Research Project China 2013

Industry Report 2013 — Sportswear Retail & Motor Vehicles

Overseas Development Strategy of Fortune 500 Companies in China

Beijing Internship ProjectBy David Connor

Sportswear Retail– Summary– Company Description– Performance in China– Expansion Strategy

Motor Vehicles– Summary– Company Description– Performance in China– Expansion Strategy

In this report, we will discuss two industries; the motor vehicle industry and the sportswear retail industry. We will make a general introduction of the industry and depict how the representative companies in Fortune 500 expand their business in China. This report also illustrates some Chinese local firms of outstanding achievement. From the comparison, we could evaluate the overseas development strategy and approach the potential clients to offer some service they may need.

Brief Introduction

SPORTSWEAR RETAIL

Sportswear Retail

In this part, we will do some research of the Western company's performance worldwide and their presence and performance within China in the recent years. Fortune/Global 500 companies that have ventured into the Chinese market will be examined as we have selected two of the major, well established firms; Nike and Adidas. With such a vast population of over 1.3bn, a retailer has a large market to target and coupled with cheaper labor than the Western world, China is an attractive market for both firms to retail in. Following the research of Nike and Adidas, it is important to examine the leading Chinese firms in this industry and this part will analyze these domestic firms in a similar way. There is argument that sportswear retail can prove problematic in China as problems of widespread competition, the presence of fake and black markets and trade regulations are present.

Summary

Sportswear Retail

Company Description

Sportswear Retail

Nike, Inc. are a consumer retail company, founded in 1968 with world headquarters in Oregon U.S. The retailer focuses on seven key product categories: Running, Basketball, Soccer, Men’s and Women’s Training, Nike Sportswear and Action Sports as well as other minor areas including Tennis and Baseball. Although designed for specific athletic use, a large proportion of products are used for casual or leisure purposes. As of May 31st 2012, according to their annual report, Nike employed approximately 44’000 employees worldwide that include retail and part-time jobs and senior management regards the relationship with these workers to be excellent.

‘The adidas Group strives to be the global leader in the sporting goods industry with brands built upon a passion for sports and a sporting lifestyle.’ Adidas Group are a sportswear retailing group founded and headquartered in Herzogenaurach, Germany. Traded on the DAX-30 blue-chip index and employing more than 46’000 people across the globe, the company produce a wide range of quality sportswear and equipment. Adidas Groups’ annual report says total revenue in 2012 was £14.883bn, a 6% rise on the previous year, however turnover has stayed steady so far in 2013.

Company Description

Sportswear Retail

Li-Ning are a sporting goods company, founded in 1990 by Mr Li Ning himself, that sell a broad range of apparel and equipment to the competitive Chinese market. With headquarters in the Beijing, the Group has departments in R&D, marketing, design and manufacturing. In addition to the Li Ning brand, the company also sells products under several other brands that include Double Happiness, AIGLE and the Italian sports fashion brand, Lotto.

A domestic rival for Li Ning comes in the form of Anta Sports Products Limited, a retailer that primarily designs, develops, manufactures and markets sportswear to the Chinese market. In the market for 11 years, Anta regard themselves as one of China’s leading companies in the sector, with a large distribution network in Tier 2 and Tier 3 cities. Using a multi-brand strategy, Anta’s own brand targets the mass market whilst their other brand, Fila aims at the high end segment.

Performance in China — Nike

Sportswear RetailNike

Footwear

VietnamChinaIndonesia

Global: Well Done!During 2013, Nike, Inc. has seen a dramatic rise of 55% in net income which saw the share price increase by 8.3%. When results of revenues were published, up by 9% to $6.2bn, the share price was pushed up by 7.9% in after-market trading.

China: Just PassableHowever, in China, Nike have not faired so successfully. Despite a sportswear boom of 29% each year from 2006-12 in the country, sales have fallen in the Greater China region, that includes Hong Kong and Taiwan, for a third consecutive quarter. Q3 saw revenue fall 9% to $635m. Christian Buss of Credit Suisse claims ‘Nike lacks enough visibility’ in the market. Although the company holds the largest market share (12.1%), it’s biggest competitor, the German firm Adidas, are growing at a fast pace behind them with 11.2% of the market.

Footwear: Vietnam ExceedsThe Nike Brand apparel manufacturing is spread throughout 28 countries with the majority in East Asia and South America. The majority of footwear manufacturing is concentrated in 3 major countries; Vietnam, China and Indonesia where 41%, 32% and 25% of Nike’s total products are made respectively.

