China Strategy - Li Ning

Li Ning's Initial Success in China and Globalization Plans

By Togo Fujiwara, Julian Petrescu, Thomas Robert, Vanessa Tan, Alan Yong

Discussion with Professor (2 April 2009). His advice: 1. Summarise the key success factors. Apply 'big picture' thinking - pick 1 or 2 key points and go into detail (instead of doing a laundry list) • • •

"Li Ning" Icon (associated with "National Brand"?) Affordable Price, Fair Quality (SPA model even penetrate into 4th tier cities level?)

1.5. Sustainability of KSFs above (without this, no need to change strategy) • • •

"Li Ning" Icon => Aging and Eroded by Global Brands Affordable Price, Reasonable Quality => Chinese People get richer and richer (SPA model even penetrate into 4th tier cities level?) => crushing Horizontal (Marketing Heavy) Model by Grobal Brands

2. What's the strategy / recommendation? • • • • • •

e.g. Move into developed markets? Fashion brand? Same as Zara's strategy? Retain control of the entire value chain & replicate across countries (ie. integrated strategy)? Change brand name... if so... explain the rationale & whether it will go through given that Li Ning is based on a real person and not like Lenovo or Shanghai Tang. Reposition its brand image to professional by going after sports such as tennis & golf Strengthen its distribution in the lower tier cities & avoid competing against Nike/Adidas in the tier 1 cities in China.

Other points: • •

• •

Give reasons and analysis to support our recommendations Can view from geographical angle (China versus Global markets / Developing versus Developed markets) ... but think about what resources Li Ning has & how it can create synergies if it were to follow a certain direction. If Li Ning were to expand overseas, how can it make the transition and compete against the links of Nike & Addidas in the developed countries? Issues faced if we position Li Ning differently in other countries outside China, ie. what will competitors like Anta perceive if Li Ning were to launch a different brand or use a different English name outside China? How can Li Ning transfer its success factors into other areas that it wish to expand/grow?

Presentation: 5 slides, 10 minutes in total Focus only on key takeaways - success factors and summary of recommendations.

Next steps for us: 1. Togo and Alan, please add in any other points I (Vanessa) missed out during our meeting with Prof. (done) 2. Add a few bullet points to the above framework to indicate the position we plan to take (done) 3. If everyone agrees with this direction, we proceed to split up the work based on this framework 4. Deadline: Next Thursday! Aim to send slides by next Wednesday (?)

Research Proposal

Abstract

Li Ning 1

is a well-known Chinese gymnast and multiple Olympic gold medal winner, earning him the title of "Price of Gynamistics" in China. After his retirement from sports, he founded a sportswear company in 1990 under his own name "Li Ning", selling footwear and apparel. Even as the Li Ning logo was based on his initials "L" and "N", there is an uncanny resemblance to the swoosh logo of Nike. Currently, there were 4,297 Li Ning retail stores as of March 2007, some owned and others franchised. Li Ning enjoyed considerable success, beating the likes of multinationals such as Nike and Addidas. Much of Li Ning's initial success can be attributed to his popularity in China as a sporting hero, and its first mover advantage amongst others. Our group will like to "zoom-in, zoom-out" on some of these success factors, relating them to the industry and its competitors. Also, we will like to analyze whether these success factors are sustainable.

However, in recent years, problems surfaced. First, Li Ning has fallen behind Nike and Adidas in terms of market share in the Chinese market, as Chinese consumers are progressively exposed to the effects of globalization and cultivated a liking towards global brands. Next, despite several significant events such as Li Ning himself being selected by China to ignite the cauldron in the 2008 Olympic Olympics, signing established world class athletics such as NBA superstar Shaquille O'Neal of the Phoenix Suns, two-time Olympic women pole vault champion Elena Isinbayeva amongst others, sponsoring the Olympic teams of Spain and Sweden, the football team of Vietnam, table tennis team of the USA and so on, Li Ning enjoyed limited international success. Most of its sales are still derived from the domestic Chinese market, and the brand "Li Ning" enjoys little recognition outside the Chinese community.

In our paper, we will analyze market trends and make recommendations on the strategies that Li Ning can deploy to establish an edge against its multinational rivals in China, and what it can do to penetrate into the international markets.

