Export trading company Li & Fung has the world's largest network of sourcing and manufacturing offices and is a leading supply chain manager for brands and retailers worldwide. According to its president, Bruce Rockowitz, "If you go to a mall in the United States, 30% to 40% [of the vendors] would be a customer of Li & Fung. The consumer never really sees our name. We are behind a lot of the things that you wear and see within your home."
It's also one of the companies, in Rockowitz's words, that helped to build Hong Kong. Although it was started 100 years ago, Li & Fung is considered by many to be a model for today's global companies. "The company has gone through so many generations of thought and evolution to get to where it stands today," said Rockowitz during a keynote address at the 2007 Wharton Global Alumni Forum in Hong Kong in May.
Before joining Li & Fung in 2000, Rockowitz was the co-founder and CEO of Colby International Limited, a large Hong Kong buying agent that was sold to Li & Fung in 2000. Rockowitz came to Hong Kong in 1979, and since that time has been deeply engaged in the region and China's future. "Hong Kong is my home," he said, adding that he intended to stay there. During his speech, he spoke about his company's model for managing supply chains in a "flat" world where boundaries no longer exist between sourcing countries. A trade veteran in the Greater China region for more than two decades, Rockowitz also commented on commerce issues between the China and the U.S., including the trade deficit and the appreciation of the yuan.
The Li & Fung Model
"The evolution of the supply chain has really created Li & Fung's model today," Rockowitz said when describing how his company engages in global business. Li & Fung has no solid assets, he noted: All of its assets are intangible, because it doesn't own factories. "It's a company without real assets but with a market capital of $12 billion. It’s a very ingenious and dynamic company. Last year we shipped over 2 billion pieces to the world." In every country where production is done on Li & Fung products, the company has representation. Today, the company has 11,000 people around the world in about 70 offices.
In addition, although it is not a technology company, Li & Fung was listed as one of the top 40 IT companies in the world by Wired magazine. "Li & Fung uses IT to enable its business in a very big way. Without IT, we definitely wouldn’t be at [our current] size today," he said. "Every point in the world is connected to one computer system, and it's still one company."
Since it went public in Hong Kong in 1992, Li & Fung has had a 22% compound annual growth rate, and between 1999 and 2006 its earnings have tripled. "It took us 93 years to get to $2 billion, and then in the last seven years our growth has outstripped the 93 years. You learn from business school that when your numbers get big, your growth slows down, but we have seen the opposite in our business." Active entrepreneurship and strong planning account for the continued growth, Rockowitz said.
In order to explain how Li & Fung has remained competitive, Rockowitz shared his views on the evolution of production. In the past, production was based in the consuming country. He cited the U.S. as an example. "In the United States, the factories were on the East coast and they migrated to the south and stayed within the country. Europe was very much the same way." Gradually, production started to move out of consuming countries to regions overseas. Hong Kong became the first port in Asia, and that is where worldwide sourcing of consumer products really started outside the United States and Europe, according to Rockowitz.
Hong Kong became the place for manufacturing, he said. However, just like the United States, Hong Kong became too expensive, and manufacturing began to migrate to Taiwan, Korea … Bangladesh and India, and actually it found its way back to Central America, and back to Europe through Hong Kong. "Hong Kong has really been the head of global sourcing and that's why Li & Fung is here today," Rockowitz noted.
Today, countries are no longer really important, and the world has become "flat," he said. "From a sourcing point of view, in any business you can't just look within your own country -- and in fact, you cannot even just look within a few countries. You have to look at the whole world and find the best places." This transformation is not only happening in products or parts, it's happening in services, too. For example, airline companies are outsourcing software production to India. "If you are going to compete in today's world, you have to look at sourcing in this manner," he said.
Rockowitz pointed out that the same pattern is taking place within China. China is so big and developing so quickly, he said, that "we have to be all over China. In China, production has been based on the coast -- down here in the south and then up in the central coast then all the way up to Beijing. What's happened is wages have gone up, electricity is a problem and the whole infrastructure is really overtaxed in coastal regions. So now you see factories moving from the coast inwards. That’s how people will work in the future," he predicted.
The Vertical "Dinosaur"
In Rockowitz's view, a vertical and integrated model is outdated in world manufacturing. The very big, monolithic factory that does everything from start to finish represents “the mentality of the way all manufacturing should be done in the 50's and 60's, but it's the dinosaur in today's world."
Then there was the 'Detroit' model, which is a little bit better, he said. "Instead of owning all the suppliers in the supply chain and being in one building, one campus, you concentrate on your own competency and your suppliers will congregate in one area, like Detroit. That's how it evolved."
The problem with these two models, he added, is that you are physically locked into one place. "Things change, but you don't have the flexibility to change. When you cluster in one place, it will not be necessarily the right place for the suppliers." In today's flat world, businesses need to be in the right place -- with logistics, with IT, with everything that connects everything, he said.
