Li & Fung pressed on US$10m debt The number of toy factories on the mainland has shrunk by more than half over the past year as the global financial crisis devastated the sector, according to official statistics. The closure of about 4,800 toy factories, mostly Hong Kong-owned, has led to the loss of 2 million jobs. The recent demise of US toy retailers such KB Toys has added to the gloom for an industry still reeling from product safety concerns. Over the past year, the number of toy factories on the mainland has dropped to 3,200 from 8,000. Most of them are in Guangdong province. Correspondingly, the number of workers employed by Hong Kong firms in the toy and related industries had shrunk to 1 million from 3 million, said Samson Chan Ming-yiu, a former president of the Toy Manufacturers Association of Hong Kong. The state of the industry has heightened tensions between producers and middlemen such as Li & Fung. At a press conference yesterday, the Joint Committee for Li & Fung Creditors, representing more than 40 Hong Kong toymakers, was contemplating legal action against Li & Fung for US$10 million of unpaid debt, said the committee's representative, Ricky Ng. This is part of the US$27.2 million debt KB Toys owes Li & Fung and more than 100 Hong Kong toy firms. In front of cameras, Mr Ng and his colleagues, carrying banners saying in Chinese, 'Li & Fung doesn't care if small and medium enterprises live or die', tore up letters of credit issued by the trading firm on behalf of KB Toys to some of these toymakers. Li & Fung is liable to repay US$10 million to these 40-plus toymakers because they supplied toys that it shipped to KB Toys, and it issued letters of credit on behalf of KB Toys to these toymakers, said Lewis Luk, a lawyer advising the committee. 'Issuers of letters of credit are legally responsible for payment. If these manufacturers don't get the money, they will be in a very difficult situation,' Mr Luk said. Li & Fung executive director Henry Chan argued that his company acted only as the agent for KB Toys and the Hong Kong toy suppliers. Many of these Hong Kong toymakers issued invoices directly to KB Toys. 'Hong Kong toy companies had delivered the goods since May last year, but the money did not come. It's pretty bad for my company. We have laid off some people,' said Mr Ng, who declined to name the toy company he worked for. The committee had retained a group of lawyers who gave advice on legal action and would soon retain a senior counsel, Mr Luk said. If all else failed, 'in the next step, we hope the Hong Kong government will intervene and help manufacturers get back their money', he said. Mr Chan said: 'Legal action doesn't help anybody. We honour our business relations with vendors.' Within 10 days, Li & Fung would have spoken to all the 100-odd Hong Kong toymakers affected by KB Toys' bankruptcy to explore how they could work together in pushing their claims in US bankruptcy proceedings against KB Toys, he said. Mr Chan said Li & Fung had a US$5 million payment claim against KB Toys. 'We want to work as partners with vendors in the bankruptcy courts in the US.' This year, US retailers were facing what could be the biggest wave of bankruptcies and store closures in history, said Credit Suisse analyst Omar Saad in the South Florida Sun Sentinel. No fun and games Retailer KB Toys' debt to Li & Fung and about 100 Hong Kong companies, in US$: $27.2m
