Li & Fung takes on Santa in Asia
By Tom Mitchell in Hong Kong
Published: December 27 2006 20:53 | Last updated: December 27 2006 20:53
What Santa Claus is to the North Pole, Li & Fung is to south China’s manufacturing heartland in the Pearl River Delta.
While the Hong Kong-based, $8.5bn-a-year trading company is neither as old nor as famous as Santa – Li & Fung was established in 1906 – its distribution network is almost as extensive as St Nick’s, with 24,000 employees operating in more than 40 countries.
A fund-manager favourite whose share price has tripled over the past two years, Li & Fung is also arguably as central to Christmas as Santa. It sources a wide range of consumer goods for leading US and European retailers, and in many instances manages their global supply chains as well. It also owns and operates the Toys “R” Us franchise in five Asian markets.
For Li & Fung, however, Christmas comes early, usually around September when orders must be shipped if they are to make it to stores in time for the holiday shopping season.
“Christmas is finished for us after we ship it,” says William Fung, Li & Fung managing director and grandson of the group’s founder. “There’s always a time lag,” he adds, noting that the company is now preoccupied with shipping retail clients’ spring orders.
Statistics compiled by Hong Kong’s Port Development Council show a steady rise in throughput at the territory’s main container port, starting in late summer and peaking in October.
As a result, Li & Fung has a pretty good idea how the Christmas shopping season will shape up long before most children have sent their wish lists to the North Pole.
“We are an early warning system,” says Mr Fung. “Our clients bought quite heavily this year. They thought Christmas would be good.”
Unfortunately, many of Li & Fung’s US clients, who account for 70 per cent of the company’s turnover, were not counting on global warming. The earth’s climactic shift is threatening everything from Santa’s Arctic Circle supply lines to sales of winter clothing.
While Hong Kong is on the same latitude as Havana, this week temperatures in the territory have been colder than they have been in the north-east US, affecting sales of cold-weather gear ordered months previously. From Boston to Washington, would-be shoppers are basking in city parks, putting off purchases of that new fur coat.
“If the weather had been colder, winter clothing would have moved better,” Mr Fung says. “Unfortunately our clients are like farmers – they really have to worry about the weather.”
Willy Lin, vice-chairman of the Hong Kong Textile Council, adds: “Customers are asking us to delay January shipments. It is causing a lot of confusion in the market.”
The toy retailers that Li & Fung sources for have it even tougher. Mr Fung notes that they are pitted against large “big-box” chains, such as Wal-Mart, who often use toys as loss-leaders to draw in parents whom they hope will snap up their higher-margin goods.
Dedicated toy stores, therefore, tend to be cautious in ordering, often flying in a test order in search of the next hot item and ordering more if it sells well. “They don’t go crazy any more and are always on the lookout for that one blockbuster,” Mr Fung says.
While Li & Fung has stuck to its traditional middleman business model in its core US and European offices – matching manufacturers with retailers and managing the supply chains that bind them – in Asia it has ventured into retailing, running the Toys “R” Us franchise in China, Hong Kong, Taiwan, Singapore and Malaysia. Earlier this month it opened its first China store in Shanghai.
Unlike US and European toy retailers, Li & Fung sources for, Christmas sales are not a make-or-break proposition for its own toy stores in Asia.
“Our toy sales are evened out across the year,” Mr Fung says, noting that Chinese New Year, Children’s Day and other holidays are just as important in its four Chinese and one Muslim market. “While Hong Kong and Singapore are very westernised, in Shanghai people really haven’t latched on to Christmas as a concept.”
Read previous parts of the series:
Copyright The Financial Times Limited 2006
Dr Reddy's charts new path for Indian drugmakers
By Amy Yee
Published: December 19 2006 02:00 | Last updated: December 19 2006 02:00
Today, India's pharmaceutical industry is synonymous with generic drugs. But if they live up to their lofty ambitions, Indian drugmakers will become innovators not just copycats.
Dr Reddy's, India's third-largest pharmaceutical company, hopes to lead the way with a diabetes medication that would be India's first original drug. If all goes according to plan, it could be launched in 2010 or 2011.
At its Discovery Research Centre in Hyderabad, a laboratory devoted to developing more profitable original drugs, Dr Reddy's is also working on treatments for oncology, metabolic disorders, cancer, cardiovascular illness and obesity. Dr Reddy's spends 12 to 14 per cent of annual revenue on research and development.
"We are a global generics player on the way to innovation," said GV Prasad, chief executive. "The company is transforming itself into a discovery-led pharmaceutical company."
However, the road from lab to market is fraught with uncertainties. Pfizer serves as a recent example of lurking setbacks. Shares in the world's largest drugmaker plunged this month following news that it would halt tests of an experimental cholesterol drug after patients died in clinical trials.
Although Dr Reddy's is betting that efforts to produce original drugs will pay off, in the next few years it will continue to rely on generics, which are driving rapid growth. In June, Dr Reddy's launched generic versions of Merck's cholesterol medicine Zocor and prostate treatment Proscar in the US; the new drugs accounted for 39 per cent of second-quarter revenues.
Dr Reddy's is extending its reach in the US and Europe - the largest markets for generic drugs - as well as emerging markets such as Russia and South Africa. It sealed one of India's largest overseas deals this year with the €480m ($627m) purchase of Betapharm, Germany's fourth-largest generic drugmaker. More deals are likely after the company recently raised more than $200m in an offering of American depository shares on the New York Stock Exchange.
Dr Reddy's is also expanding its "custom pharmaceutical service", which produces key drug ingredients to sell to other companies, through deals such as the acquisition of a Roche factory in Mexico for $61m last year.
This practice of supplying and partnering with other drug companies distinguishes it from rivals. India's leading drugmaker, Ranbaxy, aggressively targets big drug comp-anies with patent lawsuits.
But Dr Reddy's "ultimate goal is to get products to market", said Mr Prasad.
That objective might be met by collaborating with other drug makers and producing ingredients for them.
Dr Reddy's is also partnering with other pharmaceutical companies to share the long and expensive research and development process. It does early-stage research then finds a partner to take on costly clinical trials, as reflected in a recent deal with ClinTec of the UK to collaborate on developing a cancer drug. ClinTec offsets soaring costs of drug development by piggybacking on research done by India's pool of high-quality but comparatively inexpensive scientists.
Through such an arrangement Dr Reddy's would retain rights for the US and rest of the world markets and ClinTec would get rights for most of Europe if the drug makes it to market.
In addition to scientific innovation, Dr Reddy's is also experimenting with new financial models. To help separate high costs from its main business, it formed Perlecan Pharma, a joint-venture with the venture capital arms of Citigroup and ICICI, India's largest private-sector bank.
The new group finances drug research and decreases risk for Dr Reddy's. In return, the venture capital groups can co-license future products.
"We're looking at ways to innovate on our business model too," said Mr Prasad.
This article is the first in a series on emerging market companies aiming to go global
Copyright The Financial Times Limited 2006
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