OEM or not a good business?
Wen 丨 Hua Shang Tao Luo Ah Yun
Compared with emerging industries such as the Internet to make "quick money", the traditional industry of footwear is often looked down upon, while the considerable productivity of shoemaking enterprises in Taiwan and the steady growth of revenue all year round have made people think about the OEM business again.
【Shoe King】
On May 6, 2021, the Forbes Taiwan Rich List was released.
The richest man in the world is not Terry Gou, the founder of Foxconn, the world's largest foundry, nor the Wei family behind food giant Master Kang, but Zhang Congyuan, who started by making shoes and has a net worth of $13.8 billion (about 89 billion yuan).
Maybe you don't know who Zhang Congyuan is, but the Converse, Nike, and Puma you wear on your feet are likely to come from his foundry, The Warley Group.
Just over a month ago, Huali Group successfully went public and became the first A-share sneaker manufacturer. The prospectus shows that even in 2020, which was affected by the epidemic, its net profit was still as high as 1.876 billion yuan, an increase of 7.27% year-on-year.
▲Huali Group was listed on the ChiNext board of the Shenzhen Stock Exchange
Born in 1948 in the countryside of Yunlin County, Taiwan Province, Zhang Congyuan's father made a living by farming in his early years, he graduated from Chiayi Agricultural School at the age of 18, and entered a shoe factory in Yunlin at the age of 20 to work as an ordinary administrator. After he became famous, the media went to interview his fellow villagers and classmates in Tainan and talked about his achievements, which were most described as "unexpected".
With experience in the management of the shoe factory, in the 1980s, Zhang Congyuan decided to start his own shoe factory, Jingxin Shoes. Due to limited funds, he could only buy pig houses and farmhouses as factories. "When my family has no money, I live without money, and when people buy good lots and buildings, I buy pig houses and farmhouses in the countryside."
If there is not enough funds, it is natural not possible to choose products with high thresholds and difficulties in production. In an interview with the media, Zhang Congyuan said: "If football shoes and basketball shoes are the first and second profit kings in the shoe model, sulfur shoes (canvas shoes) are probably the first to last." ”
What makes him start and stand firm is precisely this "least profitable" sulfur shoe.
Because Taiwan is rich in rubber and cheap materials, if you produce ordinary sports shoes, there is almost no need for research and development costs; and the vulcanized shoe sole needs to be crosslinked in a certain temperature and pressure environment, so that the rubber sole and sulfur are crosslinked, so that the two are firmly combined, the quality is not easy to be guaranteed, and many shoe companies have given up.
There is only one logic for Zhang Congyuan to change his original idea and choose to do the opposite with his peers:
Doing business that others don't do means less competition, and as long as you do it well, you can survive.
"I don't think it's hard to do the remaining orders that others pick... The point is, you have no determination to do better than others. Zhang Congyuan said.
Compared with "Huali", Zhang Congyuan is better known in Taiwan as his shoe factory "Hongfu". Hongfu is the world's second largest shoe factory with 150,000 employees worldwide and the world's largest sulfur shoe factory.
Personal success is inseparable from the creation of the times and the environment, and Zhang Congyuan's story is only a microcosm of the development of the footwear industry in Taiwan.
【Rise】
In 1832, an Irishman immigrated to the United States, and when he was working as a printer in the small town of Massachusetts, he stood in front of the machine every day, and because of the pain of standing for a long time, he put a rubber leather pad on the sole of his foot, and the pain was significantly reduced. When he returned home, he simply fixed the rubber leather to the sole of the shoe, and the rubber sole shoe was invented.
Taiwan, which has a huge rubber production, has become the "raw material base camp" for rubber soles, which can be said to be a natural thing.
During World War II, the Japanese established a large rubber factory in Taiwan, imported natural rubber from Nanyang, and mass-produced tires and rubber shoes.
In 1955, Hollywood film star James Dean became popular with the movie "Rebel for No Reason", wearing jeans and white canvas shoes, making canvas shoes (that is, sulphur shoes) once a symbol of adolescent rebellion and hippie spirit, and became popular.
▲ The image of James Dean wearing canvas shoes
Since then, Converse and Puma have carried out technical research on canvas shoes, and through sulfur vapor technology, the upper and sole have higher strength and elasticity, which makes it possible for sulfurized shoes to be mass-produced and become popular consumer goods.
The earliest OEM enterprise for Puma and Converse was Zhang Congyuan's "Hongfu".
In the early 1970s, developed countries in Europe and the United States gradually entered the post-industrial era, the market was in a state of high competition, and the manufacturing industry was transferred outward to reduce manufacturing costs, which became the common way out for European and American enterprises. Central Taiwan, which has cheap labor, has become the "land of choice", and the shoe industry has been able to grow rapidly.
