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9 Workshop Session 1A: Stringent labour regulations suggestions to cope with global labour issues Welcome speech: Mr. Lawrence LEUNG, Chairman, Knitwear Innovation and Design Society, Hong Kong; Managing Director, Sun Hing Knitting Factory Ltd. Speakers: Mr. Jan EGGERT, Director General, Foreign Trade Association Mr. Roger LEE, COO, TAL Apparel Ltd. Mr. Francis YUK, Chief Representative, Asia, IAF Mr. Lawrence LEUNG, Chairman, Knitwear Innovation and Design Society; Hong Kong; Managing Director, Sun Hing Knitting Factory Ltd Amidst the thriving economy in China, the mindset of young people, including the migrant workers, had changed, said Mr. Lawrence Leung. They aspired to have fulfilling careers and not just jobs, which had been desired by their parents. They also wanted better working conditions and welfares. To protect the welfare of the workers, the Chinese Government had introduced new policies, including working housing and provident funds. The government also supported manufacturers in their attempt to move up the value chain. For instance, in Guandong, companies were encouraged to shift from OEM to OBM and ODM. Given the appreciation of renminbi, some buyers wanted to move their production out of China. Mr Leung said the remaining competitive edge of China included its more skilled workers and well-developed infrastructure. Mr. Roger LEE, COO, TAL Apparel Ltd Sharing his experience in operating Pan-Asian production, Mr. Roger Lee said his company employed a workforce of 25,000 in Southeast Asia. The minimum wages of workers in the region had steadily gone up since This had encountered resistance from buyers. To lure workers in China back to their 8

10 factories after the Chinese New Year break, Lee s factories in China introduced new incentive schemes which proved to be effective. His factories had moved towards more efficient production process and nurtured workers to become multi-skilled. The skills of leaders of workers groups were also upgraded. To reduce operational costs, factories could also look into the standardisation of compliance and establishing one set of audit standard. Mr. Francis YUK, Chief Representative, Asia, IAF Wages earned by workers in China were the highest among the manufacturing hubs in Asia, Mr. Francis Yuk noted. This posed challenge to export-oriented manufacturers in the country. Guangdong had put investments in exports manufacturing-related projects on hold and expected zero percent export growth this year. The provincial government advised companies to move up north as more workers had become reluctant to travel southward. Workers strikes in the province were better organised and media in China had exposed malpractices by factory owners. Yuk said the corporate social responsibility programmes required collaboration between governments and the industry. Buyers and retailers needed to spend resources to ensure the standards were met. The supply chain should think of workers social welfare and benefits and be transparent. Mr. Jan EGGERT, Director General, Foreign Trade Association Mr. Jan Eggert said his association had set up business social compliance initiatives and worked on tackling of various issues through labour conventions. He believed a lot of the deficiencies stemmed from companies lack of understanding of the local laws in countries where they had outsourced production. For instance, in China, companies were required to abide by a 60-hour work week. There were other problems such as overtime pay not calculated and settled properly, illegal pay deduction, and unpaid leaves. The main problem in Bangladesh was the poor working conditions. There was a lack of control of sub-suppliers, which should have been monitored by the main suppliers. He urged the industry to conduct regular factory production audits to produce a consistent bigger picture. Another piece of advice was to support suppliers with more training and guidance. 9

11 Session 1B: Corporate benchmarking in relation to sustainability performance ranking Welcome speech: Mr. Willy LIN, SBS, MBE, JP, Chairman, Textile Council of Hong Kong; Managing Director, Milo s Knitwear (Int l) Ltd. Speakers: Mr. Willie BEUTH, Founder, 3P Institute for Sustainability Management Ms. Gloria CHANG, Campaign Manager, Greenpeace Mr. Sean GILBERT, Director, Climate Change and Sustainability, KPMG Mr. Willy LIN, SBS, MBE, JP, Chairman, Textile Council of Hong Kong; Managing Director, Milo s Knitwear (Int l) Ltd Mr. Willy Lin said as manufacturers they constantly had to strike a balance among prices versus sustainability and corporate social responsibilities. These were not mutually exclusive to one another. The trade needed to face up to the reality and customers should appreciate that it did have a cost impact. The ultimate goal was that they needed to build a better world in a collaborative manner. He asked the delegates to think about ways that all stakeholders could work together towards a long-term sustainable industry, such as those possibilities explored by GAFTI. Trade needed to work in parallel with their customers to provide a total solution throughout the supply chain. Mr. Sean GILBERT, Director, Climate Change and Sustainability, KPMG The Hong Kong s trade sentiment on sustainability had become more upbeat and more proactive, observed Mr. Sean Gilbert. Regarding the corporate benchmarking, sustainability was the fundamental requirement in the industry now. In a recent survey about sustainability, in terms of quantitative goals, companies agreed that there were measurable targets. Over the past two years, there had been changes in the focus of the supply chain. The stakeholders understanding of the structure of the supply chain became more sophisticated. Companies issued reports which focused on quantifiable targets. In terms of 10

