Li & Fung Limited is one of the largest exporters in Hong Kong with a long history. It is also one of the largest exporters in the world and its business is distributed in many countries and regions. In the 100 years since Li & Fung started its business, the company has undergone a major transformation in its export trading industry. The business role of Li & Fung has also experienced transformation from a simple procurement agent to a global supply chain manager. With the continuous development of the opening global trade, Li & Fung is constantly renewing its business philosophy in keeping with modern times. In 2010, Li & Fung realigned the business into three core networks: trading, logistics and distribution. The company’s top priority is based on customers’ need and provides them an efficient supply chain. Li & Fung has achieved the goal of “providing suitable, timely and cost-effective consumer products to all the enterprises and consumers around the world. With the new trend of the emerging markets, Li & Fung is facing various challenges. For instance, in the face of rising labor costs and raw material costs in China, as well as various economic uncertainties, how can Li & Fung ensure a steady increase in profits? In the meantime, Li & Fung developed the U.S. and European markets by acquiring. LF Europe is facing challenges, due to the different preferences of each country of Europe, it is difficult for identical kind of goods to be sold in the markets. Last but not least, in order to selling non-durable customer products to developing countries, Li & Fung needs to extend the distribution network to Asia.
This case study report will analyze different aspects and provide the final recommendations on how should extend the Asian market. Either start LF Asian from scratch, or through an acquisition like the same did on the LF USA and LF Europe.
Li & Fung was established in Guangzhou in 1906. It was the first Chinese company engaged in foreign trade at that time, and Li & Fung broke the monopoly of foreign trade by the foreign firm. In 1937, Li & Fung’s business center shifted from the war-torn Guangzhou to relatively safe area – Hong Kong, and Li & Fung Limited was formally incorporated in Hong Kong. In the early of 1970s, William Fung and Victor Fund took over the company. And the brothers restructured the business and formulated a series of strategic plans, such as the “Three-Years Plan”. In addition, Li & Fung has also started several successful mergers and acquisitions. This not only laid a favorable foundation for Li & Fung to explore the European market and the American market, but also it was the beginning of the rapid development of Li & Fung. “Li & Fung Limited acquired Inchcape Buying Services (also known as Dodwell), thereby adding a significant European customer base to complement its existing strength in the US, and also doubling Li & Fung’s size (Li & Fung 2018).” Merger and acquisitions have become the main way of Li & Fung expansion enterprise.
With the rapid development of information technology and the accelerating trend of economic globalization and integration, enterprises must constantly innovate their management models in order to adapt to these changed and gain a competitive advantage. Li & Fung needed to change their existing simple model, “the company needed to source everywhere, including the developed world, focusing on non-durable customer goods, and selling them to the developing worlds (Macfarlan, 2012).” Thus, setting up a distribution network in Asia is a matter of great urgency, without this urgency Li & Fung could lose its best opportunity of entering the emerging markets.
Analysis of Alternatives
Option 1: Start from Scratch
One of the advantage of this option is that it does not limit where the LF Asian should start their business with. Although Li & Fung is knowing as an export trading company, but it is not merely as agents, brokers or distributor. In the general sense, it’s no longer a trading company, its function is far beyond of general export trade or intermediary. Li & Fung offers one-stop services to their customers, but not for themselves. In other words, after receiving an order from customer, Li & Fung does not simply purchase goods directly from a company, or subcontract it directly to a company to produce the goods. Instead, Li & Fung customized a value chain for each order. Linking the entire supply chain from the choice of suppliers, purchase of raw materials, and the determination of the manufacturer to the formulation of production plan, schedule control, quality control and final delivery process into a complete supply chain and managing it effectively. Li & Fung does not own any of facility, hence if Li & Fung start LF Asia from scratch. It can start in any field that Li & Fung has strongest point, such as product design or sourcing raw materials.
Entering to the Asia market and selling non-durable goods to developing world is a new challenge to Li & Fung. The major disadvantage of this option is that compared to other competitors, the brand-new company is not competitive. Start LF Asia from scratch means the company has to build their brand name and customer loyalty from nothing. This will be a time-consuming process. The target market for LF Asia is different from LF USA and LF Europe. People in developing countries may know Li & Fung as a multinational corporation and export goods from developing countries to developed countries. They are knowing nothing about Li & Fung is trying to reverse their business model. Thus, customer in developing countries may hold a wait-and-see attitude toward to LF Asia. In additional, the brand-new company will need to have experienced management and well-trained employee to keep the company running. This means that LF Asia may not have enough customers or staff in the short term of time if the company choose to start from scratch.
