Taiwan's Apparel Leader
The Secrets behind Makalot's Winning Ways
A consistently high EPS and huge garment shipments made at lightning speeds. Why is Taiwan-based Makalot Industrial such a powerful force in the global garment industry and what does its future hold?
The Secrets behind Makalot's Winning WaysBy Cindy Hsu
From CommonWealth Magazine (vol. 518 )
The chairman of textile leader Makalot Industrial Co., Frank Chou, is also the company's most discerning gourmet. On a regular workday, he rounds up a few colleagues to have lunch with him at his favorite Japanese restaurant. As he grabs a piece of nigiri sushi in his chopsticks and dips it in soy sauce and wasabi, he explains that his routine exemplifies the best way to appreciate the dish.
Every detail, from properly balancing the soy sauce and wasabi to coating the sushi in just the right spot, seems carefully choreographed, the process unhurried.
With the same precision he typically embraces to fully enjoy his sushi experience, Chou has methodically established five major production bases in Asia to best serve Makalot's customers.
"We have to be able to link our supply structure so that it can respond quickly," Chou says.
Taiwan's biggest garment manufacturer, Makalot primarily supplies fast fashion brands such as Wal-Mart, Target, Gap and Zara.
In the 10 years since the company went public, Makalot has sustained earnings of at least NT$5 per share (except in 2008 when the financial crisis hit). In 2012, Makalot had sales of NT$15.56 billion on export volume of 9.2 million dozen garments. EPS was NT$8.59, and pre-tax net margin was about 9 percent, firmly establishing it as Taiwan's apparel sector leader.
Five Countries, 18 Factories
The calm-looking Chou, who started his business 23 years ago, has strategically capitalized on labor cost and skill advantages in different parts of Asia to build a tightly integrated manufacturing network of 18 factories and 28,000 employees in five countries. It's a network that generates large quantities of garments quickly for export to Europe, the United States and Japan.
From the day he founded Makalot, Chou clearly visualized building a complete production base that could absorb big international orders. Starting with a facility in the Philippines, he has since expanded the company's operations to Indonesia, Vietnam, Cambodia and China.
Taiwan Textile Federation Secretary-General Justin Huang says Makalot has based itself exclusively in Asia for an obvious reason. Makalot's customers rely primarily on the United States market, which demands a broader mix of finished garments, involving more processing, that can only be churned out by skilled Asian workers. Concentrating its operations in the Asia-Pacific region has enabled Makalot to offer customers like Wal-Mart, Kohl's Corp., Target and Gap a greater division of labor and specialization, fast delivery and competitive pricing.
The company's appeal to big buyers is reflected in its sales distribution. Of its 15 biggest customers, the top five account for 70 percent of the company's total sales. "Concentrating production in a geographic area and controlling costs make it possible to accept big orders from any large customer," Huang says.
In July 2012, Wal-Mart, considered by Makalot to be one of its most exacting customers, placed an order for 10 million relatively inexpensive garments. Makalot produced the order simultaneously in 10 factories spanning Indonesia, Cambodia, and northern and southern Vietnam and delivered it on schedule three months later.
Among the items ordered were four or five different styles that incorporated two or three types of fabric. Eighty percent of the material needed was purchased from three factories in China; the other 20 percent, used in pant waistbands and shirt cuffs, came from Vietnam.
"A single garment is composed with the resources of many countries," Chou says, revealing the fundamental principle that gives Makalot an edge.
Having fabric suppliers and production lines concentrated in Southeast Asia means more convenient shipping compared with factories based in Africa or South Asia and much faster lead times.
Behind this sophisticated network lie elaborate production and supply chain management capabilities that result in cost advantages, skill diversification, and a masterful use of talent.
Buying a Factory in Two Weeks
Makalot has been able to keep costs in check in part because of its keen nose for good locations and its ability to build plant capacity quickly.
Makalot's biggest production base is Indonesia, where it has 10,000 employees and manufactures 3.6 million dozen garments, about 35 percent of its total output. In its third year in the country, Makalot set up a factory in Semerang in central Java.
The garment maker's country manager, Michael Song, recalls that Makalot originally based itself in Jakarta, but when a company in Semerang announced it was shutting down its operations, Chou decided to acquire the factory within two weeks and then moved aggressively to expand the company's presence in the region.
"Once he decides to do something, he will keep on you and push you to complete the task quickly," Song says with a smile.
