How local garment makers can compete with China

The 2005 quota phase-out of garments is currently being looked upon with much interest and, indeed, with some fear. Introduced by developed countries in the 1960s, it was meant to protect domestic production in developed countries by limiting the amount of textiles and clothing coming from low-income countries. In time, the quota worked by imposing limits on such manufacturing giants as China while giving less-developed countries a chance to carve out their own place in the industry.

Amid all this uncertainty, Willie Tan, president and chief executive officer of Luen Thai International Group Phils., remains optimistic.

Q. How is Luen Thai organized and how is it different from when you first started the company?

Willie Tan: Our vision is to be recognized by our customers as the best apparel supply chain partner in the world. Therefore, we’ve designed Luen Thai’s present organization to meet the value chain of a full service apparel company, which we feel is ideal for the present business environment, as well as the forecasted trends in the global industry, as a result of the World Trade Organization’s elimination of quotas in 2005 under the Agreement on Textiles and Clothing.

Our set-up was typically traditional before we launched our new strategy called "Rethinking & Renewal" in the late 1990s. Before that time, we would take orders, get the raw materials from buyer-dominated suppliers, assemble the garments, and deliver. The organization structure was simple. Our factories would just take whatever orders came from merchandizing. The latter would get orders from different buyers and try to fill our factories to capacity.

Basically, we saw the need to reengineer and we subsequently launched our continuous improvement programs for every aspect of our business–organizational, operational, financial, and compliance with world-class standards that are applicable to our business. For example, we make it a point to compete for awards such as the Hong Kong Management Quality Award, the Hong Kong Industrial Award, and the Philippine Golden Shell Award. This helps us to measure ourselves and to discover more areas to improve.

For standards in business practices, we go for the highest available, such as the Worldwide Responsible Apparel Production or WRAP principles for employee care and the General Sewing Data or GSD for production planning and target setting.

Our new organizational design supports the processes of our businesses, including the new services we provide to our customers. Today, we offer the following services:

• design and product development;

• sales and merchandising;

• fabric/raw material sourcing;

• manufacturing;

• inventory management, which includes a range of logistics services such as landed-duty pay arrangement, factory to store delivery option, and pick & pack service; and

• full service in washing, printing, and sample production.

Q. LT Phils. is part of a global garments operation. What is LT’s business model and what was the role envisioned for the Philippines? What were LT’s key reasons for deciding to invest in the Philippines?

A. Luen Thai’s business model is that of a one-stop-shop business wherein customers can come to us and we can take care of most of the supply chain activities for them from the design stage to the delivery of finished goods. We call this concept-to-store approach. This is the new thrust of the company in growing not just Luen Thai’s business but that of our major customers as well.

Our operation in the Philippines is now the largest in the country’s apparel industry. We manufacture knit and woven products here for prestigious customers like Polo Ralph Lauren, Liz Claiborne, Dillard’s, Express, Ann Taylor, and Calvin Klein.

LT Phils. is one of the pioneer operations in LT’s global network. We started the business here in the 1980s, as there was a growing demand from our customers. Our capacity in other locations was not enough, so the Philippines was a good choice because the industry was in existence already and regulation and quota management were already moving. Of course, labor-wise, it was also competitive. Although the skills were not always competitive, Filipino workers were highly trainable, so we had made major investments in training and development.

Today, however, the reasons for maintaining our Philippine operations are supported by objectives shaped by the changes the industry is going through as a result of macro forces such as trade liberalization, industry consolidation, and the technology revolution.

With its entry into WTO and its unquestionable production prowess, China has been dubbed as the 800-pound gorilla in the apparel industry. However, LT, like other companies, still believes it is wise to spread out production outside China because of risks that are political and economic in nature.

For example, the recently announced safeguard measures against China on dressing gowns and bras are deemed as a move to address the adverse effects of massive job losses for the US manufacturing industry. China took the lion’s share of production when quota was abolished in these categories at the start of the 10-year ATC implementation in 1995.

So, maintaining a production facility outside China is still a wise decision.

