Luen Thai made its foray into the world of apparel in 1983, when founder Tan Siu Lin opened his first factory in Saipan — a move to take advantage of the custom and quota exemptions in the United States territory. Some 32 years later, the company is forging its path in an entirely new sourcing landscape.
Over the past three decades, fashion brands have shifted increasing resources and strategic attention to accessories. Fast-fashion brands have emerged, putting pressure on fashion labels to churn out trendy merchandise faster and less expensively than ever. E-commerce has radically altered retailing, eliminating the need to open and maintain costly brick-and-mortar stores. All of this has transpired on an ever-changing terrain of trade agreements and duty terms between various groups of countries.
Responding to those changes, Luen Thai is working to develop itself beyond its roots as a garment maker. For starters, it is placing a big emphasis on its still relatively small but fast-growing handbag manufacturing operations. Already the company is a supplier to several brands, including Michael Kors, Coach, Tory Burch and Furla — and it aims to add more labels.
Second, the company is looking to become a major retail partner for brands, offering them integrated manufacturing and distribution services in Asia, specifically China. A deal with American footwear brand Skechers has been Luen Thai’s first experiment with this model, and similar deals with other brands are likely to come soon, executives said.
Finally, the company hopes to leverage its manufacturing presence in countries like Vietnam, the Philippines and Cambodia to maximize duty benefits for its customers and offset rising costs in China.
Henry Tan, Luen Thai’s chief executive and Tan Siu Lin’s eldest son, said the company’s acquisitions and deal-making have placed it in a strong position to adapt to shifting winds in the industry.
“I think we’ve done more mergers and acquisitions than most garment companies. As a result, we are more diversified in our product offering,” Henry said, adding that it also helped that Luen Thai went public 11 years ago. That IPO raised about 676 million Hong Kong dollars, or $87.14 million. However, the company’s share price has not performed particularly well since then. Currently Luen Thai’s shares hover near the 1.30 Hong Kong dollar mark, or about 17 cents a share (U.S.). That is less than half of the company’s IPO price of 2.98 Hong Kong dollars. Over that same time period, the Hang Seng index has risen 85.72 percent in value.
Raymond Tan, president of Luen Thai and another son of Tan Siu Lin, also stressed the importance of diversification and said the company is at a “crossroads.”
“We are unique in that way — that we have that kind of diversity. It’s a strength and it’s also a weakness because in today’s environment, if you are not focused, you’ll be beaten by the focused one. But if you get too focused, you have a very high risk of sudden change with your market or your product or your customer you know,” Raymond said. “I’m committed to the [apparel manufacturing business] but I know where the opportunities are and where we need to put our focus.”
Anne Mok, chief merchandising officer at Luen Thai, agreed that the company must take into consideration the changing needs of its customers and the fashion business in general. In the beginning, she recalled, Luen Thai was very much a men’s-centered business that over the years has grown to comprise women’s wear, knitwear, lingerie and accessories. Luen Thai’s client list includes Calvin Klein, Tommy Hilfiger, Polo Ralph Lauren and Abercrombie & Fitch.
“If you really want to capture the market and be diversified…you look at the marketplace, expand its bag-making operations in the Philippines and start up manufacturing operations in Cambodia. Both countries are beneficiaries of the U.S.’s Generalized System of Preferences and the European Union’s GSP-plus program. “I think the fact that we’re able to operate in a duty-free environment probably will help.”
Additionally, the Asian distributions deal with Skechers gave the company insight into the world of retail. Henry said the joint venture has been successful and that the company is trying to learn from that experience.
“We’ll probably be able to do a better job in the whole supply chain, leveraging our manufacturing capability and producing or to sourcing [only] what is selling,” Henry said, citing the rise of vertically integrated Zara. “I believe it is more important to be efficient at retail rather than efficient at sourcing…if you are able to sell at a full margin, there are a lot more dollars there. And that is what we are trying to figure out: Whether we are able to be more efficient in selling in this area where we are producing the product.”
Henry said fast-fashion companies have altered the retail game and the margin-eroding practice of markdowns.
“I think the industry is changing with the success of some of these high-fashion companies. They are very, very effective. They do not have to go to markdowns that much,” Henry said. “In the old days, you only got markdowns after Thanksgiving. Right now, you get 50 percent off by Thanksgiving and they sort of give it away by Christmas Eve. I think that it’s not healthy.” Where Luen Thai will be producing those goods is another issue. As manufacturing costs in China escalate, the garment industry is pushing more mass production into other countries, including those in Southeast Asia. Luen Thai’s own manufacturing setup is evolving to mirror that shift. While Luen Thai still does most of its production in China, the company has been buying up factories and manufacturing companies in Southeast Asia over the past few years. It is placing particular emphasis on Vietnam these days, in the hopes that the Trans-Pacific Partnership will come to fruition eventually — although talks stalled in Hawaii just a few weeks ago.
Henry said Luen Thai is looking at ways to create a more vertically integrated fabric-to-garment operation in Vietnam because in order to take advantage of the TPP duty benefit, the fabric for garments must be made in Vietnam as well as the final garments. “So we are trying to partner with fabric mills to see how we can be a vertical operator,” he said. “Even without TPP, Vietnam is already very competitive…Whether we like it or not, we have to be in Vietnam.” To be sure, Luen Thai has faced its share of challenges recently. Last month, the company issued its second profit warning so far this year, blaming it on the revamping of a factory in Cambodia and a drop in orders from Uniqlo parent Fast Retailing, one of its major clients. Luen Thai said it expects to post a 55 to 65 percent drop in first-half net profit when it reports results on Aug. 27.
Luen Thai executives said they were unable to discuss the company’s current financial situation because they are in blackout period, but Raymond did address the situation with Fast Retailing. This year, Students and Scholars Against Corporate Misbehavior, a non-government Hong Kong-based organization, issued a report alleging that two Uniqlo suppliers — one of them owned by Luen Thai — were exploiting workers. A SACOM spokeswoman later specified that the organization believes workers at the Luen Thai factory were forced to work over- time. Raymond denied that this was the case.
“We didn’t force any worker to work. They were willing and we paid them according to the law,” Raymond said. “You think we can force people to do what they don’t want to do?
Last month, Fast Retailing issued a progress report on its investigations into the matter. The company said it had reviewed working hours at the factory and they remained within the Japanese company’s own acceptable range since February. It also said it had brought in two dust collectors and changed workers’ masks to a dust-protective variety.
Luen Thai saw other hurdles in fiscal 2014. Its full-year sales come in nearly flat at $1.22 billion, and net profit for the year more than halved to $21.57 million. Sunny Tan, chief financial officer, another of Tan Siu Lin’s sons, said underperforming brands Esprit and Abercrombie & Fitch are to blame for much of Luen Thai’s performance last year. He said since some of the more mature brands in Luen Thai’s portfolio are struggling, it’s just another reason the company should diversify.
“We are really repositioning ourselves to be ready to service different brands. We are branching out to bags, accessories to also hedge our risk and apply what we are good at in apparel to the accessories business,” Sunny said. “We’ve got to make sure we are relevant.”