Sportswear Retail

Performance in China — Adidas

Adidas is booming in China. Based in Shanghai, the group produced revenue of $1.56bn in 2012 in the Greater China region, which includes Hong Kong and Taiwan. Seeing a 12% rise in sales in the forth quarter, their accounting figures are revealing many positives. Hot on the heals of Nike, Adidas now hold 11.2% of the market share, just behind their American counterparts’ 12.1% stake.

➢After Nike, but goes better!

Problems with inventories are not something Adidas has to deal with, employing a policy that sees each product moving off the shelf within 90 days or less. Having closed their only factory in China during 2012, cause for the concern may have been warranted when sighting their ambitions in the region but that is far from accurate. Adidas aims to target 1’400 Chinese cities by 2015 and hopes to achieve annual of growth of 15-20% in the years to come.

➢Problems and Blueprints

Sportswear Retail

Performance in China — Li Ning & Anta

Li Ning: Slowing DownIn their annual report, the company says global uncertainty and China’s slowing economic growth, aswell as the inventory problem, is responsible for their unsatisfactory figures. Although implementing new business strategies in the form of a three year transformation plan, Li-Ning blames their recent lack of success on the ‘unfavorable market environment’. This plan is an overhaul of the company’s strategies in order to ‘rebuild and revitalize the Li Ning brand’, a procedure that is necessary to transform their performance and crucially, their sales figures. With the presence of Nike and Adidas, Chinese firms have be innovative in order to gain some ground on their multi-national counterparts. In 2010, Li Ning had 8% of the market, by 2012 the figure had dropped to just 5.4%. Li Ning took in revenue of 6.73bn RMB in 2012, down a staggering 32% from the 8.93bn RMB worth of products that was sold in 2011. Li Ning reported an operating loss of 1.5bn RMB.

Anta: To Be Cautious Following the Beijing Olympics, as Li Ning did, Anta faced serious problems with over stocking and a miss direction of strategies. This build up of inventories led to deep discounts throughout many sportswear retailers’ stores and even greater competition within this crowded market. 2012 was a poor year for the firm, as turnover dropped by 14.4% resulting in profit dropping by 21.5%. Although not in the red, the figures are worrying for Anta and should show warning signs for the company. According to the annual report, Anta are to be cautious in the coming period in terms of opening stores and processing future orders.

Sportswear Retail

Expansion Strategy Comparison

Nike, Inc. are beginning to tackle these issues by stopping inefficient unit growth, closing stores and improving distribution and IT services throughout Greater China. According to brand president Charles Denison, the strategy is to reassess the retail landscape; withdrawing products in some regions and distributing more in others, which will help reduce the significant problem of a build-up in inventories. The company has said that it needs a few more quarters to sort itself out. March to July orders were up by 4% which suggests their strategies are beginning to be proved effective.

Adidas has clear strategies in their progression that include creating long-term shareholder value, maintaing a diverse brand portfolio and investing primarily in the highest potential markets and channels, with particular emphasis on emerging markets like China and Russia. What is key in the groups’ strategy is the widening of the adidas brand beyond the typical shoes and sweats. The German firm is now stocking many of its outlets with its NEO brand red skinny jeans, fashion ponchos and button-down gingham shirts. Hiring design talent from Swedish and Spanish companies, specific consumer groups and regions are being targeted which is proving effective when in comparison to their competitors.

NIKE

Distribution Adjustment

ADIDAS

NEOBrand

Sportswear Retail

Expansion Strategy Comparison—Li Ning & Anta

From the 1992 Olympic games in Barcelona, Li-Ning have supported the long-term development of the Chinese team.In the most recent Games where the five national teams, that were sponsored by Li-Ning, won 22 gold medals. This partnership has been one of Li Ning’s principal promotion strategies throughout their short history. Performing strongly around the Beijing Olympics in 2008, the company took advantage of the hype and enthusiasm that accompanied the sporting event in their home country. This was a critical mistake as over-stocking and a huge build up of inventories on the back of their success has crippled their profitability. The same can be said for the six biggest Chinese retailers in the industry as disastrous inventory management saw a build up of stock worth up to 372bn RMB.

