China s changing fashion landscape
Western hybrids World economic upheavals and changing consumer preferences incited a shift in the way European and American fashion and apparel companies do business. Not only must companies deliver more collections under shorter lead times and more intense cost conditions, they must also ensure transparency across the product lifecycle and respect wage and quality regulations all of course, while offering appealing products and constant newness. The need to balance these sometimes contradictory obligations gave rise to the hybrid business model: brands, retailers and manufacturers began to extend their value chain into new areas in order to gain the control they need to stay within margins, drive future growth or simply maintain their market share and profit levels. RETAIL $ China s fashion industry is built on a foundation of manufacturing. Hybrid business model Companies are realizing that there is power in having control over as much of the value chain as possible. This means retailers are getting into branding and manufacturing, brands are getting into retail and manufacturing, and manufacturing is getting into branding and retail the result being the emergence of a hybrid business model. This is a business model explored in depth in a sister paper, Fashion s Changing Landscape: The emergence of the hybrid business model. Increased control accompanies expansion into the value chain, giving companies an immediate advantage. But this expansion comes with a caveat: companies can no longer be content to stay with their traditional area of expertise they must now master the entire end-to-end process. For example, manufacturers must develop an understanding of design innovation and fit if they wish to move closer to the consumer while retailers and brands must learn to manage production and even raw materials in order to guarantee product exclusivity. To transition to a hybrid model, companies must look for ways to build on their existing strengths. This includes using innovative technology within a smart process to increase competitive advantage and offer something genuinely interesting to consumers. The resulting balance of style, quality and cost is key to delivering products with the price for value and newness demanded by consumers. Brands Brands are often recognized by their logos, but they re remembered for the stories they tell and the relationships they build with consumers. Brands craft value through these experiences, which they transmit through their products. Many people are passionate about the brands they love. Retailers A retailer s typical role is to sell products. As masters of margin and human behavior, they determine which products will sell best where, at what price, and to whom. While brands are concerned with creativity and relevance, retailers must ensure perfect timing, product presentation and turnover. Manufacturers Manufacturing is where product ideas take physical form, and cost and time to market pressure become a reality. The manufacturer s main concerns are controlling cost and assuring quality, minimizing downtime and managing a complex array of lead times. 2
The Chinese case Asimilar phenomenon of transformation is happening in today s most explosive market, China. But China s fashion and apparel history is built on different foundations than those of Europe and North America. As members of a nearly entirely manufacturing-based industry, China s fashion and apparel companies face unique challenges as they seek to conquer the rapidly expanding and increasingly competitive domestic market and more mature international territories where design, fit and brand image are the cornerstones of success. One thing is certain: these companies also seek control from design to production as a way to combat rising cost pressures and guarantee product quality. They also seek the prestige and financial security of being a sought-after brand. Unlike the western fashion industry, the hybrid model in China is based almost exclusively on a transformation from manufacturing to retail and branding. While Chinese manufacturing companies have a very strong production skill set, they often lack the design and development knowledge that is essential to evolve from simply executing orders to creating innovative products that can compete with firmly rooted international brands for domestic attention. As Chinese consumers become more sophisticated, it will be that much more important for Chinese companies to overcome the lack of a mature design and development culture and become sensitive to the emotional relationship between brand and consumer, one that hinges on balancing prestige and individuality. The major changes taking place are likely to redefine the world s foremost manufacturing site as the world s largest consumer market. As the Chinese market transitions from apparel production to fashion consumption, Chinese companies must change their approach to designing, developing and delivering fashion. A uniquely evolving market According to the Organization for Economic Co-operation and Development (OECD), China is set to be the world s largest economy by 2016, surpassing even the United States. While the global recession of 2008-2009 saw foreign demands on the Chinese apparel industry fall by 27.8%, 1 domestic growth continued to climb. 2 By 2020 China will become the world s largest personal luxury market. Until roughly 10 years ago, the vast majority of Chinese consumers spent very little on clothing. Easy-to-wear sportswear dominated purchases, and companies like Nike and Adidas AG were some of the first foreign players to succeed in China. Even today, spending among Chinese consumers aged 14 to 45 represents only about a fifth of their European and American equivalents. But with the market set to triple in the next decade, companies can look forward to demand for more variety across different segments. 