Building a New Factory
Marjorie Yang CHAIRMAN AND CEO Esquel Group HONG KONG
By Interviewed by Cait Murphy

(FORTUNE Magazine) – LIKE ALMOST every other textile manufacturer, Esquel is going through a difficult time right now. With the end of textile quotas, margins are under pressure, capacity is going up, and prices are coming down. It was with this environment on the horizon that I had to decide whether to commit the company to the biggest single investment in its history.

Esquel's core strategy for years has been to go upmarket. In the late 1980s that meant our operations had to reach Japanese quality. Now we want to reach Italian quality, which is the best in the world. To do that, I wanted to invest $150 million in a brand-new fabric mill to increase our capacity and make us the mill with the highest quality in China.

But there were many reasons not to do it, or at least not yet. We knew the end of quotas in early 2005 would be a rough patch. About half the money would have to be borrowed. And our performance would be hurt in '05 and '06. Still, I felt very strongly that we should go ahead.

Not everyone agreed. People thought this was the right idea, but that we should let things settle down and do it in 2006 or '07. By nature I am quite aggressive, and I saw this as a golden opportunity. I argued that the best defense is a good offense. We grow our own high-quality cotton in western China--why not make the most of it? My bet is that with the end of quotas, more people are going to invest in the low end than the high end. If Esquel can reach the pinnacle of quality, profit margins are better and competition is less. The first company in China to get there is going to have a big advantage.

The company was split about fifty-fifty on whether to wait or to do it right away. Esquel is a family company, and these kinds of decisions are ultimately mine. I decided to go ahead. We broke ground last year and should be finished by March.

This is not quite a make-or-break investment. We can always go back to just selling fabric. But it is critical if we want to be the best shirtmaker in the world. My goal is for Esquel to be a billion-dollar company by 2008, double what we are now. We'll know that this decision worked if we get there.