Thu, Jul 11, 2019 - Page 10 News List

Dispute threatens PRC factories’ existence: supplier

Bloomberg

Li & Fung Ltd chief executive Spencer Fung stands in the company’s offices in Hong Kong on Friday last week.

Photo: Bloomberg

The world’s largest supplier of consumer goods says China’s factories are getting “urgent and desperate” as worried US retailers accelerate a move out of the country amid heightened trade tensions.

China will see more factory shutdowns as the trade dispute that’s roiled the global supply chain exacerbates an exodus, Li & Fung Ltd (利豐) chief executive Spencer Fung (馮裕鈞) said.

The company, which designs, sources and transports consumer goods from Asia for some of the world’s biggest retailers, including Walmart Inc and Nike Inc, is being pushed by US clients to shift production out of China.

“US clients are definitely very, very worried,” Fung said in an interview.

“Everyone is making razor-thin margins already and most people have a huge percentage in China. So if the biggest source increases the price by 25 percent, they are worried,” he said, referring to the scale of tariffs threatened on all Chinese imports to the US by US President Donald Trump.

Though Fung did not specify Walmart by name, the US retailer is the company’s second-biggest customer after Kohl’s, accounting for 7.6 percent of revenue, according to Bloomberg data.

A spokeswoman for Walmart declined to comment.

Due to its position as middleman connecting US retail giants to low-cost Asian factories, Li & Fung has a unique, ground-level perspective of the seismic shifts taking place around the world due to the trade dispute.

Although the US and China have resumed talks on a deal, there are growing signs that the global supply chain, long reliant on China as the factory to the world, is being permanently transformed.

Intel has said it is reviewing its global supply chain, while others including Apple Inc and Amazon.com Ince are reportedly doing the same.

“Nobody’s investing, nobody’s buying. The trade war is causing people to stop investment because they don’t know where to put the money,” the Silicon Valley-trained Fung said.

“Many people put the money into Vietnam with one tweet,” he said, referring to Trump’s habit of announcing US trade policy over the social media tool.

The Hong Kong-based supply chain and logistics provider, which relies heavily on trade between the world’s two biggest economies to make its fortune, will see China’s contribution to its total sourcing fall from 59 percent in 2015 to less than half this year for the first time.

While Chinese factories suffer, manufacturers in other Asian hubs become beneficiaries — up to a point. US retailers have already taken up all the manufacturing capacity in Vietnam in their rush out of China, Fung said, highlighting the lack of scale that prevents other destinations from fully substituting for China’s manufacturing might.

“Vietnam, for example, is full, completely full,” he said. “There’s no extra capacity for the US companies to get in.”

Meanwhile, Chinese factories are lowering asking prices in their desperation, creating an opportunity for European and Japanese consumer brands.

Li & Fung is advising its non-US clients to move in and take advantage of the mature supply chain and lower costs.

“It is a buying opportunity for European and non-US retailers,” Fung said. “In China, there are a lot of factories with less and less orders. They’re offering actually pretty good prices to anybody.”

Li & Fung, which started its trading business 113 years ago, has seen a steep profit decline in the last five years as the rise of e-commerce platforms like those of Alibaba Group Holding Ltd (阿里巴巴) and Amazon cut out the middleman, and its retail clients faced waves of store closures.

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