3 The new Chinese consumers are young, urban and optimistic. They haven t struggled as their parents did and they embrace fashion as an expression of individuality. They have more money to spend and they feel entitled to spend it. François-Henri Pinault, CEO of Kering has said, The Chinese consumer has a profound belief that they deserve luxury products now. They had fifty years with little, and now, many can afford to buy luxury goods. Their growth in demand is rooted in an expression of individualism in the way you dress. 4 OEM: Many Chinese apparel companies began as Original Equipment Manufacturers, making products that were conceptualized by another company and then retailed under that other company s name. ODM: In order to increase competitiveness, many OEMs began taking on value-added segments of the product lifecycle, such as elements of design and development, thereby transforming into Original Design Manufacturers. This became particularly important for Chinese companies as wages and raw materials prices went up, rendering ASEAN countries more attractive based on price alone. OBM: While OEMs and ODMs are B-to-B companies, Original Brand Manufacturers sell directly to consumers. This is a riskier business model with higher returns and more resources allocated toward brand development and upstream lifecycle processes. lectra.com 3
RISING QUALITY OF LIFE The demographic shifts in China are reflected in the growing number of cities in inland regions. The number of middle-income and affluent consumers will triple from 150 million to 400 million by 2020 and two-thirds of them will live in smaller tier 4 to 7 cities. 5 With the number of middleto-affluent (MAC) households set to increase from 50 million to 140 million by 2020, it is estimated that fashion spending in China will account for 30% of global fashion growth over the next five years. 6 This represents an incredible potential market for Chinese companies to sell to their own public, but they will have to compete with established foreign brands. Zara, H&M, C&A, Nike and countless others have all launched stores throughout China, expanding into lower-tier cities to capitalize on the increasing spending capacity of a growing inland market. 7 It won t be enough to offer a cheaper version of an item designed for a western market. Consumers needs and preferences are maturing and companies that make the effort to tune into that will have a greater chance of cementing customer loyalty at this important early stage. While market positioning and brand image are critical, product is key. The development of cities in rural areas will give companies a fresh new target market. Maturing consumer Increased quality of life and purchasing power leads to a diversification of activities and occasions for clothing. Fashion choices reflect this increase in perceived needs. As the Chinese consumer develops her own sense of style, an emotional connection to clothing develops, giving way to new buying habits that revolve around brand story and image as opposed to a simple need to cover up in public. Chinese companies in particular are in a good place to understand the Chinese consumer and produce clothes with the right cultural sensibility. For domestic brands to compete with foreign players that already master design and development, they must offer products that meet consumer needs, in terms of design and, most importantly, fit. 4
China will remain a manufacturing giant thanks to its unparalleled history and expertise in production, but changing demographics and a shifting economic landscape will require rethinking of business models if domestic companies hope to capture the new market. As companies see inventory surpluses rising at an alarming rate and many products selling at a discount online, they are considering another strategy, one that privileges distinctive, quality products. In an effort to overcome increasing price pressures, many OEMs and ODMs are looking at ways to add value to their products, namely by offering new services to enhance development and expanding retail activities. But doing this efficiently and successfully requires a thoughtful application of expertise and technology, as well as exacting design and development process knowledge. As these companies expand their value chain to take on more complex elements of the product lifecycle, they will need to add creative roles such as design, which demand a completely different skill set in addition to a different way of working. DESIGN Design and marketing are challenges for historically manufacturing-focused companies. Understanding the market, the competition and developing a compelling brand identity are key steps that require a specific set of skills. The Chinese fashion industry grew so quickly in response to enormous demand for manufacturing, that there simply wasn t motivation to develop sensitivity toward style. But trends are a global phenomenon and consumers around the world, including in China, are looking for new and interesting clothes all the time. China s new fashion aesthetic is one that combines western and Chinese styles, and privileges discrete luxury with fewer logos, more elegant design and higher quality materials. A focus on the domestic potential A reported 30% of Chinese companies are developing their own brands, but many when asked, do not feel confident in expanding abroad. 8 The competition is too fierce and they don t feel mature enough to compete, nor do they see the interest when there is a burgeoning market at home. Many prefer to focus on developing brand awareness and clear positioning in Tier 1 and 2 cities and, depending on target market, expanding out into the lower tiers. One company s mission statement clearly illustrates the trend: from made in China to created in China. If it doesn t fit, customers won t be coming back for more. lectra.com 5
