Anthea Wong

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Anthea Wong
China
Anthea Wong, Partner,Tax and
ChinaBusiness Advisory,
PricewaterhouseCoopers LLP
www.pwc.com
Expanding into the China market
31 January 2012
Anthea Wong
Tel: +8610 6533 3352
Email: [email protected]
Agenda
1. Market overview
2. Competitive landscape
3. Latest developments
4. Performance of major players
5. Expansion strategy of foreign players
6. Challenges of expanding in China
China Apparel / Accessories Market
PwC
3
Market overview
Sales growth of apparel expected to continue…

According to the National
Bureau of Statistics
(NBS), the total retail
value of apparel by
wholesale and retail
enterprises in 2010 grew
by 20.07% year-on-year

Favourable factors for
apparel market:
•
Improving consumer
confidence
•
increasing income
•
strong government
initiatives to boost
domestic consumption
China Apparel / Accessories Market
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Market overview (Cont’d)
Expenditure on clothing is increasing steadily each year…

Annual per capita disposable
income of urban households rose
by 7.8% in real terms to 19,109
yuan in 2010

Annual net income per capita of
rural households reached 5,919
yuan up by 14.3% in real terms.

Per Capita Annual Consumption
Expenditures on clothing of Urban
Households rose by 12.44% in real
terms to 1,444 yuan in 2010

Per Capita Annual Consumption
Expenditures on clothing of Rural
Households rose by 13.55% in real
terms to 264 yuan in 2010
China Apparel / Accessories Market
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Market overview (Cont’d)
Expenditure on clothing is increasing steadily each year (Cont’d)
 Urbanites on average spent
10.72% of their annual
expenditure on clothing
(1,444 yuan) in 2010,
slightly increased from
10.47% yoy in 2009
Per Capita Annual Consumption Expenditures of
Urban Households for 2010
Education,
1628, 12%
Miscellaneous,
499, 4%
Clothing,
1444,11%
Transportation,
1984, 15%
Food
 Rural consumers spent
6.02% of their annual
expenditure on clothing
(264 yuan), slightly
increased from 5.82% yoy
in 2009
Residence
Food, 4805,
35%
Medical,
872, 6%
Facilities,
908, 7%
Residence,
1332, 10%
China Apparel / Accessories Market
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Clothing
Unit:RMB yuan
Household
Facilities,Articles and
Services ("Facilities")
Medicine and medical
Service ("Medical")
transportation and
communications
("Transportation")
Recreation,education
and Cultural services
("Education")
Miscellaneous and
Services
("Miscellaneous")
6
Market overview (Cont’d)
Climbing costs and downward clothing price pressure pose
challenges to the clothing industry…
– Escalating cotton price: rose by over 20% between February and July 2010
– Rise in minimum wage level in more than 22 provinces/municipalities since January
2010 creates pressure on the labour-intensive apparel manufacturers
– Appreciation of RMB reduced the competitiveness in price in international market.
Apparel companies are facing intensifying competition as many export-oriented
enterprises strive to increase domestic sales
– Rise in interest rate and commercial banks' reserve fund rate results in heavy burden on
request of capital for textile and apparel companies
– Clothing price dropped by 2% yoy in 2009 and the downward trend has continued in the
first eight months of 2010
– Some branded apparel companies are able to raise their price tags, many smaller
companies continue to face squeezing margins
– Retailers are forced to improve operational efficiency and to market more heavily in
order to increase store footfall and raise purchasing rates
China Apparel / Accessories Market
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Competitive landscape (Cont’d)
Domestic Firms

China’s apparel market is highly fragmented

Domestic brands dominate in the mass market. Domestic players generally have more
extensive sales channels, especially in the lower-tier cities and the rural market, and have
more competitive pricing

The strong competition in the 1- and 2-tier cities is driving retailers to gear up their plans
for regional expansion

There is a steady stream of new foreign and domestic entrants adding to the competitive
frenzy

Smaller, successful brands and chains will likely become targets for increased mergers and
acquisitions activity in a market that will need to begin consolidation

A number of domestic players have strived hard to move up the value chain. Established
players are spending more resources on brand-building
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Competitive landscape (Cont’d)
Domestic Firms (Cont’d)




