Back in 2008, when Raymond Tan suggested to Luen Thai’s board that the company should buy one of world’s leading laptop bag manufacturers, people questioned his logic.
“Raymond, you know you are in the apparel business, why in the hell would you want to buy a bag company, from China?
After the financial crisis,” he recalled them asking. “It was a crazy idea.”
Crazy or not, Luen Thai proceeded to buy Trinew Limited, also known as Desk Top Bags, for approximately $25 million. While the deal gave Luen Thai a foothold in the laptop bag and backpack manufacturing sector, it also provided the company with an entry point into the world of fashion bags because Trinew owned a small handbag production unit called D’Luxe. Seven years later, Luen Thai has established itself as a fast-growing player in the fashion handbag manufacturing game, supplying a host of brands including Coach, Michael Kors, Furla, Giorgio Armani, Kate Spade and Tory Burch.
Between 2009 and 2014, Luen Thai has grown D’Luxe’s business more than sixfold, from less than $30 million to about $185 million. That is still a relatively small part of Luen Thai’s overall business — Luen Thai Holdings Ltd.’s 2014 revenue came in at $1.22 billion. But Raymond — and the company’s other top brass — hail it as a cornerstone of the corporate growth strategy. Raymond said he thinks the company can double or triple the size of its current bag business in the next five years.
“Today, our luxury bag business is a very healthy part of our overall organization,” Raymond said, adding that the company has plenty of room to grow in the market, noting the U.S. imported $11 billion of handbags and backpacks last year, although there have been signs of a slowdown in the accessible bag market in recent months. “[We represent] a very, very small percentage.”
Sunny Tan, who manages the bag business along with his brother Raymond, said Luen Thai’s newfound focus on bags only makes sense, given the broader shifts taking place in the fashion industry and the increasing importance of accessories and product diversification for apparel brands.
“Maybe 10, 20 years ago, if you looked at Ralph Lauren, it was just clothes…but now they do shoes, bags, watches. So if we want to continue to be a strategic partner of a brand like Ralph Lauren, we need to make sure that we can expand our product services,” Sunny said. “[Customers] want to do business with fewer suppliers.”
At Desk Top, Luen Thai modernized and streamlined production. “I was amazed that they had never used an auto-cutter for a computer bag,” Raymond recalled. Nine months after buying the company, Luen Thai reduced Desk Top’s workforce from 7,000 to 4,000 but maintained its same output level. Currently Luen Thai produces the bulk of its bags in China but as manufacturing costs there rise, it is investigating ways to offset that issue and at the same time offer duty savings to its customers.
Luen Thai already does 20 to 25 percent of its bag manufacturing in the Philippines, a country where it has a long history of apparel production. Raymond and Sunny (both sons of Luen Thai founder Tan Siu Lin) said the company is looking to expand its presence there, and also plans to start bag production in Cambodia by the end of this year or next year. The Philippines and Cambodia are both eligible under the U.S. and EU Generalized System of Preferences programs. Travel goods, including designated bags, luggage and backpacks, have just become “eligible for consideration” under the U.S. Program.
“[Luen Thai] purchased the company that we were working with [on handbags] five or six years ago,” said Angus McRay, global supply chain officer and operating group member for Coach. “Since then, they’ve dramatically improved that company. They’ve made it more efficient, they’ve organized it, they’ve introduced more modern technology and our business with them has quadrupled.
“They aren’t scared to challenge old technologies and old methodologies of doing things. They have a highly skilled management team, and they are versatile in that they are spread across a number of countries, so there are opportunities to expand with them in the future in places like Cambodia and Vietnam.”
Rather than acquiring new companies or factories, Luen Thai will explore converting some of its apparel-making operations into bag factories, the executives said. The firm has already done this with one factory in the Philippines, and it hopes its diversified manufacturing operations will be a selling point for potential customers.
“Most of the bag competitors are so used to working out of China [that] they don’t have the experience to expand internationally,” Raymond said.
Sunny voiced a similar view. “China is good for [making goods to be sold in] China. It’s good for high-end production, affordable high-end production. But the more mass-market [brands] will leave China. So we are one of the natural candidates to do that,” he said, adding that each brand has a different set of circumstances that make one country more appealing than another.
He acknowledged that expanding into Cambodia will pose its own set of obstacles. “Work- force-wise, it will be a bit challenging. [But] if you look at the bigger picture, Cambodia has a very good tariff or duty benefit in terms of the E.U. and to the U.S. Cambodia is relatively cheaper in terms of wages, but it’s also not easy to manage,” Sunny said, adding that the country’s landscape is somewhat unpredictable in terms of labor and wages. “The lead time is longer, so it depends on the customer’s needs.”
Sunny said it’s also important to take different countries’ cultures into consideration when it comes to sourcing. It is not just a matter of crunching the numbers on wages, he argued.
“Can we motivate the workers to do things right?” he asked. “Sometimes it’s not just financial incentives in dealing with workers.”