That strategy has since paid off. Early this year, basic wages soared around Southeast Asia, especially in the Jakarta area where pay rose 40 percent, dealing a heavy blow to the labor-intensive apparel industry. But Makalot barely felt the impact because 80 percent of its output is currently centered in Semerang, where costs are now about US$4 per dozen less than in Jakarta.
A similar situation played out in Vietnam, where the company started off in the southern part of the country. Garment producers driven out of China because of skyrocketing labor costs later flocked to the area, causing labor shortages and forcing suppliers into repeated pay hikes. But two years earlier, Makalot had moved some of its production in Vietnam to the north where labor is more abundant, partially insulating itself from the higher wages. Production in the country now accounts for 25 percent of the company's total output.
In addition, Makalot has made good use of each country's strengths and skills to satisfy customers' diverse needs with garments in four major categories – fashion, sleepwear, sportswear and children's wear – that sell for between US$2 and US$10 per unit.
Producing such a complex range of items poses considerable manufacturing challenges. Fifty pairs of underwear, for example, can be made with the same amount of time and labor needed for a heavy winter jacket but using very different processes.
As a result, Chou has developed a certain "production logic" under which every factory, managed by top executives from Taiwan and technical and quality control people of many different nationalities, specializes in four or five kinds of garments.
Makalot's handling of a rush order last October reflected its proficient use of manpower and talent.
October is the garment industry's low season, and just as Song was pondering how to fill his production base's idle capacity, an American customer gave Makalot a rush order for 1.5 million garments for delivery within a month, springing its Indonesian factories into action.
Song immediately gathered his Taiwanese plant manager, Indian and Filipino quality control experts and a contracted Chinese technician for an emergency meeting to discuss the order.
The team decided that the Indian QC specialist would be responsible for communications with the customer because of his good English, and the Filipino QC engineer would design an efficient workflow based on his experience with process planning at a Philippine factory.
The Chinese technician, who had experience sewing and cutting fabric in a big textile plant, was assigned to solve technical problems as they emerged on Makalot production lines. The Taiwanese plant manager was responsible for communicating with the Indonesian workers in their own language.
As a result of this careful coordination and division of labor, the order was delivered on time.
Taking on Korean Rivals through Integration
An OEM and ODM specialist, Makalot develops a capacity expansion plan every year because Chou believes the trend in the garment industry is that the big will only get bigger.
"Our market share in the United States is only about 0.4 percent. It's not even 1 percent," says the normally unflappable Chou somewhat animatedly.
Because Makalot focuses almost exclusively on garment production, fabric accounts for nearly half of its costs. That may put it at a disadvantage against its Korean rivals, which generally have fully integrated operations that allow them to accept huge orders and drive costs down, says Yin Cheng-ta, the head of the Taiwan Textile Research Institute's Department of Industrial Service and Information.
But while it lacks its own upstream raw material capabilities, Makalot's strategy has concentrated on developing its own brands and marketing them online to avoid the high costs of selling them through brick-and-mortar channels. On March 5, the company introduced the online brand "fisso" and expects to sell 300,000 fisso garments this year.
Chou's strategy is not only targeting Taiwan, however, but an expanding Indonesian market at a time when large retail chains are taking shape in Indonesia, Yin notes.
"One of the benefits of developing concentrated presences in Southeast Asian countries means early access to their domestic markets," he says.
That trend means that Makalot's 13 years of experience in Indonesia could be an invaluable asset as it develops its own brands in the future.
Amy Liao, the head of Makalot's technology development division who has known Chou for more than 25 years, says Chou has the best memory of anybody at the company, able to remember every numerical target promised by Makalot's many divisions.
The razor-sharp Chou can discuss in great detail the strengths and weaknesses of all five of his major production bases, as well as analyzing his major rivals who have the most complete presence in ASEAN countries. He is also well aware of some online numbers, which tell him that Makalot's new online brand attracted 800 members, 75 percent of whom have become paying customers, within 10 days of its launch.
Every contract manufacturer dreams of cultivating its own brand. Chou rarely displays exaggerated gestures or excessive emotion, but when he discusses Makalot's branding dream, his eyes suddenly light up.
Chou is hoping that the company's experience in steadily expanding its production network can help nurture a brand that will catalyze a new growth miracle for Makalot.
Translated from the Chinese by Luke Sabatier
Frank Chou Profile
Current Position: Chairman, Makalot Industrial
Education: Industrial management degree from National Cheng Kung University
Experience: Manufacturing Manager, Formostar Garment; President, Texma International