Case study: Li & Fung family business
In this article, I would discuss the lesson we can learn from this Li & Fung’s family. The insights we can get from this family to last over one thousand years is the culture to reinvent itself in order to survive. There are not many Chinese family businesses can last for so long successfully. Starting from 1906 in Guangzhou, Li & Fung was the first Chinese trader export company. Nowadays, it already expands in 40 different countries with over 20,000 staffs.
The succession of a family business is a big challenge. In Chinese, there is a saying that “Wealth could not last for over three generations.”. Even in the United States, according to a study of the family business by Brooklyn College, 70% of the family business cannot pass from the first generation to the second generation. 88% of the family business cannot pass to the third generation. Only 3% of the family business can pass to the fourth generation. However, Li & Fung’s family business is now already in the fourth generation as an exceptional case. Why it can break the rule? What are the success factors?
The answer lies in the global view and opened-mindset of the founders and successors so that the family business was able to ride on the big trend and wave in the macro-economy. For example, at the end of the Qing Dynasty, China was opened to trade. Li & Fung was able to be the first Chinese middle man, who is better than Westerners for Chinese goods. The founders had more opportunities to widen the horizon compared to other traders in mainland China through interactions with foreigners with better English language advantages. Then after World War II, the family business was about to grow together with Hong Kong as a rising manufacturer and clothes export. They also import ball pens and rename it to atomic pen (thanks to the atomic bomb to end the war) in order to make a good profit. Later on, due to the China reform, China became the factory of the world, Li & Fung was benefited from this trend, and the Chinese business contributed to more than 51% of total sourcing business.
However, in the fourth generation these days, it is facing a lot of troubles due to its failure to foresee the digital trend. It can be shown from the fact that Li & Fung refused to invest in Alibaba for three times. The family business was a dominant trade middleman for sourcing and they stuck in their comfort zone. They did not realise that it has a dead business model and start to made irrelevant by Alibaba. The third generation, Victor & William, were happy with a traditional and profitable business so that they have the inability to grasp the e-commerce and internet trend. Figures show that Li & Fung’s profit continues to decline and struggled to boost profit and revenue as global brands change the way they manage their supply chains with the decline of the middleman. From 6th March 2017, Li & Fung was removed from Hang Seng Constituent Stocks, signalling the big challenge of the family business.
Throughout history, it was not the first time for the family business to face challenges and they were able to survive by reinventing itself and pass-through this success factor to the next generations. During the Korean war, the United States had embargo to China, which greatly affected the Hong Kong re-export business of Chinese goods. The family business was able to change direction from focusing on re-export to export Hong Kong local goods in clothing.
During the early days, the family was a traditional family business without international corporate experience. The two brothers of the third generation were studying at Harvard business school in the United States and bring the knowledge of new modern management theory into the old traditional family business. They did not follow the old rules but improve the family business in a professional way. They brought high efficiency and robust system to the family business so that it was able to go public in the stock market, due to their initiation to separate ownership and business management, as well as good governance.
Li & Fung was able to transit from One Boss / Employees system to the proper management hierarchy. The management was improved from family members to professional managers with university degrees. The return of Hong Kong to China during 1997 was also a historical crisis of family business since many Chinese family businesses were immigrant to oversea countries. However, they were still able to survive with the mindset to change and ride on the wave of macro-economy.
Nowadays the fourth generation, Spencer Fung had also success this important family values. He also studied aboard with master in MBA from the United States. He is entrepreneurial with startup experience to co-found an online marketing platform in Silicon Valley. Even with the threat of trade war between the United States and China on tariffs with a lot of small Chinese factories shut down, the family business was able to find to diversity itself out of China to Vietnam and other Asia Pacific countries.
Furthermore, the next big trend these days is on speed, innovation and digitalization. The fourth-generation was able to join as a latecomer with strategic investments to leverage new technologies, reduce the lead time of supply chain and rapid prototyping with 3D virtual design. Li & Fung also invest in advanced analytics to improve speed, cost, lead time and traceability. They have predictive analytics to enhance business performance.
Overall, the family business was successful with the merging of Western modernisation in management and technology with Eastern wisdom in relationship and family values. They have revolutionary ideas to implement change and constant improvement. The family business has a Western system but also Eastern human touch management style. In the United States, efficiency is the number one priority so that the employer-employee relationship is simply based on performance. However, Chinese people have the wisdom to treat human not as a machine. The emotional side with Chinese elements gives staffs a sense of belongings while staying professional. This is critical for the family succession and deals with the challenges faced now by the fourth generation.