12 auditing and policing of the industry, there were challenges such as the recurrence of issues which had been tackled. Some of the issues involved equipment and some were about other areas. The struggle with which companies approached compliance was that in some cases the effectiveness of auditing had been lost over time. Ms. Gloria CHANG, Campaign Manager, Greenpeace Ms. Gloria Chang s discussion focused on the management of hazardous chemicals used by the industry. Clean production in China remained a pipe dream as some areas remained heavily polluted by some industries. One fourth of chemicals in global industrial production involved the textile sector, which had long-term impact on the environment and communities lived in these areas. China had summoned up resolve to tackle the issue. In its 12 th Five Year plan, the Chinese government had specifically issued initiatives to clean up heavy metals released by industries in some areas with heavy concentrations of factories, including textile factories. Chang also provided some practical solutions that manufacturers could adopt to work towards clean production. Mr. Willie BEUTH, Founder, 3P Institute for Sustainability Management Mr. Willie Beuth said when he started working on industry sustainability over 20 years ago, his organisation asked the people involved for the same database MSDS - material safety data sheet. It worked in a similar way as purchasing something from a pharmacy: someone was responsible for explaining the ingredients. As such, why the chemical suppliers could not do that with their chemical supplies used in the textile sector? When a dangerous chemical substance was transferred from one place to another, the MSDS was a must. It was because when something was spilled onto the ground, or some people were poisoned, the chemical involved could be traced and its ingredients known so that people could come up with a timely solution. He thought that the funds were in place, it was just the individuals were too lazy to act on the issue to work on an industry-recognised MSDS system. 11

13 Session 2A: Annual review by Global Apparel, Footwear, and Textile Initiative (GAFTI) Mr. Bill FOUDY, VP, Head of Strategy and Brand Sourcing, adidas Group Bill Foudy said GAFTI helped to push the industry to gradually reduce the amount of non value-added work to improve the efficiency of the supply chain. To address the lack of a global standard, GAFTI had taken the initiative to provide advice on regulations and legislation to various governments. Another goal of GAFTI was to minimise audit fatigue. He encouraged companies from any country to get involved and participate in the working groups to contribute their ideas and suggestions. Update on product safety by Mr. Andre LEROY, Chairman, Apparel and Footwear Committee, The American Chamber of Commerce in Hong Kong; Marketing Director, Modern Testing Services (Global) Ltd While most companies sourced their products in Asia, the product safety standards in different countries varied, said Mr. Andre Leroy. GAFTI avoided duplicating its efforts in standardisation with other trade associations. Among the urgent issues was that around 28 US states considered toxic substance control regulations in 2012 which covered a lot of chemicals. The subcommittee of product safety at GAFTI looked at existing testing methods through vetting and selection. It had invited many companies in the supply chain and testing labs to provide samples. The subcommittee would study the test results and align its standard with various labs. Emerging markets might want to establish their own standards. He advised that industry could be proactive in the harmonisation of product safety standards. GAFTI would help in creating a critical mass and help improve overall efficiency in compliance. Update on compliance by Mr. Veit GEISE, VP, Asia Sourcing, VF Asia Ltd Mr. Veit GEISE focused his part on efficient production facilities from a compliance point of view. He advocated the establishment of global sustainability and audit platforms to minimise audit fatigue. A 12

14 proactive attitude was vital and the industry needed more partnership where factories would put into place self-control and a mechanism to ensure workers welfare. Meanwhile, the industry approximately spent over US$2 billion on audit. Geise said the industry could consider redirect part of this spending to staff training through establishing common audit protocol, factory self-control, etc. The gain would be a significant reduction in compliance cost. Update on work by the environmental Sustainability subcommittee by Jason KIBBEY, Executive Director, Sustainable Apparel Coalition and Kevin MYETTE, Director, Product and Supply Chain Sustainability, Recreational Equipment Inc. Regarding environmental sustainability, the approach by the GAFTI s sustainability subcommittee was based on its understanding of the means used to drive the industry. The subcommittee was to align and land its membership on several initiatives that were in motion already, including the sustainable apparel coalition and Zero Discharge of Hazardous Chemicals (ZDAC). It should be able to serve the overall purpose of GAFTI. Social compliance had been around for over 15 years and was on a heightened level. As many companies had their own standards, alignment for a common standard was complex. The situation was different for environmental sustainability. Now it was the time for the industry to get aligned and ensure that it did not build audit fatigue. 13

