The brand of flowing water, the foundry of iron

Image source @ Visual China

Text | Sunday Industry Analysis, author | Zero dew, edited | Snow white

We seem to be in an era where brands dominate everything.

Kantar's Consumer Index shows that in the consumer goods industry alone, a new product is born every 3 minutes. The brand is also constantly updated, created and removed from the shelves under the rapid change of products, until it disappears and falls.

But behind the ever-changing brand war, there is a group of foundry kings who are standing at the top and watching the scenery.

Whether it is a sporty man who likes Adi, Nike, puma, or a trendy youth who likes VANS and Converse, the shoes under his feet are likely to come from the same foundry company. Shanghai Zhenchen Cosmetics Foundry continues to export explosive models for Huaxizi and Perfect Diary, while also maintaining an amazing new speed for its peer oranges. Apple, Huawei, Xiaomi, and OPPO have competed in the mobile phone market and contributed a steady stream of orders for their foundry Foxconn.

You buy a four-piece set on Taobao, and you are blinded by thousands of brands, but no matter which brand you buy, the shipping place always seems to be Nantong, Jiangsu.

The characteristics of these industries have a fast word, rapid upgrading, rapid launch of products, and rapid competition for consumers, while foundry companies provide them with a set of diversified and stable design, production and manufacturing processes, thus laying the foundation for brand owners, setting up a template, and becoming the behind-the-scenes driver of the rapid operation of the market.

Foundry manufacturers, once at the end of the chain of industrial contempt, are standing at the top of the real economy with a strong posture, laughing at the inner volume of the brand war.

They began to use their secret hands to dominate the rapidly changing business landscape in the market.

01 Make a fortune in a muffled voice

Compared with ordinary enterprises, the "brand equity" of foundry enterprises is almost zero.

For example, when we buy a computer, we are often entangled in whether to buy HP or Dell, and rarely think about whether the machine is produced by Foxconn or the Compal computer foundry in Kunshan, China. However, as more and more foundry companies are listed, after the financial report is disclosed, people find that the income of the original super foundry has not lost to the first-line big names.

As the foundry king in the field of consumer electronics, Foxconn has become a foundry with great exposure under the blessing of "Apple Foundry". In mid-March, Foxconn announced its 2021 financial report data, with annual revenue of RMB439.557 billion and net profit of RMB20.010 billion, similar to the same period revenue of its old customer Xiaomi.

In the chip foundry industry, the revenue of the head foundry is even more pressing on customers.

TSMC, a well-known chip foundry company, made a fortune under the tide of lack of cores. According to the 2021 financial report, TSMC's annual revenue was 352.1 billion yuan and net profit was 133.12 billion yuan, surpassing his head customers, such as TSMC's second largest customer MediaTek, whose revenue in 2021 was 112.7 billion yuan, less than half of TSMC's. As of April 1, TSMC's market value was $543.29 billion, surpassing Tencent Ali and becoming one of the most valuable companies in Asia.

The case of TSMC may also make people feel that the head company has stepped on the outlet of the chip industry, but when the clothing line that has been deeply affected by the epidemic stalls and declines, the clothing foundry company stands still, and it can understand the advantages of the foundry company.

At present, many international brands, including ZARA, H&M, are in a state of decline in performance, H&M Group's 2021Q2 financial report shows that H&M Chinese mainland sales fell by 28% compared with the same period last year, but as a brand foundry of ZARA, Adi, Uniqlo and other brands, Shenzhou International's performance has risen slightly. According to the preliminary results released by Shenzhou in 2021, the annual revenue was 23.845 billion yuan, up about 3.5% year-on-year.

Such an example is also the relationship between Weilai Automobile and Jianghuai Automobile, Weilai is still losing money, but Jianghuai's foundry income is still rising.

Nowadays, the foundry field is emerging from the hidden corners, and gradually emerging foundry giants in various industries, and the financial data of these super foundries has broken the inertial thinking of "small profits" in the foundry industry.

