The inconvenient truth of being too rich and comfortable
Li & Fung Group’s biggest problem is that it needs to escape the cultural gravity of a family-owned company surviving in the low profit and low technology business of trading or advising clients.
Li & Fung took a few swings at the internet revolution, but it can’t seem to find a decisive formula to disintermediate its industry or redefine trade in the broadest sense. They do not understand that creative monopolies, not the rent seeking ones in Hong Kong, drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate.
In this context, competition means very low profits for everybody, which is the mind set and landscape that Fung Group is stuck in. Trading and sourcing companies in Hong Kong live in a world of low, but reliable margins where competition is fierce and breakout innovation is alien.
Victor Fung kwok-king will always be known as the guy who rejected buying a stake in Alibaba. He could not see e-commerce and disintermediation coming over the horizon.
The failure to see historical, technological eruption still hangs over Li & Fung which is still thrashing out how technology will redefine the group. But, instead of gutting its culture it appears to still be trapped in the limitations of an outdated local family business.
Every time Victor Fung speaks he cannot help but refer to acting as a “middleman”– a Hong Kong concept that is 30 years out of date. His group has to be a principal innovator and take greater, focused risks than you do in trading for small margins to change a market.
Privately held, Fung Group recently revealed its “Explorium” – billed as the world’s first retail business model testing platform, located in Shanghai. In operation for two years, through in-store sensors, they collect data on Chinese consumer behaviour to better plan their clients’ market entry or expansion.
Unfortunately, other Chinese groups such as JD.com have been doing this for years. They are far ahead not only in understanding local trends, but finding ways to lead them. Fung should have been doing this decades ago. Yet another Hong Kong company that is late to the China game despite access to capital and resources.
They need to understand that technology is an enabler not a driver. Fung Group is so used to B2B (sourcing for US clients) and not B2C (business-to-consumer). Their strategy is too late: mainland Chinese customers are already enabled. Being a Hong Kong company almost defines them as being out of touch with China – that they are too tactical in the way they think and act.
Innovation isn’t spawned by “middlemen” with dilettante and trendy mentalities. Li & Fung’s historical problem is that it has persistently tried to be all things to all clients, spawning all sorts of businesses within businesses. They could use a decisive restructuring to make sense of its 22,000 employees and 40 markets.
Technology success is about creating a monopoly from nowhere, winning all the cash flows inherent in the economics of a new market and your awesome monopoly. That’s why the valuations are so high. Gaining operational scale over a market is why Google has dominated search or Facebook in social media.
Then, the inconvenient truth is that the Fung family is too rich and comfortable being featured in Hong Kong Tatler to make the tough decisions that a venture capital driven entrepreneur would be forced to make. Being part of Hong Kong’s establishment works against you as you struggle against a free market of innovators.
Peter Guy is a financial writer and former international banker