Henry Tan, CEO of Luen Thai Holdings

Henry Tan, CEO of Luen Thai Holdings

In the second of two articles based on a conversation with just-style managing editor Leonie Barrie at the recent Prime Source Forum in Hong Kong, Henry Tan, the CEO of Hong Kong's largest listed garment firm Luen Thai Holdings, talks about the push into new production bases and the changing role of China.

As well as calling for "true partnerships" between retailers and vendors, and collaboration as a tool to mitigate rising costs across the supply chain, Henry Tan also points out that "trade is a very important component in our whole manufacturing equation."

Not only do "we have a lot of pressure to move out of China," but "customers are also driving the push into new production bases," he explains.

As well as factories in the Philippines, Indonesia, India, Bangladesh and Cambodia, Luen Thai has facilities in Guangdong and Jiangsu provinces which account for around 70% of its total output. But it plans to reduce its dependence on China to 50% in the next three to four years.

"A lot of customers tell us they do not want to increase any of their business with us in China. Coach is a very good example. We were just doing maybe 20,000 pieces a month with them a couple of years ago; right now we're the second biggest supplier doing a couple of hundred thousand pieces in the Philippines."

The rapid rise in Chinese wages has been well-documented, as has the government's goal under the 12th five-year plan to double wages again in the next five years.

"Everybody would agree that China has the best supply chain infrastructure, whether in the manufacture of garments or shoes," Tan says. "But the cost of labour has grown to such an extent that it has started to erode into the efficiency of the supply chain."

To illustrate the problem he points out that wages in China are about $460 a month, compared with around $260 in the Philippines. Over the course of a year, and 10,000 employees, this works out at a difference of $24m a year.

"In our business you can never make $24m with 10,000 people. Not only can we not afford it now, but if it is to double again that will be even worse.

"So we may have to start to look at what products to make in China and what products to move outside."

The challenge depends on "whether you want to pay 10 cents less or 10 cents more, and if you can afford the time you'll probably move out of China. If you cannot afford the time, you'll have to remain in China."

China's competitiveness
Further uncertainty comes from the fact that some planned wage increases in China have already been postponed.

"At the end of last year we were advised by the government in Guandong that wages would go up by 15% starting 1 January." This was put on hold, and "although we have heard rumours about an increase of about 13% starting 1 May, there is no news yet."

The cost of cotton is also eroding China's competitiveness. A scheme launched last September by the Chinese government to build the country's cotton reserves by buying up cotton at CNY19,800 (US$3,027) per tonne, failed to foresee the sharp fall in the price of the fibre. Which means Chinese garment firms now have to buy cotton at around $1.50/lb - compared with $1 on international markets.

This is "very challenging, especially for basic garments like a simple T, because the lower the price, the higher the cotton content." 

Whether the industry chooses to remain in China largely depends on government policy, Tan explains, although he believes China "will gradually lose some of its garment industry. I don't think China will lose everything; a lot of the fast turnaround, very complicated styles will definitely remain in China.

"It will probably retain its textile industry for another 10-20 years but if you look at history, it's just repeating itself. Whether it's America or Europe or Japan, you lose the sewing work first, and then the fabric mills."

The impact of trade policies 
Some of this movement will also be encouraged by trade policies, such as yarn forward rules of origin that require all the materials that go into a garment to originate in qualifying country to receive tariff-free treatment.

"Trade is a very important component in our whole manufacturing equation. Not only do we have to look at the cost of labour, but also at trade tariffs as well."

When it comes to Luen Thai's choice of a China plus one or two, "right now we're picking the Philippines...because we know the government, we know the local situation," Tan says. "We are also expanding in Indonesia and looking at Cambodia."

But he warns, the choice will - and should - be different depending on the customer and the supplier.

Tan is actively involved in campaigning for the passage of the Save Our Industries (SAVE) Act, which would grant duty-free treatment to apparel assembled in the Philippines from US-made fabrics.

Asked whether it is logistically and financially practical to use US sourced fabric in the production of garments in the Philippines in order to get duty-free concessions - or whether the higher price will offset the duty savings - he says there is one fabric that is cost effective. And that's denim.

"Denim has a very high cotton content, and manufacturing denim in the US is actually efficient.

"Because the styles and washes don't change that much, I can order fabric from the US and keep it in the Philippines and wait for the different cuts. I believe we will be competitive with Central America [and] will probably be able to make a lot more sophisticated garments.

"What is important is to find one or two customers who are willing to work with us on denim."

Click here to read part I of the interview, in which Henry Tan calls for industry-wide collaboration in a bid to increase efficiency and offset rising costs in the apparel supply chain.