Rockowitz used the clothing business as an example. "In a vertical model, you have to grow cotton and then you have to take the cotton and spin, weave and dye it. You will always have more cotton than your own factory can handle, and then you will have too much spinning, weaving and dyeing for your own factory to handle. So you then need to sell your cotton to other people, sell your fabric to other people, and then all of a sudden the outside customers are getting better served than your own factory. Then your other factories say, 'Hey, you are selling to everybody else. I can't get service. I want to use outside suppliers; they are cheaper, better and faster.' Finally, the whole system breaks down. So the vertical model doesn't work."
Rockowitz said that his company will never own factories, even though it could. "It doesn't make sense for our business, in serving our customers. On the other side, we would never own retailers, as that will put us in a complicated situation [with our retail customers]," he added. "We like our position, and it's the right place to be as the supplier to the customer."
Market-driven Supply Chains
Rockowitz also discussed the ways new supply chain models are evolving. In the old model, people sold what factories made, he said. It wasn’t really market driven; it was production driven. "The whole mechanism of supply chain then was very dysfunctional. There was no real supply chain at that time."
Instead, new supply chains are matched to demand, with a focus on what the consumer wants to buy instead of what the factory wants to make. "This evolution changes the whole mentality of production, and you need to be very flexible," he said. "It's a transactional world…. You join forces with your customer and share as much information as possible with IT -- what you are selling, what's being manufactured, what time frames you have -- so you can match demand and production. Today, retailers are competing against each other with their supply chains. The fact is that supply chains are going to win in this world."
He pointed out that one of strengths of Li & Fung’s model is that the company orchestrates supply chains on a customer-by-customer basis, based on their needs. "We assemble suppliers, manufacturers and logistics people together and build what we consider to be the best supply chain for that customer.’'
These changes have filtered down to the retailers, too. "Everything has changed in the way we ship goods. The old supply chains used to deliver goods; the store would put the price tags on, put the hangers on and add whatever they needed to add. Today, we ship everything almost store-ready. There is no work on the store's part. Same thing with packing -- everything is pre-packed…. We [also] plant a very small chip into the packages that are being shipped, or into the garments. This chip can tell you where the goods are -- on the ship or at the store, etc. -- at any given moment."
The U.S.-China Trade Deficit
During the same week that the Hong Kong Forum was taking place, a delegation led by Madam Wu Yi, the vice premier of China, was meeting with U.S. treasury secretary Henry Paulson in Washington, D.C., for strategic talks. A trading veteran in the Greater China region for more than two decades, Rockowitz offered some comments on the trade issues between the two countries.
As Rockowitz noted, manufacturing is borderless today. When one goes to a store in the United States, almost all the goods are designed in the States and very little is designed in China. That's one of the weaknesses of China, he said. 'Basically, you have the shell from Korea, the lining from Taiwan, filling from China, and accessories from Hong Kong. [The product] is actually assembled in China, although we like to say it is ‘made’ by China."
This has implications on the trade deficit between the Unites States and China, he argued. "In fact, 50% of the value that is exported by China came from somewhere outside of China. So the true trade deficit is not truly from China. The value goes to the consumer as there are much better prices. What is really left in China is very little: Prices are very low, and they don’t do the design. It's amazing that so little value is left in China. Pretty much all the value is exported to the United States."
As for the United States' pressuring of China to appreciate the yuan, Rockowitz believes that unless China appreciates the yuan 40% overnight (which would lead to catastrophic results all over the world), the trade deficit will actually go up with appreciation. He doesn't think appreciation would deter people from buying in China. "They will buy the same amount of pieces and just pay higher prices. The fact is, everything that is going on right now will cause higher prices, a higher trade deficit and inflation," he said.
Three 'Levels' of Companies
To answer a question on how Li & Fung remains entrepreneurial while it still has very predictable growth rates and strong sales, Rockowitz outlined three different "levels" of companies. According to his model, very basic "primary school" companies are the ones that stay the same or just react when the world changes. Then there are the secondary school companies, which anticipate change. "University" companies, however, are not afraid to re-invent themselves, he said.
Rockowitz stressed the importance of reinvention at Li & Fung. "Every three years, we look at reinventing our company. We go through a year-long process of thinking up what we can change…. We want to throw everything out and start from scratch. We look ahead to paint a scenario, to anticipate how trade will be. Will there be recessions and other [problems]? We set high goals, and then we jump into the future and look back to see where the company can grow. [If] we find a gap, we know we have to fill it by changing. We formulate a strategy to fill that gap. When we have that strategy, we go through the process of fulfilling it. It's tiring, but that is how Li & Fung has gotten where we are today."