By his own admission, Roger Lee, CEO at Hong Kong based apparel giant TAL Group, is an optimist. And it’s a trait that has stood him – and the 70-year-old company he leads – in good stead in recent years as he focuses and rebalances the business for future growth.
Lee has navigated the recent slowdown in the key US retail market by focusing on driving innovation and efficiencies, reducing costs and building up additional capacity at the privately-owned manufacturer’s network of 11 factories across Asia, consolidating partnerships with key brands and retailers, and generally becoming “more meaningful to customers.”
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“I always feel that when the apparel retail sector is weak, then all competitors are in the same boat…so we might as well utilise that time and not worry about stuff we cannot control,” he tells just-style.
“I’ve been at the company 13 years, and we have never embarked on this scale of growth in new factories, new lines, new staffing.” This includes ramping up its operations in Vietnam, with the launch of a second factory and a new textile mill under construction, as well as setting up its first facility in Ethiopia.
The business also celebrated its 70th anniversary last year; another cause for reflection on what has worked over the decades.
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“Many companies don’t get to 70 years because at some point in their lifecycle they become complacent with what they have. I don’t think any company can ever be satisfied with where they are; they’ve got to keep pushing forward.
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By GlobalData“For us, we strongly believe that apparel manufacturing is our core. We have not changed our core competency because we want to carry on the founder’s legacy and it’s about being the best business. Manufacturing might not be sexy, but you still need to manufacture.”
TAL Apparel, the group’s manufacturing arm with around 25,000 workers, has also been keen to show customers that it makes more than dress shirts. The company is renowned for producing one in every six dress shirts sold in the US, with customers including Brooks Brothers, Banana Republic, J Crew and JC Penney.
But while these make up two-thirds of its 50-55m annual production capacity, the remaining one-third – around 15m pieces of garments – consists of items like chinos, pants, polo knits, outerwear, tailored clothing and suits.
Once customers reach the tier of US$50m FOB and above, “that’s really meaningful to both sides. We’ve got more customers today than ever that have US$50m or more in business with us”
“For us [the US retail slowdown] was a great opportunity to drive sales with the same customers but in multiple product categories.”
The company is also focused on working with fewer customers – partly at its own instigation, but also as retailers themselves consolidate their supply bases – “to capture more product from the same customers and be much more relevant to them.”
The rationale, Lee explains, is that “the big brands, who are more strategic, are moving away from day-to-day pricing where they have suppliers compete against each other so they get the cheapest price. They realise that if you only compete on price and not on product, and don’t have a product roadmap, then you’re never going to win – unless you are at the bottom of the pyramid.
“Our customers are not at that level. At our price point, brands have to provide a better product.”
Lee also reveals that once customers reach the tier of US$50m FOB and above, “that’s really meaningful to both sides. We’ve got more customers today than ever that have US$50m or more in business with us.
“I believe that at our tier of brand they really have to have the right partner; and that’s been neglected for many years. Product development today isn’t what it used to be. Brands have spent less money on training and the people working there are less knowledgeable about product; they’re much better at marketing than ever before, but less on the technical product.
“They want us to give them a lot more innovation, a lot more options – so we have to be strong in that area.” Even in dress shirts, “probably the most basic, stable category there is,” there’s constant demand for something new and different, be it seasonal patterns, different fabrications, different handfeels, and a wider range of fits, delivered on a weekly basis.
“They can only do that through a strong partnership with their suppliers…we have to do it together.”
Capacity and capability
One consequence of these strengthening relationships is “huge” demand for TAL’s vendor managed inventory (VMI) system whereby it takes full responsibility for maintaining customer inventory levels, from generating purchase orders through to delivery. “More customers are truly believing in our capability, giving us more control on what they buy.”
But there is a downside too, and Lee admits TAL recently became a victim of its own success when orders soared.
Even in dress shirts, “probably the most basic, stable category there is,” there’s constant demand for something new and different, be it seasonal patterns, different fabrications, different handfeels, and a wider range of fits, delivered on a weekly basis
“The second half of 2017 was much stronger than we expected, so we went from a comfortable capacity situation to a completely overbooked situation. We lost money during this period because it costs money to build additional capacity and add people, the training time is long, we had a lot of overhead costs, airfreight costs.