There were 10 apparel companies in the
Most Valuable Chinese Brands 2010.
Lining (sportswear) is the most valuable
Chinese apparel brand in 2010; its brand
value rose from 5.5 billion yuan in 2009
to 9.9 billion yuan in 2010
It appears that apparel companies in
Fujian are very strong in branding; 6 out
of top 10 most valuable apparel brands are
based in Fujian
On the other hand, domestic brands are
virtually absent in China’s luxury apparel
scene. Despite some domestic players
such as NE.TIGER striving to go
upmarket, it is still a long way to go for
domestic players to rival their foreign
counterparts
Rank
1
2
Brand
Brand
% of
Product
HQ
value
market
category
location
(billion Apparel
value
Most Valuable
Brand in China, 2010
yuan)
Lining
9.9
38
Sportswear
Shanghai
Anta
9.6
35
Sportswear
Xiamen
(Fujian)
3
Metersbon
we
8.3
35
Casual wear
Shanghai
4
Heilan
4.3
36
Menswear
Wuxi
(Jiangsu)
5
Bosideng
3.7
30
Down wear
Suzhou
(Jiangsu)
6
361degrees
3.4
30
Sportswear
Xiamen
(Fujian)
7
Semir
3.2
29
Casual wear/
Children wear
Shanghai
8
Xtep
2.9
25
Sportswear
Quanzhou
(Fujian)
9
Peak
2.8
25
Sportswear
Quanzhou
(Fujian)
10
Septwolves
2.5
32
Menswear
Xiamen
(Fujian)
Source: Hurun Research Institute, Li & Fung Research Centre
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Latest developments
 Department stores and specialty stores are the major distribution channels for
branded apparel
 Online apparel retailing gaining interests
 Growing attention to lower-tier cities
 Franchise operation is popular, especially among companies with mass market
positioning
 A few established domestic players embark on overseas expansion; emerging
markets are the core focus
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Performance of major players
Growth in apparel sales volume in major department stores in the first half
of 2010 outpaced that of 2009; ladies wear continues to be the largest subsector …
Volume sales growth of ladies’ wear was the highest, reaching 18.53% yoy. Men’s suit and children’s
wear also increased by 16.44% yoy and 11.61% yoy respectively.
Retail sales volume of various apparel categories in major department stores. (2009 - the first half year of 2010)
Overall
Ladies’ wear
Knitted underwear
Children’s wear
Woolen wear
T-shirts
Thermal clothing
Trousers
Men’s suit
Men’s shirt
Jackets
Denim wear
Leather wear
First half year of 2010
Million pieces
Yoy % growth
222.2
11.71
66.1
18.53
28.7
6.50
17.1
11.61
12.9
-4.80
7.0
2.31
4.2
-0.18
5.9
6.92
6.1
16.44
5.3
9.81
3.3
6.18
2.5
5.39
0.5
-10.44
2009
Million pieces
432.3
121.3
58.8
31.4
25.8
14.7
10.3
11.1
10.7
10.3
6.5
4.8
0.9
Yoy % growth
7.38
8.18
4.60
9.58
5.62
5.43
-8.43
-2.64
11.41
1.49
2.92
3.77
6.39
(Source: China National Commercial Information Centre)
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Performance of major players (Cont’d)
Market concentration of most sub-sectors is generally low

