HONG KONG — The post-quota era hasn’t been kind to Luen Thai Holdings, a global sourcing firm based here, which reported a 1.1 percent drop in sales to $267.5 million for the first half compared with the same period last year.

The company, which has Polo Ralph Lauren, Liz Claiborne Inc., Limited Brands, Fast Retailing and Dillard’s among its clients, also posted a 12 percent drop in gross profit to $54.7 million and an almost 13 percent decline in operating profit to $15.9 million.

Companies such as Luen Thai that source in China have been caught in safeguard quota actions taken by the U.S. and European Union that limited Chinese imports into those major trading partners, even though World Trade Organization countries eliminated quotas on Jan. 1. China’s 2001 entry agreement into the WTO allowed for renewed quotas. The EU subsequently struck a deal with China that loosened restrictions, but caught some goods in limbo.

“We have been suffering a bit primarily because of the trade dispute,” said Sunny Tan, Luen Thai’s chief financial officer.

The company’s chief operating officer, Henry Tan, said the biggest problem at the moment is uncertainty. Executives expect the situation to be “quite a bit smoother” in the next year because of a trade pact between China and the EU. Luen Thai didn’t have any of its goods embargoed at EU customs, but had to forgo some second-half China business, he said.

Regarding a U.S.-China apparel and textile trade pact: “We all wish an agreement will be entered,” he said.

To deal with the possibility of safeguard quotas this year, Luen Thai began preparing outward processing arrangements last year in Hong Kong and Macau, which are special administrative districts of China but have their exports treated autonomously. The two facilities accounted for 2.9 percent of Luen Thai’s first-half shipments.

The Hong Kong OPA is being renovated for expansion. The target is 400,000 units a month, Henry Tan said. The facility now turns out about 75,000 units a month.

For 2006, he said he believes business will go back to normal, and Luen Thai will have some margin recoveries.

Meanwhile, the firm is trying to diversify into non-U.S. markets, such as Japan and the EU, Sunny Tan said. The company’s first-half revenue from operations in Europe increased almost 50 percent to $10.2 million, while in Japan revenue jumped 10 percent to $2.5 million. The two combined make up about 5 percent of Luen Thai’s total turnover.

This story first appeared in the October 3, 2005 issue of WWD. Subscribe Today.

The company recently signed the U.K.’s Marks & Spencer and Germany’s Metro as new customers. It’s also looking to expand its China business.

Luen Thai has diversified its product categories to include pants, and it is making 150,000 pairs a month at its Dongguan Supply Chain City facility.

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