Anthea Wong
Transcription
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 PwC 4 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 PwC 5 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 PwC 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 PwC 7 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 China Apparel / Accessories Market PwC 8 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 China Apparel / Accessories Market PwC 9 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 China Apparel / Accessories Market PwC 10 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) China Apparel / Accessories Market PwC 11 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) China Apparel / Accessories Market PwC 12 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 PwC 13 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) China Apparel / Accessories Market PwC 14 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 PwC 15 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? China Apparel / Accessories Market PwC 16 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 China Apparel / Accessories Market PwC 17 Expansion strategy of foreign players (Cont’d) FICE – A mature and “all-in-one” distribution model Commission Agent (excluding auction) Wholesale FICE Retail Franchise China Apparel / Accessories Market PwC 18 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 PwC 19 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. China Apparel / Accessories Market PwC 20 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 China Apparel / Accessories Market PwC 21 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 PwC • 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 China Apparel / Accessories Market PwC 23 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 China Apparel / Accessories Market PwC 24 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 China Apparel / Accessories Market PwC 25 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 China Apparel / Accessories Market PwC 26 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.