There’s a Good Chance Your Favorite Clothes Are Made by a Company You've Never Heard OfBy and
Korean producers look to boost margins as OEM business slumps
Companies have factories around the world making apparel
Hansae Co. has a favorite boast: One in every three Americans is wearing its clothes. If you’ve never heard of it, or Sae-A Trading Co., or Youngone Corp., you’d know them better by the labels they stitch on: Zara, Abercrombie & Fitch, Nike, Patagonia and many more.
They are the South Korean companies that are among a handful in Asia who have dominated the world of apparel for years, making shoes and shirts in South Korea in the 1980s and then moving factories to China and on to other developing countries as labor costs rose. After three decades of making clothes for others, they want their own brands.
"It’s a highly commoditized market," said Anna-Karin Birnik, a brand consultant based in Singapore. "A lot of firms see the opportunity not just to manufacture for others, but since they have the manufacturing capability, to leverage that and develop their own brands and command a higher price."
The push to increase margins has become more acute in the past year after a pile-up of unsold inventory in U.S. retail chains led to a drop in U.S. apparel imports since the first quarter of 2016. Hansae’s operating profit fell 43 percent to 81.6 billion won ($70.4 million) in 2016. Youngone, which makes Nike and Patagonia outdoor clothing and sportswear, suffered an 8.8 percent decline to 179.4 billion won.
Last year, Hansae acquired local retailer MK Trend, now named Hansae MK Co., with casual wear brands including TBJ, Andew and Buckaroo. The company’s share of revenue from being a so-called original equipment manufacturer -- making goods for other brands -- fell to about 80 percent after the acquisition, from more than 90 percent last year.
Founder Kim Dong-nyung, who chairs the group’s holding company, said in October that 30 percent of this year’s operating profit is expected to come from the own-label business and the number will rise. Hansae posted 1.5 trillion won ($1.38 billion) in sales last year.
"Clothing OEMs have good cash flows, with few cash expenditures required once they have grown to a certain size, and are in stable financial condition, which helps them fuel dividends or make investments," said Na Eun-chae, a Seoul-based analyst at Korea Investment & Securities Co. They "are more interested in investments, expanding their businesses for growth."
Closely-held Sae-A, which operates more than 40 factories in 10 countries, including Vietnam, Guatemala and Haiti, in 2007 took over South Korean women’s fashion retailer In The F Co., which owns labels such as Joinus and Compagna.
Sae-A, which reported 1.9 trillion won in revenue last year, plans to expand the unit by launching a range of golf wear next year. Sae-A founder and chairman Kim Woong-ki started his business in 1986 with two employees and now has a net worth of about $720 million, according to the Bloomberg Billionaires Index. The company declined to comment on Kim’s net worth.
The Korean clothing makers also face competition from their big rivals in China and Taiwan.
Taiwanese producers Makalot Industrial Co. and Eclat Textile Co., which produce clothing for brands such as Gap, Nike and Under Armour, are reported to be making apparel for a new private-label line from Amazon.com Inc.
China’s apparel giants such as Shenzhou International Group Holdings Ltd. built up their businesses during China’s consumer export boom. Shenzhou declined to comment on own-brand sales.
But building brands isn’t easy. Most of the Korean companies have tended to target their home markets or niche markets abroad to avoid clashing with their big international OEM customers.
In the case of In the F, Sae-A didn’t have to worry about such competition as it mainly targets the domestic market, not the U.S. or Europe, where many of its clients are based, the company’s spokeswoman said.
A bigger challenge is to develop the required marketing and distribution skills and the ability to anticipate the fickle tastes of the consumer.
Sae-A’s own-brands subsidiary hasn’t made a profit since 2009 and last year saw its loss widen 63 percent to 9.6 billion won after it closed its factory in Kaesong, the joint industrial complex in the demilitarized zone. The plant, largely staffed with North Koreans, was forced to shut after the North’s fourth nuclear test.
Chinese clothing maker Bosideng International Holdings Ltd., which makes down-jackets for giants including Adidas AG, opened a 35 million pound store in London’s Mayfair five years ago. Despite being China’s most successful outerwear supplier, its London shop struggled and Bosideng closed it in January.
The company said it is concentrating on restructuring its domestic business, but is interested in acquiring foreign labels to expand in China and is negotiating with a Japanese kidswear label.
The OEMs’ interest in building brand portfolios could set the stage for more acquisitions.
"Moving to regional countries or even going global, OEMs don’t have the necessary understanding of how to operate in different markets, how to do retail and marketing to different types of consumers," said Benjamin Durand-Servoingt, a Paris-based partner at McKinsey & Co. "The easiest way is to acquire existing players."
— With assistance by Rachel Chang