Adidas’ termination of working with Chinese OEMs means necessity of China to transformation its OEM industry.
The international sports brand Adidas has decided to close its last firm-owned factory in China at the year end. Such a change has already affected many OEMs of Adidas in China as ten of them working for Adidas’ factory in Suzhou were informed of the end of their cooperation with Adidas.
“We have cooperated with each other for over 10 years. But what Adidas did this time was irresponsible. They ended the cooperation without any forewarnings and even the number of orders it has given us was much smaller than the set number in the contact,” said Jiang Liuhong, vice general manager of Shanghai Donglong Feather Manufacture Co., Ltd (Donglong). He looked angry because Donglong is one of the ten OEMs.
As experts said, the increasing labor cost in China deprived the “China-made things” of the advantages brought by the low- and middle-end labor-intensive industries. There will be more Adidas-like cases of foreign companies’ withdrawal from manufacturing. The OEM industry of China needs transformation.
The Angry OEMs of Adidas
According to Jiang Liuhong, she received the notice from Adidas this April that the German sportswear brand would stop cooperating with her company and other 9 companies in this October or next April. More concretely, Donglong, which devoted a part of its production line to the service for Adidas, will see the end of cooperation this April. And those completely working for Adidas will lose Adidas’ contract next April.
“According to our contracts, Adidas should inform us of the end of cooperation half a year before the deadline. That means it should give the notice in April,” said Jiang Liuhong. Donglong and Adidas signed a long-term OEM contract in 2006 and no update occurred to the contract from then on.
In addition, the senior executives of Adidas Greater China once summoned a meeting of OEMs last November to relieve them from the worries caused by the rumor that Adidas’ factory in Suzhou would be closed. They were granted that their cooperation with Adidas would not end before 2015. However, Adidas broke its promise even when its words still ring in their ears.
Moreover, Jiang Hongliu said that Adidas should give the orders of 250 thousand apparels to Donglong quarterly, but the orders Donglong received in the third quarter and October only amounted to 20 thousand apparels. “If the normal business operation is taken, we should be given enough orders before the end of cooperation. Adidas should be criticized in that matter as it is quite an irresponsible action for OEMs.”
It is known that Donglong could manufacture 1.5 million apparels for Adidas every year before 2008. But after that year the figure kept dropping till this year when only 500 thousand apparels are to be produced. Presently, Donglong’s subsidiary company Donglong East China Apparel Co., Ltd in Tongling, Anhui is the one producing Adidas’ apparels based on orders. This company was founded in March 2002 with the total investment of 8 million US dollars. The factory covers 50 thousand square meters and employs 1600 workers. 70% of its production lines are devoted to Adidas. Some of the devices and software systems are exclusively made for Adidas, which cost Donglong over 3 million yuan. “Once the OEM contract is cancelled, these things are nothing but waste.”
Jiang Liuhong thought that Adidas should properly compensate Donglong and other companies whose special devices are no longer useful. Meanwhile, as the number of orders greatly decreased, Donglong needs to find supplementary orders from other clients to stop the factory in Anhui from collapsing and workers losing their jobs. Some of the orders with low profits were taken, which definitely influenced the company’s profitability. Adidas should redeem the loss in that field too.
“The Social and Environmental Affairs of Adidas always listed requirements for OEMs in social responsibility and environment, such as the guarantee of employees’ salaries and welfare. But now we have to try every means to keep our workers employed when losing the orders while Adidas cast aside its responsibilities, not a match with the brand image it always boasted,” Jiang Liuhong said.
In order to seek the compensations, OEMs talked with Adidas many times. On July 6 Adidas rejected the request of compensating, leading to conflicts between the parties. On August 9, Erick Haskell, CEO of Adidas Greater China, said in an email that Adidas would hold negotiations with OEMs about compensation some time.
Moving to Southeast Asia
Before closing the factory in Shuzhou, Adidas divided its production and purchasing in China into two parts. The first part was realized through subcontracting to OEMs of Suzhou factory and the products were to be provided for the Chinese market, accounting for 60% of the total demand in China. The second part was done by the International Purchasing Department of Adidas. This departments’ purchasing and supply chain cover the global market.
After the closure of Suzhou factory, all the orders in China will be given by the International Purchasing Department.
In Experts’ opinions, Adidas’ action was a result of the judgment and reaction of the increasing labor cost in China. Prior to that, Adidas CEO Herbert Hainer said that the new wage salary made by the Chinese government was so high that Adidas hoped to move part of its production out of China to places with cheaper labor. Southeast Asian countries are considered ideal destinations.
According to the data, the labor cost in China is twice of Southeast Asia. For example, a French institution’s data shows that the average salary of Chinese textile workers is 188-300 euros per month, much higher than Bangladesh, whose textile workers can only earn 80 euros each month – the lowest in the world.
Jiang Liuhong said that Donglong had plants in Burma too, which was put into used in 2011. Around 1200 Burmese are employed but they do not work for Adidas. Compared with factory in Anhui, the labor cost in Burma is 30% lower.
