Li & Fung: The Global Value Chain Configurator

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Case Details:

Case Code : BSTR149
Case Length : 30 Pages
Period : 1996-2004
Organization : Li & Fung
Pub Date : 2005
Teaching Note : Available
Countries : Hong Kong, US, Europe
Industry : Trading, FMCG

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Introduction Contd...

The company was well-placed to leverage China's leadership position in textile manufacturing and exports, as that country was the company's largest manufacturing hub, from where it sourced over US$ 2 bn worth products annually. Li & Fung had 16 offices in China, which it planned to take to 36 by 2007. The downside was that in early 2004, Li & Fung faced many challenges like a slowdown in its overall revenues and net profit growth, over dependence on the US market, declining share of revenues from the European market and negligible growth in revenues from the rapidly growing Asian markets.

Background Note

The history of Li & Fung goes back to the early 1900s, making it the oldest trading company in Hong Kong. The company was founded in 1906 by Fung Pak-Liu (Pak-Liu) and Li To-ming (To-ming) in Guangzhou (South China) and was one of the first Chinese-owned export companies. Trade in China at that time was controlled by foreign commercial houses. Li & Fung began operations by exporting porcelain and silk, mainly to the US. It later expanded its product portfolio to include bamboo, jade, ivory, rattan ware, fireworks and handicrafts. During the early 1900s, since US buyers did not know Chinese and Chinese sellers did not know English, traders who could speak both the languages became essential mediators between buyers and sellers.

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Li & Fung, being one among this lot, prospered, earning commissions as high as 15% on each export deal. Li & Fung was formally established in Hong Kong as a limited company in 1937. World War II disrupted trading in the early 1940s, forcing Li & Fung to cease trading for some years.

In 1943, Pak-Liu passed away. Shortly after the end of the war, To-ming, who had been a silent partner, retired and sold his stake to Pak-Liu's family. With this, the Fung family became sole owners of Li & Fung.

In 1949, Pak-Liu's son, Fung Hon-chu (Hon-chu), restarted trading operations in Hong Kong, which had come under British control. Hon-chu was instrumental in leading Li & Fung into the new era. The trading business picked up momentum in Hong-Kong during the mid 1900s, driven by the influx of refugees, which transformed China into a manufacturing economy that exported labour intensive consumer products.

Li & Fung began exporting consumer products such as garments, electronics, plastic flowers and toys and was soon Hong Kong's biggest exporter...

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