Focusing on their brand management, Anta signed NBA star Kevin Garnett in order to endorse their new line of ‘KG’ basketball shoes, a promotional technique that is popular in China. In May 2013, the group also signed deals to provide sportswear for the National Boxing, Taekwondo and Karate teams, taking the number of teams sponsored by the firm to sixteen. In 2013, Anta became the exclusive sportswear partner of the China Olympic Committee for the next four years, a strategy designed to market products that are well recognized by the Chinese government and their top-tier athletes.

Li Ning

Olympic GamesSponsor

Anta

Sports Stars

Sportswear Retail

Expansion Strategy— AnalysisMichael Binetti of UBS says these strategies are will return double digit growth of the sales by the end of 2014 in China, suggesting prosper in the years to come from the sportswear retailer. With the leading market share, Nike, Inc. are obviously a significant force affecting the Chinese sports retail market and should be able to overcome their problems in order to drive forward and to be prevalent in the industry like they are in the US. and Europe.

Although still a sportswear retailer, the company is using initiative and innovation in order to succeed and adapt to foreign markets.

Competitiveness is one of the major reasons that these domestic companies have had such bad fortune. Another general view is that there is no innovation, no individuality and in essence a great deal of similarity between the products that Chinese firms are selling. Not only are they competing with eachother, the introduction of Gap and Sweden's Hennes & Mauritz AB sees the introduction of some casual fashion brands taking even more customers from Li Ning. With the inventory problem somewhat under control, and their current execution of the transformation, Li Ning may be able to change their fortunes, find a new direction and grow again.

Sponsoring more well known NBA stars like LeBron James and Kobe Bryant, Nike may be stronger in this segment of the industry and Anta must be careful if they are to focus on their basketball promotion. Claiming they have sorted the inventory problem, Anta see stronger brand equity and innovation as a the method of attracting customers. It will be difficult for the domestic firm to gain some market share, however, if Adidas or Nike fade slightly, an opportunity for the smaller company may be available.

Nike

Adidas

Li Ning

Anta

Sportswear Retail

ConclusionChinese Sportswear firms have to find a way of competing with the popular brands like Nike and Adidas. A new direction of branding has to be found as it is argued that there is too much similarity between the products of these companies which the reason why fashion brands and Adidas’ innovative range is proving so successful. As Adidas keep growing, and Nike maintain their prowess, Chinese firms will find it even more difficult to grow in the coming years.

MOTOR VEHICLE

Motor Vehicle

Motor Vehicle

Summary

With over 19 million vehicles sold last year in China, the market for both domestic and foreign automakers is vast. When analyzing the automotive industry, two groups of manufacturers must be looked at: foreign companies entering the Chinese market, and the domestic firms. This research will examine recent performance of both groups of firms, their place in the market and their future prospects in order to gain a better understanding of the automotive industry in China.

Motor Vehicle

Company Description“GM’s greatest strengths today are our market-leading positions in the United States and China, the world’s two largest markets.” General Motors Co. are an American automotive corporation with brands that include Cadillac and Chevrolet. With over 212’000 employees working in 396 facilities that span 6 continents, GM are a worldwide brand and sell their vehicles in many markets.

Ford continues to move along in the midst of a challenging auto market. Europe, in particular, is troubling -- the company announced last year that it would close three factories and cut at least 6,200 jobs there. But there is some good news for the iconic American automaker: its Ford Focus was recently named the top-selling car in the world. Before an accounting change reflected a 72% net loss, Ford's full year net income was down from 2011 by about 6%, at $5.7 billion.

German automobile manufacturer headquartered in Wolfsburg, Lower Saxony, Germany. Volkswagen is the original and top-selling brand of the Volkswagen Group, the biggest German automaker and the third largest automaker in the world. Volkswagen has three cars in the top 10 list of best-selling cars of all time.

SAIC Motor Corporation Limited (informally SAIC, formerly Shanghai Automotive Industry Corporation) is a Chinese state-owned automotive manufacturing company headquartered in Shanghai, China with multinational operations. One of the "Big Four" Chinese automakers, the company had the largest production volume of any Chinese automaker in 2012 producing more than 4.5 million units,.

Dongfeng Motor Corporation is a Chinese state-owned automotive manufacturing company headquartered in Wuhan, China. As well as buses, trucks, and cars, it also manufactures parts and cooperates with foreign car makers. As of 2011 it has more Sino-foreign joint ventures than any other Chinese automaker. It was the third-largest Chinese automaker in 2012 by production volume.

Motor Vehicle

Performance in China — General Motors

Performance in China is impressive.

