Hansae beats COVID-19 odds under young CEO

Hansae CEO & Vice Chairman Kim Ik-whan speaks during an interview with The Korea Times at Hansae's headquarters on Yeouido, Seoul, Nov. 18. Korea Times photo by Choi Won-suk

Protection gear business, JVs to offer growth momentum for apparel OEM

By Nam Hyun-woo

Hansae may not be a familiar name to many but it is one of the world's largest apparel original equipment manufacturers (OEMs) in the world, making clothing for GAP, H&M, Hanes, Zara and a slew of other world-famous brands. The company estimates that it has produced nearly a third of all clothes that Americans are wearing today.

In the wake of the COVID-19 pandemic that began earlier this year, however, the lucrative business faced an unprecedented setback, as the U.S. consumer market froze. Client brands cut production volumes or delayed payments as inventory piled up, hitting not only Hansae hard but also other apparel OEMs.

In the second quarter, Hansae posted a 1.48 billion won operating loss, swinging from a 19.1 billion won operating profit a year earlier. Some analysts expressed a conservative outlook for the company, citing additional surges of COVID-19 cases in the U.S.

However, the company defied the pessimism of those analysts and achieved an earnings surprise in the third quarter, logging a 53.1 billion won operating profit, up 29.1 percent from a year earlier. The Korea Times asked Hansae CEO and Vice Chairman Kim Ik-whan how the company was able to make the turnaround, and how it expects to survive in the post-coronavirus world.

"Our chairman used to say, 'We should go slower than we can,' based on his experience of running Hansae since the 1970s," Kim said during the interview. "Due to this belief, we have been piling up cashable assets for a long time, unlike our rivals who leveraged their assets to make big investments. And this legacy helped the company to successfully overcome a time of crisis."

Kim is the second son of Hansae Group Chairman Kim Dong-nyung, and became the company's CEO in 2017. The company was established as Hansae Trade in 1972, which became defunct, and took its current form in 1982. It now has bases in eight countries, the largest being in Vietnam and Nicaragua.

According to Kim, OEMs have to shoulder the full cost of production until they deliver finished products to buyers. After the pandemic, however, many buyers refused to make payments worth hundreds of billions of won citing their inventories, or made queries from outsourcing firms very difficult.

"Some competitors ended up aggravating their relations with clients, but we tried to keep our relations with buyers intact despite suffering difficulties. This strengthened ties with buyers later and gave us additional business opportunities with them," Kim said.

Along with the company's legacy, Kim's strategic choice to jump into the personal protective equipment (PPE) business ― such as face masks and other protective gear ― in the U.S. also hit its stride in the wake of the pandemic, contributing to the company's strong comeback.

"Since we began making PPEs, we have accumulated about 260 billion won in sales so far this year," Kim said. The company's aggregated sales from January to September this year stood at 1.48 trillion won.

"Unlike Korea, fabric masks are more common in the U.S. Since we had fabric facilities, we were able to make a quick transition to making PPEs, and this allowed us to provide masks for people in the U.S. at the right time," Kim said.

In October, Hansae opened a PPE plant in North Carolina capable of producing 36 million medical masks annually, showing its PPE business was in full swing.

Though the size of the plant is not particularly big ― it occupies a 2,000 square-meter plot of land in the city of Garner ― its establishment drew attention from the local community in North Carolina, as the plant was the first to be constructed in the state after the start of the pandemic.

Among those who have visited the plant are senior executives of McKesson, which is one of the largest medical suppliers in the U.S. Reportedly, they are considering setting up a joint venture with Hansae to expand its PPE capabilities.

"There is a great chance of additional investments in the plant," Kim said. "Since U.S. medical suppliers had to largely rely on other countries such as China in securing materials, the U.S. welcomes companies which manufacture masks on American soil, and consumers also have a greater trust in products made in the USA."