15 Session 2B: Process management ways to help us drive costs out of the supply chain Speakers: Mr. Bishu JAYARAM, Vice-president, Global Supply Chain, Retailing Branding and Information Solutions, Avery Dennison Mr. Roger NELSON, Managing Director, Concept 2 Results Ltd; Lecturer, the University of Hong Kong Mr. Bishu JAYARAM, Vice-president, Global Supply Chain, Retailing Branding and Information Solutions, Avery Dennison The planning and forecasting from the tier-two suppliers perspective involved the sharing of key concepts with various factories, said Mr. Bishu Jayaram. With the framework for integrated supply chain, service levels could be enhanced. In the production management, the consistency and quality would be elevated. The future of planning pointed to the simultaneous broadcast and sharing of real-time information. Supply chain solutions would be tailored based on needs of consumers. He also emphasised that every order was unique and companies needed to plan their organisation proactively. Through anticipation, planning capacity would become more nimble. A lot of brands had begun considering this approach. Because the basic assortments of different companies differed and they each worked with different suppliers, they needed a well-tested system that would encompass all the major variations. Avery Dennison had worked with hundreds of brands and therefore acquired good idea about how the industry worked. Mr. Roger NELSON, Managing Director, Concept 2 Results Ltd; Lecturer, the University of Hong Kong On effective cost control in the supply chain, Mr. Roger Nelson said process improvement was of paramount importance. His process management approach was result-oriented while at the same time the product quality was enhanced. Supply chain could be simplified: with some buyers specifying which companies could be the fabric suppliers and which companies could be the producers. By reviewing and examining the established process closely, many companies would be able to cut down on unnecessary costs and improve the profit margins. By working closely with suppliers, companies were able to reduce 14

16 lead times, guarantee the quality of first-time delivery of products which would ensure positive market responses. Sometimes when individual companies were able to squeeze out small amount in the links throughout the supply chain, they could lift profitability and could operate in most countries efficiently. When competition was mainly about one supply chain versus another supply chain, the SWOT (strengths, weaknesses, opportunities, and threats) analysis would be helpful, Mr. Nelson said. 15

17 Session 3: Gaining supply chain value by technology advancement and strategies to mitigate risk in today s financial crisis Welcome speech: Mr. Felix CHUNG, Chairman, Hong Kong Apparel Society Speakers: Ms. Mary Beth BORLAND, Director, Retail and Consumer Corporate Strategy, PTC Mr. Kurt CAVANO, Chairman and CEO, TradeCard Inc Dr. Michael T. FRALIX, President and CEO, [TC]2 Ms. Mary Beth BORLAND, Director, Retail and Consumer Corporate Strategy, PTC Ms. Mary Beth Borland said the supply chain was under pressure. Retailers working with multi-tier suppliers had encountered challenges in quality compliance, social and environmental compliance, and the act of God risks. Problem solving of these complex issues required analytical tools. A key value was to work with suppliers and create a cohesive global working team which would help speed up the processes in the supply chain, including the quality planning execution and quality governance improvement. The integration of design into the supply chain was crucial. A strategic supply chain also included the material and part management. Dr. Michael T. FRALIX, President and CEO, [TC]2 Dr. Michael Fralix said a revolutionary technological advancement in manufacturing was additive manufacturing. A good example in this additive manufacturing technology was 3D printing. In the market there had emerged 3D printed clothing, e.g. 3D printed bikinis in nylon. Clothing made from digital knitting also became available in the market. With the advanced data transfer through the Internet, this technology enabled company to ship products before they were even made. The supply chain had turned digitalised. Fralix urged the delegates to pay attention to new innovations in such specialised areas, such as the nano fabric materials which could be fed into 3D printer for clothing production. 16

18 Mr. Kurt CAVANO, Chairman and CEO, TradeCard Inc Mr. Kurt Cavano focused his discussion on cloud-based supply chain. New technological application would help the industry to mitigate risk in today s uncertain environment. Cloud-computing helped to make the internet ubiquitous and available at a lower cost. It also made the building of systems completely different and streamlined the processes. Cloud-computing brought together groups of people from different geographical locations so that they could share information and collaborate. It put everyone on the same platform so that they could work simultaneously and update each other on the progress of various projects real time. Hence the transparency in the processes had been tremendously enhanced. When everyone was linked in the supply chain together, they could accomplish tasks more efficiently because there was only one version of the truth and it benefited all parties involved. 17

19 Session 4: How does China s one country; multi-systems shape its retail market? Discuss plannable and possible hidden cost for setting up retail structure in China Speakers: Mr. Douglas HSIA, Vice-president, The Federation of Hong Kong Footwear Ltd; Managing Director, WLH Intl Ltd Mr. Dajun YANG, President, United Times Associates, Greater China; Specialist, China Centre for Promotion of SME Development Mr. Douglas HSIA, Vice-president, The Federation of Hong Kong Footwear Ltd; Managing Director, WLH Intl Ltd Mr. Douglas Hsia noted that the retail market in China had achieved exponential growth in a relatively short time. The country s enormous size and widening wealth gap in the population divided the market into various segments with distinct characteristics. He pointed out that broadly China had four categories of consumers: mass market; core middle; aspiration; and movers and shakers. As a case study, he cited the Belle Group as a shoe retail chain with core competencies and competitive edge. It had localised sales management with centralised coordination. Having established thousands of outlets around China, Belle had implemented a multi-brand strategy successfully. With an experienced and motivated management team, Belle had muscled into department stores and set up multiple points of sale for different brands. All key personnel at Belle were shareholders and it reflected that the company trusted its own employees. Mr. Dajun YANG, President, United Times Associates, Greater China; Specialist, China Centre for Promotion of SME Development Mr. Yang Dajun said that the main development trend in China in the next few years would be the rapid urbanisation which would have an impact on consumer spending. He said 4 th tier cities in Central and Western China were considered the market with high potential. On the other hand, it was not easy for brands to tap into the market. The mainstream consumer group would be those born in the 1990s, which was considered the last population boom in the country. These young people were prepared to lavish money on luxury goods. As this group would drive the market, companies needed to consider their 18