“So why did we take so many orders? The fact is we asked customers to give us all their orders for a specific programme, and when you do that there’s no way to just say ‘no,’ because you’re their one and only supplier, they’re going very deep with you, partnering strategically, with more innovation.”
The next challenge, of course, is that “now we’ve built up all the additional capacity, in the second half of 2018 we’d better get enough orders to fill that capacity…which then becomes a cyclical issue. From a pure manufacturing point of view, that’s a day-to-day challenge we face.”
Of the group’s eight value drivers, the top three are quality, on-time delivery and profitability. “So if we take an order we’ve got to deliver, even if that means we airfreight it ourselves.”
Waver on that commitment, he notes, and there is a danger “customers will start doubting whether their strategy to go with fewer suppliers is correct.”
Rebalance and focus
Among the changes to its operations, TAL Apparel has halved its pants/chinos capacity “because we were not making money with a couple of big customers. Probably $60m topline disappeared overnight, so other products have had to grow to cover that.”
Rising costs have also led to the closure of its Jakarta factory and one of two factories in China. “We have to reposition our footprint to be more balanced in order to be able to survive in the future, and that’s why we did all this in such a rapid timeframe, because we felt urgency to rebalance everything. For us, it’s focus and rebalance before growth.”
TAL’s largest manufacturing base is Vietnam, where the current emphasis is on getting a second garment factory in Hanoi up-and-running. At the same time it is on-boarding its new facility in Ethiopia – with these two additions adding “more than enough capacity to continue growing, and allow us to position at a better cost than before.”
Textile Division
Vietnam is also set to magnify its strategic importance for TAL with the addition of a new US$320m fabric mill, which will also form the cornerstone of the group’s new Textile Division.
As a business, TAL’s initial focus was on spinning and weaving – with founder CC Lee setting up the first spinning mill in Hong Kong back in 1947 under the name Textile Alliance Limited (TAL) – before diversifying into apparel manufacturing.
And in a move that takes the business full-circle, it again sees value in having a more integrated approach within its biggest production centre.
Lee says Vietnam was chosen for the new textile base before the US withdrew from the Trans-Pacific Partnership (TPP) trade deal, but insists this was immaterial to the decision, “because we were within the short supply list, which meant that we could bring fabric from anywhere to qualify for TPP.”
Plans for the Textile Division were first mooted two years ago, as a joint venture with Italy-based shirting specialist Albini Group. The goal is to make about 60m yards of shirting fabric per year, with the first fabrics likely to be produced in 2021.
Lee is also adamant the aim is not to fully integrate or be vertical within TAL Apparel, but to drive a competitive stand-alone operation. While some of the fabric produced will be used by the internal garment division, it will also sell to external customers.
“I set it up as a separate division with its own P&L because I feel that when everything is bought internally by one customer you get lazy, you get complacent, there’s no innovation, there’s no drive to bring new cost. So I’ve specifically said the Textile Division will sit outside, so that they understand what the market requires.”
Emerging Ethiopia hub
Another cause for excitement is the group’s inaugural operation in Ethiopia – TAL Ethiopia Garments – based at the country’s flagship Hawassa Industrial Park.
The facility’s first order for retailer JCPenney was shipped in May last year, “and we’re on track to shift about 1 million garments in 2018,” Lee says.
“Ideally what I like to do with TAL is have a minimum of two factories per country to make the overhead worth it. Right now we only have one factory in Ethiopia, we’re only about 20% full, but we’re only going to grow as fast as we can recruit and train competent staff. Not workers, but staff. And that takes time.”
From previous experience operating in higher cost manufacturing centres like China, Malaysia, Thailand, Indonesia and Vietnam “we realised it takes a minimum of five years to build up a country.”
Lee’s brief when searching for the company’s latest production hub was to look for the next tier of countries that will still be competitive in 30 years time…”so we looked at Africa, and we settled on Ethiopia”
His brief when searching for the company’s latest production hub was to look for the next tier of countries that will still be competitive in 30 years time…”so we looked at Africa, and we settled on Ethiopia.”