DEVELOPMENT In addition to low brand recognition, many Chinese brands struggle with less-than-perfect fit and style. Investing in assuring good fit and product quality will be key to distancing themselves from the negative connotations associated with cheap knock offs of foreign brands and to give them a decided advantage over western companies that rely heavily on European sizing standards. Pre-production? Design Finding the garment that fits Fit is a double-edged blade for Chinese companies. On the one hand, they are most familiar with Chinese morphology and should theoretically be able to develop patterns more adapted for the market than western companies. On the other hand, finding skilled pattern makers in China that are sensitive to fashion demands is difficult. 9 As fit is the cornerstone of customer loyalty, having control over it is potentially a very big advantage. According to a Textile Future Report, one third of German companies entering the Chinese market cited products poorly adapted to the market as a factor in non success. 10 Some attribute Nike s recent slowdown in sales in China in part to unadapted fit; the brand name alone is no longer enough to propel sales. Nike must start developing the closer fitting clothing that Chinese consumers are beginning to demand. 11 Consistency of fit With the rise of e-commerce, fit has become a particularly pertinent concern. Finding the correct fit for a particular target market and making fit consistent across different styles are key to minimizing costly shipping and returns by unsure or unsatisfied customers. For example, if a consumer becomes familiar with a brand and finds something she likes, she will choose the same size the next time she orders. Retailers and brands want to avoid consumers ordering the same garment in multiple sizes, in hopes of finding Production? Product development Design and development are new roles in China. the right size. Shipping fees, inventory management and stock replenishment are all problematic, but they can be measured, managed and quantified. Brand loyalty, on the other hand, is difficult to attain and measure, and even more difficult to retain. Consistency of size is often associated with consistency of quality, and determines if a consumer decides to buy from a company again. Keeping pace with fashion Many Chinese brands are looking to fast fashion models to increase speed and reduce cost. One of the keys to mastering the increase in complexity, speed, cost, quality and fit at the development stage that characterizes fast fashion will be to recruit pattern makers who are sensitive to fashion and to work with advanced technology to streamline pattern development and ensure quality across targeted retail segments. Advanced technology for collection planning and management can also help in the combat against quality issues and is the only way to accelerate and maintain the global product development cycle. 6
Collection management In addition to fit, Chinese companies must also address the problem of product quality: 32% of samples in a Guangzhou Industrial and Commercial Bureau test failed to meet standards. 12 For companies hoping to gain domestic loyalty or expand overseas, product quality should be high on the list of priorities and not only for philosophical reasons: a company in Jiangsu province was fined $160,000 by a German importing company for failing to meet ecological standards. 13 Control equals quality Many Chinese companies realize that to get ahead they need to have control over the entire collection development process. Controlling quality is one obvious reason, but cutting out costly middle-men is another. With labor and raw materials costs on the rise, it s important to cut out as much inefficiency as possible. Managing design and expanding into branding and retail are ways for Chinese companies to extend control throughout the product lifecycle and critically, gain control over product presentation, sales and consumer experience. Technology like a fashion specific PLM can help them by providing a way to centralize product collection information and develop a smooth lifecycle process. Chinese company Nali began using a PLM to protect savoir-faire and best practices and shorten the learning curve for new or less experienced employees. Communication and knowledge sharing are at the core of their design strategy as they seek to expand their business and reach out to a larger consumer segment. Technology and expertise Some companies, especially large manufacturers based in Eastern China 14, have adopted some sort of technology in order to work with western brands and retailers or to begin to attack the domestic market themselves. By adding value to their products through investments in technology and equipment from design to development to production, companies are able to increase competitiveness, especially with emerging, lower cost ASEAN manufacturing countries. tangible that can be mass-produced is complex, and driving the creative vision behind it is often challenging. While Chinese manufacturers may traditionally master the back end of the process, raw materials procurement, production and delivery, the front end, which relies more on creativity can be a