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Li & Fung Pushes China As Key Sourcing Destination

Li & Fung, which released earnings numbers this week showing falling profits, stated in its earnings call that China has enduring importance as a sourcing destination. The country is key for retailers and importers.

“China continues to be number one,” LF president and CEO Bruce Rockowitz said, announcing the company’s earnings. “A lot of people talk about the end of China; it’s not true. China is the key country for a company that is an importer or retailer.”

Much ink has been spilled over the impact of higher labor costs in China, which have been rising at double-digit rate for over a decade. Rockowitz said that many companies are mitigating those costs by moving to the interior of the country, where wages are lower. Companies are also working with more mechanized factories that use manpower more efficiently.

At the same time, Li & Fung and other firms have been diversifying their sourcing to Bangladesh, Pakistan, Vietnam, and a handful of other Southeast Asian countries. The strategy, called China+, emphasizes appropriate sourcing, rather than one-stop solutions.

LF’s sourcing from Bangladesh is up 13% over last year, and the country is now the company’s second largest sourcing destination.

The increase comes despite a spate of extremely serious compliance problems in the country, including the deadliest ever disaster in the garment industry, the Rana Plaza collapse, which killed over 1100 workers. The Tazreen Fashions fire, which came before the collapse, also contributed to a growing awareness of the need to improve factory conditions and worker safety.

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Rockowitz said that his company has long been a thought leader in this area. LF focuses on long-term relationships with suppliers. He said, “One of the things we felt it was very important to make sure of was compliance, and that was something we started 15 – 20 years ago, before people were really that focused on it.

The company sees it as part of preserving its reputation, and making sure that agents and retailers feel comfortable doing business with them. Rockowitz called compliance “key,” for businesses operating in the western world.

In his earnings announcement, he also spoke to recent pricing trends, saying that prices are currently stable, but are set to rise in the next three years.

Rockowitz said that pricing stability is underwritten by stable commodity prices, which he says will keep prices stable for at least two years.

“But in the long term it’s going to be higher prices, I don’t think that’s changed. The cost of wages is going up; if you read the China five-year plan, they’ve programmed in a 13% increase every year, and other countries price off China, so there is no doubt that labor prices will go up.”

Commodity prices have stabilized largely due to the economic downturn, and as the economy picks back up, so will prices. Cotton prices fluctuated a few years ago based on speculation, but actual demand will start to rise.

One aspect of the LF earnings report was that an increasing share of turnover has been pushed into the second quarter of the year. Rockowitz spoke to this, chalking it up to shorter lead times, which leads to orders being placed later in the season.

Costs are fixed, which means that the shift is pushing profits into the second half of the year. A 1% shift in turnover translates into a 2% change in margin over the half that the revenue falls into.

LF’s first half profit drop largely had to do with $198 million dollars in non-cash gains in 2012. Otherwise, profit would only have fallen by 15%.

LF USA, which saw the ascension of Dow Famulak as President, is successfully completing its turnaround plan, Rockowitz said. The division hit bottom at the beginning of this year, and is now climbing back up.

Rockowitz emphasized that the brand portfolio is open to changes, particularly with regard to margin improvement, restructuring, integration, and top line growth. He did state that large-scale changes were unlikely at this time, however.