CEO Bruce Rockowitz says firm will look for alternative sourcing

Li & Fung Ltd, a Hong Kong-based consumer goods sourcing giant, will see costs increase by as much as 6 percent a year because of rising wages on the mainland, Chief Executive Officer Bruce Rockowitz said on Tuesday.

Li & Fung's costs are up 15 percent this year compared with last year, and the company, which supplies Wal-Mart Stores Inc, is passing the increases along to retailers, Rockowitz said at an event in Hong Kong. That will ease as higher prices cut demand for the consumer products, he said.

"The long-term trend is 5, 6 percent a year up, probably, over the next five years," Rockowitz said.

Higher wages and commodity costs are adding to price pressures as the world's second-largest economy battles inflation that surged to 5.3 percent in April, exceeding government targets for a fourth straight month. Wages for China's millions of factory workers soared 40 percent in 2010, according to Tao Dong, a Hong Kong-based economist for Credit Suisse Group AG.

Crude oil, the source for chemicals used in toymaking, rose 41 percent the past year on the New York Mercantile Exchange, while cotton prices surged 99 percent.

The rise in labor costs in southern China may force manufacturers to move production of consumer goods to lower-cost regions, including western China, Vietnam, Bangladesh and Indonesia, Rockowitz said.

Li & Fung also will look beyond China, he said.

"You have to mitigate that with alternative sourcing, because I don't believe consumers in the United States or Europe are prepared to pay more," Rockowitz said.

About half of the Hong Kong-based company's exports originate on the mainland, and as many as 50 other countries account for the other half, Rockowitz said.

"China in five years would probably still be about 50 percent of goods for Li & Fung," he said. "It's definitely not going away. There is no viable alternative on the scale of China."

The "deflation era", which Rockowitz defined as a time when prices dropped as much as 10 percent each year for the 30 years starting when China opened up in 1978, has come to an end and the world is entering an "era of China consumption", Rockowitz said.

China will promote domestic consumption, Vice-Premier Li Keqiang said this month, citing the government's five-year plan for economic and social development.

"The more China consumes, the better the relationship with the United States and Europe," Rockowitz said. "It can be an improvement for the relationship."

Li & Fung's shares rose 2.7 percent to HK$17.28 at the close in Hong Kong on Tuesday. The benchmark Hang Seng Index was up 2.2 percent.

Bloomberg News

(HK Edition 06/01/2011 page2)