Roger Tredre, WGSN, October 25, 2005
Many Hong Kong-based companies have positioned themselves carefully to withstand this year's quota uncertainty. WGSN spoke with Stanley Szeto, CEO of Lever Shirt, a shirt specialist that supplies clients such as Banana Republic, Ann Taylor and Tommy Hilfiger.
Summary
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Hong Kong-based Lever Shirt has two factories in Shenzhen that supply shirts to high-end retailers, mostly in the US. The company has sales of about US$100m, having doubled in size since 2000.
WGSN asked CEO Stanley Szeto how the company is coping with the uncertainties of 2005 and preparing itself for the future.
Q: How much have you been affected by US safeguards this year?
That was anticipated by the industry here. We all took steps to prepare ourselves for it. In our case, we expanded our OPA capabilities last year. I know a lot of people that bet everything on China, closing down their OPA capabilities, closing down their overseas facilities.
However, we actually expanded our Hong Kong base in anticipation of safeguard measures. As a result, the safeguard issue hasn't been a big problem. In fact, it's helped us because if the safeguards hadn't happened, our customers would not need the OPA solution and we would have spent all that money for nothing.
Another reason we're less affected is that we serve the high-end market. Our biggest customers are names such as Banana Republic and AnnTaylor. These people demand quality and value-added services and are not after the last cent. OPA is an expensive solution but our customers for now are able to deal with it. In short, we've been very fortunate to have anticipated safeguards in our preparations.
Q: And what about the EU restrictions?
We did not anticipate the extent of the EU trade restrictions, but the EU only represents about 15% of our business so it's not the bulk of our business. And the bulk of that 15% is in men's shirts, which are not included in the restrictions - it's only women's blouses. That represents a tiny amount of our business. Anyway, if they had imposed quota on men's shirts, we would have used our OPA solution.
Q: Is supplying high-end retailers the future?
Our only way to survive and to grow is to cater to the needs of the high-end customer. They have more quality requirements, more supply chain and value-added services requirements. We've moved more upmarket. We'll never be able to supply Wal-Mart because we can't meet their prices.
Q: How many factories do you have in Shenzhen?
We have two factories - one big, one small. The small one is being expanded to almost reach the size of the big one. Right now we're very busy building that up. In two weeks, we'll be moving our corporate office and the production base.
Q: In the past, you had factories outside China. Would you consider that again to give yourselves flexibility and better prices?
Definitely not at the places we were. We were in Panama and in Mauritius. Fifteen years ago when we built up those facilities, it was for quota reasons. But when we saw that quota was coming to an end, we felt that those two places didn't really make sense. Plus a very important factor is management capability. We decided that it is easier for us to manage a bigger factory or multiple factories within a single location rather than having 500 people here, a thousand people there, and flying all over the world. It's just that much more difficult.
Q: Would you move to other locations in China?
Right now Shenzhen is very convenient. Eventually, we'll probably have to move elsewhere, but we want to complete the building of our internal systems - management systems, information systems, human resources capabilities - before we move out because if we expand too fast, if we get to places that are not easily reachable without having those systems in place, then we won't do a good job.
I believe that there will be massive consolidation in the industry. We are preparing ourselves for growth and expanding our factory, but in the meantime we need to be conscientious, to build up our systems. We're doing ISO certification at the moment, we're doing ERP system implementation, we're overhauling the way we manage our production lines. In 12 months time, hopefully our systems will be in place and it will then be a lot easier to expand quickly.
Q: Labour costs are rising in southern China. How has this affected you?
For us, labour costs have gone up maybe 20% in the last year. We're on the outskirts of Shenzhen and these big cities are where the costs are rising fastest. Of course, you've heard about the labour shortage in Guangdong.
Furthermore, everybody is becoming more compliant in order to serve their customers. So the exact wage may not have risen 20% but when you factor all those [compliance] costs in - now we're paying social welfare costs - it's 20-plus percent. The challenge is for us to focus on productivity and provide value-added services, thus minimising the adverse effects of rapidly-rising labour costs.
Q: But labour costs will always be an issue in Shenzhen.
Well, the Shenzhen factory would become our flagship. But hopefully as we expand we would be in cheaper places. That's where the bulk production would be. But that's at least a couple years into the future!
Q: How about developing your own high-end brand?
If you go to 10 different manufacturers, they'll all give you different answers on that. For us, we don't believe in that sort of vertical integration. Right now OBM is very sexy, but the way I look at it is the world is moving in the opposite direction in other industries. For example, in electronics, people are now outsourcing their production of mobile phones, so Nokia doesn't make their own mobile phones, they let other people do it. I see that people are becoming more specialised in their own supply chain space.
So in the garment business I believe it will be similar. We actually had a little retail arm in the 90s. When I joined the company the first thing I did was to separate the two. There was absolutely no synergy. They require two different mentalities.
Branding and marketing - and manufacturing - these are different skill sets. I believe that whatever you're good at, you should stick to. In the electronics world, the EMS leaders such as Flextronics don't have their own brands.
Q: Let's talk about speed to market. Is air freight used by your customers?
It depends on the customer. Some do. If the lead time is nine months, from design to floor, using air freight and saving two weeks is not a big deal. But let's say if everything else is just one month or two months, then going air freight is a huge benefit. Until we can really get the rest of the cycle down, air freight is not going to be that popular.
At present we are restructuring our production line. We are moving from a huge batch system to a small bundle or single-piece flow system. One of the most high priority projects we have is setting up a lean manufacturing pilot line. It's all about speed. In the past, a shirt - all the way from the cutting table to packing - would take a week or 10 days. In the lean line, it's supposed to take just half a day for each single shirt. So we're keeping our fingers crossed! If you have capacity for 1000 shirts a day and you take an order for 1000 shirts, in the lean line production will take a day and a half.
Q: Are you looking to grow your existing customer business or to find new customers?
It's the former. Everyone is consolidating. It is easier to service one account pretty well than three accounts in a half-hearted manner. At the end, you lose all those accounts because you don't provide the service that they require. Our customers are much bigger than us at the moment so if we were so diversified with our customer base, we would represent such a small percentage of their total buy that we would be even less significant to them.
Our customers have been consolidating their vendor base and we've always remained on the short list. Whenever they eliminate another supplier, we by definition get more of the volume, even if our customers' businesses may not have grown that much. That's what we've been experiencing in the last few years. And that's why we've been experiencing double digit growth.
Q: And how about design?
There's definitely more of a trend towards that. We're starting from a small scale, and our designer is doing trend boards and our own collection. A year ago, we never had this stuff. That's moving from OEM to ODM business model. It's the future. It's like telephones. Now the sub-contractors are not just manufacturing but also designing phones for brands like Nokia and Motorola. In the apparel business, it will be similar.
Q: How would you sum up?
In short, the industry will go through massive change. I believe that (because of quotas) in the past good companies have not been able to expand much. Their focus, rather than on operational excellence, has been diverted to playing the quota game. Eventually, when quotas are lifted, I think there will be massive consolidation and good companies will enjoy tremendous growth.
© WGSN 2005