After more than a decade of robust expansion, the Chinese apparel industry is seeking to identify new growth opportunities. But how can these firms adopt revolutionary innovation at a speed that mirrors that of China’s high-speed railway? The financial results disclosed recently by some leading firms could provide some hints.
Excess inventory used to be the biggest challenge for Chinese apparel companies, a problem solved to some extent by the digitalized, smart and flexible supply chain. Now a series of factors are forcing the industry to change: The global economic situation and upheaval in the raw materials markets have led to spiraling costs; the Regional Comprehensive Economic Partnership has produced dividends and investment, as well as trade liberalization that has led to a further shift of some labor-intensive processes to emerging countries, where land and labor costs are cheaper; problems such as homogenization and low technological content of Chinese products still exist, and the nation is seeing a slowdown in GDP and consumption growth.
From offline to online, home to foreign markets, brand creation to acquisition, attempts to reinvent apparel companies reveal the struggle for survival of the industry as a whole. Yet there is no shortage of strong performances in the financial results disclosed by leading e-commerce platforms and some apparel companies.
According to results released by JD Group earlier this month, net revenue was 275.9 billion renminbi (about $43.4 billion) in the fourth quarter, a year-over-year increase of 23 percent. Net revenue for all of 2021 reached 951.6 billion renminbi (about $149.6 billion), up 27.6 percent. JD Apparel, a platform for quality apparel, saw a strong year, with such Chinese designer and trendy brands and stores as Qinghe cashmere, Putian shoes and boots, Jiangyin thermal underwear and Xiaolan men’s underwear joining the platform. On Nov. 11, or the Singles’ Day shopping festival, more than 6,000 new brands participated in the promotion and more Chinese apparel companies took the opportunity to accelerate their digital transformation.
Compared to JD’s optimism, rival Alibaba is more cautious. As early as two years ago, 5 million merchants worldwide participated in the Singles’ Day shopping festival on the Tmall e-commerce platform, which once opened a new way for foreign trade companies. But Alibaba’s results for the October to December period, released in late February, showed that revenue for the third quarter of fiscal year 2022 was 242.58 billion renminbi (about $38.1 billion), up 10 percent, while net profit was 20.43 billion renminbi (about $3.21 billion), a steep 75 percent decrease. The data showed that shoppers on Alibaba in China increased to 979 million as of Dec. 31 and the target of reaching 1 billion annual active domestic customers by the end of this fiscal year is expected to be completed on schedule.
But the negative growth in Alibaba’s core e-commerce business for the first time in its 18-year history indicated a trend commonly accepted by the industry: the turning point has arrived. It would be costly and ineffective to try to break into the sector when 1 billion active users have already been gained in China, which has a total population of 1.4 billion. This figure is the growth ceiling. Take the December figures, for example: Sales of women’s/men’s/children’s/home textiles/sports footwear on the Alibaba platform saw declines of 20 percent, 37 percent, 33 percent, 38 percent and 45 percent, respectively, with only the womenswear category increasing in sales, by a mere 1 percent.
As a result, Alibaba has increased efforts to develop its overseas markets, which were first entered in 2010 and provide huge potential for future growth. And Lu You, who was promoted to general manager of Tmall’s apparel industry at the end of last year, also publicly proclaimed at the Business Trends Conference that Tmall had launched a tool called “Style Digital.” The tool is adding various tags based on different styles, from preppy to bohemian. Through algorithms the system automatically identifies what style category the product belongs to and classifies it into the corresponding category.
Though the strong momentum of e-commerce companies in China has been globally recognized, the financial results and strategies of these two leading platforms make it clear that any concerted effort by the established firms would result in only small percentage increases in revenues and that a ceiling on growth would eventually be reached. Finding a new breakthrough point becomes the only way to achieve significant multiples of growth while building a sustainable future.
Yet there is good news: The first-half results of JNBY Cloth saw revenue growth of 7.3 percent to 2.48 billion yuan (about $390.7 million), while Semir Apparel’s 2021 company operating income of about 15.42 billion yuan (about $2.42 billion) represented an increase of 1.41 percent. The moderate growth of these companies despite all the market pressures and the strong performances of Erdos, Lilanz, Xtep and other clothing companies might indicate that Chinese apparel firms have found a second growth curve.