Most of the sub-sectors are highly fragmented; the top 10 brands in the sub-sectors such as jackets
and T-shirts accounted for less than half of the total market share in 2009. Maternity wear is the
most concentrated sub-sector, which the top 10 brands accounted for nearly 90% of the total
market in 2009.
Market share of top 10 brands of selected sectors, 2009
Sub-sector
Men’s suit
Men’s shirt
Ladies’ wear
Children’s wear
Jackets
T-shirts
Denim wear
Sportswear
Ladies’ underwear
Maternity wear
% Total market Share
40
50
40
50
20
25
65
85
75
90
(Source: China National Commercial Information Centre)
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Performance of major players (Cont’d)
Recent performance of individual sub-sectors (Top 5 players each)
Men’s suits – share of total sales value, 2009
Men’s shirts – share of total sales value, 2009
Brand
Youngor
Romon
Firs
Saint Angelo
Selon
Brand
Youngor
Rouse
Qinman
Goldlion
Pierre Cardin
% share of total sales value
14.11
3.58
3.49
3.46
3.21
(Source: China National Commercial Information Centre)
Ladies’ wear – share of total sales value, 2009
Brand
ONLY
VERO MODA
Girdear
Etam
Ochirly
% share of total sales value
9.06
8.22
4.56
3.13
2.80
(Source: China National Commercial Information Centre)
% share of total sales value
8.17
8.01
7.20
6.38
5.29
(Source: China National Commercial Information Centre)
Children’s wear – share of total sales value, 2009
Brand
Paclantic
Souhait
Dadida
Adidas
Yaduo
% share of total sales value
6.53
6.18
6.10
5.89
5.53
(Source: China National Commercial Information Centre)
China Apparel / Accessories Market
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Performance of major players (Cont’d)
Recent performance of individual sub-sectors (Top 5 players each) (Cont’d)
T-shirts – share of total sales value, 2009
Brand
Montagut
Goldlion
Pierre Cardin
Jeanswear
Playboy
% share of total sales value
4.711
4.06
3.06
2.78
2.08
(Source: China National Commercial Information Centre)
Jackets – share of total sales value, 2009
Brand
Jack & Jones
Jin Ba
JOE ONE
Ermenegildo
Zegna
Septwolves
% share of total sales value
3.10
2.95
2.72
22.72
Denim wear – share of total sales value, 2009
Brand
Boton
Kipone
Levi’s
Weipeng
LEE
% share of total sales value
13.95
9.59
7.56
6.63
5.77
(Source: China National Commercial Information Centre)
Sportswear – share of total sales value, 2009
Brand
Nike
Adidas
Lining
Kappa
Qiaodan
% share of total sales value
33.39
27.21
10.55
9.05
2.22
2.56
(Source: China National Commercial Information Centre)
(Source: China National Commercial Information Centre)
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Performance of major players (Cont’d)
Recent performance of individual sub-sectors (Top 5 players each) (Cont’d)
Ladies’ underwear – share of total sales value, 2009
Brand
Aimer
Embryform
Maniform
Gujin
Wacoal
% share of total sales value
15.13
13.66
12.22
9.54
5.47
(Source: China National Commercial Information Centre)
Maternity wear – share of total sales value, 2009
Brand
O.C.T.mami
Hui Bao
Tianxiang
Sunlight Baby
Gennie’s
% share of total sales value
27.45
25.29
9.00
8.81
5.92
(Source: China National Commercial Information Centre)
China Apparel / Accessories Market
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Expansion strategy of foreign players
Major considerations

Which location is the best fit to the business strategies?

