Li & Fung H1 profit plunges 22pc and faces long-term challenges from supply chain change

HONG Kong's long established company, Li & Fung, a major provider of integrated supply chain services for retailers in both western and Asia-Pacific markets, is feeling the pinch from both the short-term economic climate and possibly longer term trends in supply chain management.

The company's logistics business did reasonably well, with a recovery in profits leading to a two per cent margin in terms of return on sales. But, with sales of US$213 million, the logistics business represents a small proportion of the group with half-yearly revenue of $10 billion.

Li & Fung was affected by volatile costs, notably increases in the price of leather, although the company stated that the outlook was generally one of falling raw material costs. On the demand side the US, which is Li & Fung's largest market, continued to grow, although, at a modest rate. The dynamics of the European market, however, were poor.

The company's acquisition strategy of purchasing trading and distribution companies at a furious rate over the past few years has been questioned by investors. In the most recent results these acquisitions have failed to deliver the profits envisaged, Transport Intelligence reported.

However, what clearly is troubling the company in the long term is the changes in supply chain strategy by a number of its retail customers. The traditional strength of Li & Fung was its ability to negotiate with small manufacturers in Southern China and manage the logistics between locations such as Shenzhen and the US.

But today, many larger retailers are more confident in the ability to do business in China and are considering cutting-out the middle-man. If this more hands-on approach becomes widely adopted, it would be a significant threat to the company.