In 1971, the number of shoes exported in Taiwan reached 100 million pairs. In 1976, the external sales of The footwear industry in Taiwan surpassed that of Italy, becoming the world's largest footwear export region. The footwear industry, together with the two major industries of electronics and textiles, is believed to have created an economic miracle in Taiwan in the 1970s.
In the 1980s, Hongfu, Baocheng, Fengtai, Yuqi, Longdian, Qinglu, Kainan, Jiuxing and other internationally renowned foundry shoe factories emerged in Taiwan, and Taiwan also won the reputation of "shoe kingdom".
In 1986, the total volume of footwear exported in Taiwan reached its peak, exceeding 800 million pairs. At that time, the global population was about 4.9 billion, which means that 1 in 6 people in the world can wear shoes made in Taiwan.
▲A shoe factory in Taiwan in the 1970s and 1980s
In 1987, the export value of rubber products in Taiwan totaled NT$7.46 billion (about 287 million US dollars), of which the export value of rubber shoes was NT$3 billion, accounting for almost 1/2.
However, the economy of the Taiwan region, which relies on the rapid rise of "foundries" in various walks of life, has gradually imbalanced its industrial structure due to long-term excess output, and at the same time has been greatly affected by the export market, which has laid hidden dangers for its subsequent industrial dilemma.
In 1988, Taiwan's economy overheated, and the Appreciation of the Taiwan Dollar against the US dollar accelerated, resulting in a sudden chill in the exports of the footwear industry. From January to April of this year, Taiwan's exports of shoes to the United States decreased by 29% compared with the same period of the previous year.
According to the statistics of the Taiwan Footwear Association, in 1988 and 1989, more than 600 production lines in Taiwan stopped production.
Exports are cold, production is trapped, the route of "small profits but large sales" is difficult to sustain, and the footwear companies in Taiwan, which controls more than 80% of the world's brand shoe production, have set their sights on the other side of the strait.
【Migration】
In the 1990s, many Taiwanese shoe companies moved their factories to the mainland, including Zhang Congyuan's enterprises.
He co-founded the Niigata Group and engaged in the OEM of sneakers in the mainland. In 1995, the company set up its headquarters in Hong Kong and successfully listed, with Zhang Congyuan owning 15.7% of the shares.
Cheap and sufficient labor was the advantage of the mainland to attract shoe companies in Taiwan at that time. According to the data, in 1987, the wages of shoe workers in Taiwan were 1.55 US dollars / hour, while the wages of mainland shoe workers were only 1.75 US dollars / day.
Coupled with the policy advantages of reform and opening up, in a very short period of time, the mainland footwear industry has copied the glory of the footwear industry in Taiwan.
Guangdong and Fujian provinces, the closest to Taiwan, have become destinations for the transfer of the footwear industry in Taiwan, and cities such as Dongguan, Putian and Jinjiang have become the beneficiaries of this wave of industrial transfer.
Taking Putian as an example, before Taiwanese businessmen entered Putian, Putian was already the center of the shoe industry in Fujian Province. In 1986, the total output value of putian shoe leather industry exceeded 100 million yuan, accounting for more than 70% of the province, and after Taiwan businessmen brought a large number of international orders, it broke out at an astonishing speed of development.
In 1993, Putian had more than 100 shoe companies, producing more than 100 million pairs of shoes per year; by 1996, the total output value of Putian's footwear industry had risen to 4.29 billion yuan.
However, the brilliance created by relying on labor advantages and following the FOUNDRY model is also short-lived.
To put it bluntly, the OEM still earns hard money. According to a survey by the International Consumer Alliance, in the cost of a pair of shoes, the gross profit of the factory accounts for 2%, the labor cost accounts for 0.4%, and the labor cost accounts for 20% of the factory gross profit.
The rise in raw material costs is inevitable, and factories can only make a fuss about this 20% of the labor if they want to increase net profits.
Thanks to the regional economic development brought about by the rise of manufacturing, the rise in labor costs in the mainland has once again made foundries inevitably fall into a strange circle. In 2001, the minimum wage in Fujian province was 380 yuan / month, while the minimum wage in Vietnam at that time was about 164 yuan / month.
In 2012, sneaker giant Adidas announced the closure of its only own factory in China and the relocation of production lines to Southeast Asia, kicking off a new wave of industrial transfer. Footwear companies in Taiwan have also begun to shift to Southeast Asia, where labor costs are cheaper.
【Future】
Labor costs are rising, and shoemaking alone can no longer bring considerable profits.
After the listing of Xinfeng Group, where Zhang Congyuan belongs, it began to diversify its development and create a number of sports brands, and even increased investment in the real estate industry, and the proportion of the footwear part of the business in the overall business became smaller and smaller.
In July 2013, Xinfeng Group announced that it would sell all of its equity interest in Yiming Investment for a total consideration of 429 million yuan, and its main business was the manufacture of footwear products.
The person who took over was the Zhang Congyuan family. Zhang Congyuan, who started by making shoes, was obviously not willing to give up the "old business" that had accumulated for many years, and he renamed the shoemaking business of Xinfeng Group to "Huali" and began to operate independently.
