After more than a decade of robust expansion, China’s apparel industry is looking to identify new growth opportunities. But how can these companies embrace breakthrough innovation at a speed that mirrors that of China’s high-speed railway? The financial results published recently by some large companies could provide clues.

Excess inventory was once the biggest challenge for Chinese apparel companies, a problem solved to some extent by the digitized, smart and flexible supply chain. Today, a series of factors are forcing the industry to change: the global economic situation and the upheavals in the commodity markets have led to soaring costs; the Regional Comprehensive Economic Partnership has produced dividends and investments, as well as trade liberalization that has led to a further shift of some labor-intensive processes to emerging countries, where land and labor is cheaper; problems such as the homogenization and low technological content of Chinese products still exist, and the country is experiencing a slowdown in GDP growth and consumption.

From offline to online, from overseas markets, from brand building to acquisition, apparel companies’ attempts to reinvent themselves reveal the struggle for survival of the industry as a whole. Yet there is no shortage of good performance in the financial results released by major e-commerce platforms and some apparel companies.

According to results released by JD Group earlier this month, net revenue was 275.9 billion renminbi (about $43.4 billion) in the fourth quarter, a year-on-year increase of 23%. . Net revenue for the whole of 2021 reached 951.6 billion renminbi (about $149.6 billion), up 27.6%. JD Apparel, a quality apparel platform, had a strong year, with Chinese and fashionable designer brands and stores such as Qinghe cashmere, Putian shoes and boots, Jiangyin thermal underwear and Xiaolan men’s underwear joining the platform. On November 11, during the Singles’ Day shopping festival, more than 6,000 new brands participated in the promotion, and more Chinese clothing companies took the opportunity to accelerate their digital transformation.

Compared to JD’s optimism, rival Alibaba is more cautious. Already two years ago, 5 million merchants around the world participated in the Singles’ Day shopping festival on the Tmall e-commerce platform, which once opened a new path for foreign trade businesses. But Alibaba’s results for the October-December period, released in late February, showed revenue for the third quarter of fiscal 2022 was 242.58 billion renminbi (about $38.1 billion), up 10%, while net profit was 20.43 billion renminbi (about $3.21). billion), a sharp drop of 75%. The data showed that shoppers on Alibaba in China had grown to 979 million as of Dec. 31 and the goal of reaching 1 billion annual active domestic customers by the end of this fiscal year should be met on schedule.

But the negative growth of Alibaba’s core e-commerce business for the first time in its 18-year history signaled a commonly accepted industry trend: the turning point has arrived. It would be costly and inefficient to attempt to break into the industry when 1 billion active users have already been gained in China, which has a total population of 1.4 billion. This number is the growth ceiling. Take the December figures, for example: sales of women’s/men’s/kids’ clothing/household linen/sports shoes on the Alibaba platform saw declines of 20%, 37%, 33%, 38% and 45%, respectively, with only the women’s clothing category. increase in sales, of only 1 percent.

As a result, Alibaba has stepped up its efforts to develop its overseas markets, which were first introduced in 2010 and offer huge potential for future growth. And Lu You, who was promoted to general manager of Tmall’s apparel industry late last year, also publicly proclaimed at the Business Trends Conference that Tmall had launched a tool called “Style Digital.” . The tool adds various tags based on different styles, from preppy to bohemian. Thanks to algorithms, the system automatically identifies which style category the product belongs to and classifies it in the corresponding category.

Although the strong momentum of e-commerce companies in China has been globally recognized, the financial results and strategies of these two leading platforms clearly show that any concerted effort by established companies would result in only a small percentage increase in revenue. and that a ceiling on growth would eventually be reached. Finding a new breaking point becomes the only way to achieve meaningful growth multiples while building a sustainable future.

Still, there is good news: JNBY Cloth’s first-half results showed revenue growth of 7.3% to 2.48 billion yuan (about $390.7 million), while profit from Semir Apparel company‘s operation in 2021 of about 15.42 billion yuan (about 2.42 billion US dollars) was an increase. by 1.41 percent. The moderate growth of these companies despite all the market pressures and the good performance of Erdos, Lilanz, Xtep and other apparel companies could indicate that Chinese apparel companies have found a second growth curve.

