“Supply chain in the age of globalisation”

February 2012

(Part 1 of 1) Conversation with William Fung, Executive Deputy Chairman of Li & Fung, on – globalisation of the manufacturing industry – building a knowledge network – managing capital flow.

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Here is the transcript of the video.

1. Globalisation of the manufacturing industry

Emmanuel Daniel (ED): I’m very pleased to be able to speak with William Fung, the executive director of Li & Fung, global supply chain logistics behemoth which has 15,000 suppliers in 40 economies.

You are probably the best person to be able to give us a sense of how the supply chain world is evolving in the context of the many changes being put on us in the global economy today. On one hand, the regulators are coming in and there is a greater push in terms of domesticating the marketplace, especially in the U.S. and in some developed marketplaces.

On the other hand, there’s the inevitability of the impact of the internet and global trade flows. To contextualize what we need to deal with today, can you give us your take of the conversation between President Obama and Steve Jobs last year, where President Obama’s question was – “Can we bring the manufacturing jobs back to the U.S.?”

The flat answer, from Steve Jobs, was no. The reason being manufacturing, as a global complexity, had changed so much. When you read that episode, what occurred in your mind? And what did you concur with and what did you have in your mind that you think was unique that we understand better in Asia?

William Fung (WF): Well, I think what Steve Jobs said was really just a statement of fact of how the manufacturing industry has globalized over the last 30 years. In fact, the real globalization happened with the advent of China, with Deng Xiaoping opening up China in 1979. With this, the world basically increased its labour force by 20%, or as some say, 25%.

It is inevitable that manufacturing jobs in a globalized world, where transportation costs have dramatically lowered in the past few decades, and barriers to trade lowered through the efforts of WTO, has really been for the betterment of all economies around the world. For something like that, you cannot turn the clock back.

A better way of looking at the flow of not only traded goods, but also traded services, is in determining what are tradable goods and services and what are not.

Tradable goods and services are things that will inevitably be globalized because by definition they are tradable. Services have only come in recent years. The most famous example would be the IT out of Bangalore. People would not have thought that was a tradable service two decades ago. But it is now very tradable.

But there are also non-tradable goods and services that have a place in the economy, and I think President Obama would be wise to be realistic and encourage the growth of non-tradable goods and services, rather than hinder the progress of the tradable goods and services around the world.

ED: The formula that seems to be coming in shape is that hard goods and services are focused on China, soft skills in other economies like India, and a role for the U.S. in the high value added services. With regards to the desire to bring manufacturing back into the U.S., what do you think President Obama should be doing?

WF: When you talk about manufacturing, there are many stages involved. The final assembly, for consumer goods in particular, is labour-intensive and tends to gravitate towards labour intensive countries like China and India. But there are also parts of the world where things are more knowledge-intensive and subject to innovation.

ED: And you think that will not change? Do you think that will remain in Western society?

WF: Western societies, like America, and in terms of design and fashion, Europe, seem to be keeping the edge very well. If you look around you, all the luxury labels are French or Italian; if you look at the Czarists of this world, they still dominate. So it’s a matter of finding what your comparative advantage is in this new world.

ED: Given the history of Li & Fung and how you have evolved, as well as the growth years for Li & Fung in the opening up of China as you mentioned before, in terms of the value–added aspect of tradable goods, you speak in terms of networks because you represent such a great variety of supply and demand in the networks that you serve. Given that history, where is the world today, in term of the winners and losers of the production process?

WF: Well, the roles of winners and losers keep changing. Looking at recent news from China, especially in the past year or two, people have been talking about the country’s rising costs. In fact, there is a conscious government effort in China to raise the living standards of the people. Talks in the latest 12th Five-Year Plan indicate that plans are afoot for a 13%-plus increase in minimum wage across China for the next five years. This mean wages in China will almost double, to some 83%.

ED: Now I want to also add the fact that China is also becoming a consumption nation. What are the trends you are seeing in your own business as these complexities are added on?

WF: Back in the day, some 20 or 30 years ago, things seemed more of a one-directional trade. For consumer goods that are labour-intensive, one manufactured in developing countries where labour is relatively plentiful and at better value, and shipped to the consuming countries of the world, which primarily consisted of the developed markets.