20 spending cycle, such as the time when they reached marriageable age, and factor it into their product development to cater for the needs of this group. 19

21 Session 5: Lifestyle and consumption pattern of Chinese consumers of fashion products in view of regional disparity and social classes. What are the things to learn for successful distribution to this inevitable market? Speakers: Prof. ZHANG Zhe, General Manager, Shanghai Jincheng Fashion Consulting Co Ltd Dr. Sandy Chen, Senior Research Director, TNS Shanghai Dr. Sandy Chen, Senior Research Director, TNS Shanghai Dr. Sandy Chen focused her presentation on selling clothes to China and the code of fashion to men and women. Based on a recent online survey of 2,000 consumers conducted by TNS Shanghai, fashion denoted attractiveness, sexiness, uniqueness and individualistic style among women. The younger generation was creative and wanted individualistic styles. Around 50 percent sales of clothes in China were to men. Men s fashion even mattered more in lower-tier cities as men were the main income earners and needed to dress well for business occasions. Men in China believed success was important and their universe was about work. Effective advertising should feature work/ working environment to engage the potential customers. Men also liked to flaunt their success. Hence brands should be a mark for their success. Men also wanted to fulfill the social expectation of masculinity. The preferred shopping destination among many Chinese consumers had shifted to shopping malls from department stores, although the latter continued to hold the largest share of total apparel sales. Online sales were increasing quickly. Clothing items were the highest online sale category and consumers spent a great deal of time reading information on fashion available online. Prof. ZHANG Zhe, General Manager, Shanghai Jincheng Fashion Consulting Co Ltd Prof. Zhang Zhe said although the 2000s had transformed the fashion consumption in China, brand awareness among consumers remained low. Many knew about European brands and that they were of high quality. However they did not know what defined European style. Another challenge for European 20

22 brands was that many consumers in China did not know which brands were genuinely from Europe. In the fashion distribution system, department stores continued to be the main channel, accounting for between 70 and 75 percent of overall fashion sales in China. Meanwhile a lot of fashion retail was through uni-brand points of sales. The multiple brands concept was just developing in China. Because there were few professional fashion buyers in the country, the environment might be difficult for overseas companies. The development of brands in the market required huge capital outlays. Companies were required to be involved in retailing, which prolonged the capital turnover cycle. The licensing system was also full of challenges. As most Chinese brands were at a nascent stage in their development, European designers could offer to share their expertise and experience in brand establishment and designing. For instance, a French designer Marcel Marongiu had formed partnership with the Chinese brand eitie. The designer would develop the overall collection plans and eitie s design team would finish them. It was a successful collaboration as sales of eitie in 2011 reached 250 million Chinese yuan. 21

23 Welcome message By Mr. Michael DUCK, Director of APLF and Executive Vice-president of UBM Asia Mr. Michael Duck urged the delegates to voice their views and suggestions at this rare gathering of industry leaders, trade associations, manufacturers, retailers, service providers and stakeholders in the global supply chain. The global economic crisis had hit retailers around the world which had an inevitable effect on the demand for non-essential products, such as fashion. In addition, there was the knock-on effect of the political changes in the Middle East. There were plenty of issues to be discussed. 22

24 Welcome message By Mr. Andrew WONG, Permanent Secretary for Commerce and Economic Development, Hong Kong SAR At this important annual gathering where people representing the entire supply chain converged, Mr. Andrew Wong told the delegates that Hong Kong would continue to build on its strengths and adapting itself to the latest changes in the world s economy. This spirit was reflected in the Prime Source Forum because it had expanded to incorporate the footwear industry. Hong Kong s apparel and footwear combined exports and re-exports amounted to US$41 billion in It was a priority of the apparel and footwear companies to keep pace with the global trend of fast fashion that put further pressure on the supply chain. Wong urged the companies in Hong Kong and elsewhere to further sharpen their supply chain responses. Another emerging trend was the rising demand for green products worldwide, Wong thought that companies should make more eco-friendly products and also work to ensure their production complied with the green standard. Always on the forefront of innovation, many Hong Kong companies had made substantial investment in technology-intensive production. To support this innovation development, the Hong Kong Government had introduced the research and development cash rebate scheme. In 2011 the scheme benefited around 270 local companies. In the Budget for , the government had set aside a 30-percent increase in the rebate scheme from a 10-percent increase in the previous fiscal year. In addition to the efforts by private corporations, many industrial research institutes had developed new technologies and innovations, such as leading-edge high-performance materials for sportswear. Hong Kong fashion designers won acclaim worldwide and established top-notch brands. The city was an established international trading hub with important trade fairs and exhibitions. Among them the Prime Source Forum testified to the city s attraction. 23

