Li & Fung

Li & Fung was founded in 1906, in Guangzhou (previously known as Canton) by Fung Pak-liu (d. 1943), an English teacher, and Li To-ming, a local merchant whose family owned a porcelain shop.[20] The company name reflects not only the founders' surnames but also the Chinese words "profit" (Li) and plentiful (Fung). Li & Fung became the first 100% Chinese-owned company to break the British monopoly on exports during the early 1900s.

In its early years, Li & Fung exported porcelain, then China's most important export, soon adding fireworks, jade and ivory handicrafts and silk mainly to the United States through their association with Ignaz Strauss & Company in New York, the leading sourcing agent for high-end retailers.[21]

In 1937, Fung's son, Hon-chu, opened the company's first branch office outside of mainland China in British Hong Kong; it was incorporated later that year. In 1946, Li sold his 300 shares of the company,[22] but ignoring the custom for Asian companies, the company name didn't change with Li's departure. Soon after, the Li & Fung branch in Guangzhou was closed, and the employees moved to the headquarters in Hong Kong. By the late 1940s, Li & Fung was exporting 30% of Hong Kong's rattan furniture exports.[23]

In 1951, due to a United Nations trade embargo on China, Hong Kong started manufacturing textiles, plastics, electronics, clocks, watches, and toys—spurred by industrialists leaving mainland China and bringing with them technology and capital. Cheap labor from the massive influx of people from mainland China, low taxes, a fairly stable economy, few restrictions, and a well-developed port fueled the export industry.[23]

With many of the migrant entrepreneurs coming from the textile industry, Hong Kong quickly became the leading exporter of fabrics, garments, and yarns. By the 1960s, textiles and garments accounted for 40-50% of Hong Kong's exports. Despite the social upheaval in the mid-1960s, Hong Kong's exports continued to grow, and Li & Fung's fortunes grew as it became one of the country's top garment exporters.[23]

Throughout the 1960s and the early 1970s, the newer and smaller Li & Fung’s primary competitors were British firms Dodwell & Co. and the Swire Group. By focusing on the USA market, Li & Fung experienced annual growth of 28% from 1969 to 1973.[21]

William and Victor Fung, the sons of Fung Hon-chu, joined the company after completing their education at Harvard University – William with his MBA in 1972 and Victor with his doctorate in 1973. They soon restructured the company by establishing Li & Fung, Ltd with six subsidiaries.[24]

In April 1973, Li & Fung was listed on the Hong Kong Stock Exchange. In October 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) instituted an oil embargo on the United States, sparking a global recession that lasted through 1975.[25] Li & Fung’s revenues and profits declined during this period, rebounding in 1976.

In the 1970s, Western retailers began importing directly from Asian manufacturers. In response, Li & Fung shifted from playing the traditional broker role to becoming a manufacturing partner. Li & Fung’s services included design, identifying suppliers for fabrics and manufacturing, inspection, packaging, and transportation. The strategy boosted the company’s reputation among Western retailers and with suppliers in China. By the early 1980s, Li & Fung’s clientele included The Gap, The Limited, Express, Lerner, & Petrie Stores. By this time, Li & Fung was also a distributor of handbags, belts, shoes, scarves, and other fashion accessories from its Korea, Thailand, and Taiwan locations.[26]

By the late 1980s, Li & Fung was also fully entrenched in the toy business, replicating its end-to-end supply chain model that had proven successful in the apparel business. Through a joint venture with Toys R’ Us, Li & Fung expanded into retail. Li & Fung further diversified into real estate, warehousing, shipping, finance, and insurance through other joint ventures, acquisitions, and investments.[26]

In May 1987, Gap, then the company’s largest apparel client, opted to set up its own merchandising office in Hong Kong. On October 19, 1987, stock markets around the world crashed, demonstrating how financial markets had become inextricably linked.[27] Amid these setbacks, Li & Fung moved to privatize the company; the management buyout was completed in January 1989.[26]

The impetus for going public in 1973 was to create a way for "family members to profit from the company without necessarily having anything to do with running it."[28] But family members still owned 75% of the shares. To have greater control and create an environment that would attract talent, the Fung Brothers took the company private in a management buyout in 1989.

In June 1992, with the Fung Brothers now the majority shareholders, Li & Fung (Trading) Pvt. Limited, the export trading business, was relisted on the Hong Kong Stock Exchange. It wasn't long before the company began making strategic acquisitions to expand its geographic reach.

