Willie Fung is chairman of Top Form International, the world's largest OEM brassiere manufacturer. One of the strongest outperformers on the Hong Kong Stock Exchange this year, Top Form has benefited from the China outsourcing story and sound financial management.

This was not always the case.

Fung came on board in 1995 at the suggestion of his friend and company co-founder Eddie Wong, after Top Form was forced to restructure HK$700 million ($90 million) of debt, much of which came from diversification into the Chinese property and retailing sectors. A sale of non-core assets and the entrance of strategic investment from some of the world's top bra manufacturers ensued, returning the company to its core competency.

Here Fung explains the intricacies of dealing with the female form.

How big is the bra market?

Fung: Actually there isn't that much published information about the size of the global market. A year ago I saw an article in the New York Times, which said that Americans purchase 500 million bras a year. Since we produce 52 million pieces year and 80% of our business is for the American market that means we have an 8% market share. .

Is America the largest market worldwide?

Yes the average American woman purchases 4.8 bras a year. One of the main reasons is because Americans have a tendency to throw everything in the washing machine so they wear out quicker. It's a very well defined market and extremely stable. Bras aren't sold through specialist shops like Europe, but through mass distribution channels such as Wal-Mart, which is estimated to have a third of the overall market. The US business is much more price driven and bras cost a lot less. The average selling price is only about $10, whereas it's about $20 to $25 in Europe. Even China is more expensive than the US.

What about Europe?

There's a big difference between the northern and southern countries. Northern countries only average 1.8 bras per year, very low.

Is that because they wash them less?

No I think it's because these countries are colder and people wear thicker clothes, so they're not so worried about how their underwear looks. In France and Italy, on the other hand, women purchase an average of 3.5 bras a year. These countries are like Mecca for the lingerie business and women place a lot more emphasis on feeling romantic and sexy. They also tend to hand wash their bras, so they last a lot longer.

And Asia?

It's a growing market, but it has its own idiosyncrasies, which I found to my cost about 10 years ago. When we started selling bras in China we decided to take more sexy styles from Europe and blend them with what we'd learnt from the Japanese market, which is is a very demanding one in terms of quality and fit. However, it was a total disaster. Chinese consumers prefer stiffer more formal styles than the Europeans and they are a different shape to the Japanese. In Japan, women's breasts tend to be a little fuller. Asian women as a whole prefer padded bras, but the Chinese prefer foam while the Japanese like softer padding. Getting these different markets right is a real art.

Is it a very competitive industry?

It's an industry with a lot of entry barriers because bra manufacturing is one of the most highly skilled areas of the textile trade. The construction is very complicated because you're dealing with a three dimensional product. There's very little automation compared to say a shirt where 40% of the sewing process could be automated. You may not know it, but the average bra has up to 20 differential materials from lace, lining, foam, side panels, elastic, hooks, eyes, wire and ribbon. So you're dealing with up to a dozen different suppliers and also have to think about colour matching.

Is the industry dominated by women?

More so than other parts of the textile trade because bras are not just about look but fit and support. Only a woman can judge that, so whereas some designers are male, technicians are female. It's very difficult to find trained staff because one requires extensive on-the-job training before attaining the necessary skill and knowledge to do the job.

What advantages do your manufacturing operations in China give you?

Aside from the normal cost issues, the most important one is dexterity. This is very important in our industry because you need delicate finger movements to handle the sheer fabric and complicated sewing. Before I joined Top Form my former employer had a number of factories in Costa Rica and the Dominican Republic. But every time I went there, I always noticed that even though the factory workforce was female, their fingers were almost double the size of mine.

We have three plants in China and a workforce of about 7,000. The Chinese plants are where we manufacture a lot of the upmarket ranges such as La Perla and Mari-Jo, which is the high couture of the lingerie business. In Thailand and Philippines we produce a lot of the bigger, more standardized orders.

Why's that?

Our Chinese workforce is very flexible and has good attention to detail. Some of the embroidery is incredibly delicate and so fine that if you turn a piece of lace over it looks exactly the same on both sides. We also find that there's a much shorter learning curve for new products in China. Largely this is because Chinese workers are very driven. Virtually none of our workers are local residents, but young women from the inland provinces who come down to Shenzhen for a few years to try and make as much money as possible before they go back home and get married. In Thailand on the other hand, the workers are local and their beliefs give them a more relaxed attitude to life.