Although becoming an internationally renowned brand operator will make people's blood boil, excellent foundry companies often need to be careful in words and deeds, and hide their names. However, the emergence of super foundries also confirms that although the OEM model may not be "soaring", it ensures "steady progress". In the division of labor in the industrial chain, the foundry at the end of the benefit can also gradually become a high-quality enterprise with high market value, low risk and guaranteed returns, and achieve a "win-win" with the brand side.

Behind the brand rise of guochao makeup brands, it is precisely because of China's mature cosmetics foundry supply chain.

On the domestic non-special cosmetics filing platform, it can be queried that the products of the new domestic brand Perfect Diary and Huaxizi are all from Shanghai Zhenxin Biotechnology, Guangzhou Zhongshan Northbel, South Korea foundry Cosmet and other foundries. At present, these factories not only receive domestic orders, but also are the choice of international big names such as Dior, Chanel, and Aquamarine Mystery.

The reason why foundries are so popular is mainly due to two advantages. On the one hand, the foundry is priced at the point of sale, which can reduce the pressure on inventory. On the other hand, the foundry focuses on the field of product manufacturing, the cash collection time is short, it can be said that the brands are constantly fighting in the front battlefield, and the foundry earns cash flow behind it.

In the beauty industry, Northbell is called a "mask production machine", and at the same time produces masks for many brands such as Nivea, Herborist, Hanhou and so on. According to Northbell's 2020 financial report, Northbell achieved revenue of 2.67 billion yuan. The revenue of other head beauty foundries is also around 2 billion yuan.

At the same time, the gross profit margin of these beauty foundries is not low, according to the survey of Anxin Securities Research Center, the gross profit margin of the cosmetics business of the domestic foundry is between 20% and 35%, and the gross profit margin of the brand owner is about 60%-80%, but it also includes 30%-60% of the marketing expenses. Although the foundry is less profitable than the brand side, compared with the risk of the brand side fighting on the front line, the foundry has a greater chance of survival.

It can be said that behind every redefined new brand, there is a diligent foundry that strives to move forward.

02 From parasitism to symbiosis

Since the 1990s, a large number of Enterprises in China have participated in the OEM model, and it can be said that OEM was once the soul of Chinese manufacturing. OEM products cover clothing, shoes and hats, household appliances, consumer electronics and so on. Over time, the distribution of foundries has gradually approached the power law.

That is to say, in the big wave of sand and sand, some foundries have achieved industrial leapfrog upgrading and climbed to a higher ecological niche in the industrial chain.

The basic form of the original oem is to process or assemble according to the product technical solution provided by the client, that is, the OEM form (OrIGinal Equipment Manufacturer ORIGINAL Equipment Manufacturer). And this is the root cause of the foundry being considered a way out for weak and small enterprises.

If the Internet still has memories, it will not forget that Foxconn was called a sweatshop a decade ago. This is because Foxconn's early R & D and design capabilities are weak, taking the OEM production route, and even need to produce products at the lowest cost through strict and even harsh factory management, staying in simple and repetitive labor, making enterprises stay in the stage of "screw tightening" for high-end electronic products.

Today's foundry enterprises are different from the past.

In the process of development, some OEMs, while looking for special resources, form their own core capabilities, and gradually stand out from the foundry enterprises, forming a competitiveness that is difficult for other enterprises to imitate and copy.

The process by which foundry companies have core competencies and the process by which OEMs are upgraded to ODM (OrIGinal DesIGn Manufacturer Original Design Manufacturer). ODM can provide all services from R&D, design to production, post-maintenance, and the consignor only needs to "flop the concubine" in the dazzling product sequence and then crown its own brand name.

Shenzhou International and Huali Industry in the garment industry; Northbell and Cosmet in the cosmetics industry; Foxconn in the consumer electronics industry, and Quanta Computer, which manufactures notebook computers, all of which have changed the underlying processing and production logic of "screw tightening" and developed into ODM foundries.

