Overview

Part 1 comprised understanding the textile & apparel industry, production process and global trade in textiles and apparel. Part 2 looked at development of world textile & apparel regulations, voluntary export restraint, General Agreement on Tariffs and Trade, STA & LTA (Cotton Arrangements), the Multi-Fibre Arrangement (MFA), Agreement on Textiles & Clothing and Rules of Origin in the textile & apparel industry. Part 3 analysed the impact of the MFA, birth of new players, protectionism, quotas and factors affecting demand for textiles and apparels. Part 4 reviewed Malaysia’s textile and apparel industry in terms of production, structure and players, the primary & made-up textiles sub-sector, the apparel sub-sector, the free industrial zones, duties and tariffs and licensed manufacturing warehouse, import duties & tariffs. Part 5 reviewed investments in Malaysia’s textile & apparel industry and her textile & apparel imports and exports. Part 6 focused on issues affecting the competitiveness of Malaysia’s textile & apparel industry, in terms of labour, investment, raw materials, infrastructure and reliance on contract manufacturing.

8.0 Assessing Possible Survivors

With the quota removal in 2005, the question is not whether Malaysia’s textile and apparel industry will be hit, but how hard it will be hit. So, the fundamental issue is : Will Malaysia’s textile and apparel players survive the post-MFA era with competition coming from internationally efficient producers? The following points can serve as a general guide in assessing possible survivors in the post-MFA era.

8.1 What is their main business?
As mentioned in the past write-up, categorizing local textile and apparel manufacturers can be an arduous task, with each player being a somewhat different animal from one another. However, it is crucial to understand which part of the textile and apparel industry the company is competing in to assess the impact of the liberalization of the industry. What is the company’s main business? Is it manufacturing and sales of upstream products (ie yarns, fabrics, and textile related products), contract manufacturer to international brands, or is it textile and apparel retailing?

8.1.1 Manufacturers
Companies that are involved in the manufacturing of upstream products will continue to see their profit under pressure when the market is further liberalised, thus making it a low margin venture. As for contract manufacturers of international brands, i Capital is of the opinion that this segment still has the potential despite the growing dominance of lower-cost producers in the post-MFA era. Why ?

[1]. The ability possessed by local contract manufacturers to produce quality higher-end apparels, proven by the long-term involvement in this sector, [2]. Most contract manufacturers are already manufacturing non-quota goods such as winter-padded jackets, ski wear, etc, either for non-quota or quota markets, meaning to say that at this point in time they are already competing on a level playing field, [3]. The risk-mitigation policy of buyers to avoid over-reliance on certain countries (ie China and India), thus increasing the likelihood of buyers to maintain most of their businesses with their existing contract manufacturers, and [4]. The high possibility of the introduction of transitional safeguard measures by the US and the EU on China’s textiles and apparels, which would then limit the quantity of textiles and apparels that these major countries can source from China.

The 3rd point needs some elaboration. The multiple-country sourcing pattern currently practiced by most international buyers are aimed at reducing reliance on a certain source and to a greater extent, a result of quota restrictions that limits the amount of textiles and apparels buyers can source from a country. With the liberalisation of the industry, buyers will have more flexibility in choosing the supply source, thus there is the likelihood that buyers will reduce the number of sources and focus instead on a few reliable manufacturers as it will be more cost-effective. No doubt the industry will witness a shift in sourcing to lower cost countries, but it will be at the expense of inefficient manufacturers since the other manufacturers that are competitive (including a few of our local players) are still needed to ensure any over-reliance on a single source.

On point 4 or the transitional safeguard measures, under China’s WTO accession protocol, WTO members are allowed to introduce temporary safeguard measures against any type of China’s exports, including textiles and apparels, until 31 Dec 2008. These measures can be in the form of custom duties or quotas if the imported textiles and apparels threaten to impede the orderly trade development in these products in the importing countries. The imposition of trade safeguards is not new to the US. On 18 Nov 2003, the US imposed textile safeguards on Chinese exports of knitted fabric, brassiere, robes and dressing gowns shortly after the quotas of these products were lifted.

8.1.2 Retailing
On companies that are involved in apparel retailing, there are generally three types [1]. Retailing of own manufactured apparels, [2]. Retailing of own brand names but with outsourced manufacturing, and [3]. Retailing of external branded apparels such as Nike, B.U.M., etc. Companies involved in retailing local brands have faced stiff competition from both imports of cheaper apparels from countries such as China and Thailand and branded apparels. Except for a few local branded manufacturers that managed to establish a reputation for themselves, these retailers are likely to face erosion of sales and profit margin. In contrast, retailers with their own brands but do not manufacture their own products will be in a better position compared with retailers that manufacture their own products for they have the flexibility and cost advantage. As for branded apparel retailers, although there is no doubt that they are competing in a different segment from lower-end apparels, the lack-lustre economic conditions will force them to lower their margin to attract sales.