In 1995, Li & Fung acquired Inchcape Buying Services (formerly known as Dodwell & Co.), a UK-based sourcing company. A subsidiary of Inchcape plc, a British trading company with offices in India, Pakistan, Bangladesh, and Sri Lanka, the acquisition expanded Li & Fung's customer base and sourcing network to include the Indian sub-continent, the Mediterranean, and the Caribbean.[29]

In 1999, Li & Fung acquired Swire & Maclaine, a UK-based logistics company, and Camberley Enterprises,[30] effectively eliminating its top rivals.[31]

In 2000, Li & Fung acquired the Colby Group in an HK$2.2 billion deal,[32] and its founder, Bruce Rockowitz, remained at its helm and joined the Board of Directors.[33] In 2004, Rockowitz was promoted to president of Li & Fung (Trading) Limited, the Group's principal trading subsidiary. The appointment was to prepare for future growth to support the company's "Three Year Plan" for 2005-2007.[34]

In May 2006, Li & Fung acquired the Oxford Womenswear Group, a subsidiary of Oxford Industries.[35] In July 2006, New York-based Rosetti Handbags and Accessories was acquired for approximately $162 million. The move was to expand the company's private label offerings beyond apparel.[36]

In September 2006, Li & Fung raised HK$2.723 billion through a top-up share placement, a move viewed by analysts as a way to fund acquisitions. The following month, the company acquired KarstadtQuelle International Services, the global sourcing arm of KarstadtQuelle AG, Europe's largest retailer and mail order company.[37]

In 2007, the company acquired Tommy Hilfiger's global sourcing operations which was headquartered in Hong Kong for $247.8 million in cash.[38] Other acquisitions that year included: Regatta USA for $145 million, giving the company the ability to produce and market products under the names of Daisy Fuentes, Simply Vera by Vera Wang, Lagerfeld-Karl Lagerfeld, and Nicole Miller;[39] American Marketing Enterprises (AME), a US-based private label sleepwear firm and supplier to Wal-Mart. AME held 40 licenses, including Spiderman, Barbie, and Dora the Explorer.[40]

Also in 2007, Li & Fung acquired CGroup Hk Ltd., a health, beauty, and cosmetic supply chain company for US$120 million[41] and PB Beauty, a subsidiary included in the acquisition of UK-based Peter Black Group, which supplied footwear, gifts, accessories and personal care products to Marks & Spencer, Tesco, Sainsbury, and the Body Shop, among others. With the acquisition of UK-based Imagine Point of Sale which provided point-of-sale systems and RT Sourcing, a packaging company for cosmetic products, Li & Fung had officially entered the cosmetic business. In July 2009, LF Beauty was formed.[42]

In 2008, the company acquired handbag firm Van Zeeland whose brands included Kathy Van Zeeland, B. Makowsky, and Tignanello for $330 million;[43] Peter Black, a Yorkshire-based shoe manufacturer which supplied Marks & Spencer, was bought for £48.1m;[44] Slivereed, an apparel/textiles company and Wilson & Wong Trading for an undisclosed amount.[45] In the same year Miles Fashion Group, a leading German supplier was acquired for US$51 million.[46]

In September 2008, Singapore's Temasek Holdings bought 4.62% of Li & Fung for HK$3.88 billion, enabling the company to fund more acquisitions.[47]

In 2009, the company acquired Wear Me Apparel, a US children's clothing company, for up to US$401.2 million;[48] Liz Claiborne's sourcing operation for US$83 million; and Shubiz, a UK wholesaler of clothing and accessories for US$15 million. In May, Li & Fung sold US$350 million in shares at a discount to raise capital for further M&A deals.[49]

In 2010, Li & Fung acquired Hong Kong listed (2387.HK) Integrated Distribution Services Group Ltd (IDS) for US$902 million,[50] which was rebranded LF Logistics; Visage Group Ltd, a private-label apparel supplier in the UK was also acquired for £173 million ($264.1 million) to build a European platform;[51] Hong Kong-based Jackel Group;[52] Hong Kong-based HTP Group;[53] the assets of Cipriani Accessories Inc. and its affiliate, The Max Leather Group totaling US$140 million.[54] Closing the year, the company finalized the purchase of U.S.-based footwear maker Jimlar Corporation and Kenas Furniture Group, a Chinese furniture manufacturer.[55]

A share placement in March 2011 raised HK$3.89 billion to fund general working capital and future business development and acquisitions. The M&A spree continued with another 19 companies acquired that together were expected to generate approximately $2 billion annualized turnover for the Li & Fung.[56] The 19 companies included Oxford Apparel bought for US$121.7 million;[57] children's apparel firm Fishman & Tobin Inc.; costume jewelry company Crimzon Rose International; clothing supplier Loyaltex Apparel; color cosmetics maker Collection 2000; Thailand-based furniture trading company Exim Designs, TVMania, and Hampshire Designers.[58]

With the acquisitions, Li & Fung had succeeded in becoming the biggest supplier of toys and apparel to some of the world's biggest retailers, including Walmart, Toys "R" Us, and Kohl's. Its stock price peaked on 24 January 2011 at HKD 21.319.

