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Below is the transcript of an interview with TAL Group Chairman Harry Lee and CEO Roger Lee. The interview will play out in CNBC's latest episode of Managing Asia on 22 February 2019, 6.30PM SG/HK (in APAC) and 11.00PM BST time (in EMEA). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan: As a trained engineer, your passion has always been about innovation and trying to weave technology into the garment business. At the beginning, was the strategy simply a way to cut down rising costs in a highly competitive garment business?
Harry Lee: No, I think what we wanted to do was to look at what the company was going to be like 10, 20 or 30 years ahead. So we look for new things that do not exist yet in the market. This is basically our strategy.
C: You sit as chairman but you're still heavily involved in the research and development side. That's really your passion, isn't it?
H: R&D still reports to me. No other departments report to me, but R&D still reports to me.
C: TAL has intellectual property rights to more than 20 innovative technologies in the garment industry. What is it about the company's DNA that allows it to churn out so many innovative technologies?
H: I think the company's DNA is to never give up. When you want to achieve something, you suffer a lot of setbacks but you never give up. So we try and try and try until we get what we want to do. And we also do different, out of the box thinking. That's basically what we do to achieve what we want to achieve.
C: So now you control the supply chains for many of the brands you work with.
H: Yes, we basically help our customers manage their inventory. One of my nephew's strong points is in inventory management, forecasting and all that, so he's the one running this now. He can help our customers manage their inventory rather than filling up their warehouse.
C: Under your leadership, you've made sustainability a key pillar of your overall manufacturing industry. What made you embark on this journey and why is it important to you?
H: This is basically our corporate culture. We want to protect the environment as a good corporate citizen. So we work on many different areas – how to save energy, you know the lighting that we have, the watt that is required per square feet is probably less than half of what the industry norm uses. We really work at it. We save water in the wet processing and treat the waste water. In the industry, what they usually do with the waste water treatment is add more chemicals to it to coagulate the pollutants. The particles get bigger so they will precipitate and they can get it out. That's a cheaper way of doing it. We do it the biological way. What that means is using bacteria to eat the pollutants, to take away the pollutants.
C: So you're doing it the natural way.
H: Natural way. The good thing about the biological treatment is that the sludge produced is only 20 percent when you do it with the coagulation and precipitation. But in the beginning when we started doing it, water goes in, bacteria treats the water and it comes out cleaner – it's like a black box, we don't know what's going on. Now we start to understand a lot more about this bacteria treatment. Bacteria are alive, you know they're alive, you have to make sure you feed them right. Up to now, what we actually do is we fund the research in one of the universities in Hong Kong to study the DNA of the bacteria and what kind of bacteria we can use to improve the efficiency. So we are not only doing what we need to do, but we also want to help the industry reduce pollution to the water and to the environment.
C: You know the garment manufacturing industry is one of the worst pollutants on the planet. You think TAL and the technology you've developed with these particular bacteria can really make a difference in helping everyone reduce their carbon footprint?
H: It will be a few years before we can see the results for the study that we're doing. But we still invest to make sure that we can help the environment in the future. Like for the China plant, we use 100 percent of the waste water and reuse it. We clean it so that we can reuse it. So what we do is really only to use city water for the part that's evaporated. Replenish the water that evaporated.
C: So what else are you doing to help the company, to help TAL reduce its carbon footprint? What big ideas do you have?
H: We basically look at every part of the business and see what we can do. We will look at — one of my pet projects, nothing to do with the company, is how to reduce air conditioning energy cost. If you walk into this building, you feel somewhat different because it's very dry in here. In the summer, when outside is 90, 100 percent humidity, when you walk in here it is less than 50 percent. Because of the low humidity, the temperature can be raised and you still feel very comfortable. When it's wet, when the humidity is high, you want to turn the temperature down to make yourself comfortable. So this basically started in my apartment in Hong Kong. So my electricity bill has reduced by 40 percent. Okay, now we are partnering with one of the universities in Hong Kong and it so turned out the air in here is also much cleaner than the air outside. You know PM 2.5 – the particle size, the 2.5 micron — the PM 2.5 level in this building is 50 percent lower than outside. So it's a by-product of what I want to do but I really think if all the office buildings in Hong Kong can fit this type of equipment in, we can save a lot of energy for the whole of Hong Kong. It's actually really good for any part of the world that's very hot in the summer and very damp. Even in Singapore where you live.
C: So from what I'm hearing you're saying, you're trying to make sustainability a way of life for everyone.
H: Yes, yes, yes. It's my passion anyway. (Laughs)
C: Has the sustainability efforts that you're taking paid off for you? Is it starting to show up on TAL's bottom line?
H: I'm sure it will.
C: It's not yet?
