Peaceful coexistence is how sportswear firms in China might have once described competition in their market. That's because for a number of years, foreign and local companies had very different approaches to winning China's consumers. Western multinationals – notably Nike and Adidas – concentrated on first-tier cities, where their strong brands helped command high prices, while Chinese companies used low prices and mass marketing to get a strong foothold outside the tier-one cities.
But now the market lead that the likes of Nike and Adidas once had as China's top sporting goods suppliers is no longer undisputed. Close behind are a handful of local brands aggressively expanding their distribution networks to reach previously untapped markets off the beaten path. That includes Anta Sports with 7,500 own-brand outlets, which has increased sales 600% since 2006, from RMB 1.25 billion (US$1.9 billion) to RMB 7.41 billion today, while Lining’s rose from RMB 3.18 billion to RMB 9.48 billion, and Peak Sports' from RMB 623 million to RMB 4.2 billion over the same period.
As for the Western sportswear multinationals, their once-enviable growth trajectories in China are no longer a given. In the last fiscal year (ended May 31, 2010), revenue in greater China for Oregon-based Nike was flat, at US$1.7 billion, after increasing 29% the previous year, with growth returning again in fiscal 2011, and revenuelast quarter up 10% to US$458 million. Meanwhile, Germany's Adidas was hit with a similar slowdown, with its greater China revenue in 2009 falling 10% from the previous year to 967 million euro (US$1.4 billion), and then picked up 2% in 2010. Adidas blamed the slowdown on high post-Olympics inventory and subdued consumer demand in general. But that's not the whole picture, say retail experts.
In 2008, according to research company Frost & Sullivan, Nike and Adidas commanded a market share in China of 18.8% and 14.9%, respectively; by 2009, their share decreased to 10.2% and 9.6%, and Adidas was overtaken by Lining. That change happened while overall sales of sporting goods in China were increasing steadily, from RMB 38 billion in 2006 to RMB 140 billion in 2009.
Jason Ding, a Beijing-based partner at Roland Berger, a strategy consultancy, says the local firms ramped up their growth in recent years primarily by opening thousands of stores, often in markets off the beaten path. But he says brand building, too, has been important to differentiate themselves from Western competitors. Take Anta. It has honed a grass-roots, working-class image, he notes, in contrast to brands like Nike, Adidas as well as Lining, which are aimed at more up-market, image-conscious consumers wanting to be associated with the flashy sports stars promoting those brands.
A Home-grown Formula
Are China's firms about to take the lead? Not just yet, according to Eric K. Clemons, professor of operations and information management at Wharton. “Made-in-China brands can be, and over time will be, as stylish and reliable as their Western counterparts,” he says. “Western brands have enjoyed a reputation, well earned and well deserved, for superior quality and stylish design. Over time, Chinese brands will earn a reputation for comparable quality and style.”
Until that happens, home-grown companies are starting to leverage several advantages they already have over foreign rivals, says Zheng Jie, Anta's vice president. “A big difference between international and domestic sporting good enterprises is the speed of market feedback,” says Zheng, who had previously been general manager of China for Reebok. “The decision-makers at international enterprises are largely foreign managers, and their insights tend to cover the larger cities. Their understanding of smaller markets is weaker than local entrepreneurs [who] are willing to devote themselves to understanding this market."
There's another difference: While Nike, Adidas and other foreign brands outsource production, Chinese brands use a combination of in-house and outsourced manufacturing, a striking strategy in a country with a reputation as the shop floor to the world. At Anta, 41.1% of its shoes and 15.6% of its apparel is done in-house. Ding Shizhong, the firm's chairman and CEO, says that enables the company to respond more quickly to market changes, while helping to keep new product designs under wraps until they're ready to be launched. It also gives the company greater flexibility in terms of managing costs, he says.
Anta isn't alone in embracing in-house manufacturing. Peak Sports has two production sites with a total of more than 10,000 employees, in Fujian and Jiangxi provinces. Xu Zhida, vice president responsible for production, says that it's a strategy that provides better, more hands-on quality control, fast delivery times and shorter supply chains. “Although the market is expanding and our goal in 2011 is around 20% growth [in revenue], we are still investing in production,” adds Xu Jingnan, the firm's founder and chairman, noting that a big portion of a three-year, RMB 2 billion investment program will go toward its apparel manufacturing base in Shandong province. "We will not give up production and only focus on brand [management],” he insists.
