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William Fung (Int'l Edition)


International -- The Stars of Asia -- Managers

William Fung (int'l edition)

Group Managing Director -- Li & Fung -- Hong Kong

It's tough to make a living as a Hong Kong middleman. Just ask William Fung, the 51-year-old group managing director of trading company Li & Fung. Back in the 1970s, he recalls, his family-run company supplied blue jeans to Gap Inc. for $28 a pair. Today, with customers constantly demanding that Fung keep his costs down, that same pair of blue jeans is going to the Gap for--you guessed it--$28. "The pressure is tremendous," says Fung.

But he keeps finding ways to ease the cost squeeze. Li & Fung, whose U.S. clients include Toys `R' Us, Avon, and Gymboree, has sailed smoothly through the Asian crisis into the Asian recovery, all the while profiting in a notoriously low-margin business. Sales rose 14% last year, to $2.1 billion, and profits were $74 million--up 26%. Fung predicts even better times ahead. "In the last three years, we doubled our profits," he says, "and we will double them again in the next three years."

Fung is part of a high-powered team. His older brother Victor is Li & Fung's chairman and one of Hong Kong's consummate insiders: chairman of Hong Kong's Airport Authority, the city's Trade Development Council, and Prudential Asia's direct-investment arm. Day-to-day operations at Li & Fung are William's responsibility.

The brothers can thank their grandfather for picking the right market when he started nearly a century ago. While others in British-ruled Hong Kong tried to link up with big English firms, the Fung family focused on products for free-spending Americans. That U.S. concentration has seen the company through three generations. "Our tendency has always been to work with the Yankee traders," says Fung, who graduated from Princeton University in 1970; at the ceremony, he wore an armband to protest the killings at Kent State. He went on to Harvard Business School.

To slash costs, the Fungs play a global game. Now operating in 30 countries, they are adept at buying components from high-cost countries and assembling them cheaply elsewhere. To sell a ski jacket to a customer, Fung gets microfiber from South Korea, lining from Taiwan, tags and labels from Hong Kong, and zippers from Japan, then finds a factory to put them together in China. "That's a multinational joint venture," he says.

The Internet, Fung insists, won't change his tactics. While a host of dot-coms is creating online exchanges that match Asian suppliers with Western buyers, Fung says they won't undermine his business. "People want fewer suppliers, not more," he says.

He is always looking for new frontiers: most recently Swaziland and Madagascar, now that a new U.S. law makes it easier to export to the U.S. from Africa. Where there is a cost-cutting opportunity, you can bet Fung is not going to miss it.Return to top

ONLINE ORIGINAL

A Chat with William Fung

William Fung is a proud New Economy skeptic. "I'm not an Internet guy -- I'm a business guy," says the 51-year-old Group Managing Director of Li & Fung, one of Asia's biggest trading companies and Hong Kong's hottest stocks. Even so, Fung is now making a big push into one of the trendiest areas of the Internet -- business-to-business e-commerce. He recently spoke to Asia Correspondent Bruce Einhorn. Note: A slightly modified version of this interview first ran in Business Week Online's weekly column, Online Asia.Q: What do you think about the development of Asian Internet companies so far?

A: The problem that I find with the Internet in general in Asia is that they all seem to be pale imitations of American models. They are all basically copying American models. The popularity of B2B now is because that is what is popular in America now.Q: But later this year you're planning to launch an Internet subsidiary targeting the B2B market. Aren't you guilty of being a copycat, too?

A: First, this is an outcrop of our business. It's not something we are trying to clone from the U.S. Our business has always been B2B. It's not something that is just the flavor of the month. We are not just inventing a biz. We are not doing a portal or an exchange. The Internet plays in Asia and Hong Kong in particular seem to be pale imitations of U.S. counterparts.Q: What's wrong with the B2B exchange model?

A: When we first looked, we looked at exchanges and portals. What we decided was that that was not a biz model that we think makes money. Most of the exchanges are still in the matchmaking stage of development. That's a very low-value-added biz. The first thing that you read about with supply-chain management theory is that people want fewer suppliers, not more.Q: So how will you be different?

A: The [original] idea of a trading company was that a middleman, either because of his language skills or his knowledge of the market, was the broker between the buyer and the seller. That was from my grandfather's days till after the War. Then in my father's days, the trading company was the one that supervised quality and put the people together in the market.

The [B2B] portals today don't do that. A lot of the people putting together portals don't even have that basic thing, introducing quality control. We have decided to use the Internet to aggregate the small and mid-sized guys and leverage them off our traditional supply base -- 6,000 suppliers globally -- and leverage that supply base to service the small and midsized guys.Q: But doesn't that risk cannibalizing your main business?

A: Li & Fung has done private-label manufacturing for a long time. But we can only do this if the customers are very large and they have the scale, since you need intensive interaction when you do private-label work. In order to capture economies of scale, we need large customers, not small ones. That's the bedrock of Li & Fung's biz. [Before] the Internet, we haven't been able to service the smaller retailers and manufacturers because of their lack of scale, it's not cost-effective. The cutoff is $100 million in sales, too small to buy directly from us. We haven't been able to touch that whole market at all.Q: What do you figure you can offer those smaller customers on the Net?

A: What the Internet does for us is allow us to reach the small and mid-sized guys we could never reach before. What do they want? What the big guys have: a private label, their own differentiated line, and at the same price as the big guys. If you own a small chain of clothing stores in the U.S., one of the basic building blocks is "own line,'' your own polo shirt. There's no glory in selling Tommy Hilfiger.

The Internet allows us to reach those people -- without intensive interaction -- and to aggregate their orders. We can allow you different style, limited customization using American yarn, knitted in China, assembled in Bangladesh. In order for us to achieve economies of scale, [we] can't allow you to change everything. But we can allow you to put in our own label, embroidery, colors, package, box. We can reap the economics of mass production, but with enough customization.Q: How big do you figure to market this?

A: One of the beauties of B2B is that there is a finite number of customers. So the marketing costs are much different. You don't have to take out Super Bowl ads, or plaster the New York subway system. We have the names and addresses of these people, we can reach them through direct mail, sales force. Our preliminary target is to reach 1,000 of these guys. We expect to do $2 million with them each, or $2 billion total in 5 years. By end of 2001 we can roll out to Europe, a much more fertile market than the U.S.Q: Meanwhile, your traditional company has been soaring. What do

you see next?

A: In last three years, we doubled our profits. We will double again in the next three years. We can have 50% increase in turnover and an increase in operating profits from 3% to 4%.Q: If the U.S. Congress approves Permanent Normal Trade Relations for China and Beijing then joins the World Trade Organization, what will be the effect for you and others in Hong Kong?

A: You will see a boom in Hong Kong that you haven't seen in a long time. With this thing, China will open up and the beachhead is definitely Hong Kong. In distribution services, in China foreigners are not allowed wholly to own retail or wholesale operations. With WTO, those rules will be abolished in three years. You will be able to go in there direct your own thing. People who were just in the export business are saying they will put in larger factories. I know a guy who, instead of building a 400-machine plant for export, will put in a 1000-machine plant because the domestic market is opening up. It's going to be such a boom.Return to top


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