------------------------------Alan & Vanessa's part ----------------------

Company History

Li Ning the founder's background

Li Ning, born 1963 in Liuzhou city, Guangxi Province in China, was a well-known Chinese gymnast who went on to beome one of the most successful gymnasts in the world. Having won 6 out of the 7 individual gold medals and a bronze in the 1982 World Cup Gymnastics competition, he continued his success by winning 3 individual gold medals, 2 silver medals and a bronze one in the 1984 Summer Olympics in Los Angeles. This feat earned him the title of the most decorated athlete in the 1984 Olympics and the nickname “Prince of Gymnastics” in China. Through his 19-year gynastics career, Li Ning won 109 medals. He was also inducted into the International Gymnastics Hall of Fame.2

Li Ning's achievements brought great national pride at a time when China was beginning to open up to the world again. The 1984 Summer Olympic Games in Los Angeles was particularly significant to China because of the following firsts: (1) first time since 1932 that China participated due to wars, and boycott due to the Taiwan issue; (2) first time ever that China sent in a large delegation; (3) first time in history that China won an Olympic gold medal. Fast forward to 2008, in the recent Beijing Olympics, China leads the medal standings with 51 gold medals 3. China gold medal athletes are now numerous, with many of them surpassing Li Ning's performance. Thus, there will probably come a point in time when a new generation of Chinese will be asking "Who is Li Ning?".

Li Ning underwent a fail from grace when he failed to win any medals in the 1988 Summer Olympics in Seoul due to numerous personal errors. After the Olympics, Li Ning decided to retire from professional gymnastics, and this was the time when a new chapter of his life began. Instead of following the traditional route of a typical sportsperson to either coach the national team or become a sports administrator/embassador, Li Ning accepted a position at the Jianlibao Group4, which at that time was the nation's leading soft drink producer, on par with Coca Cola and PepsiCo in terms of sales in China. In 1990, Jianlibao setup a "Jianlibao sportswear company" where Li Ning served as general manager. That was the beginning of a hugely successful local sportswear company specializing in the production of footwear, apparel and accessories for sports ranging from basketball, football and tennis to swimming, fitness and sports fashion.

The defining moment for Li was not the time when he stood on the podium to receive his gold medals but in July 1989 when he appealed to the Chinese public that he was starting his company and needed help to design a logo 5. In just one month, Li Ning received more than 20,000 ideas from a diverse group of people ranging from peasants, blue-collar workers to professionals. Despite the ideas received, Li Ning decided to hire designers who came up with the “fox tail” like logo that was inspired by his initials “L” and “N”. Even when Li Ning travels today, people still come up to him to mention about this defining moment in 1989 when they took part in the contest that led to the design of the logo.

Phase 1: Initial success

Li Ning was listed on the Hong Kong stock exchange in June 2004, and it raised US$68M in the process. Together with the likes of Haier and Lenovo, the Li Ning brand is widely known as one of the most recognizable local brands. Currently, Li Ning and his family members own around 35% of the company, with around 20% owned by international funds (Fidelity, GIC and JP Morgan), and the rest owned by public shareholders. Li Ning’s initial success can be attributed to four major factors6: 1. Li Ning relied on his fame and charisma, being a national sports hero and iconic figure helped attract attention and publicity. This brought immediate credibility and acceptance to a new brand based on his name 2. Li Ning has good connections, local knowledge and an extensive distribution network covering many of China’s third and fourth tier cities 3. Li Ning sponsored key sporting events in China and signed up many of China’s top athletes including Olympic gold medal winners Wang Liqin, Zhang Yining, Guo Jingjing amongst others 4. Li Ning’s 'value for money' proposition resonated well with the Chinese population, particularly those from the lower middle class and below. Li Ning products typically retail at half the price of Nike/Adidas, but are of comparable quality.

------------------------------Togo's part (New)----------------------

Phase 2: Key Success Factors and Challenges

Still today, Li Ning’s Key factors for success have not been changed so much. Firstly, they have the well-penetrated brand “LI-NING”, associated with the man of legend and Chinese national pride. Secondly, they have broad retailing network & integrated SCM established by leveraging their first mover’s advantage. Lastly, by the combination of above 2 factors, they are in good position on the “Productivity Frontier”. The consistency of “value

for money” positioning and economy of scale provides Li Ning notable revenue growth (4,348m RMB in ’07 to 6,690m RMB in ’08, +54% *) and healthy margin (14% Operational Profit / Revenue in ’08 *) today.

