BUSINESS OPPORTUNITIES: GARMENT AND TEXTILE SECTORS IN CHINA

1. BUSINESS OPPORTUNITIES: GARMENT AND TEXTILE SECTORS IN CHINA In conjuction with Asia-Interprise Euro-China Fashion Business Meetings, CHIC 2004 Beijing, 30th – 31st March 2004 Implemented by Consorzio Italasia Industrial Relations

2. CHINA OVERVIEW

3. Area: 9.6 million sq Km Population: about 1.265 billion people, belonging to over 55 ethnic Demographic density: 128.8 inhabitants per sq km 33% of population lives in towns 56 nationalities are present in China:the Han people make up 91.02 % of the total population The national language is Putonghua or Mandarin but most of the 55 minority nationalities have their own languages China officially entered into the WTO on December, 11th 2001

4. PRODUCT DEMAND IN THE CHINESE FASHION SYSTEM

5. Population Evolution, 1990 – 2003 (Billion of Inhabitants) Very quick growth of Chinese population during the 90’s. Chinese economy: - turbulent growth in the early 90’s - slackening starting from 1996, but continue growing at high rates. Quick urban and economic development of the strongest towns: Peking, Shanghai, Guangzhou, Canton, Tianjin.

6. In the 2003 Chinese GDP has overcome Italian one. Its position is now the 6th, behind USA, Japan, United Kingdom and France. According to Government estimates it should reach the fourth place by the year 2010. GDP Evolution in Billion US$, 1990-2003

7. CONSUMER BEHAVIOUR In particular: • consumers living in Peking are the most conservative and traditionalist; • in Shanghai they pay more attention to fashion trends and are more inclined to buy branded products; • in Guangzhou they get more influenced by Hong Kong fashions. In general: • a low perception of the product quality; • high attention to the brand; • the price as determining factor of purchase.

8. Consumption Composition Population’s average income has increased during the last 5 years. The target for foreigner products: about 10-15% of income spent in items of clothes NOUVEAU RICHE

9. TEXTILE SECTOR Textile Production in January-October, 2003

10. Chinese Import and Export in the garment and textile sector (unit: 100 millions of USD) Percentage of importation and exportation per category in the textile and garment sector (Period; January – March 2003)

11. THE ORGANIZATION OF COMMERCIAL DISTRIBUTION

12. THE SUBDIVISION OF CHINA IN COMMERCIAL AREAS • Bejing: Peking area • Northeastern China: Dalian, Shenyang, Harbin • Shanghai: Shanghai area • Central China: Provinces of Jiangsu, Zhejang • Southern China: Guandong and Fujan area • Southwestern China: Province of Sichuan

13. THE DISTRIBUTION FRAMEWORK IS QUICKLY EVOLVING 100,000 STORES ORGANIZED IN CHAINS WITHIN 2005 NEAT PREDOMINANCE OF SMALL RETAIL DISTRIBUTION MIXED SHOPS

14. ORGANIZED DISTRIBUTION CHINESE COMPANIES NO. 1, LIANHUA, HUALIAN 30% of large retail distribution FOREIGN CAPITAL COMPANIES CARREFOUR, METRO, WALLMART JOINT VENTURES & MIXED COMPANIES PARKSON, PARK’N’SHOP, CITYSHOPPING

15. In particular for the fashion sector: • The number of existing chains in the fashion sector is about 150. • The number of associated firms is about 37.500. • The total turnover (year 2001) is about 90 billion RMB, with an estimated average of about 2.4 million RMB per sales outlet per year. • In general, the “franchisee” managers are companies of distribution (in large towns) or sub-distribution (in medium size towns).

16. E-COMMERCE - the type of firms that work with e-commerce is that of producers; - the main firms that sell via Internet are divided as follows:Fashion Stock Sales (25%), T-Shirts (15%), Underwear (9%), Shirts (8%), Jeans (7%). WHOLESALE TRADE • The difficulties of local wholesalers depend on: • difficulties of going out of the local areas; • lack of dynamic payment forms; • small distributors’ risk of insolvency.