H: I don't think so. Because in light of the wastewater treatment using bacteria, as I mentioned, the sludge is only 20 percent of that of the precipitation. The cost of disposing the sludge is getting higher and higher, it's going up like that. So, with only 20 percent, eventually just the sludge disposal cost will already give us a good advantage. But you know, for the future, I'm sure it will pay off.
C: You sit as chairman of TAL, you've passed over the reins of running the company to Roger, your son, who is now CEO. Do you want to make sustainability a key part of the legacy you leave behind?
H: I think so, but fortunate part is that they are also very passionate about the environment. So I don't have to do very much. I'm sure they will carry it on. Probably even better than what I'm doing.
C: I understand you're the judge of a fashion documentary where you actually get designers to do something with the waste material. Is it about forcing the fashion industry to be really creative and innovative?
Roger Lee: So I'm part of a competition called the Redress (Design) Award. So what we do here is we invite designers from all over the world to participate using recycled materials to make clothes. So it's going to be all from recycled material. The reason we would participate in this is because we truly believe that in the future we've got to use less of the world's resources. We've got to move, ultimately, to what we call closed loop, in that everything we use is from recycled material, because we're using more of the world's resources than the world generate every day. And our industry is the second biggest polluter.
C: So you really want to drive change.
R: We want to drive change. And the Redress competition which I'm a judge on, is trying to make one step, two steps, forward on that by showing people that we can create beautiful garments that people want to wear using recycled materials. To me that's, that's part of it. The bigger picture is that we have to make consumers aware of where the product comes from. So we're a founding member of a coalition called The Sustainable Apparel Coalition that represents one-third of the world's apparel and footwear retail. In that we are working on an index called the Higg Index. Our goal is that one day, everyone who buys a product, buys a garment, and there's a label there – could be platinum, gold, silver, could be A, B, C, but it shows you the sustainable impact that garment has. Both the social and environmental impact. And when consumers are aware of that, then they can make informed buying choices on what to buy. And when consumers are informed, they will make the right decision for the world. Today, I think a lot of people are talking about it. We've been doing this since 20 years ago.
C: It's been five years since the Higg Index was launched. Is it making any headway? Is it making enough progress to really impact the way consumers make their choices?
R: It's been five years since we started the Higg Index but it's not yet ready for consumers to use. So we're still testing today how to make the Higg Index measure in the right way. So we use Higg Index as our company's standard for measuring social and environmental impact. It's a very complicated calculation and it's not just in garment manufacturing, it's upstream and downstream. So the textile, farming side plus the retail modules all have to be in place. And that's still on the development. So when that whole chain of all the modules is ready, then the challenge is going to be how to market it and how to explain to consumers what it means in very simple way. Because there's actually a lot that goes into what we do – both from the greenhouse gas and the water intensity.
C: But it's a step in the right direction?
R: Absolutely. It's a step in the right direction. It's the only direction we can take to make sure that people are aware of the impact garments have – both social and environmental. And the goal is to reduce that.
C: So as a garment manufacturer, you're heavily reliant on the US market for business with key customers like Brooks Brothers, J Crew, JC Penney. There are concerns of a slowdown in the US right now. Are you worried?
R: I think we're all worried. Uncertainty is what really kills us. If we can forecast what's going to happen, we can plan our production capacity a lot better. And with a lot of uncertainty, we really got to react last minute. So what customers do when there's uncertainty is that they hold back and give us orders last minute, and they expect us to react. And that's what we have to do if we want to stay in business.
C: How would you navigate the slowdown?
R: I think we've been through that a few times – we were in 2007 financial crisis, we had different cycles where we were up and down. So every time it teaches us to be more nimble. And how to be more nimble is on the production. You got to be a lot more flexible in the capacity. In our labor-intensive industry, it takes a long time to train people. So if we can shorten the training cycle to a lot shorter than what other people need to take, then we can bring people on a lot faster and be able to flex a lot faster than other people. That's one of the things we can do.
C: There are lots of concerns also of a US-China trade war. Have you had to make any adjustments and in the way you manufacture in order to avoid paying the high tariffs?
R: I think we've been fortunate. We have a manufacturing footprint strategy that we put in place many years ago. We have a few philosophies. One is not to put all your eggs in one basket. So today, China represents about 15 percent of our total capacity. So if the trade war happens, we don't have a big impact because we have sufficient capacity around the Group that we can shift orders around. So the things made in China for the US market, we will move out of China, things made in other countries for the European market for example we can shift into China. So we have enough flexibility to handle that. Actually I think at a company level, it's an advantage to us because a lot of our competitors are heavily reliant on China. So we can actually get help in getting orders because customers want to move out of China. At a macro level I think it's going to be tough for everyone if that happens.
C: Will you get out of China completely in the future?