The strength of LI-NING brand is unparalleled awareness in China. In our analysis, this comes both from the company’s ongoing efforts on marketing and still from Mr. Li Ning himself. It’s “value for money” positioning is working well, too. Many Chinese yet have difficulty in affordability to buy Nike & Adidas even though they desire those. For them, LI-NING is an actionable choice with satisfiable quality.

Li Ning’s huge retailing channel and vertically integrated supply chain combination is another thing unmatched by anyone. “As at 31 December of 2008, Li Ning had 6,917 retail outlets in China (6,245 of which were Li-NING brand stores), representing a net addition of 1,241 stores as compared to the same period of last year. With respect to the LI-NING brand, the company had approximately 146 distributors operating a total of 5,935 franchised retail stores nationwide as well as a total of 310 directly-managed retail stores in Beijing, Shanghai and 16 other provinces in the PRC*”.

Self-developed manufacturing & distribution network backs these stores. Furthermore, Li Ning is “committed to reforming the traditional mode of supply chain by adopting a demand-driven approach. During 2008, the company adopted a delivery logistics model that is able to differentiate various retail demand and merchandise nature and integrate logistics resources to enhance efficiency, reduce costs and shorten warehousing and transit time. In addition, Li Ning is in the process of inviting a number of core suppliers in the setting up of production facilities in Jingmen Industrial City, Hubei in order to ensure that its supply chain adapts to the needs of the market in a timely manner while mitigating the pressure from cost increases. The company has also planned to set up the Li Ning Logistics Centre, a one-stop logistics solution that brings together the manufacturing and distribution of apparel, footwear and accessories products*”.

Thanks to its unique brand positioning and well-developed supply chain, Li Ning established SPA (Specialty store retailer of Private label Apparel) type business model effectively. For many Chinese customers, LI-NING is a brand of familiar, accessible (physically), affordable, and satisfiable choice. Li Ning, as a company, has achieved its success by providing these practical choices to massive amount of Chinese customers through Li-Ning Brand.

However, in our analysis, these key success factors are now becoming insufficient more and more to serve Li Ning’s business growth, facing to fierce competition with Nike and Adidas either in China and in global. Li Ning, as a company, now seems facing 2 major challenges. One is to adjust high dependency on “LI-NING” Brand and Chinese Market. The other is to respond to the upward change of disposable income of Chinese middle class. And the last is to compete with Horizontal-division business model of Nike & Adidas.

In FY2008, LI-NING brand shares 95% of Li Ning’s revenue and 99% of is comes from Chinese market. Obviously, LI-NING is the core and crucial brand for Li Ning. However, there seems to be some difficulties for Li Ning to grow by solely depending on LI-NING brand. First of all, most of the place in the world, people don’t know Mr. Li Ning and his glory. Although it’s difficult to say this anonymousness is good or bad for LI-NING brand, one thing for sure is the company must adapt different strategy on establishing LI-NING brand. Also in china, LI-NING brand is facing challenge relating its icon, brand aging. Different from Nike and Adidas, LI-NING is the name of the man. Even though he is the man of legend, brand strongly tied with particular person must get older as we can see many

evidences in famous golfer brands. It’s difficult to prospect favorably how many school kids feel a fat middle age man with a torch cool. This is not a problem in kind that can be solved by design effort or others.

Moreover, LI-NING’s “Value for Money” positioning itself starts to become a stumbling block in their competitive landscape. In mean words, LI-NING achieved its success by providing a compromise choice for customers who want modern sports goods but cannot buy foreign brand items. Generally, once its brand perception is fixed, getting out of that is very difficult. Re-establishing perceived value of “compromise” by customers to match to Nike and Adidas must be tough. For people such as “I want to buy Nike, but can’t afford it” customers, it is a natural action to stop buying LI-NING goods once they reach to the “Nike Affordable” income level. As people become richer, they buy more Nike and Adidas because of the perceived value of those items is higher than LI-NING‘s one. And people are becoming richer and richer

In 2005, Lower Aspirants (25,000 – 40,000 RMB Annual Household Income), the main customer of LI-NING, accounted 35% of urban households and consumed 1,672 billion RMB, comparing Upper Aspirants (40,000 – 100,000 RMB Annual Household Income), purchasers of Nike and Adidas, did only 4% and 370 billion RMB. But it is projected that in 2025, Lower Aspirants will shrink to 15% and consume almost same amount as in 2005 in total, and Upper Aspirants will expand to 61% and their consumption will reach over 12 trillion RMB. If LI-NING continues to be perceived as low-end brand, Li Ning will be forced to lose its position even in China by the change of the market.