What is the capital commitment?
 What should be the appropriate investment holding structure?
 Who/where are the targeted customers?
 What is the business expansion plan in China?
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Expansion strategy of foreign players (Cont’d)
Observations
 Early movers
−
−
−
−
Wider and more established retail network
Already penetrated in 2nd tier and 3rd tier cities
More flexible modes of operation, e.g. JV, franchise
Customers are more familiar with and loyal to their brands
 Second batch entry
−
−
−
−
Entrance after CEPA/WTO market opening
WFOE running self-operated stores
Mostly in 1st tier cities and are catching up in lower tier cities
Usually adopt high profile marketing strategy to establish brand names
 Later comers
−
−
Tend to consider partnerships with local players
Trademark licensing/franchising for quick market penetration
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Expansion strategy of foreign players (Cont’d)
FICE – A mature and “all-in-one” distribution model
Commission
Agent
(excluding
auction)
Wholesale
FICE
Retail
Franchise
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Expansion strategy of foreign players (Cont’d)
Entering the market: M&A vs New setup
M&A
New Set-up
• No need to start from scratch
• Full control in management and
operation
• Established distribution
network and market share
• Existing business relationships
• Not bound by non-competition
clause which usually applies in
M&A deal
• Readily available human
resources
• No hidden tax and legal liabilities
or transaction tax cost
• May inherit hidden tax and
legal liability of old entity under
share deal
• Takes time to build up
distribution network, foster
business relationship, etc
China Apparel / Accessories Market
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Expansion strategy of foreign players (Cont’d)
Entering the market: WFOE vs JV
WFOE
JV
• Full control of management and
operation
• Leverage on the local partner’s
business relationships
• No need to disclose business
models / trade secrets to the local
partner
• Make use of the local partner’s
distribution network
• No need to share profits with the
local partner
• WFOE not allowed to distribute
certain products, e.g. CD/DVD –
limited to 49% CJV *
• Help obtain premium retail
locations through the local partner
• Consent required from the local
partner for business operation
* Qualified HK companies under CEPA can set up majority JV with maximum ownership of 70% to sell CD/DVD.
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Challenges of expanding in China
Overcoming the challenges of expanding in China…
Foreign investment policy
Acute competition
Cumbersome approval
process
• “Retail of general merchandise” being
removed form the encouraged category of
the 2007 Foreign Investment Guidance
Catalogue
• Compete for locations – rental, down payment
• Compete for customers – quality, style, price
• Compete for human resources – remuneration
• Branch set-up across province/municipality involves
authorities in both the FICE’s location and the branch’s
location
• Local authorities vary in experience and exposure
• Documentation requirement and approval time may
vary
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Challenges of expanding in China (Cont’d)
Overcoming the challenges of expanding in China…
Government bureaucracy
Branch vs separate FICE
Local protectionism
China Apparel / Accessories Market
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• Involve authorities from district, municipal and
provincial level
• Involve different officials for:
− assessment of the appropriateness of the retail
network and locations
− reviewing the branch set-up applications
− business license application
− post-establishment registrations
• Operation and tax considerations
• Local authorities preference
• Loyal to local brands
26 September 2011
22
Challenges of expanding in China (Cont’d)
Challenge of cross-border cash management
Overseas
• Dividends
• Service fees
• Capital increase
• Trade finance
• Foreign debt
• Royalty payment
• Trade finance
Forex Control
• Service fees
• Repayment of
•
•
•
China
•
shareholder’s loan
Capital reduction
Liquidation
Outbound investment
Outbound lending
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Challenges of expanding in China (Cont’d)
Forex management throughout the business life cycle
Most foreign
retailers in China
are in the growth
stage
Expansion
Growth
Seed
Mature
Exit
Established
Start-up
Cash flow into China, in particular in the Growth
& Expansion Stage, for
• branching out
• promotion/marketing
• working capital, etc.
Cash extraction at different stages
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Challenges of expanding in China (Cont’d)
Some tips…
 Choose the structure and right operation format
−
−
−
Sustainable and efficient structure
In line with corporate image
Support the pace of penetration
 Choose the right location
−
−
Fit the brand’s image
Strategy of opening flag-ship store
 Real estate development strategy
−
−
Partnership with local developers
Relationship building with local governments
 Marketing strategy
−
−
−
Localisation of the brand
National marketing campaign vs tailor-made marketing campaign
Market research on target customers’ behavioural patterns/ preferences
 Stay on top of changes in regulations and practices
−
−
FDI, tax, customs, forex
Relationship building
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Assistance you should be looking for….
Pathfinder Advisory
Services
Structure Setup &
Implementation
Restructuring
• M&A
• Spin off
• Equity transfer
•
•
•
•
•
Entry/expansion strategy
Location selection
Financing and cash repatriation strategies
Distribution & retail solutions
Government relationship building
• Foreign Invested Commercial Enterprise
(“FICE”)
• Other forms of WFOEs/JVs
• Setting up shops/ branches
• Licensing arrangements
Ongoing
Maintenance
• Business scope expansion
• Capital increase/decrease
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www.pwc.com
Office:
Fax;
Email:
+86 10 6533 3352
+86 10 6533 8800
[email protected]
Anthea joined the China practice of PricewaterhouseCoopers
in 1993. She leads a national team that specialises in
providing China regulatory advisory and implementation
services, ranging from market entry solutions, PRC structure
set-up, cash repatriation strategies to restructuring solutions,
such as equity transfer, M&A, liquidation, etc.
Anthea Wong
Beijing, China
Partner
Tax and China
Business Advisory
She is familiar with China’s foreign investment environment
and regulatory framework. She has hands-on experience in
assisting clients, especially those from the retail and
consumer sector, to structure their operations in China and
penetrate the market.
Over the years, Anthea has established close contacts with
China’s approval and registration authorities as well as major
industry bureaux at both central and local levels. She has
worked with many clients on enhancing communication and
fostering relationships with the Chinese government
authorities. She is also a frequent speaker in conferences and
seminars and a regular contributor to magazines and
professional journals on various topics of doing business in
China.