In 2012, sales in China

increased by 11.3% and 2013 can

produce even better figures.

With nine joint ventures and two

wholly owned foreign enterprises, the first 5

months of the year involved 1.33 million

units being sold, making GM the largest

car supplier in the country.

Over 4’200 of their dealerships are

located in China as the company sold

261’870 vehicles in April, which was

actually more than was traded in the

US.

This shows the extent of how far GM have come in China and if they

can implement the correct strategies,

the Chinese market could prove very profitable in their

future

Motor Vehicle

Performance in China — Ford

Ford’s prospects are showing promise:

Last year Ford’s Chinese sales increased by 30%. The American company, a relatively new-comer to China, are beginning to stamp some manufacturing authority on the Asian superpower.

Ford China sales in April reached 75’331 vehicles, up 37% on the previous year. Demand has remained strong for the all-new Ford Kuga and continues to be strong for Ford’s most common automobile, the Focus. 30’672 of the China’s most popular model were sold in April, a 41% increase year-on-year.

Although only 12th in auto sales with about 3% of the market, Ford has said it plans to double its production capacity in the region to 1.2 million vehicles by 2015, making this the company’s most rapid expansion in any country for 50 years.

By 2020, the company is expected to sell 40% of its products to the Chinese market, which if projections are correct, China will pass the United States as the American company’s busiest market.

Motor Vehicle

Performance in China — Volkswagen

With a market share of 14.6%, German automaker Volkswagen have a considerable presence in China. ➢In 2012, 2.8m vehicles were sold in the country by VW, a 24.6% increase on 2011 as growth by their joint ventures outperformed the Chinese car market as a whole.➢ Volkswagen were the first overseas auto company to build a plant in China when they joined up with Shanghai Automotive Co. which has helped them achieve a head start on its competitors and time to be an establish themselves in the country.➢ The Group has over 60 models in China from it’s many brands that include Bentley and Audi and have additionally added models that are specified to the Chinese market; examples include the Volkswagen Lavida. ➢Although very successful, VW had to spend $1bn in China just on market in order to ‘stay in that market’ according to Alexi Orlov, their marketing officer. He believes that they can no longer rely on their reputation and the company will have to do more in order to maintain their status in the market. Having said this, VW are still one of the strongest companies in China and when analyzing the whole industry, this problem should be relatively easy to overcome.

Motor Vehicle

Performance in China — SAIC & DongFeng

SAIC Motor, China’s biggest domestic automaker, had a fairly ordinary 2012 with income increasing by 10% on 2011 and a net profit increase of just 2.6%. Their annual reports claims that economic growth being sluggish is the cause of their average performance last year rather than any more serious concern. In 2012, SAIC Group sold 4.49 million units but just 200’000 of these sales were from their solely domestic branch, SAIC Motor Passenger Co. That branch’s 2012 sales were up 24% compared to 2011 which shows that their brands, Roewe and MG, are growing relatively well.

DongFeng made sales of 1.74m passenger vehicles in 2012, a modest increase of 5.7%, however their commercial vehicle branch had a worrying year with a decrease of 21.2% in their sales figures. This was the prominent cause for their decrease in profits of 13.3% compared to 2011, however these profits still accumulated a respectable 9’9092m RMB. The firm insist that the competition of the local market was ‘intense’ and the had become worse during the second half of 2012. Ambition from the group is visible as they are poised to acquire more than 40% of the smaller Fujian Motor Industry Group Co., an effort to unify the country’s fragmented auto market. With less ‘household’ brands in their portfolio, Dongfeng may face trouble in the future, however, like SAIC, although their domestic brands are not performing well, their joint ventures will always provide strong sales figures.

Motor Vehicle

Expansion Strategy Comparison

! Expansion is on GM’s agenda as in May, they won approval from the relevant authorities to build a $1.3bn plant at Jinqiao in order to manufacture Cadillacs, a brand they have made improving sales of a ‘priority’. ! Shanghai GM, their partnership with SAIC, will build the plant as the company look to compete more with Daimler and BMW AG in the luxury car market. Last year, just 30’000 Cadillacs were sold in China which for GM is unsatisfactory as they aim to sell 100’000 per year by 2016, an ambitious target. The new factory’s production capacity is 150’000 vehicles annually.! GM said it’s joint ventures plan to invest $11 billion by 2016 to expand their production facilities. An early Western company to enter the Chinese market, General Motors already has a healthy position with a 14.6% market share and their performance has been solid. With expansion, the American company will only capture more Chinese customers and continue to grow in China.