R: At this time we don't have any plans to do that. We still have a local China presence in that we sell to local Chinese brands, and because of the lead time and communication, having a factory in China actually eases that. We can actually use the China factory, if we don't serve as a US market or Western market in the future, to still serve as the China local market.
C: President Trump wants to bring back manufacturing into the US. Would you consider that option?
R: We have considered that. Even before Trump came on board, we looked at manufacturing in the US.
C: Does it make sense?
R: It only makes sense if we can find the labor. Because we're such a labor-intensive industry, our factories typically should be about 1,500 people and up. Some of our factories have up to 6,000 people. We have partners who have factories in the US, and getting just a thousand people in the US is a really big challenge. Some of them in the big city that we know have a thousand people in the factory and over 20 nationalities working in that factory. It's really tough. Typically a lot of factories are more down North Carolina, South Carolina. To get anyone up to, say, 500 is already a challenge. So we need scale in order for us to make it work, and for such a labor-intensive industry, it's really hard to find scale in the US.
C: You're headquartered here in Hong Kong and from here you operate about nine factories across Asia. You spent the last few years trying to rebalance your operations. You closed down a factory over in Jakarta, one of two factories in China, you opened a second one in Vietnam, one in Ethiopia. How exactly do you decide your manufacturing footprint?
R: So we look at a few things. One is what we believe is the future cost in each of the countries we operate in. So we do a multi-year projection based on past and future understandings of inflation and government policies. And based on that, we decided that Jakarta itself, for us, is quite expensive. Outside of Jakarta, it's reasonable. China has been really expensive for us over the last ten years as well. So we believe that we need to move to a lower cost country in order for us to survive. Our industry in general has been a deflational industry. Customers have been paying us less than 20 years ago. So we need to continue to keep our cost under control. So we decided Jakarta's expensive, China is getting expensive, we have to look at alternative locations. And that was how we chose Vietnam, it's a second site because we had one already 15 years ago. And then beyond that we said we want to look at countries which have duty-free options and are the future of manufacturing. Africa to us is the last continent that we can really go to, that has not been explored. And we spent two years going around Africa. And when we went around Africa, the criteria we looked at were population size – which is workforce availability, close to ports – because obviously a lot of our stuff goes on boat to different parts of the world, government policies and government infrastructure. And we settled on Ethiopia. Ethiopia to us checked all the boxes. They have sufficient work, available workforce – they have about 90 million people in Ethiopia, they're actually very well-educated – their university system is one of the best we've seen in Africa, the government policy is very advanced in that the infrastructure is built – the roads, the railways, even the industrial parks, were already being built when we went to look at it. And by the time we decided to go, it was ready for us to use. So infrastructure was very good, so it checked all the boxes. So we found actually going to Ethiopia quite an easy decision to make compared to all the other countries we looked at.
C: Any plans to have a second facility in Ethiopia?
C: When will that happen?
R: Depends on how long it takes for the first factory to get up. I've always told people, it's probably a five year journey to go from zero to an efficient factory at TAL standard. Today, the factory is TAL standard in terms of quality, but the efficiency isn't where it needs to be. So I think it's five years. I'm still hoping that it will be sooner rather than later. Hopefully in the next two or three years, we can already look at building a second factory. Possibly just from a policy point of view, we need to have sufficient mass in a country to make the overhead for people to fly over to Ethiopia – all our technicians and customers and our team – to support Ethiopia. We should have two factories, which is roughly 10,000 people that we would employ when we have two full factories in a single country.
C: You've also made headlines when the company announced it was in the process of opening a textile mill in Vietnam. It marks the company's foray back into the textile business, which it sold off in the 1980s. Is it all about integration, trying to control the upstream garment manufacturing business?
R: It is, that's part of the reason. So the textile mill that we are in the process of building is only going to supply a portion of what we need. And we still believe that we have very good and strong partners but there's a portion of what we do we would like to keep in-house and to be fully integrated.
C: Why is that?
R: There's a lot of R&D that goes into what we do. And when we work for our partners, it's good, we share the R&D with them, and we share technology. But then through natural business reasons, they will also use that for other customers which is natural, we expect that.
C: So it's all to protect your intellectual property rights?
R: It is partly to protect intellectual property rights, it's partly because we do have a big presence in Vietnam from garment manufacturing and we can't find a supplier at the scale and size that we need to supply our garments in a very short lead time. So it's for multiple reasons that we decided to restart. Now, I will tell you one more reason that is my father who's been in the business, is still actively involved from R&D point of view. And I rather do it now with his technical knowledge than to wait later when he's not around or not healthy enough to do it. I rather do it now when he's still active, healthy and can contribute a lot to the technical side of the operations.
C: Today, TAL is one of the largest garment manufacturers in the world. Where do you see annual revenues?
