CEO Conversations Installment II: Hebert Chan, Chairman and CEO, Kwong Lung Enterprise (8916 TT)

The only garment maker that’s not hanging by a Covid-19 thread

As most garment makers in Asia are hanging by a Covid-19 thread, there’s one company that’s still thriving. In its most recent quarter – 1st Quarter 2020 – Kwong Lung Enterprise’s (8916 TT) operating profit grew over 500% YoY while net profit more than doubled. This was accomplished organically, in other words without M&A, via improvements in product mix and manufacturing efficiency. More importantly, it marks the second year in a row that Kwong Lung has delivered solid profits in what is traditionally a seasonally low quarter.

Most people who know Kwong Lung are aware that the company is a major supplier in the down feather industry. However, few people know just how important they are in this arena. Kwong Lung purchases nearly 20% of the down sold annually in Europe, which is the global center of the high end down trade. The company also supplies close to 20% of all down consumed in Japan. It is one of only two down feather suppliers to Nike, and one of four suppliers to Uniqlo, both on a global basis.

However, when the current Chairman & CEO Hebert Chan took over the reins of this 54-year old company in 2013, he knew in his heart that the company needed to diversify into the garment business. When Kwong Lung’s consolidated revenues exceeded the NT$10bn mark for the first time in 2018 – with the garment business contributing close to 50% of Group’s revenue – it became clear that he had made the right call.

I didn’t inherit this company, I bought it when others would not

“Hebert is one of the most unique second-generation managers that I’ve come across. He works very hard and he is a fast-learner. He’s also humble. But what impresses me the most is that he built his stake in Kwong Lung by buying it in the open market,” says QIC CEO Alex Lee.

When the young heir graduated from college, his father encouraged him to explore opportunities outside of the family business. He started a career in a large technology company and was soon immersed in production management. While his job in technology held promise, Hebert realized that Kwong Lung was facing existential challenges. “I felt that I had a responsibility to help save the company,” says Hebert. At the time, Kwong Lung’s share price had fallen to only NT$7 per share while his father had fallen ill. Other family members saw the company as more of a liability than an asset, but Hebert saw the potential. He returned home on a rescue mission, and at the same time began accumulating Kwong Lung’s shares with his own savings – eventually becoming the company’s controlling shareholder.

We were amateurs in the garment industry, but that didn’t stop us

We chose a challenging market niche with high entry barriers

As a late entrant to the garment industry, Hebert decided it was not a good idea to try to compete in high-volume product categories dominated by the big players. Instead, he saw opportunity in an unlikely market segment: Snowboarding & Ski-Wear/Functional Outerwear. “There are very few large players in this space because the products are much more complicated with strong seasonality,” says Hebert. “Production efficiency and capacity utilization are critical to success in this market segment. We saw many manufacturers go bankrupt in the end because they just weren’t efficient enough and/or lost money when low season hit,” he added.

Right now, the decision to penetrate garment from its toughest category has turned out to be a blessing in disguise. As COVID-19 hit globally, clothing brands and retailers are suspending orders from Asia garment makers, causing many factories to layoff or close. The effect on Kwong Lung has been muted though, as their customer base is made up of brands who have less exposure in physical retail and for whom sell-through occurs mostly in fall and winter. Hence, order cuts and cancellations have been limited so far, and some customer even increased their orders as a result of a fear of supply chain disruption, as clients in this segment typically prepare for peak season by ordering pre-determined volumes based on projected customer demand for the year’s new product introductions.

Learning the garment industry the hard way

“We pretty much have had to learn how to make garments the hard way. We found out that doing a good job and doing the best job are entirely different,” says Hebert. “People probably don’t know that Under Armour was once our client, but kicked us off of their vendor list because we were not competent enough,” he laughed.