Early this month, Erdos reported total revenue of 36.41 billion renminbi (about $5.72 billion) for 2021, an increase of 57.3 percent compared with the previous year, and a total profit of 9.63 billion renminbi (about $1.51 billion), an increase of 280.2 percent compared with the pandemic-impacted year of 2020.
As a leading firm in cashmere apparel, Erdos adheres to the concept of “full life cycle” and the sustainable development of the entire supply chain, realizing “green” production from raw materials to finished products. By reinventing the traditional manufacturing industry with technology and innovation, Erdos has turned “manufacturing” into “Smart Production,” making it a model for China’s cashmere industry as it seeks to grow globally and add more high-end, eco-friendly products.
Hong Kong-listed Chinese menswear brand Lilanz, meanwhile, also reported its financial results this month, with total revenue increasing by 26.1 percent to 3.38 billion renminbi (about $531.4 million ) for fiscal 2021. The firm also saw its sell-out rate increase to 73 percent from 65 percent during the fourth quarter.
Although Lilanz is smaller than Erdos, the 35-year-old Chinese menswear company is undertaking a total restructuring of its products, channels and brands and a transformation of its sales model. Wang Dongxing, chairman and executive director of Lilanz China, said the strong results last year despite the market upheaval resulted from the company’s change in its sales model, channel optimization, young consumer-oriented product design and internet-plus strategies. He said the sales performance was satisfactory while the total retail value exceeded expectations.
The main collection of Lilanz and its Less Is More casual business collection have undergone significant changes in the last two years. Less Is More adopted a self-operated model from the second half of 2020, with a total of 290 shops opened by the end of 2021, a net increase of three stores. Meanwhile, about 40 percent of the main Lilianz collection stores adopted an “agency model” from the spring 2021 season. By the end of 2021, 966 shops were converted into franchised units. This shift in the sales model resulted in a significant reduction in the average annual trade receivable turnover days from 101 to 57 days.
At the same time, Lilanz has continued to improve product personalization and design, with about 50 percent of the fabrics used in the Less Is More collection exclusive ones it developed.
Xtep, a manufacturer and distributor of its own as well as foreign activewear and lifestyle brands, released its full-year 2021 performances this month, showing record revenues of 10.01 billion renminbi (about $1.57 billion), up by 22.5 percent compared to 2020. This included strong revenue growth for the main Xtep brand, up by 24.5 percent to a record 8.84 billion renminbi (about $1.39 billion).
Behind the record revenue and continued growth is the increasing consumer recognition of the Xtep brand. Also noteworthy last year was the rapid growth in revenue from brands still emerging in China, such as K-Swiss, Palladium, Saucony and Merrell. According to its “Five-Year Plan” (2021 to 2025) released in September 2021, future revenue goals for the main brands will be 20 billion renminbi (about $3.14 billion), with a compound annual growth rate of 23 percent; future revenue goals for the newer brands will be 4 billion renminbi (about $628.7 million), with a compound annual growth rate of more than 30 percent.
From export to domestic sales, from following the trend to self-innovation, from OEM to the acquisition of overseas brands, Xtep has evolved from a foreign trade foundry into a global sporting goods company. As shown by the Xtep itself, the domestic sports market is in a period of transformation due to personalized and experience-based consumption. To better meet the demands of consumers upgrading their footwear and apparel, Xtep has boosted its investment in technology. The group’s recent financial reports show that since 2015, its R&D investment ratio has remained above 2.4 percent year-round, and in 2021, the figure was about 252 million renminbi (about $37.2 million), accounting for 2.5 percent of revenues. In terms of product innovation, taking running products as an example, it launched the Race Series of 160X2.0, 160XPRO and 300X2.0 in 2021, as well as the Race Training Shoe 260, which is specifically designed for marathon runners and ordinary runners with training needs.
These companies’ financial results indicate that China’s apparel industry continues to evolve in the context of globalization and amid significant pressures, ranging from the pandemic to the economy and global political turmoil. Facing the robust and rapid expansion of foreign brands in the Chinese market and the multiple challenges, the country’s apparel sector is beginning to innovate beyond the traditional low-cost manufacturing model as it seeks new avenues for growth.