacturers in poor nations.

A garment factory fire in Bangladesh that killed 112 workers last year sparked violent protests across the capital, Dhaka.

And the company has been attacked by rights groups for contracting work to "sweatshops".

Li & Fung argues that it creates jobs and shares economic gains for the communities in which its suppliers operate, and that its staff conduct safety audits at the factories it works with to ensure minimum standards are met.

In an interview with The New York Times recently, Li & Fung chief executive Bruce Rockowitz said: "We make our best effort to weed out bad factories. But we don't always succeed."

Fung is keen to tout the family business' philanthropic credentials. The Victor and William Fung Foundation, for instance, founded in 2006, promotes leadership development through scholarship programmes with universities.

Last year, it co-operated with the Institute of Service Leadership and Management to start an initiative to boost competitiveness in the service industry. It put up a grant of HK$40 million to kick off the Li & Fung Service Leadership Initiative.

Fung says: "We do a lot in terms of fulfilling our civic duties, whether through philanthropy or public service, giving back to the community that has served us so well over the years."