Dr John Cheh, the newly appointed chief executive officer of Hong Kong based cotton shirt manufacturer Esquel, talks to just-style about social responsibility and sustainable development, life after quotas with the EU, and the soft market in both the US and EU.

Dr John Cheh joined Esquel in 2003 and took up the post of CEO on 1 January this year.

Privately held Esquel is a vertical supplier that produces everything from cotton fibre to yarn, fabric and garments and sells close to 70m knit and woven shirts and T-shirts a year.

Its customers are in the US, Europe, Japan and the rest of Asia - including top brands like Hugo Boss, Polo Ralph Lauren, Nordstrom, Brooks Brothers, Next, Ted Baker, Abercrombie & Fitch - and also in China where the company has stepped into retail with its own PYE brand.

As well as men's and women's shirts, the business also sells about 15m yards woven fabric to brands and stores.

In Guangdong, the company has a knit fabric mill that produces about 15,000 tons a year, and two woven fabric mills producing over 80m yards a year. The woven fabric is all yarn-dyed - with plans to add a piece-dyed line for flexibility - and the knit mill makes both yarn-dyed and piece-dyed fabrics.

In Xinjiang, its cotton operations include cotton farming, ginning and yarn spinning. The company specialises in higher count yarn, all of which is used in its fabrics, but it also buys in the more regular yarn.

Garment manufacturing takes place in Guangdong and in the Shanghai area, but Esquel also has facilities in Mauritius (woven), Sri Lanka (knit), Malaysia (woven) and Vietnam (knit). Worldwide, the company employs 47,000 people, including 30,000 in China.

just-style: How does being vertical affect your offer?

Dr Cheh: Because we are a vertical supplier, we control the quality of the cotton, the yarn, the fabric and the final product. We also carry out product development on the fabric, yarn, blends, dyes and washes, depending on the requirements of the customer. Technology and innovation at the textile level give us an edge.

We also have our own design team to interpret fashion trends and offer different yarn counts, densities and hand feels.

j-s: Are you totally focused on cotton? Do you produce organic cotton?

Dr Cheh: Our strength is in cotton, and we also have an organic offer. We have international certification by US organisation OCIA (Organic Crop Improvement Association) of our cotton farming, ginning and spinning mill.

Right now, organic cotton is still a niche part in our production, but if demand grows we are able to supply and provide the certification. The main thing about organic cotton is verification and authentication. The cost is 50% higher than for regular cotton.

Our main customers in organic cotton are big players - Marks & Spencer, Nike and Nordstrom. They do not do everything with organic cotton, but in blends of 5%.

Among the 20,000 metric tons of cotton - including 10,000 metric tons of extra long staple cotton - that we use each year, we use about 300 tons of organic cotton. We don't produce all our organic cotton, and also buy some from Turkey.

j-s: The production of cotton is a very polluting process, so what do you do in terms of environmental protection?

Dr Cheh: By having control of the whole supply chain we are able to offer customers social responsibility. That encompasses how we treat our workers, the conditions that they work in, and how we treat the environment, including energy saving technologies, pollution control, and waste treatment.

Dying and finishing are the most polluting part of the process. It is easy for garment manufacturers to say they are green if they do not know how the fabrics they are buying have been made.

But for us, being vertical means we know what we do and we can see what we do. We have our own power plant, which is extremely friendly to the environment. In dyeing, we have innovations to use less water and we have our own waste water treatment. It means investment, but also offers savings in energy, water and waste water treatment costs.

j-s: Does your concern for sustainable development make you more expensive?

Dr Cheh: No, we provide better value. Our customers recognise that, and they choose to do more business with us.

There are many cost pressures on us. The Chinese RMB is rising, labour costs and wages are going up, energy costs worldwide are going up, labour laws are getting tougher, and export tax policies are changing.

We have to be competitive of course, but we are investing to lower the labour costs and improve productivity and efficiency.

j-s: Quotas between China and Europe came to an end on 31 December 2007, but trade will still be monitored for a surge in Chinese imports. How do you see the situation now and in coming years?

Dr Cheh: The situation now is far better than the chaos in 2005 [when the EU reimposed quotas on imports of some Chinese textiles and apparel]. After two years of transition, we shall wait for three months to see the numbers in the first quarter of 2008 and gauge the impact of the total suppression of quotas with the EU.

But from Esquel's point of view, trade with Europe was steady after 2005. Suppliers cannot continue to play the cut-price game or they will lose money. It seems that some stability has now been restored, but we shall see.

For China, trade with the US is still under safeguard quotas for one more year. But Esquel has the highest quota for men's woven shirts and also the highest quota for men's and women's knit shirts because the government accepted that in order to encourage upmarket companies, allocation should be based on export performance, global performance and upgrading. We earned the quotas.

And of course we still have our other facilities in Mauritius, Sri Lanka, Malaysia and Vietnam. The reason we have a global presence is that we are diversified. If there is any trade action, like in 2005 when Europe was basically under embargo, we switch orders to Sri Lanka and Vietnam.

j-s: The last few months have been quite difficult for high-end brands because of turmoil in the financial markets. Has this had an impact on Esquel?

Dr Cheh: The financial turmoil in the sub-prime markets in the US and then Europe has had a negative impact on holiday retail sales, with many US and European retailers and stores seeing sluggish performances. The market is slowing down and is uncertain.

Obviously we are concerned and have to respond very carefully. But the interesting thing is, in a weak market there is consolidation. When business declines customers tend to buy from fewer suppliers, reducing from, say, 30 suppliers down to 15.

And at the end of quotas, because there are more suppliers, customers want to pick strategic ones who can also be partners. So as a result, our business with our top customers has been growing strongly.

Last year our sales grew by more than 20% to more than US$660m, and this year, in a slowing market, we are counting on a double digit growth. Because of our value proposition, our business is still very strong and our order book for the first half is overflowing, both for the knit and woven businesses.

j-s: Are you planning a European launch for your own men's and ladies' shirt brand, PYE?

Dr Cheh: Not in Europe, but in China we plan to expand it selectively - the retail price is close to EUR100 per shirt. We have one shop in the Oriental Plaza mall in Beijing and are planning to expand the brand in the main Chinese cities to show our customers our design ability and earn some retail experience.

But it is a challenge, because we have to build a brand. We used to have more than 100 stores 12 years ago, but that was our first entry and it was too early.

j-s: Europe plays a small part in your total sales; do you have ambitions in this market?

Dr Cheh: We would definitely like to grow our business in Europe. We have notable European customers - Marks & Spencer, Tesco, Hugo Boss, Cortefiel - but the European market is huge. Less than 15% of our sales are to Europe, compared with 60% to the US.

Except for Zara and H&M, it seems the rest of the European market is very fragmented. Last year, our business in euros grew by 60%, because we have an office in London, and we have added a presence in continental Europe. But it is still too slow relative to the US.

By Marie-Hélène Corbin.