25 Keynote address By Mr. Ronald FROMM, Chairman of the Board, Brown Shoe Co. Inc. Mr. Ronald Fromm opened his address by asking the delegates to ponder over several questions, including the challenges of change, the compelling competing values, and the integrity and authenticity of brands and products. The year 1969 was an eventful year for him and Brown Shoe. It was in that year that Fromm graduated from high school and Brown Shoe was under the order from the United States Supreme Court to break up its footwear monopoly in the US. The company was certainly aware of changes. Its 1,500 brand outlets in the US supplied a lot of brand products. The year also marked the first astronauts setting foot on the moon. This mission was critical for the footwear industry because the moon boots became a fashion hit in the market. As a company with a history of over 150 years, chaos and drastic changes prevailed in the company s operations in the three decades from late 1960s to 1990s. In 1969, around 95 percent of shoes sold at Brown were made and distributed in the US. Thirty years later, not a single show sold by Brown was made in the US. The operational focus of Brown Shoe in the 1990s was therefore on establishing an efficient sourcing platform. Reminding the delegates that they were all valuable and responsible individuals in the global supply chain, Fromm cited the agenda of the forum s workshop held the day before. He said it was an agenda for change. All companies needed to get engaged and committed. There were changes in sourcing caused by various factors, including new technologies, the changing dynamics between developed markets and emerging economies, and the new ways to engage consumers and communicate with them, such as the Internet and social media. We were also confronted with the challenge of change. The footwear segment achieved positive growths from 2007 to 2010 and developing markets made significant contributions to such growths. Fromm believed the markets in the US, Europe, China and the rest of the world were all complex markets. Department stores in China were the main retail channels for footwear. The retail scene in the US became a different landscape: department stores used to dominate in the retail sales of footwear, accounting for 78 percent of overall sales in 1969; now sales through department stores were 11 percent only. Because of the Supreme Court s order, Brown needed to divest and opened Footlocker outlets specialising in trainers. Footwear sales in mass-market big retail chains like Walmart had shrunken. The companies that had experienced significant sales growth were the offprice channels. Many of these companies had integrated their business with the sourcing from multiple brands. Internet sales soared by 30 percent from 2003 to In addition to specialised online shoe retailers, the majority of footwear sales were conducted by the same shoe retailers with brick and mortar 24

26 retail operations, such as Nordstrom. Looking at today s retail landscape from the department stores perspective, it had been undergoing consolidation. We saw the need to keep up with change to maintain a competitive edge. In terms of number of pairs of shoes sold, the larger chains had the lower retail prices of footwear sold because they had more commodity items in their stocks. In athletic brands, top ten companies accounted for over 50 percent of total sales. Meanwhile the fastest growing segment today was the contemporary luxury brand products in the footwear retail market. Companies needed to develop strategies to harness the power of these brands that would equate the value of their sales. In terms of the competing values, Brown Shoe s top management was in constant communication with individual team heads and spent a great deal of time on strategic thinking and sourcing. We were swayed by the challenges in the chaotic development in major sourcing countries, such as China. Between 40 and 50 percent of our sourcing was carried out in Chinese cities and villages where we had not sourced 24 to 40 months ago. Therefore the new suppliers required a lot of training to bring them up to our quality standards. We were constantly thinking of ways to drive the competing values. Several years ago Brown Shoe aimed to spend millions on moving onto SAP (Systems Applications and Products). The company thought it was worth the resources as no company could compete without integrating this supply chain structure. On a daily basis, all teams were under the pressure of driving sales while maintaining the integrity of various brands. Companies needed to have competing value in their decision making structures. The company s mission critical was to enhance its sourcing supply chain and marketing. Because China had emerged as an important consumer market and costs had escalated, Fromm believed the company needed to source beyond the country. Regarding the integrity of products and brands, Fromm urged the top management of corporations to ensure their decisions were made by taking into account the integrity of their companies, amid the chaos in the sector. He had learned about the 3-dimensional printing technology at the forum s workshop which was predicted to be a game changer for the industry. When everything was made under the pressure of ever-tightening production lead times, production would be a new learning experience for many companies. But it was vital that companies maintained their integrity. For Brown, it was always about how to do business more than how much business. Integrity mattered in the relationships with all stakeholders in the supply chain and with the consumers. Fromm said that Brown Shoe had begun tapping the market in China around 7 years ago and focused on its Naturalizer brands. The company operated joint ventures and franchised stores in the country. Overall sales in China achieved double-digit growth annually. In addition, Brown Shoe had wholesale business in 25

27 China. The country was considered a market with tremendous growth prospect, but it was still years away in terms of brand awareness and clear differentiation in quality, among other aspects. Fromm thought the boom of luxury brands in the country was a red herring and it would still be a long way to go for other lesser known brands in terms of market penetration. Recently, multi-brand shoe departments began emerging in retail outlets in the US, where retailers displayed shoes by styles and colours, etc, but we did not see much of this trend in China yet. 26

