Family-owned TAL Group is one of the world’s largest clothing manufacturers: It produces 55 million garments a year in China and Southeast Asia and is responsible for one in six dress shirts sold in the US. Its customers include a host of major global brands and retailers including J.C. Penny (JCP.NYSE), Brooks Brothers, DKNY (MC.Euronext), Tommy Hilfiger, and Burberry (BRBY.LSE). Roger Lee, TAL Apparel’s COO, spoke to China Economic Review about the challenges facing manufacturers in China.
Q: What happened to business during the downturn and when did it start to pick up?
A We didn’t see the impact of the financial crisis until the beginning of 2009 because of order lead time. During the first six months of 2009 business was down 10-20%. Things started to pick up in August of last year. In the first half retailers across the US cut inventories by 20-30%, but then they realized they didn’t have enough stock to sell for Christmas. Suddenly they started ordering more garments. For 2010 we are forecasting 25% growth over the previous year.
Q: How did you respond to the downturn?
A: It was the first time in 20 years we had extra capacity. We’d always had more orders than we could handle. We took stock of what we had, got rid of underperforming people and restructured. We spent more on training last year than ever before. We knew the market would come back eventually so we wanted to use our time wisely. The key was not cutting costs too much. For example, the travel budget stayed the same because it was important to keep up relationships with customers and understand what they needed during the downturn.
Q: To what extent is sector consolidation playing a role in the rebound?
A: There is consolidation among the larger players. Some manufacturers went out of business last year and then our customers are consolidating the number of suppliers they use. If a customer wants to introduce a new initiative, it is easier to talk to 100 suppliers than 1,000. The other reason for the rebound is retailer optimism – and we think they have been a little bit over-optimistic. They are putting through more orders than last year and, looking at the economic numbers in the US, our concern is that there won’t be a significant rebound.
Q: Are the sizes of individual orders getting smaller?
A: They are buying smaller amounts each time, but then they come with chase orders, asking for shipments faster than before. Placing an order and getting it to the US warehouse takes about two months of fabric lead time, one month in garment production and one month over the water. We do a lot of order replenishment. This means we look at individual shop inventory and have a few weeks’ worth of fabric supply in the factory based on forecasts. We manufacture according to what an individual store needs, pre-package and inspect it at the factory, and when it gets to the US it’s simply moved from one truck to another and goes to the store. Once they place the replenishment order, we can turn it around in two weeks and then it takes one month to ship. If they are out of stock they might air it – two weeks out, one week air – which means it’s in the shop in three weeks.
Q: How has the geography of your production evolved?
A: We started in Hong Kong and we have been in Thailand for over 43 years now, longer than we have been in China. Our most recent factory opened in China about three years ago, so more is coming out of the country than before.
Q: Both your factories are in south China. Have you considered moving further inland?
A: Before we opened our most recent factory we looked at whether we wanted to go further north. Yes, it’s cheaper, but the logistics are not as good. And we wanted the management team to be closer to us in Hong Kong as the headquarters and closer to the sister factory in China. While the costs were a little bit cheaper, it wasn’t justifiable for us.
Q: Are you finding increasing cost pressures in China?
A: Costs are rising, but we look at it this way: For things that we can’t control, everyone is in the same boat. There’s not much you can do apart from be more efficient – or move out of China. We have a factory in Vietnam and a lot of people have gone to this country in the last few years. But there is no way Vietnam or other countries can absorb China’s production. I don’t believe anyone is going to leave China completely. It’s proven within our company – we operate in five countries – that it’s not all down to the labor cost. It’s about the best management team running the most efficient factory. Garment manufacturing is complicated. Often if you don’t do it right the first time, you have problems on the US side and the consumer complains. In our industry getting consistency is the hardest thing to do. Every thing, every day, has to be right. To get this, you need a well-trained, committed workforce and you can’t replicate that in another country overnight.
Q: Some Chinese garment companies are developing their own brands. Do you see a customer base in China for your products?
A: Our product can’t retail in the China market right now because it’s too expensive. The younger generations are becoming wealthier and eventually their taste level and requirements will get to a level close to what we are producing. This could take five to 10 years, but China is evolving so fast it could be shorter. Traditionally we haven’t sought out customers in China; a lot of retailers have their own production already. However, many of our products are 100% cotton, wrinkle-free. There are processes and technologies for which we own the intellectual property.
Q: Your customer base is predominantly US-based. How would you find dealing with Chinese retailers?
A: Each country is in some way unique. Every country in Europe has different requirements and China will be the same. We need a team that has experience working in China and understands what customers are looking for so we can tailor our products and services accordingly. Given the size of China, distribution and replenishment are issues. J.C. Penny has about 1,200 stores, but some retailers in China have 4,000 to 6,000 stores. We have gained a lot of experience with distribution networks in the US and we would bring this to China.