Li Ning’s SPA model is also facing some challenges. Externally, Nike and Adidas constantly acquire market share in China with their globally-adapted marketing oriented business model. And internally, Li Ning seems still stagnates to adjust their retail & supply chain network for other their brand than LI-NING. There are only a total of 637 franchised retail stores and 35 directly-managed retail stores under the AIGLE brand, the Z-DO brand and the Lotto brand, comparing 6,245 stores for LI-NING*. LI-NING brand & SPA model has definitely shown excellent performances of highly coordinated activity-system. But Li Ning, as a company, now required to version up this model either to conquer global markets which Li Ning has neither brand value nor retail & supply chain

infrastructures yet, or to compete against global players in China with leveraging their brands addition to LI-NING.

(*Company Press Release 18. Mar 2009)

------------------------------Togo's part (New) End ----------------------

Phase 2: Challenges from outside and within

Up through to 2003, Li Ning was the number 1 sports brand in China, selling 50% more in revenue terms than Nike, which is the number two, with Adidas, a close third and other brands far behind the lead trio. According to the TDC, one Li Ning product is "sold every 10 seconds, the group is netting billions of yuan in annual turnover." However, this lead was soon challenged by sporting behemoths Nike and Adidas, as well as other Chinese competitors such as Anta, Tebu, Kongwei, Peak, China Hongxing Sport, XStep, and 361 degrees amongst others. Together, these competitors presented different sets of challenges for Li Ning.



General ideas: *Among the costume products in China, sportswear has the fastest sales growth, as high as 50%, because more and more Chinese people with improved living standards want their clothes to be more fashionable and comfortable. Sportswear is their best choice. And the approaching Beijing Olympic Games is also helping to boost the sportswear market by highlighting the whole nation's passion for sports. (Researchandmarkets) * http://knowledge.insead.edu/ChinaSportswear081092.cfm

Demographics indicate China's slowing growth rate due to the one-child policy in cities:

0-14 years: 20.1% (male 142,085,665/female 125,300,391)

15-64 years: 71.9% (male 491,513,378/female 465,020,030)

65 years and over: 8% (male 50,652,480/female 55,472,661) (2008 est.)

Median age total: 33.6 years male: 33.1 years female: 34.2 years (2008 est.)

Population growth rate 0.629% (2008 est.)

------------------------------(Old) Togo's part ---------------------The challenges facing Li Ning Challenges for Li Ning (Vanessa's thoughts - extra stuff, not meant to be in the writeup)

• • •

Regain market share in China. Li Ning has lost market share to global brands Nike and Adidas, who have caught up. Address the growing individualism of Chinese youths, who now have more exposure to Western values, media, information (even with great Firewall of China); the one child policy + increasing affluence and growth of the middle class = more spoilt kids who can afford to wear better brands Should it really stick to its low price model? It may work in the short run, and still appeal to the lower classes of Chinese, but in the long run it may have to modify its value proposition. Low price + made in China does not help to build aspirations among Chinese. Advertising on aspirations may not help if it's a brand you only wear in school when you can't afford anything better.

• (end of Vanessa's thoughts snippet)

After its remarkable success, Li Ning now seems to be facing 2 major challenges, adjusting high dependency on “LI-NING” Brand and responding to the upward change of disposable income of Chinese middle class. In FY2008, LI-NING brand shares 95% of Li Ning’s revenue. Obviously, LI-NING is the core and crucial brand for Li Ning. However, there seems to be some difficulties for Li Ning to grow by solely depending on LI-NING brand. Firstly, different from Nike and Adidas, LI-NING is the name of the man. Even though he is the man of legend, a brand strongly tied with particular person must get older as we can see many evidences in famous golfers' brands. It’s difficult to prospect favorably how many school kids feel a fat middle age man with a torch cool. This is not a problem in kind that can be solved by design effort or others. Secondly, once its brand perception is fixed, getting out of it is very difficult. Historically, LINING achieved its success by providing a compromise choice for customers who want modern