daunting world to enter. How does a company with little to no design experience compete with established brands? By balancing talent, technology and process. Talent Many Chinese companies turn to foreign creative talent, either transplants to China or freelancers who are not onsite full-time. While there are a handful of internationally recognized Asian designers, the region lags behind Europe and North America due to a lack of long-standing, wellestablished design schools. Although this is slowly changing, it is still a challenge to find home-grown design talent. Rising quality of life brings with it more occasions to dress for. While manufacturing operations may be lean and run smoothly, the question of what to produce and how to sell it looms large. Translating a creative idea into something One reason is that good designers must understand draping, pattern-making and garment construction, none of which hold the same glamorous aura in China as artistic direction does. Schools have difficulty getting students to shift to this way of thinking. In France and Italy, both strong fashion capitals, draping and pattern-making are very highly skilled, lectra.com 7
highly paid roles. The creative directors of major fashion houses have these skills, even if they no longer exercise them on a day-today basis. A blend of technical and creative expertise, these skills take years of training and practice to develop. There is also the question of design maturity. Many of the most well-known brands have taken years to develop their image and iconic styles; many Chinese companies are still relatively young. The best-known fashion brands such as Burberry, Gap, Gucci, Chanel and Dior, have either been in business for generations, or were founded with a strong, purposeful focus on brand, such as Ralph Lauren, Tory Burch, Michael Kors and Kenzo. Technology and Process Fashion-specific technology can help Chinese companies bridge the gap between development and production in several ways. By providing a framework with a variety of built-in best practices, technology helps keep development on track. Textile and fashion design best practices such as developing and controlling colors, creating proprietary woven, knit and print designs and creating new styles and translating these into technical sketches can all be guided with the right use of technology. Technology should also be visual to help translate ideas into a tangible vision that can be shared with different contributors. 3D product development, for example, provides a common visual reference for merchandising, design, product development and production teams. Not only can a designer immediately confirm that a pattern-maker has understood the style they were after, but fit, drape and fabric choice is easy to visualize and approve. Design approvals become much easier when everyone can see the same idea and fewer details are left to the imagination. Visuals can help new and less-experienced team members get up to speed more quickly. Finally, a proper technology foundation will provide information at both global and operational views, so that all teams can coordinate and synchronize, from retail planning to production delivery. Design is often a reluctant contributor to the product lifecycle management process because the Success requires finding balance. solutions traditionally used were not built to be intuitive or user-friendly for designers. But getting design on board is very important a brand is driven by their ideas. Advanced technology in the development office As China builds up a base of skilled workers, pattern development and prototyping technology can provide a way to develop and store patterns season after season, allowing a company to build up a base of knowledge and protect brand equity. By using the right kind of technology, a fashion company can always work from the same base set of patterns and then vary style details to continuously generate new designs that retain the fit of previous styles. They can also use this base pattern to automatically generate the sizes needed to produce and sell. Typically, fit is checked in a single sample size, but with 3D technology, all sizes can be checked very quickly. Given that certain styles do not render well in the smallest or largest sizes, even though they might look fine in the sample size, checking the entire size range is important. This is especially true with childrenswear, as proportions change drastically from one end of the scale to the other. Technology for collection management Gaining control over the entire collection development process requires a balance between technology and a smart process that is possible with a PLM. A fashion-specific PLM 8
can help synchronize the entire team, leading to overall process efficiency and better communication. This in turn contributes to cost savings, a shorter time to market and improved design and product quality, all important considerations for companies looking to expand their activity and compete with established brands. With PLM as a base, companies start with industry best practices, then in time, develop and capitalize off of their own best practices. They can, for example, use past styles as the basis for new ones instead of re-inventing specification information; draw on existing patterns and material layout to economize on fabric; and apply past grade rules to ensure consistent sizes and fit. With a strong technology base and proper IT practices, the effects of staff turnover can also be mitigated, helping companies keep pace as they recruit new talent. Teams can capitalize off of one another s knowledge, for example enabling design to interact with