Li & Fung: Canary in the Coal Mine
I remember watching the opening ceremony of the 2008 Olympics in China and thinking “Man, I hope they’re nice to old people. It’s just a matter of time until they own the US.” Back then, it seemed as though almost everything for sale was at least partially made in China. The last barrier was broken in 2005, when apparel quotas ended in the US. Within months Chinese production of socks had increased by 2000% with underwear and other apparel and soft home not far behind. In August 2008 the US was already busy bailing out Bear Stearns, Fannie Mae and Freddie Mac and the Global Great Recession was just around the corner. No matter how China fared in the medal count, it was still clearly the Next Big Thing.
What a difference five years makes. The Global Economy remains pretty unstable, even as we’ve seen green shoots of growth in the US, and leaps forward in Brazil, Russia and other “new” economies. I don’t have a crystal ball, and certainly don’t pretend to understand some of the intricacies of global power winds. But I do understand several things:
- Demand cycles continue to shorten
- Supply cycles remain long
- Price deflation has helped retailers continue to improve gross margin even in an era of hyper-promotions
- Retailers continue to tell us they need to become more nimble and innovative to respondent to their short-attention-span customers. That’s hard to do when you’re sourcing a half a world away
That brings us to Li & Fung. Hong Kong based Li & Fung is the world’s biggest supplier of toys and apparel to mass merchants (think Walmart), and specialty stores (think Limited Brands). Not only does the company produce lots of private label product, but it has been the middle man for name brands around the world.
Even though the company is quite old, its revenue exploded in the first part of the 21st Century. Yet as early as 2005, executives were saying (at least privately) that production was being sub-contracted from China to lower cost countries like Vietnam and Laos. Now, in a Businessweek article, company President Bruce Rockowitz reports that he believes 2010 was the year the deflationary trend for consumer goods ended (in fact, Li & Fung did issue that warning publically). That’s important news for retailers. It may not be great news for the US and European consumer, but it is good long-term news for their economies. And Li & Fung is attempting to adapt by becoming global distributors. When you’ve built a global supply chain, you might as well use it. It’s still dropping off at the same retailers: distributing brands like Tommy Hilfiger to the likes of Macy’s – but the front end of the supply chain is very different, and for Li & Fung, apparently far less profitable.
So, is Li & Fung the canary in the coal mine for a shift to near-sourcing? We have to take Europe out of the mix, since its economies are still in very rough shape. But I think for other countries, the answer is yes. Certain economic laws really do apply…and the pendulum is swinging away from China and back to sourcing nearer to our shores. Walmart has indicated it will be sourcing more in the US, significant sourcing activity is going on in Central and South America, and Europe will remain an interesting source of goods as well.
I also must end by saying I think long term, this will be quite healthy to economies as a whole. We may pay a little more for the stuff we buy, but it just feels right to be both a producer and a consumer. More sustainable; more predicable; more manageable. It’s a good thing.