In 2010, Li & Fung created the Direct Sourcing Group to serve Walmart's sourcing needs which was estimated at the time to be worth $2 billion in sourced goods. Two years later, in 2012, Walmart announced they were taking sourcing back in-house.[59]

Early in 2012, Li & Fung raised US$504 million (HK$3.91 billion) from a top-up placement executed in March; it was the first time the company had tapped the equity market since May 2009. The money was raised to fund general working capital and future acquisitions. [60]

In 2013, the company acquired Lornamead Acquisitions Limited for US$190 million, giving them access to a portfolio of more than 20 brands, including Finesse, Aqua Net, and Yardley; Lornamead sold its products to CVS, Walgreens in the US, Rossman and DM in Germany, and Boots, Tesco, and Sainsbury's in the UK.[61]

In 2014, Spencer Fung, son of Victor Fung, became Group CEO and Marc Compagnon was named Group President as Li & Fung spun out its global brands and licensing business through a one-to-one stock split. With the spin off Bruce Rockowitz became Chief Executive of Global Brands Group (787.HK), listed on the Stock Exchange of Hong Kong as a separate entity in July.[62] Li & Fung acquired freight forwarding company China Container Line.[63] For the new 3-year plan between 2014 and 2016, Li & Fung announced the growth strategy will be changed from M&A to focus on organic growth, marking an end to 8 years of large scale acquisitions.[64] Turnover excluding Global Brands Group peaked at US$19,288 million.

In 2015, Li & Fung entered into a joint venture with two department store operators in China, Beijing Wangfujing Department Store Group Co Ltd and Shanghai Bailian, with the aim of setting up as many as 300 stores and developing its own private labels.[65] Four years after the joint venture was announced, of the planned 300 stores, under 5 stores were opened and the sun finally set permanently without fanfare on this venture in 2019. As with all its other failed ventures, no public announcement was made regarding the collapse of this venture.

In 2016, Li & Fung announced it sold LF Asia Distribution, its non-core consumer and healthcare distribution business to Dah Chong Hong for US$350 million.[66] At the end of the 2014-2016 3-year plan, the company missed targets and saw both revenue and profits falling 3 years consecutively with 2016 alone seeing a 47% drop in profit.[67]

With effect from 6 March 2017, Li & Fung was removed from Hang Seng Index as a constituent (Blue Chip stock) and replaced by Geely Automobile.[8] In the same year, Li & Fung entered into a strategic transaction between Hony Capital and the Fung Group whom acquire three of its vertical product businesses, furniture (Whalen), sweaters (Cobalt Fashion) and beauty (MEIYUME), for an estimated cash price of $1.1 billion.[68] Turnover and profits in these three vertical products business have been declining in recent years such that a one-time accounting loss of US$610 million to accommodate write-downs related to the disposal was required of Li & Fung.[69]

In 2018, core operation profit dropped by 20%.[70]

In 2019, LF Logistics postponed the previously proposed spin-off initial public offering with Temasek Holdings of Singapore investing US$300 million for a 21.7% stake in LF Logistics. Li & Fung will hold the remaining 78.3%.[71] This deal values LF Logistics at US$1.38 billion, the market cap of Li & Fung at the point of the deal was approximately US$1.25 billion, leading to the understanding that Li & Fung core sourcing business has a negative valuation. Record store closures and customer bankruptcies led to another 20% decrease in core operation profit.[72]

Circa 2020, it has been struggling to turn its century-old business around by itself over the last few years [9]

In April 2021, a separate and new company called LFX was announced with the CFO of Li & Fung taking the helm in the new company.[73]

In December 2021, LF Logistics was sold to container shipping giant Maersk for US$3.6 billion in an all-cash deal.[74] The former minority shareholders has requested the Securities and Futures Commission investigate the sale of the LF Logistics as it was 4 times the value of the LF privatization deal.[75]