8.2. Foreign Operations?
The point is not whether a company has operations in a low-cost country but whether the company has profitable foreign operations. To benefit from the low labour cost and preferential trade status granted to certain countries, it is common to find companies with foreign manufacturing plants. However, since most plants are in developing countries, problems such as high hidden cost, labour skills and attitude, quality of electricity and water supplies and labour productivity are considered as common. Having foreign operations do not indicate better chances of survival, but having profitable foreign operations would. This information can be found in the segmental report provided in a company’s annual report.

8.3 Financial strength
Players in this industry that have strong cash flow and solid balance sheets are in a better position to withstand the declining margin that is developing in this industry. A company’s financial strength and performance can be one of the most crucial factors in determining the survivors. The following are a quick review of some of the listed textile and apparel players in Malaysia.

[1]. Prolexus (Prolexus)
Prolexus was listed on 23 Nov 1993. Its main business lies in contract manufacturing knitted and woven garments and winter wear for international brands, with Nike being one of the major buyers. The group’s manufacturing venture came to a halt when Prolexus-Lotus Kamal Limited, its 51% own subsidiary in Bangladesh, was disposed off in Jul 2003 after continuous losses since 1998. Although the group is also involved in retailing, it is not substantial. 90% of the group’s products consist of quota products, with the US and EU being a major trading partner of the group.

Table 1 : Prolexus (RM mln)

[2]. Hing Yiap Industries (Hing Yiap)
Listed on 21 Feb 1997, Hing Yiap derives most of its sales from the local market. Hing Yiap is involved in fabric knitting, apparel manufacturing, marketing and retailing the group’s products. It does not have any foreign subsidiaries. In 1993, Hing Yiap acquired the master license to manufacture, market, distribute and sub-license products under “B.U.M. Equipment” from B.U.M. International Ltd in Malaysia and Singapore. In 2000, it acquired the right to retail and distribute the “Diesel” brand of casual wear and related accessories. In 2001, Hing Yiap acquired the rights to manufacture, market, and distribute the “Vanity Fair” brand of women intimate apparel and related accessories. Hing Yiap also manages B.U.M. Equipment concept stores, Diesel concept stores, and BUMCITY concept stores. Hing Yiap has nurtured 2 widely known local brands, namely Antioni and Bontton.

Table 2 : Hing Yiap (RM mln)

[3]. John Master Industries (John Master)
Listed on 11 Aug 1992, John Master is another retailing player with a significant portion of its business in trading men’s garments under the brand of “John Master”. Its sales cater to the local market and are sold mainly on a consignment basis via outlets at departmental stores and supermarkets. In Sep 1994, the company acquired 87.5% of KIKO Garments S/B, a manufacturer and retailer of children’s garments under the brand “KIKO” which was sold off in 2004 at a loss. In Oct 1994, John Master acquired 90.48% of Schwarzenbach (M) S/B, a retailer of sports apparel under the “Schwarzenbach” brand. Currently, Hebeichem (Malaysia) S/B, a wholly owned subsidiary, manufactures men’s apparels.

Table 3 : John Master (RM mln)

[4]. Elba Holdings (Elba)
Listed on 20 Aug 1997, Elba manufactures 3 local brands, namely Elba, Edwin and Adax. Elba’s sales are mainly through departmental stores that allow Elba to set up its counters in return for commission from Elba’s sales instead of buying the apparels from Elba. Other than consignment, other methods undertaken by Elba includes outright sales and concept stores.

Table 4 : Elba (RM mln)

[5]. CNLT (Far East) (CNLT)
CNLT manufacture cotton and synthetic blended yarn. Listed on 17 Dec 1997, among its major shareholders include JCT Ltd (JCT), the flagship company of the Thapar Group of India, one of the largest conglomerates in India. JCT is the fourth largest manufacturer of cotton and cotton blended textiles in India and specializes in producing polyester nylon filament yarns. CNLT strongly relies on the US and EU as markets, which succumb to serious threats from low cost producers such as China, India and Pakistan. Domestic sales only represent 35% of the group’s turnover. In 2003, CNLT ventured into apparel manufacturing in Senegal.

Table 5 : CNLT (RM mln)

[6]. Hytex Integrated (Hytex)
Hytex, listed on 8 Nov 2002, is an integrated garment manufacturer with factories in Malaysia and Phnom Penh. Its operations include original equipment (OEM), original design (ODM), and original brand manufacturing (OBM). For OEM, the group contract manufactures branded garments such as Nike, ELLE, and Puma. For ODM, the group was granted licences from The Walt Disney Company (Singapore) Pte Ltd and Warner Bros to design, manufacture and market apparels under their brands. As for OBM, the group has 4 in-house brands, namely American Athletics (for sports fashion and casual wear), ISSUE (casual fashion wear), Tenderly (for babies and maternity wear), and WOC Kids and Baby WOC (for children causal wear). The group currently manages Nike’s flagship stores in Malaysia. 45% of Hytex’s sales come from exports with 60% of them going to Asia. Out of the balance 55% local sales, 60% are for consignment/franchise outlets and 40% for the group’s own stores.