28 Session 1: Outlook for the fashion industry amid global financial uncertainty Moderator: Mr. Kevin BURKE, President and CEO, American Apparel and Footwear Association Panelists: Mr. Edward GRIBBIN, President, Alvanon Inc. Mr. Peter HEVICON, General Manager, Debenhams Hong Kong Ltd. Prof. Dr. Helmut MERKEL, Managing Shareholder, Prologue Asia Pacific Ltd; EurAsia Global Concept Ltd. Prof. Michael REDWOOD, BSc, MBA, FSLTC, Visiting Professor in Business Development in Leather, The University of Northampton Moderator: Mr. Kevin BURKE, President and CEO, American Apparel and Footwear Association Uncertainties prevailed in the global fashion and footwear supply chain and market, aggravated by the increasingly tightened regulations and fickle consumers demands, said Mr. Kevin Burke. On the one side, energy prices, such as oil prices, and costs of materials, including natural leather and man-made ones like polyester, and shipping costs continued to climb. On the other side, labour costs sustained their upward trend because such countries as China and Indonesia had legislated minimum wages. Labour unrests over wages and workers welfares became more frequent. Looking at the global regulation landscape, the fashion and footwear sectors were among the most regulated ones. The sectors were also confronted with the consumption slowdown in the developed markets, such as the US and EU. Although the US might have seen some recovery on Wall Street, it had yet to have any significant impact on the Main Street. In 2010, footwear sales in the US experienced a slight resurgence in retail sales: footwear sales up by 14 percent and apparel up 13 percent. However, the market appeared stagnant for most of The US apparel market was approximately US$280 billion and footwear market was approximately US$60 billion. Price deflation had prevailed in the retail market for years and the trend showed sign of reverting in 2011, thanks to the surging labour costs. The sectors were now undergoing a period of consolidation. 27

29 Prof. Dr. Helmut MERKEL, Managing Shareholder, Prologue Asia Pacific Ltd; EurAsia Global Concept Ltd. Dr. Helmut Merkel gave an overview of the European market. There were approximately 500 million people in 27 countries in Europe. Since 2005, the European market showed sign of shrinkage and its graying aging structure was expected to be a future threat to the market. Europe was fragmented as the developed affluent side was represented by countries like France, Germany and Britain, and there were developing economies such as Bulgaria and the other former Eastern Bloc countries. The combined population growth in 16 states was 6 percent in the past five years. Gross domestic product was estimated to be 12.5 trillion euros in the developed economies. Economic performances varied from one member state of the European Union to another. For instance, unemployment rate in Spain was 20 percent whereas unemployment in Norway was 3 percent and Germany was 7 percent. Retail in EU countries gained growth between 2 and 3 percent despite the debt crisis in Greece. Prices of apparel and shoes went up around 5 percent in the past year and inflation was 2.7 percent on average. In Germany it was 1.2 percent. In terms of retail spending it was around 4,700 euros per citizen per annum. The overall European retail market was estimated to be 3.3 trillion euros. Food retailers accounted for the biggest share in the overall retail market. Apparel retail market was approximately 350 billion euros. Giants such as H & M achieved strong growth. Online sales of apparels and shoes accounted for around 10 percent of total retail sales. The main problem in Europe was market saturation. More stringent regulations had emerged, some of them focused on environmental protection in the country of origin, such as China, which had driven up costs further. The differentiation by designs was pursued by leading brands mainly. Copying was rampant among lesser known brands. Mr. Peter HEVICON, General Manager, Debenhams Hong Kong Ltd. Mr. Peter Hevicon shared his experience of more than 30 years operating in the Far East first as a supplier then in a sourcing office for a brand retailer. He thought the difficulties in the supply chain in China varied from company to company. As far as Debenhams was concerned, which marketed its products under several in-house brands, China remained highly relevant. Despite the mass migration of production out of China, China continued to be vital for Debenhams sourcing mix. In terms of Freight on Board cost, to mitigate the effect of exchange rate and appreciation of yuan, Hevicon began its negotiation with the Royal Bank of Scotland for trade payment settlement in yuan. After 18 months, he briefed the treasury at Debenhams on how it worked and began paying suppliers in China in yuan. 28