But that equation is now changing. A country like China now has the domestic market and wants its domestic consumption to grow and to consume world-class goods. This market is becoming one that we can sell to as well. So this new equation will see us try to manufacture wherever in the world where it is advantageous for us to do so. For example, certain technology products could be manufactured in developed countries, to be sold everywhere in the world, including under-developed countries.

ED: As an organization, are you a Hong Kong-centric organization? Or do you have multiple nodes as it were?

WF: It’s basically multiple nodes. Although Hong Kong represent our headquarters, but we work in all 40 economies around the world and they are becoming both our markets as well as places we sell to.

2. Building a knowledge network

ED: Describe to me the knowledge flow in your network. Where does it originate and where is the value-add built? Yours is a private, wholly owned company in Hong Kong with profits booked in Hong Kong, but how do you manage this multiplicity of origination points in the knowledge part of your business?

WF: This is something that we have built up over a very long time. The idea, our basic assumption, is that the world is flat. You go the best place in the world to manufacture any product. That’s how you get world-class quality and world-class products. Once you have that in mind, you can actually go wherever it is in the world you should be going. But things are not always black or white. Sometimes, it is better for us to manufacture everything in China while at other times, in Europe, where response is tremendously quick to a fashion trend. Sometimes, we need a combination of both.

ED: There is a rising sun, or a shooting star, in the sky at the moment – the rise of Myanmar. How is that going to influence your business?

WF: Myanmar is arriving at the party just like many other developing countries have done in the past, and this includes Vietnam, Cambodia, and countries that have been there, gone away and come back, like Indonesia.

ED: Do you find that you have to build your knowledge base of what’s possible?

WF: Yes, we are constantly updating it.

ED: What is Myanmar potentially good for in the trading industry?

WF: Myanmar definitely follows the model of a country where labour is plentiful. They intend to move from the agricultural and industrial sectors, so labour-intensive manufacturing is definitely advisable. Looking at the histories of other neighbouring countries however, Myanmar faces the political stigma dilemma and they don’t seem to be addressing that. We have customers who will not buy from Myanmar because of this issue, even if prices are lower.

ED: it is interesting that even as these lowest cost producers enter the marketplace, the rules are changing in that they will have to meet child labour and environmental requirements. So, the entry level is going to be higher for Myanmar than it would have been for Vietnam or Cambodia.

WF: First of all, let me say that our business development has a lot of respect for human rights – basic human rights and labour conditions, and also for the environment. You cannot have people buying from places that do not conform to these basic rights. A marketing company’s greatest equity is its brand, and as such, companies cannot afford to have their brands associated with any malpractices in the market.

And we are very much part of that process. We ensure that even if prices are at their cheapest, we look elsewhere if there are problems with like child labour and other issues. Most countries involved in the trade understand the minimum requirements they must conform. Only after then does one compete on labour availability.

3. Managing capital flow

ED: I asked you about the role of knowledge in the networks that you have built, but the role of capital, where does it originate from, and how do you manage the flow of capital in a trade network that you provide?

WF: I think that knowledge is very important. Capital has become globalized. I think that the imminent bank reforms are going to restrictive, geographically. Right now, capital flow is unrestricted, it is everywhere in the world. The market too, is fairly open, except for certain countries with capital controls.

ED: In terms of putting their own stake in the global trade market place, countries have given up on multi-lateral trade agreements, and there are so many multi-bilateral agreements coming together in the world. What are the pros and cons of taking a bilateral approach? It seems to be working and moving faster than any attempt at a multi-lateral approach.

WF: First of all, a multi-lateral system is always harder to put in place because it requires the acquiescence of all parties. However that is certainly the more desirable option, the idea favoured by most nations, where everybody is equally treated. The bilateral approach certainly makes trade more complex and it diverts trade to places where it should not normally be.

ED: Do you see examples of that?

WF: It is everywhere. Look at the EU, there is free trade within EU. If you look at NAFTA, you’re talking about the newer bi-laterals and the free trade areas. All of these are attempts to eventually move towards a multi-lateral system. And I think it is the frustration of putting together a workable multi-lateral system that has prompted governments to choose to deal with their allies, where their interests coincide, like ASEAN.

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