In this way, the foundry field has begun to be highly integrated, highly intensive, and often can achieve product supply for several brands. With the improvement of the production and design capabilities of the foundry, it gradually gets rid of the "parasitic" fate of becoming a brand appendage and "symbiosis" with the brand.

For example, no one could have imagined that Zhang Congyuan, who was at the top of the "2021 Forbes Taiwan Rich List", was only the owner of a foundry, and his Huali Industrial Footwear OEM enterprise broke the "small profit" pattern and relied on industrial upgrading.

Efficient production is an important reason why Huali stands out from many foundries. According to investment reports, It takes only 12-18 cycles from the initial design of a new shoe to the listing, while the average foundry requires more than 20 cycles. Nike, Vans, Puma, Columbia, Converse, UGG are all Service Objects of Warley, which means that as long as we open the shoe cabinet, there should be several pairs of "Warley shoes" inside.

The cooperation between foundries and big-name consignors is often mutually profitable. The foundry saves development costs and production cycles for the brand, supporting the brand's rapid iterative ability, and the foundry also accumulates its own production and research and development strength through production practices.

In 2012, Huali obtained an order from NIKE, and in the process of cooperation with NIKE, Huali learned advanced technology and management concepts from the latter, and then vertically integrated into the upstream textile and rubber industries and concentrated on research and development. The effect is also very obvious, at present, Huali is one of the few sneaker foundry companies that can achieve self-production of woven uppers, this technology was once Nike's proud unique technology, according to its prospectus, only this project in a single factory is expected to achieve annual sales revenue of 1.3 billion yuan, the internal rate of return reached 32.84%.

In emerging fields, the phenomenon of "symbiosis" is even more pronounced. Foundries have even become a kind of parent incubator.

Simmer International is a leading e-cigarette foundry located in Shenzhen, which has made rapid progress in the e-cigarette outlet. According to the 2021 financial report of Simao International, its 2021 revenue was 13.755 billion yuan, up 37.4% year-on-year, of which 91.5% came from the To B business.

If Lysmoore International's customers are listed, this figure would not be a surprise. E-cigarette brands such as RELX, Yuzu YOOZ, and Modi MOTI, which are well known to consumers, and international tobacco giants such as Philip Morris International E-cigarette Brand Company and Japan Ploom Tech are all major customers of Smore. According to Frost & Sullivan, the brand company's technology and production capacity are far inferior to Smore's.

The e-cigarette industry knows that Smore is the most important giant in the industry.

In the process of OEM upgrade to ODM, in addition to Huali Industry, Shenzhou International, Fengtai Enterprise and other clothing and shoe foundries have also done seemingly "low-end" business, and have also obtained a not low valuation in the capital market, and foundries like Smore have gradually begun to lead the development of the industry. Foundries have gradually freed themselves from the "parasitic" relationship, formed a new ecological model of "symbiosis" with brand owners, and become the formulators of the industrial pattern.

03 Foundry becoming a brand is an inevitable trend

In the process of integration with the world's industrial chain, China's foundry enterprises have launched the "Made in China" brand with excellent product quality. As the quality and technology of "Made in China" are recognized by more and more people, enterprises that oem international brands are gradually not satisfied with being "subject to people" in the manufacturing process, but instead challenge independent production and marketing.

Home appliance brand Galanz has achieved leapfrog development to its own brand after becoming the "top stream" in the OEM industry. Galanz was the first to oem Panasonic microwave ovens, and the extremely low OEM price made it known as the "price butcher" in the industry, and snatched foreign OEM orders from the United States, Japan, South Korea and other countries on a large scale. In the following years, Galanz became the "World Microwave Oven Manufacturing Center", accounting for more than half of the microwave oven market. By 2000, more than 240 well-known brands around the world were from Galanz.