30 Mainland suppliers welcomed this move. The company was able to achieve costing savings of 6 percent, or 3 percent of net savings. To mitigate the impact of the surging cotton prices several years ago, Debenhams pursued parallel sourcing with textile suppliers and the company made tremendous savings as a result of this strategy. Above all, the company deployed tremendous resources to design innovation. Hevicon advised the delegates should focus on brand handwriting by ensuring that the producers were able to correctly interpret the designs by the designers. He said he had had experience in excellent sell-through records by getting the products right. While many companies were concerned about the yuan appreciation and soaring costs of materials and labour in China, Hevicon said companies should look at the opportunity of this growing market. Retailers could consider tapping the China market to supplement sales in the US and Europe. Despite its higher costs, China remained a vital sourcing hub, particularly for products in the mediumpriced market. ASEAN countries might become more attractive for companies based in the EU because of SAFSA, the Source ASEAN Full Service Alliance. And Myanmar might come into the equation. He pointed out that ASEAN s importance as a sourcing hub for China was growing too. There were an increasing number of manufacturers in China beginning outsourcing production of goods to be sold in the domestic Chinese market to ASEAN countries. Hevicon said China s advantage was its developed infrastructure which allowed for flexibility and speed to market whereas ASEAN s production enjoyed duty-free exports to EU. Mr. Edward GRIBBIN, President, Alvanon Inc. Alvanon collaborated with retailers around the world. Among the BRIC countries, Brazil and Russia had an edge as emerging retail markets, said Mr. Edward Gribbin. China was maturing and the competition in the market had intensified. The high street mid-market segment in China seemed to be tough. Protectionism prevailed in the Indian market and the political landscape had been wrought with corruption. On the other hand, Russia and Brazil were set to host international sporting events in the near future, such as World Cup and the Olympics. These countries perhaps needed to carefully look at the improvement on their infrastructures and human rights, to elevate themselves to a higher place in terms of international standing. Market entry into Russia was difficult, although the country had the third highest concentration of billionaires in the world and was a member of the World Trade Organisation. Nevertheless, we gradually saw the market being opened up to welcome foreign investment and trade barriers had come down one by one. However the market showed sign of maturing and birth rate in 29

31 Russia was among the lowest in the world. Its infrastructure was poorly developed which posed a challenge to the supply chain, which was among the concerns of some retailers, Gribbin said. According to an article in Just Style online magazine, the Russia s fashion sector was expected to grow at an annual rate of 6 percent from 2012 to Foreign brands dominated the market with menswear as the fastest growing segment. Despite the low birthrate, children s wear achieved healthy growth in Russia. Perhaps the kids in Russia were doted on by their parents. The market was in need of innovation in all aspects of the sector. Russia was among the countries with the fastest adoption of Internet and other mobile technologies. According to a survey, a Russian adult spent an average of 10.2 hours on social media per week. An increasing number of them utilised social media to share product news and they also made online purchases. Around 6.1 million consumers bought items online in 2011 which represented a 30 percent increase compared with Twitter was widely used for social commentary in the country, Gribbin noted. Although India was eyed by many companies as an important market, around 60 percent of Indian women still preferred the traditional wear, i.e. saris. On the other hand, Italian menswear was popular with consumers in India. Alvanon would initiate a body fit research project in which thousands of individuals in four cities would be scanned for their measurements, Gribbin added. Countries in Latin America had emerged from the US and EU s economic crises relatively unscathed. In Brazil, the middle class was growing fast and 60 percent of them were under 29 years. The combined effect of rising income level and increased access to credit was conducive to retailing growth. In 2011 alone, 22 new shopping malls were opened across the country. Shopping malls accounted for 20 percent of Brazil s overall fashion sales, and they were big attractions for international brands. Meanwhile Sao Paulo hosted international fashion week twice a year. The other countries in the region, such as Uruguay and Chile, also seemed to be promising untapped markets for fashion retailers, Gribbin pointed out. For the moment, Brazil and EU did not have any trade agreement. Between the US and Latin America there was NAFTA. Colombia and US were expected to formalise free trade agreement. However, as identified by research firm McKinsey, culture remained a hurdle for overseas brands looking to tap into Brazil. Among the findings in a recent survey by McKinsey, around 80 percent of Brazilians had a deep trust of domestic brands and only 11 percent thought foreign brands represented better quality. Local retailers were known to provide exceptionally good services to consumers and many foreign brands were not aware of this, Gribbin said. In conclusion, Gribbin believed Russia and Brazil were the viable options for retailers, provided that they knew how to pick the correct spots for market penetration and where the pitfalls were. 30

32 Prof. Michael REDWOOD, BSc, MBA, FSLTC, Visiting Professor in Business Development in Leather, The University of Northampton Nearly 99 percent of the hides and skins used in the leather industry were by-products of the meat industry and required a great deal of processing. The leather industry relied on the meat industry for steady supply: two thirds of leather was from bovines and 11 percent from pigs and goats, Professor Michael Redwood noted. Bovines skins were considered the best materials for footwear. The farming of cows required huge plot of land. With the significant growth in herds of bovines in China in the past, the growth of bovines had been in proportion to the growth of the human population before. However, as the human population grew at a fast pace and needed more land for accommodation, the land suitable for grazing was reduced substantially and the more crowded conditions for animal farming and husbandry led to the outbreaks of many types of diseases in recent years. Redwood forecast that we would not see the continuing growth of the leather industry. Because of the scarcer resources, leather use might be confined to products with good value for money and of high quality. At present approximately 50 percent of leather went into footwear production, compared with the 75 percent recorded years ago. The industry experienced substantial increase in consumption in the 1980s, when leather became popular as the seating materials of choice in the automobile industry. At present, leather goods (accessories), garments and automobile each accounted for roughly 10 percent of the overall leather consumption. Leather industry could be divided into two distinct product groups: one of premium quality natural category; and the other one was commodity-quality category. Soon the leather industry would realise that this was an error. Redwood predicted that the industry would shift towards the premium-quality product category and production of lower-end leather products would gradually come down. For instance, the mass-produced athletic shoes focused on high-performance plastic and other synthetic materials and production had more or less moved out of China to lower-cost outsourcing hubs. Leather casual footwear, on the other hand, would remain an important segment in the market. The underlying trends in the leather industry would emerge over the next few years: companies should develop value creation that injected emotion into leather products; and deploy more resources to innovating on high quality and performance products that could command higher price points. The leather footwear industry remained highly promising: on average a consumer in the US purchased between 7 and 8 pairs of shoes a year; and in China it was 3 pairs per consumer per annum. This represented a seismic change in the global footwear market companies should stop just focusing on pursuing the US, other markets had huge untapped potential as well, Redwood pointed out. Regarding the outsourcing China + 1 strategy, the efficient supply chain infrastructure and propensity for product innovation continued to make China an important production hub for footwear. When the footwear industry grew, the leather industry would follow. However, Redwood s prediction was that footwear might 31

