(please answer all the three Questions and i will give a thumbs up )

Case 7: Hong Bang Tailors at a Crossroads of Diversification

Key words: importance of strategy, corporate-level strategy, diversification strategy

Purpose: This case introduces the journey of diversification for apparel enterprises in Ningbo, with focus on the significant difference between the strategies developed by Ningbo Shanshan Co., Ltd., hereinafter, Shanshan and Youngor Group Co., Ltd., hereinafter, Youngor. The case is to help students understand the importance of strategic management and the concepts of diversification strategy. In particular, as strategy means diversification itself is not classified as good or bad, its management process is the key.

Case:

Diversification itself is not classified as good or bad, its management process is the key. Diversification is often pursued due to market opportunity and risk avoidance, but the success lies in common resources and professional management. Many apparel entrepreneurs have adopted diversification strategy yet they still believe that clothing is their foundation.

Ningbo tailors have long been making Western-style clothes. In the late Qing Dynasty and early Republic of China, Europeans arrived at the Port of Ningbo to explore Chinese market. They had red beards and wore very differently from the locals, so Ningbo tailors who made custom clothes for them were called "Hong Bang Tailors" (Hong means red, Bang means a cohort of people.). They made five First in the history of Chinese clothing, namely the first Western-style clothes, the first Zhongshan coat, the first Western-style clothing store, the first theoretical book on Western-style clothes and the first Western-style clothes school. As the "city of apparel", Ningbo is home to many top brands like Romon, Taiping Bird, Tonlion, Progen, GXG, etc. Among others, the most famous ones are Li Rucheng's Youngor and Zheng Yonggang's Shanshan.

Turn left, or turn right?

Both being the leading companies in the apparel industry in China, Youngor and Shanshan march on different roads of industrial expansion. In 2002, Youngor formed a joint venture with Japanese Itochu and Nisshinbo to manage the upstream since the quality and purchase of apparel fabrics has a direct influence on the cloth textures, the manufacturing process, and the speed of consumer demand response. With this advantage, Youngor launched DP non-iron cotton shirts. They gained popularity in the market and have become the main shirt products with a monthly capacity of 400,000 pieces. Responding to global high requirements for ecofriendly and comfortabl clothing fabrics, Youngor collaborated with the Military Equipment Research Institute and developed China-hemp fiber with improved breeding. As a result, the hemp products are soft, breathable, anti-mildew and deodorant. In 2007, Youngor invested RMB 48 million in Hemp Industry Investment Holding Co. for development, planting, acquisition, production, processing, transportation and sales of various products in relation to hemp. In 2009, the world's first hemp fiber line, jointly invested by Youngor and Ningbo Yike Technology Industry Co Ltd., was put into operation with an annual production capacity of 5,000 tons, forming a guarantee for raw material supply. Although the hemp industry is still at a loss, Li Rucheng firmly believes that hemp has great business opportunities in the application of medicine, food, health products and other fields. In 2020, Youngor recorded revenue of RMB 5.75 billion, with profit reaching RMB 1.082 billion.

Unlike Youngor, Zheng Yonggangs Shanshan put major efforts into the downstream and adopted a multi-brand and internationalization strategy. They ran clothing business with brand operation in the global market. Shanshan has established long-term collaborative relationships with worlds famous apparel enterprises and institutions, such as Itochu, Forall, Rubicon, Renoma and the Fdration de la Haute Couture et de la Mode. Shanshan had more than 2,000 stores in China with a suit market share of 37.4% in its prime, but the number of stores decreased to 1,226 and market share shrank to 1.55% in 2018. In the same year, Shanshan spun off its apparel business to establish separately Shanshan Brand Operation Co., Ltd.

Fortunes Brought by Diversification

"Based on my experience, when an apparel company reaches an annual sale of RMB 50 million to RMB 100 million, there isnt much profit to earn due to the increasing inventory", said by an executive in the apparel industry. Then Youngor and Shanshan began to build other businesses, they started their journey of diversification.

When Chinas housing reform just begun in 1992, Youngor already had its first real estate company, Youngor Real Estate. But it didnt have rapid development until 2000. In 2000, Youngor launched the "East Lake Garden" project, marking the first entry in the real estate industry in Ningbo. Two years later, Youngor Real Estate achieved a revenue of RMB 534 million and started the implementation of the Yangtze River Delta Development Strategy. The company entered the Taizhou market in 2002, the Suzhou market in 2004, and the Hangzhou and Shaoxing markets in 2007. In 2010, the company reached a revenue of RMB 6.843 billion, surpassing apparel business revenue for the first time. The real estate business became the major business for Youngor. In 2020, its revenue reached RMB 5.071 billion with a total profit of RMB 2.014 billion. The real estate business contributed greatly to Youngors performance as the apparel industry was hit by the COVID-19 pandemic. Besides the real estate business, Youngor also entered the financial investment to support diversification. Youngor took a stake in Bank of Ningbo in 1997 and invested RMB 320 million in CITIC Securities in 1999, which came out to be a huge profit 10 years later. Youngor made a series of equity investments afterwards and held shares of listed companies with market value worth of RMB 24 billion in its prime. The company was given a nickname, "stock speculation specialist", by the media. Youngors obsession with equity investment made it like dancer on the tip of a knife: its operating income frequently fluctuated with the market. After two financial crises, Youngor gradually scaled down its financial investment business. According to the new financial instruments, Youngor had available-for-sale financial assets worth of RMB 19.6 billion to be reclassified as financial assets measured at fair value through profit or loss.

