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Sourcing Scoop: Luen Thai CEO on the Future Factory and Why the Little Guys are Positioned to Win the Sourcing Game

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The ants are eating the elephants in today’s apparel sector, and no one’s yet figured out how to make the bleeding stop.

That’s largely because retail—and thus sourcing—is seeing wide-reaching shifts, like an e-commerce takeover, which drove a whole new way to shop, and rampant uncertainty hasn’t helped or made it easy to know which foot to place in front of the other.

“The market is very confused,” said Raymond Tan, CEO of Hong Kong-based consumer goods supply chain group, Luen Thai, during an interview with Sourcing Journal in Hong Kong. The company specializes in casual and fashion apparel, sweaters and accessories. “I have to say that this is the most challenging environment that I’ve ever seen in my last 33 years.”

How has all that confusion changed sourcing?

In the past, a manufacturer making for multiple brands could rest fairly assured that when one brand wasn’t doing well, another might be, and things would generally balance out. But now that so many brands are facing so many challenges all at the same time, it’s hard to count on that balance and business becomes unpredictable.

However, Tan said, “One thing that’s very, very predictable is that most of the brands are buying very, very conservative and they want much shorter lead times at a very low price.”

In more certain times, manufacturers could make investments and then service the customer based on their needs, but without knowing how long that customer might even be in business, manufacturers are now investing blindly, so to speak. What’s more, those same brands and retailers with unpromised futures want manufacturers to invest in new markets, without even so much as a 3-5 year commitment on orders.

“And knowing market conditions and the uncertainty with President Trump, I have to take a lot more risk in whatever I do,” Tan said. “I need to be a lot more cautious in the way I have to plan my business now.”

When it comes to things like the border tax, Tan doesn’t take action until things happen, because, as with the Trans-Pacific Partnership trade agreement, it seemed like a done deal until it wasn’t. If the border tax does come to pass, however, Tan said it will be more than bad news for retail.

(Read more about the status of U.S. trade deals: Update from Washington: BAT, NAFTA and What’s Dead or Alive)

“I can’t imagine department stores can survive this blow again. They are already facing huge challenges with what they have right now,” Tan said. “Nobody knows how it’s going to work out, but at the end of the day, even if this were to happen, apparel will not move back to the U.S. in a big way. It will for some, but not in a big way. So the cost increase would have to be passed on to the consumer, but then nowadays the consumer has other ways to shop. How do you deal with that? It may open up even more opportunity for e-commerce and cross border purchasing.”

So what’s the future for factories?

Just like retail won’t survive with the status quo, neither will factories for much longer.

In acknowledging that, Luen Thai is building what Tan calls the “future factory.” The smart factory under construction in the Philippines, where Luen Thai has more than 50 percent of its workforce, will be equipped to produce its own fabric and be run using a lot of automation.

“The combo of the two will give me much quicker speed, hopefully at lower costs and will develop a model that will be more suitable for the uncertainty,” Tan said. Considering the Philippines does not produce fabric, equipping the factory to fully service itself creates more opportunity in that market.

What will China’s new role in sourcing be?

China may be changing its face a bit from the old days when it was strictly the world’s manufacturer, but the country will retain the title nonetheless.

“China manufacturing will still be there, but will be mainly for the Chinese market and for the high fashion items which require a lot of speed and supply chain network in terms of the material, like fabric accessories and some of the unique stitching methods which some of the newer manufacturing countries might not have yet,” Tan explained.

What’s the take on Vietnam with no TPP?

Luen Thai was one of the many companies that invested in Vietnam ahead of what was expected to be a sizable influx of manufacturing demand brought about by the TPP, which the U.S. pulled out of.

Thinking innovatively, Luen Thai went into Vietnam as Sunrise Luen Thai, a joint venture with a fabric mill that will supply fabric for its own garment mill.

“We felt it was necessary because a fabric mill requires sizable garment manufacturing capabilities for it to become vertical,” Tan said. Right now, Sunrise Luen Thai produces roughly 3 million square meters of woven fabric per month, but by the end of the year, that number should reach 4.5 million and eventually, output will hit 6 million square meters of fabric per month.

For Tan, the end (for now) of the TPP, really wasn’t bad at all.

“Being vertical there, it gives us the speed and cost benefit. With the withdrawal of the U.S. from TPP, when I look at the positive side, other fabric mills stopped going there. There are only two major fabric mills in the woven shirt area that are going to be in Vietnam,” Tan said. “With the withdrawal of the U.S. from TPP, in a way it reduced my competition, gave me an edge for the Japanese market and also gave me an edge for the U.S. market in terms of speed and cost. Most of my other competitors may have a garment factory in Vietnam, but their fabric still comes from China.”

In apparel, the ants are eating the elephants

With the entrance of e-commerce came the entrance of any innovator with a new idea for a better way to sell apparel.

“The challenge now for many brands is that the world is changing and there are platforms out there to allow anyone to run their business,” Tan said.

These are companies bigger companies wouldn’t have even given a second look at as competitors, but now that nonchalance may be coming to bite them.

“When you add them all up, it’s almost like the ants are eating up the elephant,” Tan said.

Start-ups and small businesses with big ideas are leveraging a multitude of platforms to run their companies; they are working from home with no overhead and leveraging their resources globally.

So, as Tan explained, “You have brands who continue to do it the traditional way but leverage the e-commerce technology but you also have little guys, like my son, who just go out there and do whatever they want and their market is very targeted.”

Tan’s son started up a business selling hiking T-shirts while still in school, running it strictly as e-commerce, making a margin substantially larger than any major retailer could hope for and using targeted Facebook ads that chase just the people who always click on hiking.

“If he can sell $10,000 a year, when you have a hundred of them [small, ant-like start-ups], that’s already $1 million, so how do brands compete against them? How do I service them? I don’t even know them,” Tan said. “But that’s the future. That’s the future we have to face.”

[Read more about how marketplaces are enabling small businesses to play in the big leagues: Alibaba’s Jack Ma Says the Future is Now & It’s in China]

It’s challenging for big brands to give consumers exactly what they like—or to even know what that is—but start-ups are closer to the consumer and doing better at both knowing and delivering what they want. And a lot of brands will be hard pressed to survive that.

“Even if they can survive the current situation, the next question is: how do you compete with the little ants? How do you compete with a platform like amazon.com or Alibaba that allow the little ants to run their business?”

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