Trading Up

By Chaim Estulin / Hong Kong

In any family firm, there is that moment when parent and boss intersect. For Hong Kong billionaire William Fung, that moment has arrived, and with it comes his own special predicament. In 1972, as a brash 23-year-old fresh out of Harvard Business School, he reluctantly joined Li & Fung, a trading company co-founded by his grandfather. William's first move was "to get rid of the family deadwood," he says, by taking the company public. His son Terence, 25, recently joined the business, and William, a drafter of Hong Kong's mini-constitution who is famous for having a judicious opinion about everything, isn't sure how to play this one. "This is a meritocracy," he affirms, and then grins. "But I am hoping that we are creating an environment he will like."

If Terence, a fastidious Princeton grad, likes the environment, it will probably be because it is very different from the one his father--and new boss--inherited. Founded a century ago to hawk Canton-made goods such as porcelain, silk and fireworks to the U.S., Li & Fung is the leader among middleman companies, fashioning the world into a smooth-running assembly line in which buttons produced in Sri Lanka and velvet milled in Italy are sewn into a vest at a Shenzhen factory and shipped on time to a store near you. Leading an army of 7,162 workers in nearly 40 countries, Li & Fung is the world's largest consumer-products sourcing company, last year managing the manufacture of more than $6 billion worth of toys, clothes, memorabilia and even auto parts for the likes of Abercrombie & Fitch, Advance Auto Parts, Coke and Kohl's. "They are our eyes and ears," says Laura Willensky, vice president of merchandising and design for Gymboree, a San Francisco--based women's- and children's-apparel chain.

But the winds are shifting, and the middleman is becoming obsolete. "Traditional trading firms are dying off," says Victor Lo, an industrial and manufacturing lecturer at the University of Hong Kong. "They have to transform." Brands and retailers have been consolidating, liposuctioning off layers to better battle Goliaths Wal-Mart and Target--which mostly do their own sourcing. A developing China and the Internet have made it simpler and more reliable for buyers to communicate directly with low-cost factories. Li & Fung has been able to achieve an average annual growth rate of more than 20% over the past decade. But going forward won't be as easy.

What's the solution? Li & Fung is moving up the food chain, becoming a brand-managing powerhouse. This year it is on track to sell more than $200 million of licensed goods like Levi's Red Tab and Signature tops and Disney plush toys--a business many analysts expect to grow to $1 billion by 2007. In August it paid $124 million for the U.S.-based Briefly Stated, which produces pajamas, underwear and T shirts for such diverse brands as Professional Bull Riders Inc. and Catwoman. Eradicating the middleman role for some products could open up other opportunities for the firm too. "This will help us do business with certain retailers in the world which we haven't been able to before--like Wal-Mart," says Bruce Rockowitz, president of Li & Fung's trading division. The Fungs "tend to be visionary," says Paul McKenzie, head of consumer research in Hong Kong for investment bank CLSA, "and get positioned early for change."

That's a lucky thing because in the globalized manufacturing jungle, it's not survival just of the fittest but also of the nimblest. When Fung took the firm public in the early 1970s--the first Chinese trading company to list on a stock market--he displayed his knack for timing. Unencumbered by generations of cousins and uncles, Fung was able to take advantage of the dawn of the roaring Asian tigers, moving his manufacturing operations to Taiwan and South Korea, then Thailand, Indonesia and the Philippines, networking with Asia's entrepreneurial Chinese diaspora. Today about half the firm's manufacturing is done in China. "The truth of the matter is, as things shifted, we were better at doing things because we are Chinese," says Fung. "We didn't have to go through interpreters."

The extended Fung family, which controls 42% of the company's equity, still plays an important part in the business. William's eldest brother Victor--a former Harvard Business School professor whose name is often raised as a possible future leader for Hong Kong--is chairman. At the family's weekly Sunday brunches at a mountainside luxury tower that houses three generations of Fungs, the brothers usually pair off to talk shop. But unlike many other Asian companies, which are treated as opaque clan fiefs, Li & Fung produces a straight-talking triennial three-year plan, and the brothers are regularly ranked as top managers in Asia.

Ironically, some of the brands Li & Fung is snapping up are the very ones it helped doom: American labels that were slow to export manufacturing overseas. Last year it acquired the license to sell Royal Velvet, a home-textiles brand that went bust in '03. "We wanted a company that knew how to source overseas," says Rick Platt, managing director of Official Pillowtex LLC, which bought the bankrupt firm.

William Fung has a clear idea of where all this streamlining will lead. "In 10, 20 years, consumers will buy directly from the factory over the Internet," he says. "We want to be the people operating it." The new Fung recruit, meanwhile, already shows some attributes needed in the fast-paced global industry. He has a penchant for fast cars (he zips around in one of his two black souped-up BMW M5s) and air travel (he writes a private blog about his plane trips). "It's good to be here," Terence says. A techie who once ran his own online venture, Terence may have just the right experience to help spark a new manufacturing revolution.