Climate Change and Supply Chains

Li & Fung’s client list reads like a phonebook of discount stores in Omaha, Nebraska. The Hong Kong based enterprise helps Wal-Mart, Sears, Macy’s and Kohl’s bring $7.99 sweatshirts to Americans. Since 1906 Li & Fung has acted as a middleman between cheap Asian labor and the developed world. The company began by bringing Chinese toys to the shores of America and now handles all aspects of supply chain management. The New York Times called them the, “most important company that most American shoppers have never heard of.” My guess is that they like it that way. Li & Fung revolutionized modern commerce by connecting over 15,000 suppliers in 60 countries and has 8,000 words less in their Wikipedia page than Gangnam Style.

Li & Fung handles over 2 billion items and doesn’t own a single factory. Their network is the company’s sole value. They can find you a factory to make 10,000 custom socks in a week. They can make sure the crate gets on a boat without hassle. Hell, they can probably get you a toe by 3:00 this afternoon. With nail polish. In 2012 the company utilized their network to generate over $20 billion in revenue. To put that in perspective, if Li & Fung were an African country they’d be nestled right between Mozambique and Namibia in terms of GDP.

Li & Fung has a businesses model that climate change will turn obsolete.

Their international network of sourcing and logistics relies on three things: cheap energy, cheap materials and political stability. Climate change has the potential to upend all three. India, and Pakistan are two leading countries in Li & Fung’s export network, with India alone exporting around $17 billion of clothing a year.  The two countries share a border, are home to around 1.4 billion people, and hate each other. They also are two of the most vulnerable nations to the effects of climate change. A large percentage of the 1.4 billion people rely on the 21,000 glaciers and lakes of the Himalayan-Tibetan Plateau for their fresh water supply. “No other region on earth,” wrote Georgetown University’s Robert Wirsing, “is as dependent on glacial ice reserves.”

The glaciers are melting. The water supply is going down. A lot of people in an already fragile situation are going to be without water. I know Thomas Friedman once wrote that no two countries with McDonalds have ever gone to war, but Thomas Friedman isn’t really living in reality anymore. His entire theory is based off the idea that country boundaries are somehow ordained and static. He’s right, Pakistan and India may never outright declare war, but billions of people without water will lead to conflict, political turmoil and as trite as it sounds: the upending of global supply chains. Roads, ports and airports will all be affected. That is just the political stability side of the ledger; we haven’t even touched the impact of drought on energy and materials.

Smart companies understand the dilemma and are building it into their business model. “Increased droughts, more unpredictable variability, 100-year floods every two years,” Jeffrey Seabright, Coca-Cola’s vice president of environment and water resources told the New York Times, “When we look at our most essential ingredients, we see those events as threats.” Coke would know. They lost a large India operating license because of a water shortage in 2004. Coke learned. They embraced water-conservation techniques and another innovator, Nike, uses more synthetic material to avoid drought and weather shocks to cotton (and ultimately lowering their material cost over time).

The question is, what wills Li & Fung do? Their product isn’t soda or shoes. It is a network that is dependent on system that is becoming unstable. If they don’t change, they will go from the company that no one knows about, to the company no one cares about.