Harder times in China factories

Top News | BLOOMBERG 11 Jul 2019

The world's largest supplier of consumer goods says China factories are becoming "desperate" as US retailers accelerate a move out of the country amid trade tensions.

For China will see more factory shutdowns as the trade war that has roiled the global supply chain exacerbates an exodus, said Spencer Fung, chief executive of Hong Kong-based Li & Fung.

The company, which designs, sources and transports consumer goods from Asia for some of the world's biggest retailers, is being pushed by American clients to shift production from China.

"US clients are definitely very, very worried," Fung said. "Everyone is making razor-thin margins already, and most people have a huge percentage in China.

"So if the biggest source increases the price by 25 percent they are worried," he said about the scale of tariffs threatened by US President Donald Trump on all Chinese imports to the United States.

Although Fung did not specify Walmart by name, the US retailer is his company's second-biggest customer after Kohl's, accounting for 7.6 percent of revenue.

Because of its position as middleman connecting American retail giants to low-cost Asian factories, Li & Fung has a unique, ground-level perspective of the seismic shifts due to the trade war.

Although Beijing and Washington have resumed talks on a deal, there are signs the global supply chain is being transformed permanently.

"Nobody's investing, nobody's buying," Fung said. "The trade war is causing people to stop investment because they don't know where to put the money.

"Many people put the money into Vietnam with one tweet," he added, referring to Trump's habit of announcing US policy on the social media tool.

Li & Fung will see China's contribution to total sourcing fall from 59 percent in 2015 to less than half this year for the first time.

While Chinese factories suffer, manufacturers in other Asian hubs become beneficiaries -- up to a point. American retailers have already taken up all the manufacturing capacity in Vietnam in the rush out of China, said Fung, highlighting a lack of scale that prevents other places from substituting fully for China.

Chinese factories, meanwhile, are lowering prices, and Li & Fung is advising its non-US clients to move in and take advantage of the mature supply chain and lower costs.

Li & Fung, which started its trading business 113 years ago, has seen a steep profit decline in the last five years as e-commerce platforms cut out the middleman and retail clients face store closures.

But a 50-country sourcing network means it can shift out of China nimbly as clients desire.

So core operating profit will continue to decline this year, Fung said, but he's "seeing the bottom."

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