sports goods but cannot buy foreign brand items. Re-establishing perceived value by customers to match to Nike and Adidas is very tough for sure. For people such as “I want to buy Nike, but can’t afford it” customers, it is a natural action to stop buying LI-NING goods once they reach to the “Nike Affordable” income level. They have no reason to buy LI-NING items. As people become richer, they buy more Nike and Adidas because of the perceived value of those items is higher than LI-NING‘s one. And people are actually becoming richer and richer. In 2005, Lower Aspirants (25,000 – 40,000 RMB Annual Household Income), the main customer of LI-NING, accounted 35% of urban households and consumed 1,672 billion RMB, comparing Upper Aspirants (40,000 – 100,000 RMB Annual Household Income), purchasers of Nike and Adidas, did only 4% and 370 billion RMB. But it is projected that in 2025, Lower Aspirants will shrink to 15% and consume almost same amount as in 2005 in total, and Upper Aspirants will expand to 61% and their consumption will reach over 12 trillion RMB. If LI-NING continues to be perceived as low-end brand, Li Ning will be forced to lose its market position by the change of Chinese market. (From Session 1 slide)

Julian's thoughts re challenges: Once Li Ning becomes a global brand, it will become a target for NGO activism; all A-level brands are being hounded for labor practices - perhaps rather unfairly since they do not operate the production plants themselves. So making sure that the factories that manufacture Li Ning products enforce fair labor practices must be done proactively, otherwise Li Ning might face a very hostile reception in the West.

------------------------------(OLD) end of Togo's part ----------------------

Sportswear and shoes market in China Market Overview · Size: sportswear ->$3.84b (2006) - $7.2b (2009) - $12b (2012) /year (source Zou Marketing) · Growth: CAGR 20% · Production: China produces 65% of world supplies · Market potential: 2 pairs of sport shoes per capita in China (vs 7 in US and 5 in Japan)

5 Forces Analysis Value Chain R&D > Production > Marketing > Distribution > Consumers

(Julian's notes from the paper that analyzes the clothing industry in China follow next, with adaptations for Li Ning and sportswear in general) Analysis of the structure of China’s textile industry -

Entry… barriers not high, but incumbents do have advantages

Barriers to Entry: Something about IP? Distribution? -

Threat of new entrants o http://bizchina.chinadaily.com.cn/shp_report_info.shtml?id=251 o http://www.bm.ust.hk/~larryqiu/China-Textile.pdf

Exit Barriers: Why? Growing so fast...

-

o Factors that affect entry to this industry: § Capital · Industry is labor intensive so required capital is not so large à not high potential for economies of scale · Some sectors are more industrial (chemical fiber), others less so (cotton yarn) · Competition from developed countries (advanced technology offsets low costs) · There exists local excess capacity · à is it profitable to enter? § Technology § Policies · Export quotas (some still in practice: allocations from the Ministry of Commerce) – affects export · 2009 China/US agreement, will be lifted · Experience in the overseas market is a barrier § Business environment · Location is important: need to adapt to demand, hence it must be located in an area where information is easily available · There is a push from the government to encourage investment in the western area of China (raw materials and cheap labor) Threat of substitution o Xiaokang o Strata: § Famous brand 0.6% of the population, 3% of the consumption à fur

§ Medium end 60% urban population, 20% of the rural à pure cotton § Low end 25% urban population, 60% rural population à chemical fibers o Sales channels § Big department stores 30% of all consumers § Ordinary apparel stores (self select sale) § Brand franchised stores § Storage emporiums, supermarkets, chain stores (open shelf, mostly non fashion products) § Wholesale market -