Table 6 : Hytex (RM mln)

[7]. Ramatex (Ramatex)
Ramatex is the most vertically integrated local textile and apparel player locally, with involvement in yarn spinning, fabric knitting, dyeing and finishing, embroidering and apparel manufacturing. Listed on 12 Nov 1996, Ramatex has operations in Suzhou, Namibia, Mauritius and Cambodia. 80% of the group’s manufactured apparels are in the non-quota category, with companies such as Target, KMART, Sear, Ms Erika, Walmart, Puma and OTTO (Austria) being a few of the international names that the group is contract manufacturing for.

Table 7 : Ramatex (RM mln)

[8]. PCCS Group (PCCS)
Listed on 16 Aug 1995, other than apparel manufacturing which contributes 80% to its sales, PCCS has a basket of supporting activities like embroidery, label and sticker printing, fabric knitting and printing, manufacturing of elastic webbings, marketing of sports apparels, golf equipment and manufacturing packaging materials. Approximately 98% of PCCS’ products are exported overseas to the US, Canada, EU, Japan, Singapore and the Middle East. Among the group’s major clients are Adidas, The Gap, Banana Republic, William Carter, Fila, Nike, Cross Creek, Old Navy and Visage. The group’s overseas apparel manufacturing facility operates in Cambodia. PCCS is involved in the manufacturing of plastic packaging materials and labels in China. The group used to have textile and apparel trading operations in Singapore. However, it was subsequently fully disposed in Dec 2003.

Table 8 : PCCS (RM mln)

[9]. Teo Guan Lee Corporation (TGL)
Listed on 25 Oct 1994, TGL introduced the Kiki Lala brand of baby and children wear and accessories way back in 1980. The group also developed a few local brands such as TooToo (ladies’ undergarments), Bellington (towels and cotton related products), Fellini (women’s apparels), Carpenter (men’s casual wear), and Jo-Kids (baby’s and children’s clothing). In 1987, TGL was granted a license to distribute S’fare brand of men’s apparels and in 1989 was appointed as sole distributor and licensed manufacturer for Mizuno. In 1997, the group also managed to a secure license agreement to manufacture and distribute the Admiral brand of sports apparels. The strength of TGL lies in children’s apparels and footwear. This segment is also the main contributor of sales and profit to the group. To further strengthen its position in the children’s segment, TGL launced Cartoon Planet concept stores, where all the brands with children characters are sold under one roof.

Table 9 : TGL (RM mln)

[10]. MWE Holdings (MWE)
MWE has businesses in textiles, property, leisure, industrial and electronics and it was listed on 22 Jul 1974. Its textile operations are involved in textile and apparel manufacturing with an operation in Vietnam. The international markets such as USA, Canada and Europe, represents more than 90% of the group’s apparel sales. On the other hand, 75% of the group’s yarns and 35% of the group’s knitted fabrics are consumed by the local market.

Table 10 : MWE (RM mln)

[11]. Baneng Holdings (Baneng)
Baneng was listed on 25 Mar 2002, with operations ranging from fabric knitting to apparel manufacturing. Baneng commenced operations in Brunei to benefit from its quota free status. Approximately 23.7% of the knitted fabrics produced by the group are consumed internally, and the balance is sold to both domestic and export markets such as Hong Kong, Singapore and Brunei. The fabric division contributes approximately 40% to the group’s revenue. 77% of Baneng’s apparels are exported, with more than 60% of the exported apparels going to the US.

Table 11: Baneng (RM mln)

[12]. DNP Holdings (DNP)
DNP has a long listing history that stretches back to 17 Jan 1979. DNP has diverse operations ranging from garment manufacturing, property investment, and investment holding and trading. Besides locally, it also has garment manufacturing activities in Sri Lanka. DNP’s apparel business also revolves around contract manufacturing for international brand such as YvesSaintLaurent, Polo, and DKNY. Most of its exports go to the US and Europe markets.

Table 12 : DNP (RM mln)

Conclusion
At the end, Malaysia’s textile and apparel industry would not be a doom and gloom scenario as most Nostradamus-wannabes predict. There will be survivors. Of course, local uncompetitive manufacturers or those known as ‘jaguh kampung’ will be wiped out with the liberalization of the industry. However, with or without the liberalization, the increasing competitiveness in the global manufacturing industry will eventually wipe them out anyway. Taking these companies as a benchmark to form a conclusion on the domestic textile and apparel industry’s ability to survive would be a grave mistake and doing a great injustice to the industry as a whole. This concludes the series on the textile and apparel industry.