The notion of social enterprise gained popularity after Muhammad Yunus of Bangladesh’s Grameen Bank impressed the world by serving the rural poor through a sustainable banking business. Although understanding of the term varies, “social enterprise” is usually defined as a business that makes a social contribution while still remaining profitable. “The idea of social business is that investors have invested the money not for their own benefit, but to achieve a social objective. In the case of [joint venture] Grameen Danone, the objective is to bring nutrition to malnourished children,” Yunus said in an interview with Knowledge at Wharton in May this year.

For Carol Chyau, co-founder and CEO of Shokay, the goal is to improve the lives of poor herders in remote Western China and women knitters in rural Shanghai by directly sourcing yak fiber and then selling finished products to the international market. Chyau and Mario So started Shokay — which means “yak down” in Tibetan — two and half years ago. She is seeing her idea become a reality in China.

“Social enterprise is an innovative, profit-making but not profit-maximizing solution to a social problem,” said Chyau. “I became interested in the concept of social enterprise during my years at Wharton. I was in Peru and Chile for one semester doing international development work when I realized that there is so much more you can do when you apply business concepts in socially impactful ways. And because I am from Taiwan, and my partner is from Hong Kong, as much as I was interested in Latin America, I thought we might be able to make a better contribution and manage faster growth in Asia.”

But it’s not easy to achieve social objectives, especially when the business is in its start up phase. “You have got to have a sustainable model even though profit maximizing is not your target. But social enterprises also have their own metrics. For us, we look at how many employment opportunities we could offer to herders and farmers and how much income growth we could bring to them,” said Chyau.

In the highly competitive textile industry, for-profit companies often find it difficult to survive. What happens when good intentions enter the equation? How does Shokay manage to achieve its social objectives, and what kinds of challenges does it face as a growing business in China? China Knowledge at Wharton recently interviewed Chyau about her experience as a social entrepreneur.

Below is an edited transcript of the interview.

China Knowledge at Wharton: Based on your definition of social enterprise — “an innovative, profit-making but not profit-maximizing solution to a social problem” — what is innovative in your business model?

Chyau: No one bought yak fiber before. That’s the most innovative part of our business. Eighty percent of the world’s yak population is in China. In theory, it should be Chinese local companies who are the first to bring yak fiber into the market. But Chinese textile companies are not that forward thinking and customer focused; they are more traditional and reactive, so they just react to what their customers demand. But customers in Europe and the U.S. are not going to know about Yak fiber if textile companies don’t promote it. Historically, there has not been good information on this product so the market didn’t exist until we started it.

Some people even use yak [fiber] to [make] fake cashmere, which traditionally is a luxury fiber. Anywhere in the world, when you say “cashmere,” you expect it to be expensive. But it’s very hard to sell yak because nobody knows what it is. On the other hand, yak itself has some limitations when compared to cashmere. Its fiber is shorter than cashmere and it’s not easy to weave. In addition, its natural color is brown while cashmere is white, so it’s not easy to dye. But we think we can overcome these challenges, so we created a brand focused around the yak. Shokay is “yak down” in Tibetan. We are the first yak lifestyle shop in the world. And we [operate as] an integrator, because we work from raw material all the way to retail.

China Knowledge at Wharton: How is the business going now? Could you tell us a little bit about your operation?

Chyau: We started the company two and a half years ago, and our major customers are in Europe and Japan. We sell to more than 130 stores in the world, most of them knitting yarn stores. We didn’t sell to the Chinese market until late 2007, and we only directly manage two stores in China so far. All the rest of the products are sold to corporations for corporate gifts, other fashion brands for co-branded projects, wholesale boutiques and distributors.

I have 13 people on my team here in Shanghai and two staff in Xi Ning [the capital of Qinghai Province, West China], who are local Tibetans managing fiber sourcing once a year.

China Knowledge at Wharton: What were the challenges you encountered after starting the business?

Chyau: We ran into some challenges…. In the beginning, we only sold knitting yarn to the U.S., but that market was too small. It did not grow as fast as we needed it to grow to sustain the company.

On the other hand, you can’t just sell knitting yarn, you have to create patterns. When customers came into the store, they needed to see the pattern for the finished products — “Oh, this hat is so lovely and cute, therefore I need to buy the yarn.” We had to provide some finished products and add them to our collections.