Earlier this month, Erdos reported total revenue of 36.41 billion renminbi (about $5.72 billion) for 2021, a 57.3% increase from the previous year. and a total profit of 9.63 billion renminbi (about $1.51 billion), an increase of 280.2%. compared to the year 2020 affected by the pandemic.

As a leading cashmere clothing company, Erdos adheres to the concept of “full life cycle” and the sustainable development of the entire supply chain, realizing “green” production from raw materials to finished products. . By reinventing the traditional manufacturing industry with technology and innovation, Erdos has transformed “manufacturing” into “intelligent production”, making it a model for the Chinese cashmere industry as it seeks to grow in globally and add premium, environmentally friendly products.

Hong Kong-listed Chinese menswear brand Lilanz also released its financial results this month, with total revenue up 26.1% to 3.38 billion renminbi (about 531 $.4 million) for fiscal 2021. The company also saw its sales rate increase to 73% from 65% in the fourth quarter.

Although Lilanz is smaller than Erdos, the 35-year-old Chinese menswear company is undertaking a total restructuring of its products, channels and brands and a transformation of its sales model. Wang Dongxing, chairman and chief executive of Lilanz China, said last year’s strong results despite market upheaval were the result of the company’s change in sales model, channel optimization, products aimed at young consumers and internet-plus strategies. He said sales performance was satisfactory while total retail value exceeded expectations.

Lilanz’s main collection and its business casual Less Is More collection have undergone significant changes over the past two years. Less Is More adopted a self-managed model from the second half of 2020, with a total of 290 stores open at the end of 2021, a net increase of three stores. Meanwhile, about 40% of major Lilianz collectible stores have adopted an “agency model” starting with the spring 2021 season. By the end of 2021, 966 stores have been converted into franchised units. This evolution of the sales model has resulted in a significant reduction in the average annual number of days of rotation of trade receivables from 101 to 57 days.

At the same time, Lilanz continued to improve product customization and design, with around 50% of the fabrics used in the exclusive Less Is More collection it developed.

Xtep, a manufacturer and distributor of its own brands as well as overseas sportswear and lifestyle brands, released its performance for the year 2021 this month, posting record revenue of 10.01 billion renminbi. (approximately $1.57 billion), up 22.5% from 2020. Strong revenue growth from leading brand Xtep, up 24.5% to a record RMB 8.84 billion (about $1.39 billion).

Behind the record sales and continued growth is growing consumer recognition of the Xtep brand. Also noteworthy last year was the rapid revenue growth of still-emerging brands in China, such as K-Swiss, Palladium, Saucony and Merrell. According to its “five-year plan” (2021 to 2025) released in September 2021, future revenue targets for major brands will be 20 billion renminbi (about $3.14 billion), with a compound annual growth rate of 23 %; future revenue targets for the new brands will be 4 billion renminbi (approximately $628.7 million), with a compound annual growth rate of more than 30%.

From exporting to domestic sales, following the trend to self-innovation, from OEM to acquiring foreign brands, Xtep has grown from a foreign trade foundry to a global wearables enterprise. sport. As the Xtep itself shows, the national sports market is in a period of transformation due to personalized and experience-based consumption. To better respond to consumer demands for better footwear and apparel, Xtep has increased its investment in technology. The group’s recent financial reports show that since 2015, its R&D investment ratio has remained above 2.4% throughout the year, and in 2021 the figure was around 252 million renminbi (about $37.2 million), representing 2.5% of revenue. In terms of product innovation, taking racing products as an example, it launched the Race series of 160X2.0, 160XPRO and 300X2.0 in 2021, as well as the Race Training Shoe 260, which is specially designed for marathon runners and ordinary runners. with training needs.

The financial results of these companies indicate that China’s apparel industry continues to evolve against the backdrop of globalization and amid significant pressures, ranging from the pandemic to the global economy and political unrest. Faced with the robust and rapid expansion of foreign brands in the Chinese market and multiple challenges, the country’s apparel industry is starting to innovate beyond the traditional low-cost manufacturing model by seeking new avenues for growth.

Editor’s Note: China Insight is a monthly article written by the staff of WWD’s sister publication, WWD China, to provide a more in-depth look at developments in this key market.