33 move away from high-volume fast fashion. Improvement needed to be made in the processes throughout the supply chain and production. For instance, the tanners should continue their efforts in minimising their polluting processing and integrate more eco-friendly processes into their production. 32

34 Keynote address Mr. Henry TAN, BBS, JP, CEO and President of Luen Thai Holdings Ltd and MD and President of Luen Thai International Group Ltd in conversation with Ms. Leonie BARRIE, Managing Editor of Just-Style Leonie Barrie: The outsourcing situation in China was changing and the country presented enormous retailing opportunities. Here Mr. Henry Tan would share his thoughts with us. His US$1 billion company had production operations for leading international brands located in China and other countries in Asia. My first question was what were the main challenges in sourcing in China and beyond China? Henry Tan: China remained important for the global sourcing of apparel and footwear. Although wages had skyrocketed in the past years, we forecast they would only continue their upward trend over the next five years as part of the Central Government s policy. Costs would continue going up. To sell goods at more or less the same prices, we needed to make goods in a more efficient manner. China had good infrastructure but the significant wage increases had somehow eroded its advantages. We saw that products made in China were losing market shares in the US and EU. Barrie: Was the Chinese government concerned that the continuingly rising costs would drive manufacturing out of China? Tan: Municipal governments of different cities had adopted different approaches to combat the issue. For instance, Guangdong government had put a temporary halt to the worker s wage increase for the moment. Large production hub like Dongguan did not show any sign of further wage increase. The current wage increase was only seen in the western part of China. In view of the stagnant exports, some municipal governments had postponed the wage increase as mandated by the Central Government. The increase in minimum wage in China eroded the competitive edge of companies the average monthly wage of a worker in China reach US$460 compared with US$260 earned by a worker in the Philippines. Hong Kong had experienced loss of manufacturing when the worker s wage went through the roof. Industrial development depended on government policies to a certain extent. Despite the economic growth of China, we actually saw that the proportion of the country s workers in gross domestic product declined. They did not get to enjoy the fruit of the economic boom. Wage increases were inevitable in this context. Apparel industry was labour-intensive. A worker who had undergone six months of training would already be considered skilled worker. There were factories producing other types of products competing for labour in China. My opinion was that the government should let free market work on its own, instead of raising the minimum wages. 33

35 Barrie: With the costs of production in China rising rapidly and widespread, how did your balance your production? Tan: China approximately accounted for 40 percent of the production of apparel destined for the US market. We were looking for the next China. Vietnam had been quite saturated and wages in the country surged fast. The population in Cambodia was relatively small. Burma might present some prospect but the infrastructure was poorly developed. I believed the most important key here was the collaboration between customers and suppliers. This would make the portion of initial markup to go down more easily. Say for instance, we worked with UNIQLO and did not charge the company the highest prices. Over the years we had established efficient operations with them and these operations delivered the value to the customers. This was the key to success, rather than always trying to figure out where the lower-cost manufacturing centres were. Barrie: How difficult was it to build a sound relationship with your customers? Tan: Trust was the most important. UNIQLO had only two suppliers. It could get the best out of us and our rivals. They made good savings in costs and auditing would become easier as well. Barrie: How much was the relocation of production to new outsourcing centres driven by the customers? Tan: Some of my customers did not want to increase their production in China. For instance, we made a lot of Coach s products in the Philippines. As ASEAN member countries had free-trade agreement with China, sometimes it was cheaper to produce the goods in ASEAN countries then shipped them to China. We should look at the trade part of the production as we were under pressure to move production out of China. Barrie: How did you balance the costs of sourcing from different countries? Tan: We focused on the Philippines and we were expanding in Indonesia. We also sought opportunities in Cambodia. The specific countries depended on individual customers. We considered if the operation had certain root in a country. It also depended on the types of products and whether a company needed to squeeze the last penny out. Barrie: China s apparel producers got the support from a well-developed textile sector. How would the shift of production out of the country affect the big picture? Tan: China would continue to have significant production, especially for goods with short lead times and of complicated designs. History showed us that a country would lose the sewing part first. Then the textile 34