Kwong Lung built up its capability piece by piece, slowly but steadily finding its position in the market. “We knew we couldn’t compete with those larger players directly. So, we strategically targeted the many small-and-mid-sized brand customers in this category that are not well served by the larger manufacturers,” says Hebert. “These customers tend to place smaller orders for a wider variety of products, and are a perfect fit for us. Our plant utilizes U-shaped production cells that are designed to take on small-volume, high variety orders.” 

Improving production efficiency by a factor of 8 through the implementation of TPI

As Kwong Lung’s garment business has grown in both volume and variety, so has the difficulty of maintaining a highly efficient production line. “As we grew, we began running into the same problems that put many of our peers into bankruptcy. We knew that our production efficiency was low because of the fact that so many different components and manufacturing process are needed to make functional outerwear,” says Hebert. “Our production lines were often halted due to a missing part.”

In 2019, Kwong Lung kicked off its total production innovation (TPI) program. Each manufacturing operation was broken down into its into its individual steps and the optimal processing time for each step was determined. A streamlined protocol was then designed to minimize work-in-process handling and down time. The program also includes a monitoring checkpoint at select manufacturing stations to allow real-time feedback for defect rates. 

“TPI has delivered excellent results. Using our proprietary measurement of optimal production volume per working hour, we improved our production efficiency from 7% of the optimum in 2013 to 55% in 2019,” says Hebert. “We expect this number to further improve as we roll out the TPI program across all our production lines.” Kwong Lung’s ambition to improve its production efficiency does not end with TPI. In 2019, the company also initiated a 4-stage Intelligent Manufacturing Plan that it plans to implement over the next 3-5 years. The aim of the plan is to raise its production efficiency to world class levels, reducing unit production costs and expanding profit margins.

“Because we were amateurs in the garment industry, we had the flexibility to try out all kinds of options to improve production efficiency, including some very unconventional production methods.” says Hebert. 

2019 offered Kwong Lung a chance to start anew, after recovery from the 2017 fire

“The 2017 fire that destroyed our Home Textiles plant in Vietnam was a big setback. But, we have fully recovered now, and are stronger than ever in terms of financial position, capacity, and efficiency. Garment will remain our focus in coming years as we have delivered stronger financial results since entering the business. We expect to continue gaining new clients in garment and to increase our wallet share with existing clients,” says Hebert. 

As for the legacy down business, Hebert said he will strategically keep the business at the current scale. Allowing it to decline in terms of its revenue contribution to the overall company will reduce Kwong Lung’s exposure to volatility in down prices and result in an improved product mix, leading to better and more stable profitability over time. 

For the home textiles business, Hebert expects inventory adjustment at major clients to come to an end in 2019. Kwong Lung remains committed to its largest home textile customer Nitori, and is in the process of rebuilding its home textile capacity. “We took the rebuilding effort from the fire to conduct a comprehensive review of our plant and worker safety protocols. As a result, Nitori was deeply impressed with our commitment to excellence. Once the new plant is up and running, I expect an even deeper collaboration with Nitori to kick off.” 

I will be here to celebrate Kwong Lung’s 100-year anniversary 

2019 was also the first year Hebert began speaking to global institutional investors, meeting investors from the US, Singapore, Hong Kong, and Japan. “We have learned so much from meeting with investors,” says Hebert. “The experience has helped me better understand how institutional investors perceive my company from the perspective of ROE, debt ratio and corporate governance.” “I now take these metrics into consideration when setting goals or making business decisions.” 

Kwong Lung ranked in the top 5% of the Taipei Exchange 2019 Corporate Governance Evaluation of its 700 listed companies, improving from a 6-20% ranking in the previous year. “Improving our ESG performance is a strong area of emphasis at Kwong Lung. We have been publishing our Sustainability Report since 2014. We aim to look after all of our stakeholders and to act as a responsible global citizen,” says Hebert. 

The journey of transformation continues. “I told my staff that I will be here when Kwong Lung celebrates its 100- year anniversary,” says Hebert with a look that exudes the determination he showed when returning home to help out the family business. 

If you would like to arrange a meeting with Hebert Chan, please contact yvonnehuang@qtumic.com