Some of the OEMs have followed the track of Adidas by moving a part of its production lines to Southeast Asia or establishing new factories there. “So far as I know, a Ningbo-based company manufacturing hosieries for Adidas set up a big factory in Cambodia,” Jiang Liuhong said.
Taiwan-based Yue Yuen Industrial (Holdings) Co., Ltd, which acts as a big OEM for Adidas, also eyes Southeast Asia as a new place of production in recent years. In 2003 this company respectively had 161, 78 and 51 production lines in China, Vietnam and Indonesia. In 2010, the figure increased to 226, 120 and 114 and the increasing rates were 40.3%, 53.8% and 123.5% - the increasing rate in China was much lower than Vietnam and Indonesia.
The Further-off “World Plant”?
Actually, Adidas’ rival Nike also closed its only firm-owned shoemaking factory in China in March 2009. In contrast, Nike produced 37% of its shoes in Vietnam in 2010, higher than the 34% proportion in China.
Not only the apparel company, multinationals in other industries also began to change its map of global manufacturing. With the forfeiture of low-cost advantages, China is gradually losing its grace as the “World Plant”.
Zhang Youwen, head of the World Economy Institute, Shanghai Academy of Social Sciences, told CBF journalists that “more cases like Adidas would emerge in the future as the situation decides it. The labor cost in coastal areas of China is indeed increasing and there is also very serious shortage of labor force. Some foreign investors and Chinese companies are now moving to Southeast Asia or the central and western parts of China for a better advantage in labor. This trend will be continued, casting greater and greater stress on export and processing trade.”
However, he added that the “made-in-China” had a wide coverage. Those low-end industries which are sensitive to cost and need a large number of workforces may move outward massively. But others which need to consider the entire macroeconomic environment, policies and supporting facilities might refuse to follow suit. Therefore, it is hard to doom China’s manufacturing just because of these things.
Jiang Liuhong also said that Dongliu needed to watch the result of its factory in Burma. “Though the labor cost there is comparatively lower, the efficiency of workers and the supporting facilities were worse in China.”
The Tough Way of Transformation
In spite of the somewhat optimistic forecast from experts and participants, the external environment and the internal situation need the OEMs in China get onto the way of transformation as soon as possible.
Among all the 10 OEMs with which Adidas ended the cooperation, Donglong is not the one that is most influenced. As Jiang Liuhong said, only one tens of the 10000 employees of Donglong are working for Adidas. In comparison, Junhe Clothes Manufacturing Co., Ltd (Junhe) and other companies that completely devoted to being OEMs for Adidas received much more impact from this change.
Shanghai-based Junhe is now busy moving from clothes making to automobile decoration. The director of the company refused to answer questions from CBF with the excuse of “being too busy with transformation”.
Zhang Youwen said that oversupply was now haunting companies in traditional industries and the key to transformation lied with the upgrade and evolvement of products. If they want to stay in the same industry, they can lengthen their industrial chains and equip them with brands, technologies and sales network. They should not be simple OEMs for forign brands. In addition, it is a shortcut for Chinese companies to acquire the main enterprises of multinationals through overseas mergers and acquisitions.
Then, according to Jiang Liuhong, Donglong has actually been planning transformation for long. Substantial measures have been taken as the company began to develop self-owned brands after the financial crisis in 2008. But now, the self-owned brands can only contribute to less than 20% of the sales revenue and the rest still come from manufacturing products for Adidas, H2M and other foreign brands.
In her opinion, the ways to resist the crisis of OME include the further devotion to self-owned brands and the extension of its industrial chain. Donglong is going to get involved in the production of cloth – the upper part of the clothing industry. It will also build its own distribution channels. The lengthened industrial chain will offset the loss in manufacturing clothes. Meanwhile, it will increase its investment in research and development, making its products more competitive.
However, Jiang Liuhong admitted that the transformation is a difficult process. “The biggest problem is that the shopping malls in China usually charge high entry fees for products, increasing the difficulty for us to build distribution channels. The logistics cost is higher than foreign countries as well. In addition, presently the Chinese designers cannot compete with foreigners in innovation and creation. And what they design cannot gain the approval of consumers. Even the examination could be a problem as the disparity among technological level and device of different places might lead to the disparity of results, which could confuse the manufacturers.” In addition, the new Law of Labor Contract pushed up the labor cost and gave workers more freedom to leave the employer, making it harder to organize normal production.
“The industrial transformation is a gradual and progressive process and will not be finished within one night. The government should give reasonable guidance and corresponding support in that field too,” Zhang Youwen said.
During the eight years Wilson Cheung Chi was chief financial officer of clothing firm Win Hanverky (3322), he helped fashion some major changes, from engineering a flotation in 2006 to assisting in acquisitions and disposals .
But as he embarked on putting his stamp on the company, Cheung was in turn influenced by its culture.
After acquiring niche street-fashion label D-mop in 2011, Cheung did something that is rarely done by executives of listed firms.
He gave up his formal attire - ties and laundry-pressed shirts - and turned himself into a moving advert for D-mop's products, even while meeting investors.
Cheung spoke with passion about his Y-3 sneakers, Evisu jeans and Blues Heroes shirt that he was wearing.