When Youngor entered the real estate industry, Shanshan also created 100 multimillionaires with its apparel business. But the business was not very profitable and the inventory remained high, Zheng Yonggang decided to make a breakthrough and said that "A big enterprise must enter a big industry. Shanshan must reform to become bigger and stronger. To do this, we need high technology". At the end of 1998, Shanshans headquarters were relocated to Pudong, Shanghai. Despite missing a golden decade of real estate, Shanshan continued its efforts in science and technology and witnessed the start of the development of new energy industry.

In 2020, Shanshan achieved an income of RMB 6.915 billion in the lithium battery materials business and reached a year-on-year increase of 1.83%, with RMB 288 million as the net profit attributable to the listed company. In the same year, the company transfered 48.1% of the equity of Shanshan Brand Management Co. Ltd. and was no longer the direct and ultimate holding company of Shanshan Brand Management Co. Ltd. Shanshan has become the worlds largest integrated lithium battery materials supplier and top three in the world in terms of scale and technological advancement and created 863 research achievements and dozens of independent patents in four countries. Shanshan also gains investment returns through investment in Bank of Ningbo, Huishang Bank and other financial institutions and engages in financial leasing, commercial factoring and other financial businesses. The company successfully transformed from the first listed apparel enterprise to a leading enterprise in the new energy industry. Shanshan has becomes a diversified enterprise group with technology, fashion, financial services, urban complex and trade logistics as its major businesses.

Same Goal Achieved with Different Means

Diversification itself is not classified as good or bad, its management process is the key. Diversification is often pursued due to market opportunity and risk avoidance, but the success lies in common resources and professional management. Common resources include management, capital, brand, technology, channels, etc. Youngor and Shanshan have established a good brand image throughout their major apparel business with improved cash flow. This laid the foundation for the expansion of other businesses. Their good relationships with local governments also provide important support for the diversification.

For professional management, Youngor and Shanshan both apply the principle of "let professional people do their work". Hiring professional managers to manage industrial companies is an important method for enterprises to manage diversified businesses. In relation to authorization, two companies adopted different solutions. Shanshan appoints professional managers through the Board of Directors based on the headquarters recommendation, and the headquarters fully delegates the operation to each industrial company, and manages companies through finance, internal control, audit, performance control, etc. Shanshan conducts an internal management analysis and evaluation and a performance audit twice a year. The performance appraisal of the management team focuses on the ROE, supplemented by growth and risk control indicators to fully encourage their creativity, initiative and motivation.

Youngor looked for professional managers from external resources. For example, Jing Zhaohui, the Executive Chairman of Youngor Wool Textile Co., Ltd., had textile background and many years of experience as a senior executive in the textile industry. Meanwhile, Li Rucheng tightened his control over Youngor through equity control. By the end of 2020, Li Rucheng and his daughter held 98.73% of the shares of Ningbo Shengda Development Co. Ltd. to indirectly increase their holdings in Youngor. As a result they directly and indirectly hold 33.03% of Youngor from less than 10% before this equity change completed.

Transformation Underwent by Hong Bang Tailors

Some apparel enterprises might have world-leading manufacturing capacity and operate major OEM businesses of international brands, yet they dont have a famous brand in the global market. For enterprises like Youngor, they do have a complete production chain, various sales channels in the domestic market and a strong brand influence; however, they went under tremendous pressure as inventories proliferated due to flat-type e-commerce consumption habits.

The whole apparel industry has run into serious supply problems since 2013. Shanshan also faced the dilemma of high inventory levels, which added up to RMB 430 million, accounting for 48.7% of total assets in 2020.

Youngor and Shanshan are not alone in their journey to pursue diversification. Other leading apparel enterprises in Ningbo have also implemented diversification strategies: Taiping Bird entered into car sales, home furnishing products and commercial investment, and Romon ventured into real estate development and international trade. With increasing cash flow and inventory level brought by the development of apparel business, diversification is a must for enterprises in Ningbo when searching market opportunities and avoiding risks.

Besides the efforts taken by entrepreneurs, the huge demand of clothing as one of the basic necessities of our life is also an important guarantee for enterprises to handle external risks. "Two financial crises helped Youngor a lot and made us realize that our strength is still clothing", Li Rucheng said. Shanshan has successfully transformed into a high-tech enterprise from a suit manufacturing giant. Zheng Yonggang once said to the media: "The era of making money by selling apparels has long passed. I prefer to be called a financier."

Questions:

What are the drivers for apparel enterprises in Ningbo to pursue diversification?

Related diversification strategies or unrelated diversification strategy does Youngor and Shanshan adopt? Why?

Please evaluate the diversification strategies of Youngor and Shanshan.