Some buyers do not believe the Philippines can compete and, as a result, the majority of manufacturers in the Philippines have given up. However, we are not giving up; instead we are gearing up to compete. I believe we can overcome the perception that the Philippines is too expensive by proving otherwise. Luen Thai has built a strong manufacturing foundation in the Philippines. The reengineering projects were mostly initiated or piloted in the Philippine plants four years ago. These projects have become our templates for other locations of LT in China, Mexico, Cambodia, and Saipan.

I am very proud of our Philippine team. We are now sending Filipinos abroad to guide the rest of our employees on the company’s reengineering and other continuous improvement projects.

Q. How do the Philippine factories fare vis-à-vis the other LT factories in the region in terms of productivity? How do the Philippine factories perform with respect to the best practices in garments manufacturing?

A. Luen Thai Phils. has world-class facilities. Our Tarlac facility is now considered a world-class facility for women’s blouses. Our facilities in Pampanga are recognized by our customers as manufacturers of high-quality men’s dress shirts. Our Clark knit factory is another world-class operation that is an expert in placket shirts.

Q. How did LT identify its business partners, e.g. major suppliers of textiles, designers of garments, and distributors of finished garments in the different markets?

A. Normally, suppliers are nominated by our customers. Since we have taken a proactive approach in servicing our customers, we also provide them with choices of suppliers. The process calls for accreditation, which means the supplier has to have proven ability to supply the required materials at the right time to the right location.

Luen Thai has been in the business for 38 years. We have known a lot of good suppliers and we are approached all the time by new vendors. The rule of thumb for suppliers is that the company has to be accredited, based on the standards set by the customers and Luen Thai.

Q. LT. has become a respected name in the garments industry. How have you managed to grow the group in spite of stiff competition worldwide? How would you differentiate LT from the rest of the industry?

A. We have positioned ourselves to compete by reengineering. First, examined our strengths and weaknesses vis-à-vis where we wanted to be. We continue to move towards a lean structure, with lean manufacturing and modular lines.

We also hire and train the right people who have the skills, flexibility, and capability to implement and own the action plans stated under R&R ("Rethinking & Renewal" strategy). The vision, the strategy, and action plans are communicated to all employees. In implementing the continuous improvement projects, best practices are learned and shared among different teams.

A very good customer of ours says that one thing about Luen Thai is that we are never scared to try new things in an effort to improve our services. We invest and never tire of improving our business, which results in setting new standards.

When a customer walks in, we can do an end-to-end supply chain service for them from design to delivery of goods to a specific store. Our multi-product and multi-country manufacturing capability adds to our overall competitive advantage.

I am very proud to say that we are one of the leaders in the global industry and we would like to keep it that way–today, in 2005, and for many years to come.

Q. LT invests heavily in its people. What kind of training do your workers get from your programs. Tell us more about your Unified Principles of Social Responsibility and Practice or UPSRP?

A.We have different training programs for different employees. There has been an emergence of knowledge workers and the apparel industry is also getting more of this kind. Our training ensures we are addressing the knowledge needs of our employees.

For example, a basic module in our training program is "vision and values" training, wherein employees learn about the meaning of our vision, the challenges we are facing, the strategic plan, and change management program. Armed with this basic knowledge about the business, they can participate and contribute proactively in achieving this vision. In addition to technical training, we feel this values training is very important.

In our succession planning, we also ensure that future managers are updated with new knowledge. We send them to relevant and special training or short courses being offered outside the company. We also have an apprenticeship program for future leaders of our company.

We also conduct extensive technical training, especially in GSD, which is a global standard for sewing different parts of a garment. Interestingly, GSD helps us ensure that employees in the production floor are not overworked since the time to make the garment is already predetermined, based on scientific studies of time and motion. The reasonable target output for the day can be determined in advance.

UPSRP is Luen Thai’s own code of social responsibility. Its principles were taken from various global standards on worker care, including the International Labor Code of conduct. UPSRP has become the company’s compliance policy, which guides the management team in instilling employee care in all facilities. It has also become the platform for preparing our facilities for customers and other third-party audits or inspections.

Today, almost all Luen Thai facilities around the world are WRAP-certified. WRAP is a social responsibility certification standard put together by members of the American Apparel and Footwear Association, which include customers and non-governmental organizations.