R: Our annual revenue today as a Group is around US$850 million. So if we project that high single digit CAGR, US$1 billion is definitely within our reach in the next couple of years, especially when our textile mill comes on board. And beyond that, it could be anywhere.
C: You're the third generation running the family business. So far the company has been privately held for all these years. Has anyone in the family ever talked about going public?
R: No, they haven't.
C: No? Not at all? Why?
R: I think typically when a company goes public, it's one of two reasons – either they want to raise cash for investment or they want to cash out. Now, we have sufficient cash for future investments so the family doesn't want to cash out. They want to stay in this business for another 70 years, that's how we started. We're probably the only company left that started in that era – the 1940s, 1950s – that's still in this industry. And that's the core of the family belief, that they want to continue being in this industry.
C: As a family business, I understand you limit the number of family members joining the family business. For instance, in your generation, you only have two other cousins working in the company. Why so strict?
R: When I took over the job, I had an agreement that there are only three of us in the company. Out of the three, I'm actually the only one who doesn't have any shares. My two cousins are the shareholders of the company. I told them I wanted to operate the company as a truly professional multinational company. And I believe to have more family members creates more complexity. It's a natural fact that when people know you're from the family, if you do things wrong, they don't tell you the truth, they don't tell you and so you can't learn. So the more family members, the more the complexities. So I rather not have so many family members, and they agreed to that. I think that's a very good way to operate for a company like us.
C: You're 46 years old, worked many years in the US in the IT consulting industry before returning to Hong Kong to join the family business. You took over from your father as CEO 2012 and he now sits as Chairman of TAL. Has he given you any advice about how to manage and lead the family business?
R: He hasn't from that point of view. What we hold consistent, it doesn't matter who's managing, is our core values and how we service our customers. My father and I have very different management styles. So a lot of family businesses, from generation to generation fail. And I think we're very fortunate that, touchwood, so far, we've been successful. And one of the key reasons is that he doesn't get involved once he has given it over because we're so different in the way we operate and the way we manage. He knows that if he was involved, we would clash all the time and never work. So I think that's one of the secrets to succession planning. When you hand it over, have a clean break and let the next generation make mistakes. So what he does to me is that he sees that I would make a mistake, he lets me make the mistake – doesn't matter if it will cost us millions – but the most important is that I learn from that. Because everyone makes mistakes. If you don't dare to make mistakes, that means you won't dare to try new things.
C: Do you consult him on certain business matters?
R: I consult him much more on the technical side because he has a wealth of technical knowledge. When it comes to business matters, we discuss as an executive committee, because I have a whole committee of senior executives and we discuss the business matters. So he typically stays out of operations or any strategies.
C: How would you describe your leadership and management style? What are you like as the boss?
R: People say that I can go very deep and that's why when they talk to me, sometimes they're kind of worried that they don't have all the answers for me. The reality is that my scope of responsibilities is quite wide. So my focus is that my team's got to be very strong. They can represent me and they can make decisions on behalf of the company without needing my interference or my approval. So I like to delegate clear responsibilities, let them make the decisions and if they make mistakes, they tell me why, it's okay, we move on. So my goal is that each one of them is capable to run their own divisions and own organizations and all I'm there to do is to help them remove roadblocks. I think that's what a leader should be doing. Leaders should not be telling people what to do day to day. You should be setting the direction, setting the guidelines, and helping them remove roadblocks when they face them. And that's the way I like to manage.
C: And finally, as the third generation driving the family business, what impact do you want to make? Where do you see the company?
R: So right now, we have 25,000 people and growing. We provide not only the livelihoods but we also impact their families. We provide jobs to them but their families also benefit – the children benefit from that. So it's more than 25,000 people. It's easily close to 100,000 people that we can impact. Now, that's a huge responsibility for the company, in that we want to make sure that we can make their lives better than the previous generation. So that's one aspect of it. The second aspect is that as a company we must continue to survive so that we can continue giving jobs to people.
C: And how do you make sure the company continues to survive through the generations?
R: I think it's a long journey. We're not here for a sprint, we're doing a marathon. Our goal is to be here for at least another 70 years. So there are many things we need to put in place to make sure that happens. One is succession planning, so the next generation management could be from family or most likely will not be from family members. So that's one thing we'll have to put in place and we're doing that. The second thing is we must have a strategy that will serve us well now and in the future. And then the third thing is to have a purpose – why are we here? And our purpose is to lead change in our industry for people to buy in a more sustainable way. That's our long term goal. And we believe that we can make an impact. Even though we are one of many thousands of manufacturers in the world, we do believe that we do have a small part to play, and that we can be impactful by showing people how things can be done differently than in the past.
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Managing Asia is the Asia Pacific region's ground-breaking interview programme featuring CEOs, entrepreneurs and other business leaders.