The successful experience in the OEM field has also revitalized Galanz's own brand, because Galanz has a complete range of parts suppliers, low domestic labor prices and mastery of mature microwave oven production technology, in 2000 Galanz monopolized the microwave oven market with a price advantage of about 300 yuan per microwave oven. In 2004, Yu Yaochang, then deputy general manager of Galanz, said in an interview with Lianshang News that Galanz's microwave oven products had a market share of 55% in Europe and 84% of the market share in the United States. At present, home appliances manufactured by Galanz also cover from microwave ovens to air conditioners, washing machines, air fryers and so on.

In a global context, you will find that the story of Galanz is not special. Based on foundry, it is the consensus of global foundry enterprises to gradually realize the coexistence of foundry business and self-operated business.

South Korea's Samsung has also oem for microwave oven companies, and to this day has not completely abandoned the OEM business.

Today's new energy leader BYD, initially from the OEM Nokia mobile phone into the manufacturing industry, so far the mobile phone OEM still accounts for half of THE REVENUE of ATD, 40% in 2021, recording a mobile phone FOUNDRY income of 86.45 billion, and its automobile manufacturing sector of 112.49 billion annual income, the gap is not large, in the country can be regarded as second only to Foxconn's foundry giant, its manufacturing capacity, during the epidemic period can even temporarily switch to the mask production line.

Among the many factors that Samsung and BYD have achieved as internationally renowned brand owners, it is difficult to ignore the favorable impact of corporate foundry experience on the development of brands. When the private brand surpasses the oem status, consumers will not even remember that BYD and Samsung are also foundries.

Nowadays, the production of independent brands by the foundry can be said to be an extra leg to walk, which has a pull-up effect on the company's performance. For example, Coworth, who works on a vacuum cleaner, now relies on sweeping robots to the top of the vertical product list; Henglin shares for IKEA foundry chairs have become "flat replacement" hot in the Little Red Book.

The person in charge of netease koala global factory store said in an interview with International Finance News that under the general trend of structural deleveraging, returning to the commodity itself in the way of self-created brands is a healthy way to enhance value, and it is also a new way out for domestic foundries.

04 Super FOUNDC can determine the future

Some foundries have achieved a "class jump" in the process of developing their own brands, and some foundries have insisted on "generation to the end" in the field of foundries.

Magna, a vehicle foundry company, can be said to be the king specializing in OEM production. As a professional oem of luxury cars, Magna oem for Mercedes-Benz Big G, BMW 5 Series, as well as the new car-making force Polar Fox Alpha T, Alpha S and other car brands. Although the early automobile companies have more or less experience in OEM for others, such as Chery OEM Chrysler, Mitsubishi OEM Peugeot, etc., but only do the vehicle OEM business is magna.

In addition to Magna, TSMC, Foxconn and other foundries with core technologies in the field of manufacturing have also become a role that cannot be ignored in their respective industrial chains, and even produced a certain number of clamp production, taking TSMC, in 2020, TSMC will achieve mass production of 5nm chips, and this chip is the core component of high-end mobile phones. Therefore, it can be said that in the context of global core shortage, its industrial discourse power can be imagined.

Under the impetus of the new economic market, brands have mushroomed like mushrooms, and brands can be created at will, but there may only be one with production capacity.

Liang Qingde, chairman of Galanz, once said in the "Manager" magazine: Whether the foundry enterprise is strong or weak depends on whether you can achieve the world's first in a focused field. Companies like Foxconn, even if Apple doesn't work with it, will have orders from other brands like Sony, and now it's not the brand owners that dominate it, it's dominating those brands.

40 years of reform and opening up tide, Chinese enterprises rely on talent and technology investment, in the industrial chain continues to climb, from the fishing village small factory to attack into the international giant, China's manufacturing discourse power is getting stronger and stronger, but also support the strength of the country, perhaps, this point of inspiration to us is to adhere to technological breakthroughs, respect property rights, mobilize the vitality of private enterprises, accumulate industrial capital, occupy a leading position in the international industrial chain, but also the foundation of a country.