Among the reasons behind the decision are its duty-free access to the US under AGOA, and to Europe under the Everything But Arms (EBA) initiative. But “the differentiating factor” was the foresight and vision of the Ethiopian government on everything from overhauling the education system to focus on the qualifications needed by industry, to bringing in Chinese companies to invest in building macro infrastructures, airports, highways and railways.
“They are not just talking about it; they have actually been doing it. We meet a lot of different government officials across the world and the Ethiopian government were the strongest in their mindset and in their thinking. So in a lot of ways it was an easy decision.”
An unexpected bonus, however, has been the Ethiopian people, who are “extremely proud and extremely intelligent.” But the big difference in a factory environment, is that “when you ask someone to do something in Asia they will always say ‘yes,’ even if they don’t really understand. In Ethiopia, you can’t just expect someone to follow the instruction you give them…they will ask you many, many questions. But once you explain – and typically you have to explain several times – they’ll go execute.”
In turn, this creates another challenge: making sure the company’s managers know how to spell out their instructions clearly and concisely. “They’ve never had to in other countries before. So they have to have this competency.”
A complication experienced by all companies setting up manufacturing operations in Hawassa is that while there are a lot of potential workers in the region, most are unskilled and unfamiliar with the day-to-day demands of a factory environment. “That’s why there is lot of focus from the government and investors to try to train people. This is a critical part.”
Also lacking is enough local housing for workers, who are unable to commute to the industrial park because there isn’t the necessary road or transportation infrastructure. “They all walk…so simple things that we take for granted in other countries still need to be developed.” This is also why a receptive government is key, Lee says, adding that discussions are underway on building dormitories and putting a proper infrastructure plan in place.
“A lot of people, internally, doubted Ethiopia – but once I’ve taken them there they’ve bought into the future.”
Onshoring not an option
One direction TAL won’t be moving in, however, is onshoring closer to its customers.
“I don’t believe in onshoring. It sounds good, but financially it’s not practical. Even if I wanted to set up manufacturing in the US, the issue is this: cost. It’s nothing to do with the higher minimum wage, it’s to do with the fact that garment manufacturing is labour intensive, and the challenge to get workers in the US is extremely tough – especially the skill that we need to get to.
“If onshoring is serious, there’s no way to get out of the cost. Is the consumer going to pay more? I don’t think so…which is why – in our industry at least – onshoring is not an option. In textiles, which is more machinery intensive, less labour…possibly. But garments? I don’t see it, unless there’s a lot of automation, but we’re not there yet.”
Complementary investments
Not surprisingly, Lee keeps a close watch on wider industry developments, especially those related to the future of fashion retailing.
TAL Group’s four divisions include its Services business, which incorporates a number of ventures including Weave Services Limited (demand and supply planning consulting), TPC (HK) Limited (garment technology consulting), and Size Stream LLC (3D body measurement and its applications).
Weave Services was spun off as a direct result of TAL Apparel’s expertise in vendor managed inventory, and now offers a dedicated team to help manufacturers and retailers navigate fluctuations in demand and supply planning.
“Every retailer – not just apparel – has supply-demand planning issues. How much can you forecast, how much does the customer want, how much can you supply…it’s a balancing act, and a complex thing to do”
“Every retailer – not just apparel – has supply-demand planning issues. How much can you forecast, how much does the customer want, how much can you supply, supply has to be flat, no fluctuations…so it’s a balancing act, and a complex thing to do.”
The group has also invested in startups such as virtual fitting room firm Metail, and body scanning company Size Stream, “capturing the size data of consumers, which is important in the future.”
Past investments have included online menswear retailer Bonobos, which was bought by US retail giant Walmart last year. The current portfolio includes J. Hilburn, the Dallas-based online men’s wear retailer, which employs more than 2,000 stylists across the US who measure men for custom-fit clothing – and for whom TAL makes the shirts; US contemporary high end brand Zachary Prell; and America’s oldest clothing retailer Brooks Brothers, which has more than 300 stores around the world – and where Lee also sits on board.
“There are two objectives behind our investments: there has to be a financial return, but it’s also about investing to learn. Bonobos taught us a whole different dimension about how to sell online. With Brooks Brothers, we’re their largest supplier, they’re our largest customer – so it was a mutual thing; it’s a good partnership, and I’ve learnt a lot more about the other side of the business by sitting on the board.”