Option 2: Through small and incremental acquisition
The measure of acquisition is to determine whether the acquisition can optimize efficiency, increase profitability, and help the company expand the market region or customer network or not. The benefits of this option are listed below:
· Li & Fung has successful experience in the acquisition of the U.S. market and the European market. This provides a good basis for entering the Asian market through acquisitions. LF Asia would strengthen their strong points, and they can avoid the same mistakes that they made in the past.
· Access to intangible assets. This is exactly the opposite of disadvantage in Option 1. Acquiring the existing company means acquiring all its human capital (which are the staff working in the company), customer capital and structural capital (the network with the customers). The foreign trade industry is very reliant on experience, competent managers are very precious. Li & Fung has a very powerful incentive mechanism, the managers can obtain the dividend according to the results obtained. In the same time, the renewal of the “three- year plant” has made manager very motivated. For example, Bruce Rockowitz, the CEO of Li & Fung joined the company as a result of an acquisition.
· Co-location acquisition strategy can expand the company’s purchasing power to the whole world, expand the customer base and make the regional distribution function more reasonable.
· The acquisition will allow Li & Fung to optimize the allocation of resources and enter the Asian market within a short period of time. A big acquisition can instantly open the name of LF Asia to the developing market.
This option has advantages, also has disadvantage with it. There are two main opposites to this option and listed below:
· First of all is financing risk. In general, mergers and acquisitions require substantial financial support. No matter chooses which kinds of financing options, there is a certain financing risk exist. If the price is paid too high by the acquirer in the acquisition activity, it may cause the capital structure to deteriorate after the acquisition and the debt ratio will be too large and it may lead the company to bankruptcy.
· Secondly, cultural differences make acquisitions and merge difficult. The onesize fits all management methods may not work here. There are a lot of developing countries in the Asia. Every country has different languages, legal treaties and religious beliefs. A manager from another country will not know the local customs, and it will make hard to communicate with the customer and subordinate staff.
After analyzing the advantages and disadvantages of each options, the best option for LF Asia is option 2, which is building LF Asia with an acquisition. As stated in the Analysis section, this option could help LF enter in Asia market in a short of time, and also proving the resources to help LF Asia to be successes. Each of Li & Fung’s acquisitions is based on the needs of business, complemented by a “fill in the mosaic” of the Li & Fung strategy. The company does not need to create its own brand for the immediate benefit because these brands inevitably conflict with the major brands that Li & Fung serves. Such conflicting business models inevitably hamper the long-term development of the company. In order to eliminating complexity that bring by cultural difference, they should keep eyes on the people who has potential to manage cross cultural
when Li & Fung start on the acquisition.
LF Asia was established through an acquisition. In 2010, Li & Fung acquired an Asia-based company called Integrated Distribution Services Group (IDS). “The IDS acquisition provided Li & Fung a platform to provide distribution service in Asia, similar to the ways it did in the U.S and Europe (Macfarlan, 2012).” This shows that the acquisition of IDS is not only expanded Li & Fung’s geographical coverage, but not gave the company a better ability to provide customers with the most comprehensive supply chain solutions.
For today’s world, LF Asia has achieved a great success in the distribution of consumer goods and healthcare products. LF Asia has developing a long-term partnership with several world-renowned healthcare brand and fast-moving consumer goods brand. LF Asia has seven operation offices across the east Asia, they have office located in China, Thailand and other developing countries (See Exhibit 1 for LF Asia’s offices location.) In addition, LF Asia is doing business with a lot of famous brands all over the world, such as Unilever, Nutriben and Nivea (see Exhibit 2 for LF Asia’s customer). According to the Asia Today news, in July 2016, LF Asia is selling their healthcare and consumer goods distribution operations to Dah Chong Hong Holdings Limited. “As of 1 Nov 2017, LF Asia’s healthcare business will change its name to DCH Auriga Ltd (Asia Today, 2017).”
Overall, Li & Fung is really successful as an enterprise. Li & Fung is recognized as a global leader in supply chain management. It has a lot to do with how they manage the company with modern management ideas. LF Asia is part of “three-year plan for 2011-2013”, Li & Fung adopts a three-year plan to continuously improve its business. For Li & Fung at any time, opportunities and challenges are always coexisting. The only way Li & Fung to go further is by seizing the opportunities and facing the challenges.