Bargaining power of buyers

Buyer Power: Young people: brand sensitive Old ones: price sensitive - Power of customers o Consumer market o GDP low à fiber consumption low (4.6 kg/capita in 1995 compared to 19 kg developed countries) o 1% increase in GDP will raise garment consumption by 0.4% (elasticity?) o à estimated growth of apparel market 2-3% per year (+20 bil. Yuan) o Per capita spending on garments: 591 yuan (2002) o Room for growth in medium and high end markets o Urbanization (36% households à 50% 2010) o Consumer preferences (high end demand in coastal areas especially; clothes become symbols of fashion and wealth) o Industry chain: § Textiles à clothing § Sports apparel manufacturers are buyers of the textile industry § Consumers are buyers for the apparel manufacturers § Some companies cover both areas, although probably most sports apparel manufacturers do not § Overcapacity in silk, cotton, chemical fibers gives relative power to apparel manufacturers § Final consumers do not have much power over the manufacturers § But, manufacturers sell to retailers unless they have their own stores § Foreign retailers: not sure how Li Ning sells overseas; however, here they are at a clear disadvantage compared to Adidas/etc, since the foreign brands have long experience with foreign retailers § Local retailers: would be interesting to know how much % they sell through their own stores and how much through the stores identified above, and how these channels compare to those used by other and foreign competitors -

Bargaining power of suppliers

Supplier Power: Most production in the Fujian Province (largest base for sports apparels). Example of producers: CTSAN and Yue Yuen (YY) for shoes Power of suppliers o Competitive industry o As above, two different supplier groups § Raw material producers à supply to textile producers · Raw material producers: agricultural businesses · China produces 24% of the world’s cotton (2001) · But China is also the world’s largest cotton consumer à import from US, Uzbekistan, Benin (?!), India · Foreign imports/exports before were mediated by the state, à little experience for individual companies in dealing with imports and exports § Textile producers à supply to clothing manufacturers -

Rivalry among competitors

Competition: HIGH Very competitive environment with lots of players Pressure to innovate fast (especially in the shoes market) Main competitors: · Foreign brands: Nike, Adidas, Kappa, Puma Mostly Tier 1 cities · Domestic brands: Li-Ning, Anta, Tebu, Kongwei, Peak, China Hongxing Sport, XStep, 361 degrees Mostly small to middle size cities – Better understanding of the market, lower prices -

Competitive rivalry o Size: § § § §

US$ 12 bil (2012) US$ 7.2 bil (2009) US$3.84 bil (2006) (data from ZOU marketing)

Main Competitors Nike: 22,000 people worldwide (direct employees) Entered the Chinese market in 1980. More than $1b sales in China, 16.7% of the sportswear market Brand concern / customer value (shoes): 44.84% Adidas: 15,000 people worldwide (direct employees) 15.6% of the sportswear market – Distribution: 8000 points of sale in 2010 Brand concern / customer value(shoes): 12.72% Li-Ning: 10.5% of the sportswear market, market leader (among domestic brand) because first mover Brand concern / customer value(shoes): 6.90%

Anta: $430m sales in China (2007), 4% of the sportswear market – Distribution: 5300 stores in 2008, 7000 in 2009 Brand concern / customer value(shoes): 8.04% Pepsi: Brand concern / customer value(shoes): 5.29%

o Competitors: § Nike 16.7% (06) sales US$1 bil § Adidas 15.6% § Kappa § Puma § Li Ning 10.5% § Anta 4% “Forge yourself” http://www.anta.cn/en/home.php · Brand equity · Distribution network · R&d · Production § Xtep http://www.xtep.com.cn/encompany/xtep.asp · Very dodgy english § Peak http://www.chinapeak.com · … § Hongxing http://www.chinahongxing.com.sg · Erke · 17.9 mil. shoes produced in Quanzhou · http://www.pdfcoke.com/doc/6574936/China-Hongxing-060925 § Kangwei http://www.kangwei.com.cn · In Chinese § Qingdao Doublestar Group · No info; tyre company also?

o For the general textile industry, domestic supply is far greater than domestic demand (this might not be the case for sports apparel) o Price wars are common o Sub-industries (might be interesting to see which are used in sports apparel production) § Chemical fibers § Cotton fabrics § Garments · E.g. Ningbo Youngor using POS information management system to link direct retail and franchised stores (important to know different types of stores, maybe ask Li Ning what kinds they use) § Silk o Conclusion: quality improvement, business diversification, product differentiation, improvement in marketing and management are seen as key factors for success, not just price (end notes) (Julian's notes from the document about the different manufacturers) “A” brands:

