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Rubber gloves have long been a Malaysian specialty, but they have drawbacks in everyday health care and other sanitary situations. For one thing, the price of latex is volatile, making it harder to know what kind of a sales deal to offer. Also, allergies to latex cause many wearers discomfort.
Hartalega Holdings is not the country's leader in the sector--that lofty perch belongs securely to Top Glove--but in synthetic glove technology it's another story. The Kuan family is driving a shift to nitrile-based gloves, which are made of an oil by-product called butadiene but are sufficiently buffered from price shocks in that commodity. Nonetheless it takes costly innovation to make the leap, and Hartalega is at the forefront.
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Credit not just the founder, Chairman and Managing Director Kuan Kam Hon, 63, but his younger son, Mun Leong, 34, a trained engineer and M.B.A. First son, Mun Keng, 35, is a certified public accountant and also helps run the company. The three are committed to innovation as both an efficiency and a growth strategy.
So far it's working. Sales have grown by five times in five years to $175 million, and net profit was up better than 11 times to $44 million. Worldwide, the glove share held by nitrile synthetics is thought to be nearing a third, and Hartalega exported 4.4 billion nitrile gloves in 2009 compared with 100 million in 2004. All of its output is sold under others' brand names.
The company won't put a number on its R&D efforts--the Kuans say they don't want staff thinking that innovation can be so narrowly defined. By unified means, the company has achieved a 30% return on assets. Production lines turn out 33,000 pieces an hour--they can go up to 40,000--whereas the initial runs in the late 1980s peaked at 3,000. A sixth plant (all are in Malaysia) is under construction and the initial one is being upgraded to boost output. Inside the factories, a proprietary system speedily autostrips each glove off a handlike mold. And Hartalega is able to leapfrog rivals in what it produces, for instance in the weight of a glove. When synthetics leader Kimberly-Clark shaved its average model down to 4.5 grams, Hartalega was able to hit back at 3.7 grams, while maintaining strength and flexibility. It's also the first in the world with a polymer-coated natural rubber glove--powder free.
Hartalega's gross margins approximate 30%, said to be double the sector's average. Mun Leong, who is deputy managing director, explains, "We don't derive our high margins from selling at high prices but from operational efficiencies and automation. We are the lowest priced for nitrile gloves. If pushed to the corner, we have the margins to defend our position."
Last year was a big one for glovemakers with the H1N1 pandemic alert. But that led to overstocking by health care providers and anxieties about looming price wars. What's more, prices of latex had spiked in the second quarter--and Hartalega still does rubber-glove production to service China, where synthetics aren't yet accepted for medical use under official standards.
Mun Keng, who does the number crunching as director of finance and business development, says, "We'll get better guidance by early next year on whether there's overcapacity in the industry. Demand has merely normalized, and we expect the sector to grow by 10% annually like it used to. Demand for nitrile gloves is still intact. I am confident we can achieve a 15% to 25% growth in earnings year on year."
While the U.S. remains the primary market and the looming health care changes promise a wider clientele, Hartalega is also expanding in emerging markets. Usage of gloves in China, for instance, is only 1.3 pieces a year per capita, compared with 140 pieces in the U.S. Promised enhancements by the central government could boost usage in rural areas, especially good news for Hartalega if synthetics gain approval.
The Kuans' bent for technology is also seen in the fuel sector. Most plants in Malaysia rely on natural gas, subject to allocation by the government, and glovemakers had to negotiate for more supply over the years. To supplement their fuel supply and to get energy savings, some companies have built plants that use the shell of oil-palm seeds as biomass. This is cheaper to construct than plants that use empty fruit bunches (left over after removal of the palm fruits) as feedstock. But Hartalega had chosen to build the latter-type plant. Mun Leong, expert in industrial boilers, says: "Our energy savings is up to 30% compared to using natural gas. Empty fruit bunches are in ample supply and have stable prices, while palm shells are scarce and the price high. We had anticipated this problem."
Nimbleness has been a Hartalega hallmark from the beginning. The company was set up to dabble in properties--the name is a combination of two Malay words, literally meaning "assets comfort." This had been Kuan Kam Hon's family's line of business, which he'd dropped out of school to pursue. But a deep recession in Malaysia in the 1980s diverted him to other endeavors. A friend recommended rubber-glove making as it was early in the aids epidemic. He taught himself the basic technology. Today he likes to say, "There is no such thing as fast success. It is a journey, not a destination."
Although the father says he will remain in operational charge for three more years and possibly as chairman after that, the sons, who both attended Monash University in Australia, are the public voices and faces. Each of them started work outside the company; Mun Leong recalls their basic production tasks upon joining: "One of the things we had to do was to wash latex storage tanks. It is a very unpleasant experience. The smell is very pungent due to the ammonia [used as an anticoagulant], and your protective mask will be stained with sweat and mucus."
They persisted, and with brother watching the books, systems guy Mun Leong is due to succeed his father. He quips that it's a lifetime contract with no clocking out.
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