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Xtep stays a step ahead of the rest

By Lu Haoting and Hu Meidong (China Daily)
Updated: 2009-06-01 16:03

Though most of the panic-stricken Chinese shoemakers call the ongoing global economic crisis the worst ever in their career, others like Ding Shuibo are optimistic.

Related readings:  Xtep expands in China sportswear market  Sportswear maker Xtep to raise HK$3b in IPO  Sportswear tops fashion podium

Ding's optimism is evident as he outlines plans to open 800 to 1,000 new stores in the country's second- and third-tier cities this year along with 15 additional flagship stores in prime and strategic locations in key cities. He also plans to employ 2,000 more workers for his newly launched factory this year, even as other companies are shutting down production lines and laying off workers.

"The financial crisis is a serious blow to OEM (original equipment manufacturer) suppliers for the overseas market. But we are less affected as we have our own brand and focus largely on the domestic market," said Ding, president of Xtep (China) Co Ltd.

He adds that the financial crisis has provided the ideal opportunity for him to further expand his retail chain to better locations while paying less expensive rents.

Hong Kong-listed Xtep is a leading Chinese fashion sportswear producer. With more than 5,532 outlets around the country, the Fujian-based company posted a 110 percent increase in sales to 2 billion yuan last year while net profit more than doubled to 508 million yuan.

With demand in overseas markets weakening, some local OEMs in Fujian, including those producing shoes for Nike and Adidas, are now manufacturing shoes for Xtep.

"It is a win-win partnership. These factories have good quality control in production as for many years they manufactured shoes for leading global brands. By outsourcing some of our production, we can concentrate more on marketing and brand building," said Ding, who founded the Xtep brand eight years ago.

"As China's urbanization speeds up, there is huge potential in the Chinese domestic shoe market, especially in the second- and third-tier cities," he said.

With health awareness increasing among the general public, China has witnessed a surging demand for sportswear products. The sports frenzy during the Beijing 2008 Olympic Games also boosted the passion for sports in the country. China's sportswear market is expected to grow to $7.2 billion this year from $3.84 billion in 2006, according to Shanghai-based brand strategists ZOU Marketing.

The Chinese market has become a white-hot battlefield for not only leading international sports apparel and accessories giants, such as Nike and Adidas, but also for domestic athletic sportswear brands such as Li Ning and Anta Sports.

Li Ning, the eponymous company founded in 1989 by the Chinese gymnast who won three gold medals at the 1984 Los Angeles Games, said earlier that the country's second- and third-tier cities would also be the focus for its expansion this year. By the end of last year, Li Ning had 6,917 outlets around the country.

Anta Sports, another brand from Fujian province, has also postponed its overseas marketing plans in order to focus on the domestic market. Anta had 5,667 stores by the end of last year.

Brand building

Dressed in a grey suit the dapper Ding said he often wears Xtep shoes and clothes in spare time. "When I was young, people thought about sportswear only when they needed to exercise. But now sportswear has become something for daily use, or even a daily necessity. As long as you have an established brand and your products are fashionable, there will be demand," said the 39-year-old native of Fujian.

For a large number of customers, the functionality of sportswear products may not be the number one issue, but they yearn for stylish and fashionable designs, Ding said.

Adding a fashion element into sportswear was in fact Ding's trump card to stand out in a market already dominated by other leading brands.

The story started 22 years ago when Ding opened a small shoe workshop with two friends for about 1,500 yuan in Chendai, a small town that is a three-hour drive from Fuzhou. In the beginning, the workshop produced about 15 pairs of slippers a day. By 1990 it had become a small factory with annual sales of 30 million yuan.

"At that time, we did not have any specific target or so-called management standards. As long as our products could be sold, we would keep going," Ding said.

He named the company Sanxing, which in Chinese means "three prosperity". Even today the headquarters of Xtep comprises two office buildings across the street. The fancy and modern one is called Xtep building, while the older one still bears the old name of Sanxing Shoe Co.

Ding started to produce sports shoes since 1990 and one year later he began exporting his products by doing OEM for foreign companies. By 1999 he was already one of China's largest shoe exporters and exported nearly 200 containers of shoes a year. One container can accommodate more than 10,000 pairs of shoes.

During those 10 years, Ding's business was not exactly a smooth ride.

The depreciation of the Russian rouble in 1992 was the biggest blow as 60 percent of the company's sales came from Russia at that time. "The money you earned was worth a villa today. But the next day you could only buy two cars. On the third day, you could not even buy a piece of bread," Ding said. His 100 percent-export oriented business was also hit by the Asian financial crisis at the end of 1997.

What worried Ding most was the fact that his fellow villagers had all started their shoe business. His hometown, Chendai, had grown into a major base for sports shoe OEMs, from mom-and-pop workshops to factories with hundreds of workers. Fierce competition in prices resulted in sharp declines in profit margins.

"The profit margin for doing OEM is only about 5-8 percent. But if you have a brand, it can reach as high as 20 percent," Ding said.

Functionality or fashion?

Although Ding was confident about the quality of his sports shoe manufacturing, the real challenge was to make the Chinese customers accept a new brand.

At that time Li Ning was the top local brand and Anta was steadily catching up. Anta, founded by Ding's fellow villager Ding Zhizhong, started to build its own brand as early as 1994. Anta invited Kong Linghui, the world table tennis champion, to endorse its products in advertisements in 1999, which immediately made the brand famous nationwide.

After careful market research, Ding decided to focus on the young Chinese aged between 13 and 25 and launched the Xtep brand in 2001. He found that these customers care more about stylish and fashionable designs that can show their individuality when choosing sportswear.

In 2002 Xtep unveiled a special line of sports shoes called "Feng Huo", which was a big success. At that time most sports shoes in the market were designed with three colors - white, black and blue. But the "Feng Huo" shoes were painted with fiery red and orange and resembled flames. The shoes were a hit in the market and more than 1.2 million pairs were sold that year.

"When I was a little boy, we accepted what our parents chose for us. But today's young people are exposed to a much more colorful world. They yearn for individuality and make their own decisions," said Ding, the father of three teenage children.

Ding even broke the convention in the Chinese sportswear industry by inviting Hong Kong pop singers and actors to endorse his shoes while other local companies only cooperated with famous athletes at that time. "Our target consumers are university students and middle school kids. They all have their own entertainment idols," he said.

Xtep established its own "all-star family" in the following years by signing endorsement deals with Hong Kong and Taiwan pop stars including Nicholas Tse, Wilber Pan, Jolin Tsai and Twins.

Ding is also a big spender on advertisements. Xtep aired commercials and sponsored many high-rating TV programs in popular entertainment channels in China, such as the Hunan Satellite TV. The company spent 6 percent of its sales revenue on advertising in 2007 and expects to spend around 10 percent this year.

"Ding Shuibo is very ambitious and self-driven," said Xu Zhenkun, president of Shingon (Fujian) Shoes Co Ltd. Xu has been doing shoe business in the same town of Chendai for over two decades and manufactures sports shoes for foreign brands.

Xu said he regrets the decision of not embarking on brand building earlier. Shoe orders from foreign customers have dropped about 20 percent this year due to the global economic downturn. "He took the best chance to launch his own brand. It is already too late for me to do this now," Xu said.

Ding drives a Jaguar and likes to play golf in his spare time. He is also captain of the local entrepreneur golf team.

"When playing golf, you must be concentrated and persistent. That is also the secret of doing business," he said.