Nike, Reebok, Adidas “B” brands: Puma, Filo, Umbro, Asics, Mizuno, Lotto, Kappa, New Balance Sportswear industry = footwear + apparel à very labor intensive à production in low wage countries. è Potential for targeting by anti sweatshop campaigns (mostly targeted at A brands) è B brands managed to escape Asian sportswear companies: Yue Yuen: world’s largest shoe manufacturer Li & Fung: one of the world’s largest sportswear agents (SCM for numerous brands including Kappa) Both unknown to the public but with profits exceeding the established brands (manufacturers for R&D US companies) Sportswear market originates in the 1970’s (becomes mainstream fashion product). Most athletic foootwear now bought for casual use; Nike makes athletic wear a fashion statement. Also Nike is the first to have shoes produced in Asia and the first to advertise athletic shoes. Total market today: 58+ bil. US$: · $41.5 bil apparel (wholesale) – 41% US, 38% EU, 16% Asia; Nike, Adidas, Rebook: 14%; Fila, Puma, Umbro 1%; Mizuno 0.5% · $17 bil shoes (wholesale, retail 25 bil) – 47% US, EU 31%, Asia 16%; Nike, Adidas, Rebook together 60%; 70% in the US àlittle room for growth à need to expand internationally and/or move to new product categories; B-brands 24% o Other shoe brands: Vans, LA Gear, Skechers (1%+ each) In US the growth is flat with falling prices.In Europe, UK, D, NL same situation, but growth in I and S. Japan: decline. Profitability peaked in 1997. China and India are considered growth markets but with falling prices à “perpetual sale” Marketing and promotion is an industry-wide trend: companies such as Adidas do this even as they close factories. This is a method of stimulating demand and raising market barriers for new entrants. There are 2 paths: -

Emphasize physical activity (Nike, Reebok)

-

Emphasize fashion; sport shoe as streetwear fashion icon (Puma, Kappa, Fila)

Spending is twice as high as with normal apparel retailers (10% vs 5%). Everyone outsources production: Phil Knight, “no value in making things… value is added by research, innovation, marketing”. So most are manufacturers without factories. Main (shoe) producer countries: China, Indonesia, Vietnam; Thailand lost much production capacity. Apparel production is much more dispersed due to shorter production cycles and lower technology requirements. At the same time, this distribution necessitates much more coordination, hence a need for agents to manage the production process for the branded companies. Li & Fung is such an agent (SCM). The Multi Fibre Agreement is being phased out à likelihood of manufacturer consolidation in China à larger factories à smaller role for agents. Types of costs: -

Macro costs (related to the producing country)

-

Indirect costs (argh, the horror) mills, factories, and agents

-

Direct costs attributable to the goods; mostly DL and insignificant

This is important because low DC’s can be easily offset by high MC (when there is no infrastructure, all IPA here). Then, some lefty propaganda about working conditions in producing companies – might be interesting in that Li Ning might have to prove its not using child labor if it wants to succeed in the west and it sounds like it’s a pain in the ass with NGO’s and so on.

Yue Yuen: produces for Nike, Adidas, Reebok, Puma, Asics, New Balance. Largest shoe manufacturer in the world (130 million pairs). They have distributed facilities (205000 workers) in China, Indonesia, Vietnam, to reduce political risk and to control macro costs. They serve a diversified array of customers are comparatively more powerful than each individual client, e.g. Nike. Their profit is higher than that of Reebok and Adidas. They started expanding downstream into retail and have some exclusive distribution deals across China à they are a potential competitor. They have a militaristic management style including limited access to toilet. They had to change some labor practices under pressure from Nike.

Li & Fung The largest export trading company in Hong Kong. Initially it was an apparel buying agent, now is a VA provider (another SCM & logistics). Customers just send specifications, then they do everything else. (end notes) Li Ning needs to: (Vanessa's thoughts again)

• • • •

Recapture the youth market in China, because that's the demographical base for the future Address global perceptions that it is a me-too/copycat, made in China brand, with similar logo and advertising style as Nike. Or else it won't be able to gain credibility and expand market share. Move away from its "China" nationalist image, even within China. They have gotten well known global celebrities but somehow that isn't getting as much exposure as, say, David Beckham in an Adidas ad. -Vantan 18/03/2009 13:07 Plan for succession - what if something happens to the figurehead/founder, Li Ning? There's similar uncertainty for other global companies fronted by a charismatic person, e.g. Steve Jobs, Richard Branson

