Textile manufacturer prefers Israeli workers
Gary Heiman, founder of Arad Towels company, explains how the continues to make profit from textile while the entire world manufactures in China
Manufacturing textile in Israel sounds like an unrealistic idea these days. As the Delta company moves all its production activity to neighboring Arab states and other companies prefer manufacturing in China – Arad Towels continues to manufacture towels and uniform for the world's institutional market.
If you recently stayed at a Marriott hotel, the towel you used was most likely made in Israel's desert city of Arad, which is the main supplier (60%) of the Marriott chain and other leading chains.
The company's founder, Gary Heiman, is the co-owner (along with his brother) of an all-embracing American textile empire Standard Textile, which has a yearly turnover of $600 million. Arad Towels is Standard Textile's main subsidiary and is responsible for 20% of its sales.
Heiman, 54, was born in Cincinnati, where he lives today. He first came to Israel at the age of 22 as part of the "service to the people" program.
"As the son to a family of Holocaust survivors, I wanted to know what Israel is," he says.
During his first year in Israel he lived in northern towns of Neve Ativ and Kiryat Shmona. The Yom Kippur War broke out when he was at the Golan Heights, and he immediately volunteered to serve in an elite IDF artillery unit. After the war he decided to build a factory in the Negev, "Where the future is, like (Israel's first prime minister, David) Ben-Gurion believed."
The factory was founded in Arad in 1976. The first years were tough, but an investment by Delta, which bought about 40% of Arad Towel's shares, helped the company.
At the time, Standard Textile dealt with marketing and distributing products to the American market only. Arad Towels was its first manufacturing factory.
"Today our products can be found in nearly every hotel 4-star or higher rated hotel, in the army and in hospitals," Heiman says.
Later Delta sold its shares in the company. In 2002, after operating as a public company for 10 years, Heiman removed the company from stock listings.
"I was asked too many questions which went too deep," he explains. "Today we're happy this way. We are in no need of an exit or financing in order to expand, so we have no plans to issue bonds."
In 1998, Heiman was appointed president of Standard Textile. Today the company has 24 factories in 14 countries and it is considered the no. 1 textile company in the United States and in Europe, with a market share of more than 60% in hospitals. It is the third biggest manufacturer of textile products to US hotels.
Heiman is one of the most prominent Zionist investors in the Israeli industry. Before he turned 45 he used to travel to Israel once a year for voluntary reserve service as a fighter and a paramedic.
He refused to move the company's production from Israel, even during the most difficult days of the intifada, and was not tempted by the low manufacturing costs in the East. He owns an apartment in Tel Aviv and is fluent in Hebrew.
The holding company employs 3,600 workers, 800 of them in China and 1,000 in Israel. The Arad factory manufactures 85% of the company's towels and the rest are produced in the factory built in China, where it was the first foreign company to enter the market without a local partner.
The company's products are sold in 57 countries, and its customers include the Accor, Ritz, Hyatt, Intercontinental and Le Meridien hotel chains.
'We make a pretty good profit'
Arad Towels has become the biggest supplier of its kinds of towels and bedclothes for hospitals and hotels. Eight months ago, the company entered the retail market for the first time, opening three stores – in Arad, the Dead Sea and Eilat. Two additional stores are expected to open in Tel Aviv and in northern Israel by the end of the year.
In 1992, following the former Soviet Union, Heiman established a factory for work clothes named Standard Textile Israel in Migdal Ha'emek, which was later merged with Arad Towels. The factory supplies work clothes mainly to operating rooms and hospitals.
Arad Towels owns two additional factories in Irbid, Jordan.
The annual sales of the Migdal Ha'emek factory amount to approximately $40 million. The cloths are designed and cut at the factory and then sent to Irbid, where the clothes are sewn and sent back to Israel.
The Jordan factories were established following the QIZ agreement, which gives companies manufacturing in Jordan and Israel tax reductions in the United States.
Because it is a private company, Arad Towels does not report its earnings, but Heiman indicates that "our profit in Israel is something we are very proud of. Before the company was traded in the market the profit before taxes stood at 13%-16% of the income (the company pays 31%-32% tax), and I can tell you that the profit today is not lower than that."
According to these figures, the company's profits total approximately $11-12 million a year.
The company sells towels for $830,000 per workers. According to Heiman, "When I mention these figures, people think that we're a high-tech company."
Can one profit from textile in Israel?
"Yes, and thank God, I have no complaints. We make a pretty good profit."
But others in the industry are fleeing the country.
