Chinese Nike, Adidas ODMs Have Higher Profit Margins Than Big Brands

[Stranagor]

(Yicai Global) Jan. 25 -- Chinese firms that manufacture footwear and clothes for renowned international brands such as Nike, Adidas, and Uniqlo can have higher profit margins than their clients based on their supply chain prowess.

Ningbo-based Shenzhou International Holdings, which makes sportswear and lingerie for brands such as Nike and Puma, had a 19.6 percent net profit margin in 2021. In 2020, the rate was 22.1 percent.

Zhongshan-headquartered Huali Industrial Group, which produces footwear for Converse, Vans, and Ugg, reported a net profit margin of 15.7 percent in the first half of last year. In 2020, the figure was 13.5 percent.

It may surprise some that the numbers are higher than those of famous overseas brands. Nike's net profit margin was nearly 12.9 percent in 2021, rising from 6.8 percent. Others logged even smaller numbers. In 2020, Adidas had a net profit margin of 2.2 percent, declining from nearly 8.4 percent.

Nike and others can reside at the top of the industrial value chain but they have huge marketing expenses to maintain their brand positioning, which affects their net profits, said Wu Daiqi, chief executive of brand management company Siqisheng.

Chinese manufacturers' advantages point to ecosystems. Both Shenzhou and Huali have plants in Vietnam to cut their labor costs. But their long-term competitiveness lies in production efficiency, as well as research and development skills.

For leading original design manufacturers, some of the important factors are international teams, information systems, as well as investment in research and development, hardware, and talents, said Zhou Yaling, chairperson of apparel company Sabrina.

Even though ODMs' gross profits may be lower than those of premium brands, some ODMs have become supply chain companies that control a certain category after vertical integration, said Cheng Weixiong, general manager of Shanghai-based Liangqi Brand Management.

Shenzhou makes fabrics but also ready-made clothes and can thus cut its transportation costs and delivery time, said Zhou. Moreover, automated production reduces labor costs, the brand chief added.

Huali is one of the few ODMs with a complete industrial chain in footwear manufacturing, said Zhou. The firm can make molds, shoe uppers and soles, as well as finished products.

ODMs need to match their clients' changing demand. For example, Shenzhou bought special equipment to make lightweight shoe uppers for Nike's Flyknit trainers. The share of Flyknit upper orders rose to make up 6 percent of the firm's revenue in 2016 from 2 percent in 2012. Moreover, Huali became a supplier for Nike after solving a problem related to vulcanized rubber sole shoes in 2012.

However, not all ODMs are as profitable. Yue Yuen Industrial Holdings, a Chinese firm that also makes shoes for Nike and Adidas, reported up to 6 percent in net profit margin in recent years. At the lowest, the rate was minus 3 percent.

"I have seen factories with a long history of cooperation with Nike and Adidas," said Zhou. "But they were later eliminated. Any firm can be excluded if they make no progress and cannot keep up with the times."

Chinese Nike, Adidas ODMs Have Higher Profit Margins Than Big Brands

www.yicaiglobal.com

 

[letsrock]

this may not be as impressive as it sounds. Lets say OEM sell their stuff for $10 million to Nike and Nike sells it for $90 million in market (using apple conversion of 1:10) then 20% on 10 million is 2 million and 6 percent on $90 million is 5.4 million.

Morover leaving apart the absolute profit margin the $90 million can support a lot of cushy sales and design jobs at much higher salaries whereas oems have to emit pollutionetc.

 

[Stranagor]

this may not be as impressive as it sounds. Lets say OEM sell their stuff for $10 million to Nike and Nike sells it for $90 million in market (using apple conversion of 1:10) then 20% on 10 million is 2 million and 6 percent on $90 million is 5.4 million.

Morover leaving apart the absolute profit margin the $90 million can support a lot of cushy sales and design jobs at much higher salaries whereas oems have to emit pollutionetc.

Extreme outsourcing is a good thing for US. In the end, private interest does not have to care about public interest.

China's OEMs outsource to other SEA countries, too, whereas it receives high-end investment (178 billion USD in 2021) and upgrades its manufacturing.

I think, in a scheme like Tesla doing marketing and investor relationship stunts in the US while building in China with an eye for exports with 90% of components locally sourced is a good arrangement.

What is important for China is to keep strong in manufacturing in up-middle-down stream while pushing for high-end, value-added production. This solves lots of underdeveloped-developing country problems such as low wages or environmental pollution.

The ability to produce simple face-masks could come handy one day. Who knows.

 

[letsrock]

Extreme outsourcing is a good thing for US. In the end, private interest does not have to care about public interest.

China's OEMs outsource to other SEA countries, too, whereas it receives high-end investment (178 billion USD in 2021) and upgrades its manufacturing.

I think, in a scheme like Tesla doing marketing and investor relationship stunts in the US while building in China with an eye for exports with 90% of components locally sourced is a good arrangement.

What is important for China is to keep strong in manufacturing in up-middle-down stream while pushing for high-end, value-added production. This solves lots of underdeveloped-developing country problems such as low wages or environmental pollution.

The ability to produce simple face-masks could come handy one day. Who knows.

Thats all good. Nobody will say manufacturing is bad. But owning the customer, their tastes, ability to design final goods to match the customer interests- all are much more lucrative capabilities. Not saying china cannot do them - tiktok is one great examples where i am amazed how well a chinese company cater to tastes of the world. This applies in this case too - nike is still nike, no name oem is no name oem.

 

[Stranagor]

Thats all good. Nobody will say manufacturing is bad. But owning the customer, their tastes, ability to design final goods to match the customer interests- all are much more lucrative capabilities. Not saying china cannot do them - tiktok is one great examples where i am amazed how well a chinese company cater to tastes of the world. This applies in this case too - nike is still nike, no name oem is no name oem.

Exactly. Two different development philosophies. China has textile brands, as well, but they are still regional, at most (Anta, Li-Ning and 361 come to mind). But, I find their designs and quality increasingly appealing, as well. I do not think they have cash flow problems. What they need is a good marketing strategy. That takes time but I can see the progress.