Hong Kong based Li & Fung sees Asia as one of the main drivers of future growth

Hong Kong based Li & Fung sees Asia as one of the main drivers of future growth

China continues to be key to the sourcing plans of Li & Fung, the world's largest supplier of apparel and consumer goods, despite concerns the country is losing its competitiveness to lower-cost production bases such as Vietnam and Bangladesh.

In fact, group president and CEO Bruce Rockowitz told investors last week that with production volume from China already up 30% in the first six months of the year, it remains the firm's largest supplier. And as the company moves forward with its current three-year plan, China "will still be a huge growth area."

That said, the Hong Kong based business is also seeking to offset higher labour costs and a shortage of production capacity in China by moving some manufacturing to countries with lower wages, such as Bangladesh, Vietnam and Indonesia.

Bangladesh, for instance, is now its second-largest supplier, ousting Vietnam from the slot with a 52% hike in production volume in the first half of the year. The country "is really in high growth mode and we're moving a lot of business in Bangladesh," Rockowitz explained.

Other top ten sourcing countries for the group include Indonesia (production volume up 20%), Vietnam (production volume flat with last year, but falling from second to fourth largest supplier), India (+18%), Turkey (+24%), Cambodia (+14%), Thailand (+15%), Philippines (+42%), and Guatemala (+21%).

Part of this growth is the legacy of a series of acquisitions as Li & Fung, which employs 27,000 staff globally and whose customers include retailers and brands like Wal-Mart, Target, Kohl's and Marks & Spencer, seeks to expand its customer base, strengthen its product offerings and move into new niche markets with good growth prospects.

In the second quarter of this year alone it added five new businesses to its line-up, including Loyaltex Apparel, which specialises in knits, woven/denim and sweaters; TVMania, a European supplier of licensed and branded merchandise; and Hampshire Designers, the women's division of US-based Hampshire Group.

And last week it revealed plans to buy boys' apparel company Fishman Tobin, and Crimzon Rose, which takes it into the new category of fashion jewellery and accessories.

Rockowitz blames the cost of acquisitions and other investments for pushing first-half profit down 15% to US$236m - and instead points to a 33% rise in sales to $8.8bn, achieved during one of the worst recessions in the past three years, as a measure of the firm's continuing success. The company also says it is on track to meet its target of $1.5bn in core operating profit by 2013 - with acquisitions a cornerstone in achieving this.

Streamlining certain areas of the group to reduce operating costs is also part of its plan, including shifting jobs [from its European and US businesses] to Asia "to get closer to production."

A shift to selling into Asia
Not to mention a shift to selling into Asia as well as sourcing garments here, which is seen as a key driver of future growth. Largely as a result of its acquisition last year of Integrated Distribution Services Group (IDS), its customer base has seen a dramatic change, with the US falling from 67% to 58% of its business, and a drop from 25% to 22% also seen in Europe.

The difference is Asia and China, which have grown from virtually zero to around 12% of Li & Fung's customer base. This "will be a very fast growing part of our business and is very positive for the company," Rockowitz enthused.

Also seen as good news is the fact that prices have now started to moderate - improving not only the cost of goods but Li & Fung's margins too. "The cost of commodities like cotton and oil has come down dramatically, and the market is very positive now for our distribution businesses," says Rockowitz, adding that average cost price is likely to gradually trend down from the high.

And the company believes that with its focus now divided clearly across three divisions - trading, logistics and distribution - there are untapped opportunities to build its business by selling new services to existing customers.

A case in point here is apparel seller Liz Claiborne Inc, which in 2009 offloaded its sourcing business to Li & Fung and last week signed a deal extending this to include all its warehousing and distribution in the US as well. The move will see Li & Fung deliver Kate Spade, Juicy Couture and Lucky Brand goods to stores and wholesale customers - making Liz Claiborne one of the logistics group's largest customers.

"We see many more opportunities to do outsourcing deals with our existing customers across our different networks," adds Rockowitz.

Looking ahead though, while the environment in the US and Europe is uncertain and unlikely to see a marked improvement this year, "we believe Asia will continue to expand, and that's the market we are planning for. 

"But we still have a lot of customers [in the US and EU] who still need goods, and what is growing is private label, because of what's happening in the world with higher prices and customers needing more value, and we're gaining market share in this environment."

All of which adds up to a growing top line, with the first half "indicative of what our year and beyond opportunities look like."