"Are you asking what our secret is? Non-stop innovations. Here, for example, the customer gets his towel washed and ready for use. The institutions are spared the need to wash the towels after receiving them in their washing machine and can send them straight to the rooms immediately after taking them out of the cartons.
"Our towels are more absorbent because we use longer cotton fibers, which also create a more pleasant touch. Our engineers are involved in all our manufacturing processes in order to improve and reduce costs for the customers."
Wouldn’t you make a better profit in China?
"We have something new to offer the clients every three to four weeks. With our speed and the service we provide, I don’t think we would earn more in China. Everyone thought that the best thing was to go to China, but things have changed.
"When we entered china we got a 13% return on the value added tax, but today the conditions have changed to the worse and you only get 9%. It is still worthwhile manufacturing there, but it's not what people thought.
"Pakistan? Who knows what will happen there tomorrow. India is a more stable country, but is still unorganized and the orders face problems of meeting the timetable. Turkey is pretty passé – the cost of labor there is on the rise, and they were never reliable in terms of quality and supply.
So we work in the US, Europe, Israel and Jordan – stable strategic places, and therefore I am very optimistic about the company's future. People don’t understand that the cost of labor is no longer the price's main component, in light of the rise in the prices of energy and raw materials, which amount to 60%-70% of the cost. Therefore the work efficiency, the manufacturing processes and the product are what counts."
Production in Israel 4 times higher
During his last visit in Israel, several weeks ago, Heiman met with President Shimon Peres and decided to lead a move of encouraging Jewish businesspeople to invest in Israel.
"They don’t have to do what I did and necessarily build factories. It's enough if they buy Israeli products and serve as Israel's ambassadors, and this would help develop the economy," he says.
Heiman is trying to build a group of Jewish businesspeople who invest in Israel and will try to convince other businesspeople to invest in the country. Peres will be involved in the meetings and will encourage them.
So why are other manufacturers moving their production abroad?
"I think the difference between them and us is the fact that other people look at the gross figures. For example, the cost of a worker in China, Vietnam, Cambodia or Thailand. They don’t look at the net figures.
"For example, we talked to a Pakistani company about manufacturing there. It turns out that we produce 4 times more per weaving machine than they produce. The same machines, the same equipment, but here the production is 4 times higher.
"In China they manufacture generic products (simple textile products), while we manufacture premium products for hotels, hospitals and even for Israel's retail market. Special things with technology and innovations, which cannot be produced with the same quality and efficiency in Thailand, Vietnam, China or Pakistan, not matter home much you invest."
Do you have any examples?
"For instance, the santium, a synthetic fiber we developed in which each horizontal thread you put in basically equals 96 fibers. In order to prepare the machine which puts this fiber in for work, you need high-quality technicians, not to mention the machine's operation. We failed to produce the santium technology anywhere else.
"In China we mainly manufacture sheets and bedclothes. Our factory is one of the biggest in China, and it also has the same weaving machines like the ones in Arad. Several weeks ago we tried to produce there the same towel manufactured here. We tried and tried, until we gave up and realized that our technologies cannot be transferred to the Chinese.
"We sent our technologists, and when they stood by the machines it worked, but three days after they left and the Chinese had to adjust the machines, the problems began. You understand? The same looms, the same company, the same procedure, both in China and in Israel, but without the people it just didn’t work."
"Yes. Another problem we failed to solve in China: The towels come out of the weaving machines and are automatically cut and sewn, bleached, washed and dried, until they are ready to be sent to the hotels, with no need to wash them before sending them to the guestrooms.
"In Arad, the towel comes out snow-white. In China, on the same machine, its colors were cream, and even light blue, and it had to be washed, which cost 25-30 cents more per towel. So we only let the Chinese produce the blankets and sheets, products which require simple weaving.
"So it's true that the gross is cheaper, less salaries, but in the net, I earn well when I take advantage of what I can get in Israel – high-quality and intelligent manpower, with energy, innovation, who are proud of what they do. The Israeli workers and the managers want to be the best. Their level cannot be compared to other places.
"We recently received a huge order from a large international hotel chain. They demanded that we manufacture the products in Israel, after visiting all our sites. If you ask me for a stronger, more absorbent, more durable towel which has a more pleasant touch and nicer patterns, I can produce it in Israel but not in China."
The Arad workers are contractor workers or company employees?
"They are all company employees, with all the social benefits. An employee's average cost for the company is about NIS 10,000 (about $2,490) a month."
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