Shortly after taking over, the Zhang Congyuan family first acquired 15 Vietnamese factories and Dominican factories through the family-controlled Hong Kong company in China, and acquired the trading business of 24 trading companies, and then acquired 15 companies in Hong Kong, China through a subsidiary of Huali Shares.
At present, most of The employees of Huali Group are in northern Vietnam, and the proportion of manufacturing personnel in mainland China and Taiwan is only 0.3%. As of the first half of 2020, the company's self-produced output totaled 75.4 million pairs, of which 74.61 million pairs were produced in Vietnam and 800,000 pairs in Dominica, accounting for 98.9% and 1.1% respectively.
▲The development history of the main customers of Huali Group
Image source: Huali Group Prospectus
Zhang Congyuan's consistent play of "small profits and high sales" determines that the low labor force in Southeast Asia will be the key to Huali's profits.
In the first half of 2020, the average unit price of Huali's sales to Converse was 72.50 yuan / pair, and the average unit price of sales to Nike was 80.20 yuan / pair, while another factory was mainly concentrated in Taiwan and the mainland's shoe company Fengtai, and the unit price of sales to Nike was about 120 yuan to 140 yuan, nearly 2 times that of Huali.
In terms of output, Huali is also far ahead among a number of shoe companies in Taiwan. In 2019, the per capita shoe production of Yuyuan, Yuqi and Fengtai was 929 pairs/year, 927 pairs/year and 792 pairs/year, respectively, while Huali reached 1378 pairs/year.
In addition, compared with other Southeast Asian countries, Vietnam has the advantage of being close to China, which can effectively save transportation costs and have low import tariffs on European and American countries, which is why Huali chose to set up its factory here.
In 2018, the revenue growth rate of the shoe manufacturing business of several major shoe companies in Taiwan, such as Yuyuan, Yuqi and Fengtai, was -3.12%, -3.91% and 9.41% respectively, with an average growth rate of 0.79%, but Huali's revenue achieved a high growth rate of 23.96%.
According to the disclosure of The prospectus of Huali Group, the number of employees of Huali Group in 2020 is close to 136,000, the number of shoes is more than 180 million pairs, the operating income exceeds 15 billion yuan, and the net profit reaches 1.821 billion yuan.
Huali's considerable productivity and perennial steady growth in revenue have made people see the amazing resilience of the traditional industry of shoemaking and begin to re-understand the business of "foundry".
However, there are two sides to everything, people see the glory, what they can't see is the crisis.
Under the influence of the epidemic, European and American sneaker brands have cut orders. The revenue of Huali's two main customers, Nike and VF, fell significantly. Nike reported that the net profit in the fourth fiscal quarter of 2019 directly lost 5.634 billion yuan; VF revenue also plummeted, with revenue falling by 47.51% in the first fiscal quarter of 2020.
Vietnam, which has the advantage of labor force, has also been exposed to be caught in a "labor shortage".
VnExpress pointed out that in Ho Chi Minh City and Binh Duong province, the monthly salary of workers in textile and shoe factories ranges from 5 million to 12 million VND including social insurance and lunch, but due to the impact of emerging industries such as the Internet, even if they pay 15 million yuan (about 4200 yuan), it is still difficult to find workers.
At the same time, the emerging economy is surging and some young people are also accelerating their escape from traditional manufacturing. The prospectus of Huali Group's listing also shows that in the past three years, the company's turnover rate was 22.04%, 22.83% and 27.31%, respectively, and at least 20% of employees left every year, and the turnover rate climbed.
Following in the footsteps of Taiwan's footwear industry, Zhang Congyuan, who started from scratch and relied on the fast pace of chasing cheaper labor, is now at the top of the "dark horse posture", but under the general trend of accelerating the disappearance of labor cost advantages, there will only be more challenges in the future.
The traditional "OEM" is still profitable, but when the "low-cost labor" is no longer the advantage of the shoe industry, can the Foundry enterprises in Taiwan, represented by Huali, continue their shoe kingdom? In other words, whether or not to reduce the dependence on labor will largely determine the future of "oem".
In fact, Huali is also planning for its future, that is, from OEM production to design and OEM production, and gradually has a strong product development and design strength.
【References】
[1] Exclusive Interview: From Pig House Startup to The New Richest Man, BusinessWeek
[2] "Dismantling the "First Share of Sneaker OEM" Huali Shares: Only 2% of R&D Investment, Binding Big Names Such as Nike, What is the Competitive Advantage" Yuanqi Capital
[3] "Taiwan's new richest man, making shoes to make a hundred billion | tide" huge tide business review
[4] "Taiwan's Export Industry: The Rise and Fall of the Footwear Industry", Journal of Hangzhou Normal University
[5] "Recent Developments in Taiwan's Footwear Industry" Western Leather
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