GM: Cooperate with SAIC

Ford: diverse and effective product portfolio

According to Alan Mulally, Ford’s CEO, he and the company are spending ‘more and more time’ in China. He believes the company’s strategies are particularly strong as they tap into the thriving markets of inner China as well as having a diverse and effective product portfolio. Ford have doubled their number of dealers, targeting the most prosperous regions where families are buying their first car or the popular SUV. The company has invested over $2bn into China, best shown by their 15x15 campaign, an aggressive expansion that involves introducing 15 new vehicle models by 2015. It can been seen that Ford’s Chinese ventures are very much on the rise, and with the right application of this expansion, the market is there for Ford to become very successful in the ‘Middle Kingdom’.

Motor Vehicle

Expansion Strategy ComparisonVolkswagen: New facilities

Volkswagen’s goal is to increase annual capacity of their production facilities to 4 million by 2018. A new plant in Yizheng is to be soon to opened and in addition to this, decisions have been reached to construct new facilities in Ningbo and Urmuqi. Expected to invest up to €9.8bn, the German giant are expected to maintain their grasp of the industry and continue to sell strongly to the Chinese consumer.

Motor Vehicle

Expansion Strategy Comparison — Joint Ventures are very important

The joint-venture program by the Chinese government was designed to let the domestic companies learn and grow beside the incomers and become major exporting car makers that supplied the world. This hasn’t happened as the Chinese firms rely too much on their partners in almost all aspects of the automotive making process. One factor is the gap in quality between Chinese and foreign built cars. By European standards, many Chinese vehicles have failed or scored very poorly on safety standards, which is why the exporting of Chinese vehicles to other parts of the world has never been effective on a large scale and why their expansion has been so limited. Last year, Algeria was the number one importer on Chinese cars, a sign that they are not appealing to the developed regions, their own country being one of them.

Their joint ventures with General Motors and Volkswagen produced 2.67 million sales in 2012 and have been very successful therefore if SAIC maintain their joint ventures, the group will continue to perform well as the VW and GM brands are popular in China. Even if their domestic brands lose ground, they can rely on the Western brands to keep their group profitable and in good shape.

Dongnfeng Motor Corp. have joint venture partnerships with Honda, Nissan and Peugeot Citreon and with these foreign companies, command an 11.2% of the market. SAIC and Dongfeng are just two of the multiple Chinese owned automakers that flood the market. FAW, GAC, Changan and BAIC sell between 50’000 and 150’000 cars a month, a modest number but significantly less than the large foreign companies.

Motor Vehicle

Expansion Strategy— Analysis

How will the industry look in the future?There is argument that the automotive market in China is peaking, or will be in the near future. In the first few months of 2013, the market increased just 7.5% compared to same period of 2011. The China Association of Automotive Manufacturers reported that the inventory ratio was reaching a dangerous level of 1.98, which indicates that there are almost two cars in stock for every one sold. The organization recommends 1.5. Furthermore, car restrictions are becoming an ever greater concern after major cities including Beijing and Shanghai put in place the controlling measures that limits the number of cars that can be registered each month.

Motor Vehicle

Conclusion

With such a competitive market, it is unlikely that the vast number of companies can be profitable and successful in the future. Experts says that there will be ‘only a handful’ of automakers in China around 2020, which will see up to a possible 1bn customers by that year. Those named ‘Tier 2’ or ‘Tier 3’ cities, beyond the giants of Shanghai, Guangzhou and Beijing are where foreign brands are targeting, supplying to the ‘rest of China’. A fragmented industry with far too many minor competitors, I feel the market will gradually become more concise as the stronger companies can obtain or push out those smaller firms and gain greater market shares. GM, VW and Ford are all targeting great expansion in China which will help the industry to grow and give the Chinese consumer wider choice in buying their automobiles. The industry remains strong and prosperous as foreign multi-nationals have boosted competition, quality standards and choice for the Chinese consumer.

Advice:➢The sportswear retail industry in China may suffer in the future, though more opportunities will occur in the field of brand promotion and public relations.

➢The automotive industry is rising but almost all of the big companies have found their partners. More transactions will happen between the big firms and the smaller supplier and the Chinese local producers may need more services in the supply chain management.

Thank You For Your Time

Beijing Internship Project 2013 By David Connor