Hansae CEO & Vice Chairman Kim Ik-whan poses during an interview with The Korea Times at Hansae's headquarters on Yeouido, Seoul, Nov. 18. Korea Times photo by Choi Won-suk

New trade order

As Hansae is running most of its plants in countries with cheaper labor costs and exports products to global markets, mostly the U.S., consumer trends and trade orders related to America heavily affect the company.

"The coronavirus directly affects the apparel market not only in the U.S., but also in countries around the world. People meet less frequently and visit less populated places, meaning they care less about wearing nice clothes than they did before," Kim said. "Such a trend, however, is removing OEMs that fail to meet buyers' demands, thus narrowing the market and offering greater opportunities to capable and stable firms. We believe we can capitalize on this."

He also cast a positive outlook for trade under new President Joe Biden, as the administration is anticipated to maintain a stance on China that is not incredibly different from that of the Donald Trump government.

"Regardless of Biden or Trump, the U.S. trade stance against China will likely remain similar, and the U.S. will want products to be made on its soil," he said. "For a long time, OEMs have been thinking that they should contain the risks from China, and so focused on Vietnam.

"For U.S. buyers, however, OEMs' excessive concentration in Vietnam is also not a desirable situation given policy risks. Luckily, we have already diversified our facilities to other countries such as Haiti and Myanmar. Under the new trade order, OEMs with a diversified country of origin will get more orders from buyers."

For further growth and client diversification, Kim said Hansae is making efforts to improve its presence in the European market, adding more clients, such as Primark and Zara to its European portfolio.

"Recently, we started the operation of a joint venture called Stronger Together along with a Spanish partner," Kim said, refusing to specify which Spanish firm. "For years, we have been looking into the M&A market to acquire an OEM working with Zara or H&M. And we found this partner which has a solid client base in Europe and seeks to increase its client base in the U.S."

According to Kim, Hansae is a big-name OEM in the global market, but still faced limits in seeking organic growth in Europe, where brands and other OEMs have already developed long-term relation.

After setting up the joint venture, Kim said he'd had successful meetings with top executives of top European fashion giants including Zara and Primark, and he is expecting increased sales from those companies in the coming years.

Hansae CEO & Vice Chairman Kim Ik-whan speaks during an interview with The Korea Times at Hansae's headquarters on Yeouido, Seoul, Nov. 18. Korea Times photo by Choi Won-suk

Opportunities in environment

Consistent with the growing corporate trend of reflecting environmental values in management, Kim said Hansae is also making investments in manufacturing clothes made with renewable cotton and polyester, with a goal of making a recognizable fabric brand like Gore-Tex.

Though cotton is one of the most common material for making clothes, it is difficult to reuse ― most worn-out cotton clothing either gets burnt or goes to landfills ― causing environmental concerns. Though there are a number of firms with the technology to develop reusable cotton, they remain far from commercialization due to high costs.

Kim said Hansae is in talks with a Spanish firm as a strategic partner in a technology for re-creating raw cotton from used clothing after shredding it into fibers. Though he refused to name the company, he added the firm's technology enables the costs to remain at a similar level to that of general cotton and the company recently received a sizable investment from a private equity firm due to its growth potential.

"So far, there have been no apparel OEMs that will use eco-friendly technology for future growth," Kim said. "However, the Biden administration is demanding industries pay more attention to the environment and many clothing brands and retailers are demanding their manufacturers to follow suit. In the near future, firms with these kinds of technologies will survive and those days are coming faster than we think in Korea."

Kim said Hansae is seeking to achieve 3 trillion won in annual sales by 2025 ― a more than 1 trillion won increase from 1.92 trillion won last year ― as well as widening the gap with its rivals. To achieve this, he said incorporating new technological developments into the labor-intensive OEM business is crucial, though progress is slow.

"To see a change, you have to try again and again until it reaches boiling point," Kim said. "Though our business is in one of the most labor-intensive industries, I tell employees, 'We should think of ourselves as the leader in the industry, navigating for others to follow.' Change comes when we do something others don't."