So will future investment be targeted at China?

Yes, although we will not be phasing out our investments in Thailand and the Philippines. Even though WTO means that China should have eliminated all quotas by 2005, we still think there'll be some form of trade barriers in place, so diversification is essential.

Have your Chinese operations been affected by SAR's?

It's not affected our OEM business at all, but has had some impact on the operational side. We've have had to implement procedures such as checking employees' temperatures when they come to work and carefully monitoring every case of sick leave. In terms of customers trying to source supplies, they're much more likely to stick with companies they know in circumstances like these rather than try and shop around for different deals.

What are profit margins like at the moment?

If you take a $200 bra from La Perla and a $10 one from Wal-Mart, it's actually more profitable for us to manufacture the cheaper brand because the order sizes are much bigger and the individual bras are less time consuming to produce. I always tell people that we're not a company selling a product, but our time, or rather our machine time.

At the moment, we're almost running at full capacity. Typically we would try and run at about 90% capacity, but there have been a number of pendulum swings on the demand side over the last couple of years. After 9/11, the market virtually ground to a halt and customers withheld orders. But then when things settled down a bit, they rushed out to fill inventory and this has carried on until early this year. But in terms of our expansion plans, we've ignored the wilder ends of the swings and are concentrating on bringing in new customers from Europe and Japan, as well as increasing our business with Best Form, which is owned by Vanity Fair. This is one of the two largest suppliers in the US market. The other is Sara Lee. Between them they account for over 50% of the market, and we're responsible for about 27% of Vanity Fair's sourcing and probably less than 10% of Sara Lee's.

In total about 80% of our business comes from the US and the remaining 12% is mainly from Europe. Two of our major customers are also our shareholders (Vanity Fair and Van de Velde), so it helps secure our order book. We will also principally remain an OEM manufacturer. We do a little of our own design as well as manufacture for our own brand, but this accounts for less than 3% of our revenues.

How many new factories are you planning to open?

One at the moment in Jiangxi province. This will complement our existing two factories on the Mainland in Guangzhou and Shenzhen. We chose Jiangxi because it is only seven hours drive north of Hong Kong but wages are much cheaper. The monthly wage in Jiangxi is around Rmb400 a month per worker, whereas it's now over Rmb1,000 in the other two cities. As China opens up after WTO, the coastal cities are going to become increasingly expensive to operate from so it makes sense to start diversifying inland.

Are there a lot of price pressures?

No brassieres seem to resist deflation quite well. Once consumers find a brand they like, they tend to be very loyal and willing to pay for it. Lingerie is also classic shopping therapy. When end customers feel depressed, they tend to buy new pieces to cheer themselves up and when they're happy because they've got a new boyfriend or promotion or whatever, they also go out and buy new pieces.

Your share price has performed very well this year. What do you put this down to?

Yes, it's up about 100% and has recently been trading in a HK$0.85 to HK$0.90 band. I'd say it comes down to the fact that we were financially shaky a few years ago and investors had not paid much attention to the fact that the company has turned around until recently. The key event was the maturity in January of a HK$120 million ($15.24 million) convertible that had been issued as part of our restructuring.

Companies such as AIG, which was the largest participant in the CB did very well as the strike price was HK$0.31. Back in 1998, Vanity Fair also participated because the company had never done any sourcing from Asia before, but had just purchased Best Form a US bra company, which was our major customer. The acquisition saw them automatically get the 9% stake Best Form held in us and today, Vanity Fair owns 9.9% of the company.

Who's the major shareholder?

Giuliano, which owns 34.5%. This is a company controlled by myself, one of the company's co-founders, Eddie Wong and Van de Velde, which came to hold a 21.58% stake via the acquisition of shares from Frank Lo, the other co-founder of Top Form. Van de Velde is a listed Belgian bra manufacturer, which also owns a further 2% of the company outside of the holding company. This holding company was put together last year and because the combined shareholdings triggered the takeover code, we ended up having to make a general offer. This is when a number of securities companies started to sit up and take notice. SBI E2-Capital was the first. Then UBS Warburg put a buy recommendation on the stock, followed by DBS and ABN AMRO.