Question

1. What motivated Tony Wu to set up a factory in Cambodia? As an advisor to the company, where would you have suggested Sunton go?

Answer 1

Tony Wu wants to expand to another location since the conditions in China were being detrimental to thecompany’s growth. The Chinese garment factories were getting smaller and could not meet demand. Chinese wages hadbeen increasing in the past years and Sunton could not offer the same prices as other larger companies. The new exchangerate policy also allowed larger companies to gain an advantage against smaller businesses. Wu was motivated to move to Cambodia after a friend suggested that it was a viable and profitable opportunity. Wu had not viewed this as an optionbefore, but after research he believed it was a good decision. Cambodia offers low labor and material cost, thus being able to compete with larger businesses with economies of scale. The country has no tariffs to major developed countries, andstrong ties to the U.S. and the E.U. He located the factory in the economic zone of Sihanoukville, owned by a Chinese corporation. I believe that this might have given him more confidence to open this factory since he felt like he better understood the environment, and that other Chinese companies shared his thoughts about moving into Cambodia. Wu believed that this investment would increase the capacity and flexibility to meet and grow demand in more regions of the globe. He claims that by having more control over the supply chain of the company it would increase its efficiency and thus gain a competitive advantage. Cambodia was also experiencing rapid growth in its disposable income within agrowing middle class. The company was one of the top garment exporters in the world and thus was improving itsinfrastructure, although it was still very poor. After finding what seemed like a valid partner to enter this venture with, Wu was convinced that it was the right move.

As an advisor to the company I would have suggested to go to other low-cost method.

Since its establishment in 2000 in Wuxi, Sunton had positioned itself as a supplier of casual wear and sportswear brands sold in specialty stores and hypermarkets. Sunton dedicated itself to being “a useful company as long as possible.” Over the past decade, Sunton had always focused on its original positioning, and it gained many advantages, especially in the knitwear sector, by partnering with multiple knitwear factories. Sunton provided good services in four sectors of the garment supply chain—namely, orders management, fabric sourcing and procurement, manufacturing and quality control, and warehousing and shipping. Sunton differentiated itself by consolidating its strengths in these four segments to serve the different needs of its clients in different parts of the world. Sunton’s target clients were retailers, importers, and wholesalers, as well as garment supermarkets.

In 2017, there were around 30 Sunton staff members grouped into three departments in Wuxi: the International Business Department, the Domestic Business Department, and the Production Department (see Exhibit 2). The sales office in Italy consisted of four local staff who were in charge of market exploration and customer service. Sunton’s Cambodian factory had around 350 local workers. Sunton was planning to set up an office in the United States in the future in order to create a broader value chain.

Counted by pieces, t-shirts made up the largest proportion of the products sold by Sunton, whose biggest supplier was located in Nantong, Jiangsu Province. For the fashion products, Sunton deemed its designs to be an advantage, with the designers hailing from Italy and other countries. Sunton fully owned a factory in China, which had not been in operation since 2010. Sunton worked with 15 to 20 partner factories in China but had never invested in nor owned any of them. Sunton’s partner factories were mainly located near Wuxi, in the provinces of Jiangsu, Jiangxi, and Anhui. The productivity and products of these partners varied significantly. Many, but not all, of their suppliers of t-shirts and other knitwear produced solely for Sunton.

Many Chinese SMEs in the garment export field averaged sales of around US$15 million. The profitability varied. Generally, the gross margin ranged from 10 per cent to 30 per cent. Wu believed that internationalization would greatly benefit the company, feeling it could (1) bring the company more flexibility to sell the products made in either China or Cambodia; (2) optimize the flow of the supply chain, as the company would be more likely to meet and seize opportunities; and (3) occupy more links in the supply chain and enhance the company’s competitiveness.

Sunton’s JV in Cambodia was located in the Sihanoukville economic zone. Though Wu thought it would be convenient to operate a factory in the zone, progress had not been easy because of the lack of development in the country.

The establishment of the factory took much longer than expected, with the registration process spanning almost a year. In January 2015, Sunton was finally granted a license from the Cambodian government. The idea of having a partner in Cambodia occurred to Wu right after the registration of the new company in Sihanoukville. At the outset, he had tried but was ultimately unable to find a partner from within his list of suppliers. Through a friend’s recommendation, Wu found a partner—Xiao Ma, and Ma’s close friend Ping Yu. Ma was a factory owner in China and was interested in also setting up a factory in Cambodia. Ma’s friend, Yu, had invested in Cambodia and was a shareholder of a garment bag factory in Cambodia. He had little experience in management but at least had been living in Cambodia for several years. In contrast to Sunton’s wide coverage in terms of product offerings, Ma’s factory produced only a single product: men’s tennis shirts. Sunton dealt with a wide range of products and aimed to make its own manufacturing base in Cambodia a multi-product one.

The partner negotiations took several months, and the preparations for and construction of the factory took half a year. Recognizing his lack of familiarity with Cambodia and its operational environment, Wu entrusted the daily management of factory operations to his JV partner. Ma and Yu handled the operation and management of the factory.

From the beginning, Ma had claimed he would need six months for decoration and recruiting, and six months to train workers. He also requested that Wu wire money to his account, so that his people could procure all machinery. At the end of the training period, Ma told Wu that things had not gone smoothly, as the workers were still too slow. It took an additional six months to complete the training. Operations began in January 2016 upon completion of the factory’s construction.

After one year of operation, Ma suddenly called a meeting and told Wu that all the investment money was lost and that if they wanted to continue, Sunton needed to invest more money. Ma’s message came as a complete surprise to Wu. Wu knew that he no longer wanted to do business with Ma and that he would have to dissolve the JV.

Reflecting on the co-operation with Ma, Wu perceived that Ma had never planned to operate a multi- product factory in Cambodia. It seemed that what he really wanted from this co-operation was to use the business licence and money from Sunton to do his own test, because even as an experienced factory owner he could not guarantee that a new factory in Cambodia would be a success. Furthermore, because Ma was aggressive in wanting total control of the daily management of the JV, Wu did not insist on auditing the bank accounts and books every month. Consequently, he did not follow up properly nor did he effectively control the financial situation of the factory. As a result, Wu acknowledged that although he was the legal owner of the company, he had never had total control of it.

Sunton’s Italian sales department staff claimed that, with the establishment of the Cambodian factory, the mixture of Chinese and Cambodian culture had convinced some European clients that Sunton was an attractive international corporation. And, when invited to the biggest show in the garment fashion supply industry, Sunton was urged to use its Cambodian trademark and local language because it was the only company present with activities in Cambodia.

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