In September 2022, after years of struggled restructuring under the reign of Fung Family and after completed sale of LF Logistics to Maersk, Li & Fung Limited and its credit rating was unsurprisingly placed on review for downgrade by Moody's Investors Service. In further elaboration, Moody's Investors Service cited that, “The review for downgrade reflects Li & Fung’s significantly weakened business profile and reduced earnings base after the transaction, which will more than offset a likely material improvement in its net financial leverage,” and "...there is a degree of uncertainty over whether the company can sustain such a positive trend over the next 2-to-3 years," [76]

In February 2020, media outlets reported Circle K stores, part of the Li & Fung parent company, Fung Group, drawing massive crowds as chain gives away 100,000 free masks to Hong Kong's elderly[77]

In June 2020, Li & Fung dismissed 70 Percent of procurement staff attributing it publicly as restructuring and the impact of COVID-19.[78]

Li & Fung is a founding member of the Sustainable Apparel Coalition (SAC) and has been involved in the development of the Higg Index. The Index helps organizations standardize how they measure and evaluate environmental performance of apparel products across the supply chain at the brand, product, and facility levels.[79] Li & Fung offered consultation service offering(s) for vendors to "upgrade" factories and "help them navigate supply chain complexity and compliance demands."[80]

In 2012, Li & Fung, through the Fung Group, started working with the Business for Social Responsibility (BSR) to train female workers in Bangladeshi factories in the basics of health, nutrition and financial planning.[81] They later extended the HERProject to Cambodia, India and Vietnam.[82]

Between 2011 and 2014, Li & Fung supported CARE International's Hemaya project.[83] The project targets women working in garment factories in Qualified Industrial Zones (QIZs) around the northern cities of Irbid, Al Mafraq and Az Zarqa, where many textile factories are located. Hemaya is part of a larger effort by CARE Jordan to promote linkages between local employment opportunities and the local female workforce in the face of Jordan's low rate of female participation in the workforce which has one of the lowest in the world. Li & Fung barely sources from Jordan and where majority of its sourcing is, there are currently no efforts to improve the lives of those millions of workers there.

Following the Tazreen Fire in 2012 and Rana Plaza collapse in 2013, attention was drawn to the role of Li & Fung as a supply chain intermediary in factory sourcing and its influence on worker rights and safety. Immediately following the incident, the company formed safety task force composed of engineers and fire safety experts to develop in-house safety improvements of listed factories and became signatories of Accord and Alliance for Safety in Bangladesh RMG, which ceased operations effective December 31, 2018.[84] Since many have forgotten about the incident, Li & Fung too is no longer signatory of the Accord and Alliance for Safety in Bangladesh RMG [85][86]

In August 2013, The New York Times reported that Li & Fung's "great bargaining power" allowed it to pressure suppliers and manufacturers to lower costs, often utilizing a "take it or leave it" approach when it made an offer. Critics said that factories would cut corners in order to meet the offer. The article also said that Li & Fung had been tied to labor violations and had been accused by activists of depressing wages in developing countries and failing to investigate factory conditions. [87]

In December 2014, a Clark University paper criticized the company's network of suppliers as a "dispersion" strategy that was contradictory to worker safety. The paper concluded that this strategy prevented workers from obtaining a living wage and would always encourage buyers to use factories based in countries with weak government enforcement of regulation.[88]

In a 2014 article by the Financial Times, Li & Fung has incurred a total cost of acquisitions (included performance-related payments) of up to US$7 billion between 2006 and 2014. With the explosive revenue growth from US$4 billion to US$16 billion, the top line has only increased by a mere 30%. The article also goes on to explain how the acquisitions have barely added much value to Li & Fung.[89] The synergies expected from the acquisitions have not materialized, critics say a refocus on the core business is necessary.[90]

In an 2020 analysis by SimplyWallSt looking at CEO pay, it concluded that despite falling turnover and disappointing earnings per share, CEO compensation has been higher than market norms and thus overpaid.[91]

During the privatization process, the small shareholder alliance, composed of more than a dozen people, filed a complaint to the Securities Regulatory Commission. They claimed that some shareholders had applied to the bank or securities firm to attend the voting, but had not been issued with the privatization voting form, which prevented them from participating in the voting process.[92] Chairman William Fung Kwok-lun said that buying other stocks could generate higher returns than investing in Li & Fung.[93]

In 2020, two issues were taken to the Inland Revenue Department (Hong Kong). The first issue was whether (Li & Fung Trading) LFT's profits relating to goods sourced from suppliers located in places other than Hong Kong, Mainland of China and Macau were offshore and so not chargeable to profits tax. The second issue was whether LFT's deduction of a marketing commission paid to its holding company incorporated in the British Virgin Islands from onshore profits was caught by the anti-avoidance provisions in sections 61 and 61A of the Inland Revenue Ordinance.[94]