We were also weaving the fiber into scarves and throws because it didn’t require as much design work. However, it’s hard to only have scarves and throws, because they actually belong to two different markets — one is home furnishing, one is accessories…. You can’t enter the market with only one product and only one fabric…. Your clients will expect different things every year when they buy from you, so we had to quickly expand our product line. And we did; we started to add in a lot of products to our collection — like pillows, handwarmers, hats, etc. — and we also entered the children’s market.

China Knowledge at Wharton: I have visited your Shokay store in Taikang Lu, and it looks like you are now in the fashion business?

Chyau: It wasn’t the original plan, but very quickly, we turned from a textile company into a fashion company. It’s a trade off, too. Once you are in fashion, you need to have at least two seasons — Spring-Summer and Fall-Winter — although most fashion brands have at least three to four seasons. For us, it’s hard because most of our products are for the winter season.

Initially, we wanted to make our collection very full, but because we are new to the market, customers were ordering very little of each product. Orders essentially became customized. The good thing is that most of our products are hand knit, so we can still make orders without very high minimum requirements. But we have gone too far in that direction. It’s very hard to make only customized items. It’s much easier to produce in greater quantities to achieve economies of scale. If everything is customized, it’s very hard to manage production. Now, we are standardizing our processes.

For example, for one product, we used to offer 24 different colors for people to choose. Now we encourage our customers only to order from five featured colors. If they want something customized, we will still do it. But I think when you offer a lot of choices, most customers actually can’t handle it.

We now have to learn how to be a fashion business — from design, colors, quality control, inventory management, all of that.

China Knowledge at Wharton: Back to the mission of a social enterprise: How do you measure your social impact?

Chyau: We are measuring it ourselves — for example, how many employment opportunities we have provided and how much income growth we have been able to achieve. We also work with Qinghai Bureau of Animal Husbandry to organize training courses for herders. For example, we train them to do combing; if the herders do combing in a particular way, we will pay them more. And we also train the knitters in Chongming County [in rural Shanghai] in our specific patterns, quality and standards.

China Knowledge at Wharton: But if I were a for-profit company, wouldn’t I still do these things?

Chyau: It’s actually higher cost to directly source and organize trainings in such a remote place. So if I were just a textile company, I may not [be involved with the] raw material. Instead, I would just buy from manufacturers who source from suppliers or other traders, because they actually have an existing network for raw material. And it would be so much easier and cheaper for us. Actually, when we go to the manufacturers, they are pretty surprised to hear that we source directly from herders. Their usual response is: “Why? Isn’t that more challenging? I can give you materials….”

There are also a lot of uncertainties in the manufacturing process. If I buy the raw material, it becomes my inventory, which is quite a burden for any company, especially a start up.

If I were purely a fashion brand, I would just design a product, give it to a factory to make it, and then sell that to the market. And I probably would not organize my own hand-knitter team, either, because we could just outsource that. But we want to work with herders and knitters because it is their income that we want to raise, so we have to start from the very beginning. These are the subtle differences between our social enterprise and the traditional business model.

However, this kind of model creates a couple of challenges. In any country and in any industry, when you work all the way from raw materials to retail of finished goods, it’s actually pretty challenging. It may not be very efficient. Usually, vertically integrated companies are large companies who can achieve economies of scale, but it’s very challenging for a small company like ours.

China Knowledge at Wharton: Are there any unique challenges when it comes to doing business in China?

Chyau: One specific thing is that it’s very hard to work with manufacturers in China. Because China is good at mass production, there is a high minimum requirement to order from factories. For example, if I want to dye a color with an Italian mill, I may only need five kilos to start. In China, I need 50 kilos. Italian mills are used to working on small orders and their mills are smaller. In China, the mills are large, so the minimum requirement is very large.

The second thing is it’s hard to find good, ethical local partners who can deliver on international standards. A lot of them don’t know what it means to deliver on time, or sometimes they lack quality control. You have to go there yourself and monitor. In the beginning, we visited over 30 factories and tried to find good partners. Now, we have narrowed them down, but it’s hard because we continuously need to look for more good manufacturers to be our partners.

And sometimes, even if you find a very good partner, that partner is usually very busy, so you have to have your back-up partners. And because we are small, they will put off our orders. We have no bargaining power because we are a small company — we order small, and we order something they don’t usually make, so we really have to try to convince our partner that we are opening a new market with big potential. Even though we are ordering small now, yak has huge potential.