The CEO on the Trade War’s Front Lines Says It Isn’t All Bleak

Date: Thursday, July 11, 2019
Source: Bloomburg

Spencer Fung, whose company supplies Walmart and Nike, sees opportunities in the upheaval of the global supply chain.

Li & Fung Ltd., the world’s largest supplier of consumer goods, has a front-line view of the battlefield in the trade war that’s changing the landscape for global manufacturing. The company, whose customers include Walmart and Nike, is being pushed by worried U.S. clients to accelerate a shift away from China, putting factories there at risk.

Spencer Fung, chief executive officer of Li & Fung, says that while the tariff situation is creating major upheaval to the global supply chain, he also sees opportunities—for factories, multinationals and Li & Fung itself. The CEO spoke to Bloomberg about the transformations taking shape. Comments have been edited and condensed.

How is the trade war hurting China manufacturing?

In the last four, five years, a lot of small factories were shut down, just because they were not competitive. With a trade war, that will continue even more. If you’re a small factory and you have your only customer pulling out, then you know you don’t have cash flow to survive for more than three months.

What are alternatives for factories as U.S. companies pull away?

In China right now, there are a lot of factories with less and less orders. They’re actually getting a little bit urgent and desperate. They need to fill the capacity, so they’re offering actually pretty good prices to anybody. It is a buying opportunity for European retailers and any non-U.S. retailer. Last year was the beginning. Now, more and more so. The Europeans will come, the Japanese will come, Southeast Asian companies will come. Domestic production will take more of the capacity, so it won’t just go away.

We’re also helping a lot of Chinese manufacturers move out of China. They will reduce producing in China over time. They will continue to operate as a factory, but the factories will be outside. They will be in Pakistan, Bangladesh, Indonesia, India and so on, but they will still control everything from China. That’s the evolution we’ve seen in most countries and this will happen to China as well.


Is this the end of the ‘Made in China’ era?

No way. China has so much production capacity. The amount of goods produced in China compared to the next biggest country is like 10 times. There is not any country that can take over China—there is not even a collection of countries that can take over China—because it is so dominant. What will likely happen is the U.S. companies need to diversify away, but not fully out. So they won’t leave China.

Are there other positives for China’s outlook?

For the next 10 years, China will continue to dominate non-apparel. China is absolutely the fastest country because it’s got all the supporting industries around. It’s still speeding up. So if you want something fast, like fast fashion, China is the place to go. Also, China is very good with small production. It has a lot of natural advantages, and they continue to advance.

What’s ahead for the next decade in global trade?

The next decade is going to be diversification. Because of the lack of control of what happens and the lack of protection, diversification is the only way to managing risk today, because there’s no safe haven out there.

Vietnam was the No. 1 beneficiary of the trade war. Well, guess what? Mr. Trump woke up one day and said, Vietnam is the biggest abuser. What you cannot do is respond to a tweet and change your strategy one day, and the next week that goes the other direction. Moving production takes two years. It’s not like clicking on an e-commerce site that you can buy from Vietnam one day, and then buy from China the other day.

What makes you most excited about the future?

We’re pretty optimistic, because it turns out that this will create the biggest opportunity for us in the last 20 years. The more complex the world is, the more suitable for companies like ourselves, because we have a diversified network.

If you stay status quo and don’t change, new forces will come in and eat up your value year after year. And that’s what happened to us. We didn’t change fast enough. Now that we’re innovating on digital and building a faster global network, we’re providing value. We’re not at the bottom yet, but I can actually see the bottom for the first time in many years.

 

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