Q.LT expanded in the Philippines during interesting times–it was 1988–and, since then, the country has gone through several events. How did LT Phils. cope with these events?

A.Just like other business, we had difficulties, especially in delivering our goods. This industry is a major positive contributor to the Philippine economy and has remained resilient through those bad times.

What affected us more in the past was the declining consumer spending in our customers’ markets. For example, after September 11 (when terrorists attacked New York), our customers rapidly cancelled or reduced their orders.

Q. How will the quota phase-out affect your operations in the Philippines? In the rest of the countries where your factories and offices are located, how are you preparing LT for these potential effects?

A. The quota abolition will affect all countries involved in apparel manufacturing. It is the competitive advantages of each nation that will determine how it will survive. There are key factors–and not just labor–that have to be taken into consideration when we talk about a country’s survival. Definitely though, China has the advantages of labor supply and cost, a robust source of raw materials, proximity to efficient ports, efficient operations as more and more factories are improving their operations, compliance with labor laws, and bilateral or regional trade agreements with markets.

For LT Phils, I feel that we have enjoyed a leadership position in many of these factors, so the removal of the quota will only help us secure the further trust of our customers.

However, no matter how efficiently we operate, the bottom line is if the utility costs remain uncompetitive or if transporting raw materials continues to be troublesome due to inefficient import/export process or if it is costly due to a lack of good sources here, then we might have to rethink about resizing the business in the Philippines–if our capacity in China can accommodate some of the volume of our products we’re doing here.

For Luen Thai, China is a massive expansion opportunity but we have no plan to pull back existing facilities. It will not make sense for the buyers to put all their eggs in one basket, so we will have efficient operation in various places that can meet their needs.

Q. China is expected to benefit greatly from the quota phase-out in 2005. What could entice garment businesses to locate in the Philippines instead of in China? What would make good local garment makers stay and continue doing business in the Philippines?

A. Prices should be competitive. Raw materials should be abundant and quality should be competitive as well. Efficiency should be high and flexibility to handle multiple styles with smaller volume is very important. Employees should be highly skilled in terms of global standards.

Government should be proactive and be seen as partners of the industry in the improvement of regulations, import-export documentations, shipping and airfreight processes, and in other issues that are outside the manufacturer’s control.

I would recommend very strongly to the Philippine government to negotiate a free trade agreement as Singapore has done. Thailand is negotiating an agreement now. The Philippines should not let itself be left behind.

I also believe that the country and the industry should be seen as champions of employee rights.

Q. Based on the LT experience, what would you recommend to the Philippine garment manufacturers to help position themselves competitively in the post-quota regime?

A. Each company has to stop, look, and listen before stepping on the brakes or gas. Ask what the company does best. Always listen to what your customers are saying so you can make your improvements to meet your major stakeholders’ demands.

Ensure employees are treated fairly. Training and development are very important.

Cost-wise, reengineering your processes to increase output is necessary, not just to compete globally but also to compensate for the high costs of doing business here in the Philippines. Our labor cost is not the cheapest in the region. We have to show more value for money than our competitors in countries like China, India, and Pakistan.

If it’s location, location, location in real estate, it is integrate, integrate, integrate in the apparel industry. We are in a supply chain business. Customers are consolidating, vendors are merging, and factories are expanding vertically and horizontally. A company can be linked and stay in the game if its supply chain management principles are updated and people are willing to partner and learn best practices from others.

Take, for example, a customer acquiring another brand. The supplier of the acquired brand, or vice-versa, will have to adjust to the new system and management of the new owners. So, if you have not updated your processes or invested in new information systems that are available, there is a high chance that you’ll see your share of orders going to a preferred supplier who can provide the integration requirements.

I like the phrase, "survival of the fittest". But you know, I also believe in the "power of one". If the industry and government continue to band together and promote the Philippine industry to major markets, we’ll see not just the survival of the Philippine apparel industry beyond 2005 but also a very chance of becoming a choice supplier outside China.

(Reprinted from the March 2004 issue of The SGV Review)