production and merchandising. A fashion specific PLM is a must for any company looking to go hybrid, especially one with a challenging learning curve to overcome. Technology must accommodate the different ways that different contributors to the product lifecycle function. Designers for example, need flexibility and room to innovate, but they also need structure to stay organized and keep up with the priorities of other contributors, such as product development, production and sales. The right technology goes hand in hand with the fashion product lifecycle, supporting creativity, streamlining development and empowering companies to control collection creation from beginning to end. Enhanced with best practices, technology is a strategic tool for manufacturing companies intent on expanding up the value chain and taking on China s new, demanding consumer market. Inland development is fueling growth in the Chinese market. lectra.com 9
Why lectra? For over 40 years, Lectra has supported the world s most respected fashion and apparel companies. With business and solution experts specialized in process optimization and advanced technology integration, Lectra has the experience to help fashion and apparel business models retail, brand, manufacturer or hybrid achieve their business goals. The transformation from manufacturer to retailer or brand requires an optimized design and development process that Lectra can help build. Delivering collections for the world s largest economy and beyond also necessitates innovative technology and a streamlined process from design to production. Being competitive from the start is critical. We can assess your current way of working and future goals to then plan the right evolutions to take you where you want to go. Our design, development, pre-production and production solutions coupled with consulting and training were developed with input from our customers to meet real-world challenges. We can help bridge the gap between design and production, seamlessly. Lectra also understands the importance of ensuring the future of fashion knowledge and expertise. That s why we have partnered with 870 schools worldwide, including Donghua University and The Hong Kong Polytechnic University, among a few in China. Each year approximately 70,000 students are trained on Lectra solutions, which represent the leading edge of fashion and apparel technology with innovations like all-size pattern development and 3D prototyping. Lectra has been in China for over 35 years and so we have witnessed the evolution from apparel to fashion from manufacturer to hybrid first-hand and are proud to have helped numerous companies pursue their goals in both the domestic and international markets. 10
1 Apparel Manufacturing in China. IBISWorld Industry Report 1810. August 2012. p5. 2 China to Be World s Largest Economy by 2016: OECD. Site visit 09/08/2013. http://www.wwd.com/business-news/forecasts-analysis/china-to-be-worlds-largest-economy-by-2016-oecd-6862893 3 Dressing Up: Capturing the Dynamic Growth of China s Fashion Market. The Boston Consulting Group. July 2011. p3. 4 China s upper middle class will drive long term growth of its luxury market. December 2012 http://www.cpp-luxury.com/chinas-upper-middle-class-will-drive-long-term-growth-of-its-luxury-market/ 5 Smaller cities offer bigger scope. China Daily Europe. Site visited 08/08/2013. http://europe.chinadaily.com.cn/china/2010-12/31/content_11781822.htm. 6 Dressing Up: Capturing the Dynamic Growth of China s Fashion Market. The Boston Consulting Group. July 2011. p5. 7 Dressing Up: Capturing the Dynamic Growth of China s Fashion Market. The Boston Consulting Group. July 2011. p3. 8 Apparel Manufacturing in China. IBISWorld Industry Report 1810. August 2012. p21. 9 Hung, Huang. ChinaFile: The Problems with China Design. Women s Wear Daily. July 18, 2012. http://www.wwd.com/fashion-news/fashion-features/chinafile-the-problems-with-china-design-6088115?module=fashion-fashion%20features-third. 10 Textile Future by Virginia. Issue December 2011. 11 Nike just doesn t do it with Chinese in lost sales year. Business of Fashion. July 17, 2013. http://www.businessoffashion.com/2013/07/nike-just-doesnt-do-it-with-chinese-in-lost-sales-year.html 12 Textile Future by Virginia. Issue December 2011. 13 Apparel Manufacturing in China. IBISWorld Industry Report 1810. August 2012. p22. 14 Apparel Manufacturing in China. IBISWorld Industry Report 1810. August 2012. p16. lectra.com 11
About Lectra Every Lectra Fashion Project benefits from Lectra s 40 years of fashion expertise in the form of consulting, training, and ongoing support. Lectra s consultants evaluate customer needs and process to propose appropriate solutions to support their unique business goals. Contact one of our global offices today to find out if a Lectra Project is right for your business. CONTACT LECTRA Lectra has offices worldwide. Please visit www.lectra.com for more information. Lectra in Fashion With 40 years experience in fashion and apparel, Lectra s mission is to provide a complete spectrum of design, development, and production solutions to confront 21st-century challenges. From first creative spark to final product, our professional services address an end-to-end process. We support the day-to-day operations of our customers in over 100 countries for around-the-clock process optimization. From fast fashion to luxury to ready-to-wear, Lectra s 23,000 customers in markets as diverse as casual, sports, outdoor, denim, and lingerie represent every development and sourcing model imaginable. Beyond suppliers and manufacturers, they are the brands you love and the stores where you shop. lectra.com