Jeffrey Cheong picked up the folder marked “URGENT”, which his secretary had just placed on his table and looked at its content. The folder contained letters from two of his major clients, KiKi and Houida. Both KiKi and Houida, two European fashion houses, were Haute Couture Fashion Berhad (HCF)’s first customers and have been with HCF since its inception. They were writing to Jeffrey to inform him that they may be looking to China to “contract manufacture” for them as the prices there were very competitive.
Jeffrey stared out of his window in contemplation. He was in a dilemma. Loss of its two major clients would be disastrous to HCF. As it stood, HCF had been experiencing falling margins and profits over the last few years as evidenced in the financial statements enclosed. Loss of Kiki and Houida would mean that HCF would then be incurring losses.
As soon as his other clients heard of this new development, they too would be taking similar steps. Jeffrey realised he had to review his strategy quickly if he wanted to retain the present clientele. He knew the inevitable. During the late 1990’s and into the early 21st century, China had made inroads into the textile industry and was forecasted to grow further. Following the relaxation of trade barriers, many of the European and American fashion houses were looking at importing clothes from China at very low prices. This was mainly due to its low operating costs. This had a massive negative impact on many companies operating at higher costs and based elsewhere. The previous adverse perception of “Made in China” labels had slowly changed as China now manufactured clothes that are higher quality at substantially lower operating costs.
If Jeffrey wanted to survive in this industry, he too must consider moving his operations to China.
Haute Couture Fashions Bhd (HCF)
Houte Couture Fashions Bhd was established in the 1974 by the Tan family. Tan Boon Kheong, the patriarch of the Tan family was a skilled master cutter, trained by British cutters in 1950s in Penang. He ran a small but successful business tailoring men’s clothing in Argyll Road, Penang until his retirement in 1980.
Peter Tan, the oldest son of Tan Boon Kheong, initially under his father as a young 17-year-old but after three years left for Europe as he was interested in creating for both men and women’s fashion, rather than merely tailoring men’s suits and pants. His sojourn in Europe saw him training at Yves St Laurent and Gucci. He had a keen eye on women’s silhouette and soon established himself as a talented designer. Many of the fashion houses were happy to employ him into their team. He returned to Malaysia with a wealth of experience, eager to put his newly acquired knowledge into use. His return to Malaysia coincided with the trend of European clothes’ manufacturers looking at Asia for outsourcing. Peter saw this as an opportunity to kick-start his business venture, especially with his contacts with the European fashion houses.
HCF started out as a family owned business with all of its shares being held by the Tan family. Peter prepared to bid for contract manufacturing deals with the European fashion houses. With the help of his contacts and excellent track record with the fashion houses, he soon managed to convince three of them to sign outsourcing deals with him. These fashion houses were keen on doing business with the people known to them as they set-off their new venture.
HCF started its first fully equipped factory in Penang in November1974. Under Peter’s helm, HCF very quickly established itself as a high quality manufacturer of both men’s and women’s clothes. It had no difficulty meeting the demand of the fashion houses as Peter had recruited several European-trained Malaysian designers to join his team.
By late of 1970s, HCF’s turnover had reached RM10 million. Over the ensuing five years since its inception, HCF had managed to add two more European fashion houses into its customer base. HCF’s talented designers were providing inputs toward the development of the ready-to-wear designs and were well received by the fashion houses. HCF was now faced with a problem. The factory located in Penang was no longer big enough to cope with the production capacity. Peter quickly sourced a large plot of land in mainland Penang – Butterworth and began building a new and much larger state-of-the-art factory to cater for the growing demand.
In July 1980, HCF opened its new factory in Butterworth. Peter, then the Managing Director of HCF, decided not to shut down the Penang factory but operated both factories. HCF then employed between 80 to 100, mostly tailors in the Penang factory, while the Butterworth factory employed about 300 employees.
HCF continued to experience growth in sales throughout the early 1980s to mid 1990s, charted annual sales of around RM100 million. Its customer base had also increased, drawing in customers from Europe as well as America. Profits were also riding high. HCF opened two more factories. In 1990, it opened its third factory in Jitra, Kedah. The factory had a capacity of producing 1 million garments a year with a strength of 300 employees. In 1995, due to even increasing demand for its clothes, HCF decided to open its fourth factory with a production capacity of 2 million garments a year. This time, it looked to Thailand, as labour was very cheap. HCF set up a wholly owned subsidiary Haute Couture (Thailand) Pte. Ltd to operate the Chieng Mai based factory. It recruited about 500 employees.
In 1997, Malaysia was facing financial crisis, with foreign exchange market volatility being the main issue. Manufacturers with foreign customers were unable to honour their contract price as exchange rates fluctuated. HCF was cought unaware. HCF had to tender for a contract six months before the delivery of the consignment. Fluctuation in the exchange rates made it impossible to predict the cost of material that HCF had to purchase form the fashion houses. HCF found itself selling its garments at very low margins for the very first time. 1998 saw HCF suffering its first loss since its inception. Many of its competitors also suffered losses and some even had to cease manufacturing. In a bid to survive the financial tsunami that had hit Malaysia, Peter Tan consolidated HCF’s position by deciding to cut operating costs.
HCF’s major cost apart from the cost of imported material was labour cost. Peter Tan made the decision to shut down the Penang factory, much to the dissent of his father. HCF was still able to meet the demand while still operating the other three factories in Butterworth, Jitra and Chieng Mai. He also decided to shift as much of the production to Chieng Mai, as the labour cost was a quarter of the labour cost incurred in the Malaysian factories. Moreover, HCF was facing labour shortage problems in Malaysia, as many of the labour force were moving to the cities for better prospects. As a result of this consolidation exercise, about 300 of HCF’s employees were made redundant, many of whom had been with HCF since its inception.
Over the next few years, its profitability increased gradually and HCF slowly pulled itself out of the loss making situation. HCF managed this difficult feat because of its customer base as well as its reputation for high quality clothes, which commanded premium prices with its customers. The financial crisis had not affected Europe much, and as such, demand for the clothes continued.
HCF’s Contract Manufacturing Structure
The contract manufacturing deals signed with the European fashion houses were such that the designs were provided by the fashion houses and HCF had to adhere to the designs when producing the respective labels. The fashion houses welcomed suggestions from HCF’s designers but were particular that the designs were not crossed between the various labels that HCF was producing. Cross producing design between labels would be disastrous for HCF as it would immediately loose the contract for the labels involved.
Further, the European fashion houses would supply the material for the clothes as they wanted to maintain the quality of the output. HCF purchased the material, sourced for appropriate accessories locally and produced the clothes. The fashion houses would contract for “a specific quantity of a specific design at a specific quality” to be delivered at a specific time. Any variation outside the contract stipulation would have to be borne by HCF itself.
Usually, the contracts were for delivery of clothes one season ahead. This meant that summer’s design clothes would have to be delivered by the beginning of spring. HCF would sell the manufactured clothes at a contracted price. The fashion houses allowed HCF to tender for the contract price based on the design, quantity and price of material supplied. The contract tendering process usually took place about six months before the due date for the delivery of a season’s batch.
HCF manufactured ready-to-wear clothes for a number of European and American fashion houses. Its clothes were well-sought after for its modern designs and high quality finishing. HCF’s customers have remained loyal over the last three decades, although its major coup was the securing of 2 major American fashion houses as its customers within the last 5 years. All of HCF’s clothing was manufactured under the customer’s own label.