Chinadaily：Dressed for success

　 Title：Dressed for success

   Editor's note: China's manufacturers have become a major force in the world economy as they churn out Made-in-China products and export them to every corner of the world.

　　China Business Weekly is partnering with Sohu.com to look at China's leading manufacturers that are flexing their muscles both at home and overseas and are climbing up the global value chain.

　　In this issue, we take a look at Youngor Group Co Ltd, a private garment manufacturer in Ningbo, Zhejiang province.

　　Neighboring 33-hectare Youngor Industrial Park, new plants are clustered in a 60,000 sq m manufacturing area that will be complete within two years.

　　The new workshops, an investment of over 200 million yuan, will be equipped with new production lines that combine the technologies and strengths of both of China's leading garment manufacturers, Youngor Group Co Ltd and Xin Ma - the menswear business of US-based Kellwood Company, which was acquired by Youngor for $120 million in January. Design and development teams from both groups will work together in the new facilities.

　　Compared with TCL's acquisition of Thomson and Lenovo's buyout of IBM's PC unit - which received much media attention - Youngor's purchase of Xin Ma has been very low profile.

　　However, the $120-million takeover is a milestone for China' textile and apparel industry because it's the first overseas acquisition by a Chinese private clothing manufacturer and the largest foreign takeover deal by a domestic garment maker.

　　Li Chengru, chairman of the 29-year-old Youngor, says acquiring Xin Ma could expand the private company's business and help it turn from an OEM (original equipment manufacturer) into an ODM (original design manufacturer).

　　It will also help Youngor improve its value chain by integrating cotton plantations, weaving, logistics, distribution and marketing in both domestic and overseas markets, especially in the United States and Europe, he adds.

　　Xin Ma, one of the top three garment manufacturers in Hong Kong, has an annual sales income of $500 million.

　　"Reducing risks and increasing value is our top priority. Overseas expansion could help us offset the risks brought by a slowing and uncertain market," says Li, adding Youngor would also benefit from Xin Ma's strength in design and quality control and its international logistical and distribution networks.

　　After the acquisition, Youngor has become the No 1 menswear maker in the world. The company now has 430,000 employees and is able to produce 80 million pieces of shirts a year.

　　Xin Ma, a wholly owned company by New York-listed Kellwood, is a top shirt producer in Asia-Pacific region with its biggest source of revenue currently coming from North America.

　　The acquisition gives Youngor Xin Ma's 14 production bases in Sri Lanka, the Philippines, and some regions in China the ODM business for 20-plus global brands such as Polo and Calvin Klein; it also includes the licenses for five brands including Nautica and PerryEllis.

　　The combination also brings together a management and design team with decades of experience in international brands, a complete distribution network that covers hundreds of department stores in the US, as well as a powerful logistics system that ensures goods get to those sales points smoothly in real time for zero-stock retailing.

　　"Youngor bought Xin Ma at a right time at a relatively low cost," says Yu Jie, garment industry analyst of Everbright Securities, adding the US recession and yuan's appreciation have given Youngor a lot of bargaining power.

　　She also stresses that Xin Ma's distribution network in the rest of the world, especially in the United States and European marketplaces can help Youngor to be exempt from export rebate uncertainties.

　　Tentative negotiations on the acquisition began in 2005, when women's clothing specialist Kellwood wanted to sell its men's garment segment, Xin Ma. Li bid $160 million, roughly the same value as its net assets.

　　But the Union Bank of Switzerland estimated the value of Xin Ma at $320 million, forcing Youngor to abandon the bid because of the higher price.

　　However, Xin Ma's profits began to fall in 2006 as the competition became fiercer in the American middle and upper-end clothing markets and the US recession triggered by the subprime mortgage crisis curbed consumption. Kellwood was unwilling to support Xin Ma and offered up the men's clothing business again at a price Youngor found reasonable. Youngor expects the acquisition will bring an annual sales revenue and net profit of $360 million and $12 million respectively.

　　The profit is based on the OEM backlog held by the acquired company, whose order prices are 20 to 30 percent higher than those received by Youngor itself. And Xin Ma's annual shirts production capacity is 30 million, 2.5 times Youngor's current capacity.

　　For incoming orders from international brands, Xin Ma charges about $10 for each shirt, while Youngor charges $7. Depending on Xin Ma's experience, Youngor is likely to take a shortcut to switch from OEM to ODM and become more profitable.

　　Challenges

　　Chinese textile and apparel companies are taking various measures to cope with a struggling market. For example, Fujian-based Septwolves is trying to build itself as a premium brand to target the high-end market which promises higher margins; FIRS - a menswear company based in Ningbo, the same place as Youngor - has moved its headquarters to Shanghai and is focusing on franchise operations and diversifying its businesses as its core strategies; and Romon, a leading men's suit maker, is remaking itself to carry several brands rather than one.

　　Still many of them still saw sales decline amid increased competition and a slumping international market. Youngor is one of the few exceptions.

　　According to Youngor's annual report, its textile sector continued to show strength last year with operating revenues amounting to 4.66 billion yuan, up 19.73 percent from one year ago. Market shares of Youngor's shirt and suit division grew steadily in 2007 from 11.61 percent and 13.88 percent in January to 14.04 percent and 16.27 percent by December, ranking first for 13 and eight consecutive years respectively.

　　Though some analysts herald the Xin Ma acquisition as a pivotal point in Youngor's development strategy, Li says he is very cautious and an overseas takeover will not be the key expansion plan for the company in the coming years.

　　A major challenge for Youngor is how to apply its own successful business model to Xin Ma in order to reduce the operational costs and make it more profitable. Xin Ma's business volume in 2006 dropped to half of that in 2004 due to high costs and reduced quotas.

　　For the manufacturing line, Xin Ma has the edge for high quality control but with relatively low efficiency, while Youngor is faster and produces more. "Combining the strengths of both companies is our top priority in the following years," Li says.

　　Another challenge could be integrating the design teams, a merger that could clash due to different corporate cultures and operational models, says Zhang Weiwen, a senior researcher at Guotai Jun'an Securities.

　　But Li sees the global vision of Xin Ma's design team and Youngor's keen understanding of the local market as a perfect match.

　　The two teams will be integrated under direct coordination and supervision of the headquarters in Youngor Industrial Park when the new production facilities are complete. However, Li admits, the full integration could take "years".

　　(China Daily 07/07/2008 page7)