Win Hanverky, which distributes Evisu and Y-3, is a cross between Adidas and Japanese designer Yohji Yamamoto. It also owns the Blues Heroes brand.
It did take some time for Cheung to dress down from his usual jacket and tie. At first, he felt physically uncomfortable wearing slim or even skinny cuts that are so characteristic of trendy clothes.
But he was fortunate as his first investor meeting, dressed in the niche street fashion, got off to a flying start.
They said: "Wilson, you look fabulous!". After that he felt obliged to wear such clothes.
Now, his wardrobe comprises of mostly stylish items and gone are the staid ties and suits.
Cheung said he did not have a stylist to help him pick the right pieces, but has since acquired a taste for
trendy dressing by observing his employees and business partners.
"We often co-operate with stylists and people in the showbiz industry who are at the top of the fashion pyramid," he said.
Cheung said Win will soon be working with a star stylist on a mainland singer's image. "So as I work, I pick up a sense of fashion, bit-by-bit, and learn how to match clothes."
In the past, Cheung tended to dress casual when he was not at work. "I could walk on the street and be perfectly comfortable with flip-flops, tee-shirt and shorts."
Now, even when he's off from work, he still dresses up in limited edition items and niche clothing.
"I'm in the process of assimilating fashion ... but it takes time. Some have suggested that I dye my hair in bright colors. I told them I'll have to try and get used to it before I really do something like that."
The general trend is, he said, that the financial industry is becoming less formal about what they wear. "Some fund managers no longer wear ties. So I don't actually feel that odd."
People do not mind if you look casual, but care more about how you deliver results, he added.
Cheung also pays a lot of attention on how his staff dresses.
"I will rebuke them if they do not wear the company's products. I want them to stand by the company's image and ideas. Of course, we give them an allowance to buy clothes," he said.
Physically immersing himself into a part of the label's operation can be attributed to Cheung's devotion to his work.
"When you are leading a project, it is not possible to get your team 100 percent behind you if you don't feel it that way," he said.
When our staff deal with customers, wearing your product is a great way to promote your brand, so why waste the chance, he adds.
The dress rule that Cheung enforces may not be uncommon in brand-heavy enterprises. But what he is looking at is how ideas are being communicated to customers and also among staff.
Cheung said that in his entire business career he was always learning and practicing different forms of communications.
He has previously worked with ZF Machinery, private firm eBIS and an unit of China Mobile.
"In the German firm [ZF]], I learnt to make five-year plans and draw up a detailed division of labor. At my next job, an IT private enterprise, things moved very fast, and you had to get your intelligence spot on."
When he was chief financial officer of Aspire Holdings, an unit of state- owned China Mobile, all decisions had to have the support of almost every department involved and the parent firm .
"Even China Mobile's top management have to abide by these rules when they want to launch a new policy. It's a good place to learn about lobbying."
Cheung said the working pace is faster in local enterprises than in larger organizations, and there are times when decisions with the boss can be made over the phone.
In any case, you still have to learn how to "communicate your ideas in a 360-degree fashion," Cheung said.
First, it is with the boss, then to whoever you will be working with. "It's important for people to follow your ideas [so that] they can help you deliver what you want to achieve."
Cheung believes the message from Win Hanverky is simply the D-mop spirit.
"Bring in less well-known designers onto the stage and act as a venture- capitalist in the fashion industry."
Win Hanverky made a bold move when it decided to walk away from its traditional sportswear manufacturing business, whose clients included Adidas and Reebok, and also stopped distributing labels such as Umbro and Diadora.
"It isn't easy to sell second-tier sports labels, especially in China," Cheung explained.
In the sportswear industry, there are two dominating brands - Adidas and Nike - with Puma, a distant third.
But the world of fashion is much bigger, he said.
"Admittedly there are some fast fashion outfits that are running big, but they belong to the mass segment.
There are plenty of segments in fashion, and they are not very much interchangeable, he said, adding, they target avant garde customers and those who insist on taste. "Those who wear Yamamoto probably wouldn't go to Zara or H&M."
Although Cheung insists that fast fashion brands are not competing with his company, there are some ideas which he likes to borrow from them. For instance, supply chain management.
The idea of making two season's lines a year no longer works, he said. "We aim to have at least four to six fashion lines for each brand every year in order to cope with ever-changing fads. We produce small orders each time in order to reduce the chances of stocking unsold clothes."
This also helps to promote the idea of limited edition which serves two purposes, he added. "First, for customers to get a sense of uniqueness, and, second, to keep inventories low."
In a fast-changing market and where rents are high, the cost of making mistakes, say, in wrongly selecting the season's products, is very high, Cheung said.
Since Win Hanverky took over a majority stake in D-mop from the financially troubled Shine Gold in 2011, it underwent a year-long restructuring.
One of the most radical moves was to shut all D-mop outlets in the mainland, he said.
"We wanted to get right all the details of doing business in the mainland, including store decoration, the music being played in shops and how store assistants talked to customers."
After an intense round of restructuring plans are afoot to re-open the first flagship store this month in TaiKoo Hui mall in Guangzhou.
"We want to make sure all stores reflect the D-mop spirit that we hold."