But deciding the optimal manufacturing strategy is a constant balancing act, says Roland Berger’s Ding. He points out that "there is no right or wrong" when it comes to deciding how much and what to keep in-house. Therein lies a big debate among executives at each of these firms. While keeping manufacturing in-house can assure executives a more complete view of their supply chains, an "asset-light" model which puts all production into the hands of third parties can offer even more flexibility in managing costs.
Many Chinese companies say a cornerstone of their past growth has been the production basics they collectively learned as OEMs for foreign multinationals. They also say they have benefitted from being geographically concentrated in "clusters" of other manufacturers, suppliers, distributors and other key stakeholders in their supply chains. With the exception of Lining, many of today's big Chinese sporting goods firms are based in or near the third-tier city of Jinjiang in Fujian province. As management guru Michael Porter of Harvard Business School, among others, has noted, such clusters are indeed known to drive efficiency, innovation, collaboration and competitiveness under the certain conditions.
But clearly it's not just how sportswear rivals are competing, but also where they are competing that holds the key for China's sportswear firms. Research from Boston Consulting Group shows that while multinationals wanting to expand in emerging markets like China are currently focused on large cities, their future growth will increasingly rely on smaller cities and harder-to-reach markets where their brands are unknown.
That point isn't lost on the likes of Adidas and Nike. Adidas recently said it plans to open 2,500 stores in China in next three years, most of which will be franchises in third- and fourth-tier cities. As for Nike, the country's 20 largest cities accounted for half of its sales in greater China last year, but its executives have also said they are betting on greater growth beyond those cities — some analysts predict that Nike will use its low-end Converse brand to enter rural cities. “You can see that they have already started the shift by opening stores, deploying sales networks and developing products to cater the low-end market," observes Roland Berger's Ding.
The Cost of Quality
Can sportswear's local firms move in the other direction, and compete on quality? Wharton's Clemons doesn't see why not, particularly since the majority of Western brands sold in China are also produced in the country. However, he says, China's local sportswear firms can't ignore the knocking that the reputation of Chinese manufacturing has taken in recent years. “Chinese execution has in some categories been inferior to execution in the West, and Chinese consumers have suffered as a result,” he says. “Inferior Chinese product quality has on rare occasions been toxic and even lethal, in categories like infant formula, and Chinese consumers will not forget or forgive this easily."
Likewise, he adds, Chinese products in a range of categories, including sports equipment, might look identical to Western brands but are either poorly designed copies or defective seconds. "These forms of inferior products have severely damaged the reputations of Chinese brands among Chinese consumers, enough to deserve the label of ‘economic treason’ to describe the firms deliberately marketing them,” he asserts.
According to experts, the locals' growth strategy in the past years will only go so far in winning consumers' loyalty. There are already signs of strain. Lining, for example, has begun to close low-performing stores and adjust its branding. That suggests that the old strategies relying on fast-expanding distribution networks and huge marketing campaigns aren't paying the dividends they once did as the sector matures.
What's more, says Ding, while catchy advertising campaigns and high-profile deals with sports stars might be increasingly important, two other areas will be a market differentiator among the locals: Developing proprietary technology and increasing their online presence. "They have a lot of catching up to do," he comments.
But they have come a long way, too. Last year, for example, Anta introduced 2,100 new footwear styles, 3,000 garments and 2,000 accessories. Like other sportswear firms, it's also upgrading its brand — and international profile — partly through acquisitions. In 2009, Anta acquired Fila from Belle International to help it tap the high-end market, and now plans to increase the number of Fila stores from nearly 200 to 500 stores in 2011, mainly in first- and second-tier cities.
Experts such as Ding say foreign and local companies alike might soon find that old strategies developed when the market was burgeoning no longer work. "Competition in this market will be very heated, and market growth will slow down," he predicts. “Right now, China’s sportswear sector counts as a much higher percentage of the whole apparel market than in Western markets, which is 30% vs. 15%.”
The race has just begun.