It should be careful to choose a strong position, e.g. "The choice of professionals". -Vantan 18/03/2009 13:01

(end of Vanessa's thoughts snippet)

Julian's recommendation - Li Ning should focus on the fashion aspect of sportswear: urban wear or similar; all other Chinese brands seem to emphasize physical activity and this fashion statement is a valuable niche that might have an appeal in the West as well, more so than sports - create a brand that is more easily understood by foreigners and that is detached from the personality of Li Ning - e.g. Shanghai Tang (something similar): name with Chinese characteristics, but palatable to a foreign audience - this can be similar to what Air Jordan is to Nike - the Nike component is under emphasized, while the shoe brand and the celebrity endorsement is over emphasized - Li Ning would be the brand to be used locally and the new brand would be used internationally; same products, maybe minor differences - for endorsements, try the European basketball market: not as expensive as NBA, yet powerful and with dedicated fans (teams: Spain, Greece) - sponsor (for example) the Greeks at Olympics - a few years ago they beat the US and if they repeat it, there will be a lot of coverage - so drop Sudan and other unknowns (was ok for gaining experience, but now must focus on real results) (end of Julian's recommendation snippet)

Group Member's Biography

FUJIWARA Togo, Japanese Director Corporate Planning at Diecast Towa Manufacturing

PETRESCU Julian, Romanian/American, BSc Business, MSc Information Systems, 9 years experience in international transport, technology, and healthcare in France and in the US.

ROBERT Thomas, French Manager at Devoteam (IT Consultancy)

TAN Vanessa, Singaporean Senior Executive at the Singapore Health Promotion Board

YONG Alan, Singaporean Project Manager/Finance Lead at Whirlpool

Julian suggested topics: - about Li Ning (李宁): •

How did the company get started?

•

Where do the ideas for products originate? in-house, Li Ning himself, inspiration from others? How does Li Ning compare to competitors in terms of products: features/price/how fashionable -> value for money

•

○ What do local Chinese think of Li Ning versus other brands - we can check out some of the

• •

•

popular Chinese community sites to see what people are saying (VT/AY to do some cybersleuthing) What are some of the barriers Li Ning encountered in its expansion overseas? How did Li Ning evolve in time: e.g. move upscale?

Changing consumer trends and how this can affect the market leader. Specifically, the trend of Chinese youth (possibly Li Ning's main target audience since they're young, atheletic, aspirational) becoming more Westernised, individualistic. Maybe they want to feel global so they buy global brands; or they're at least becoming indifferent in attitude towards local v global brands

- questions to ask: •

What was the idea behind the company: to be a manufacturer or distributor of sportswear apparel?

• •

Did they plan an international expansion initially or was it an afterthought?

•

What did Li Ning do right at the beginning, that needs to be modified/reviewed to survive and thrive in the future? Is Li Ning's early success preventing it from seeking to improve its existing strategy? i.e. is it becoming a victim of its own success? Has Li Ning encountered any internal, HR/OB issues (which have afflicted many other Chinese companies) such as a high attrition rate? Particularly, did any good senior executives leave and did this affect company performance? What is Li Ning's incentive system like? Is there a career path and a retention policy? Does it need to be changed as the company expands, and how exactly?

•

• •

Where do they do the design and what trends influence the design? (apart from the Nike logo, was there anything else they imitated or emulated?)

一次穿 LI—NING 是什么时候 -摘自《看天下》半月刊 2007 年第 20 期 Chinese youths only wear Li Ning when they're students

Thomas suggested topics: - Growth Strategy: organic vs partnership vs acquisition - Which strategy moving forward? •

Organic growth (initial strategy?): in-house R&D, design and manufacturing (Li Ning and Z-DO)

• •

Partnership (JV or licencing to distribute other brands in China): Aigle and Lotto Acquisition: DHS (completed in July 2008)

- What goals shall Li Ning pursue on the mid-term? Local leader (China), regional player or leader (Asia) or global player?

1. 2. 3. 4. 5. 6.

International website: http://intl.li-ning.com/ http://www.ighof.com/honorees/honorees_ning.html

http://results.beijing2008.cn/WRM/ENG/INF/GL/95A/GL0000000.shtml http://en.wikipedia.org/wiki/Jianlibao_Group Roll (2006) Roll (2006)