17. CHARACTERISTICS AND TRENDS OF ITALIAN FASHION SYSTEM PRODUCT DISTRIBUTION

18. THE MARKET POSITION OF MADE IN ITALY Natural market TOP END MARKET STATUS SYMBOL OF “RICH & POWERFULL” Italian brands

19. Italian direct investments are rilevant: GFT, Gruppo Inghirami, Zegna are present with some of their production structures and distribution societies. The sectors with the largest potential for further growth of MADE IN ITALY are (% of Italian products in the Chinese market): Men’s clothes 70% Women’s fashion 50% Women’s knitwear 45% Ties 35% Sportwear 15%

20. THE MAIN CHARACTERISTICS OF THE DISTRIBUTION CHAIN OF ITALIAN PRODUCTS • HIGH LEVEL PRODUCTS • Large hotels • Department stores • Shopping centres • LOWER QUALITY PRODUCTS • Specialized dress stores • Mixed shops • Department stores at lower prices than imported products

21. SMALL DISTRIBUTION Specialized dress shops in shopping centres Mixed dress shops in department stores or shopping centres Boutiques in 4-5 star hotels and luxury shopping centres (Max Mara, Ferragamo, ecc..) LARGE DISTRIBUTION High level department stores Distribution organized in shop chains: Benetton, Sisley, Zegna, Reporter Franchising with local operators Hyper- and supermarkets for some sportswear brands

22. REGULATIONS AND CONCESSIONS

23. 2001: ENTRY OF CHINA INTO THE WTO OPENING TO FOREIGN INVESTMENT REDUCTION OF CUSTOMS DUTIES

24. REDUCTION OF CUSTOMS DUTIES Fashion products imported to China are subjected to: - Import Customs Duty (ICD) - Value Added Tax (VAT) Textiles product imported to China are tested for: - Composition Test (for the materials that have been used); - OZA Free Test; - Workmanship (Absence of dying stuff); - Color fastness test.

25. Textiles must carry the following information on their label: • Textile composition; • Size; • Washing instructions; • Country of origin of the cloth; • Country of origin of the textile; BRAND ATTENTION: REGISTER YOUR TRADE MARK IN CHINA!!!

26. OPENING TO FOREIGN INVESTMENT NEW REGULATION: 1/02/2002: PRC Regulations on Administration of Foreign Invested Insurance Companies 1/04/2002: Foreign Investment Guideline Regulations China FDI In 2002 China surpassed the USA as the world’s largest foreign investment receiver, with an inflow of 52.7 US$.

27. Top 5 FDI contributors: • Hong Kong • United Kingdom • Japan • South Korea • United States of America • Top 4 FDI destinations: • Jiangsu • Guangdong • Shandong • Shanghai

28. SARS: ECONOMIC IMPACTS AND IMPLICATIONS

29. SHORT-TERM ECONOMIC IMPACTS OF SARS • Consumer confidence has dramatically declined leading to a significant reduction in private consumption spending • Service exports had been hard hit • Investment is affected by reduced overall demand, heightened uncertainties and increased risks • While increased government spending will mitigate the impact, the ability of governments to revive economies facing widespreadreductions in private spending is limited

30. ESTIMATION OF THE IMPACT OF SARS ON SELECTED ASIAN ECONOMIES

31. THE SARS EPIDEMIC DEMONSTRATES THAT: • The accurate, timely and transparent provision of information on the nature and extent of diseases by governments is critical for educating the public about the real risks • Early identification and containment is critical, as any delays will create greater costs later on • To minimize the occurence of “all contagious” diseases • Effectively respond to emergency situations • To strenghten health systems • Governments need to intensify cooperation and coordination • An appropriate amount of funds should be set aside to cope with such contingencies

32. SUGGESTIONS TO THE OPERATORS FOR THEIR CORRECT ENTRY INTO THE MARKET

33. Carry out a market research in order to: evaluate the potential success of your products correctly place your products define the right strategy of distribution • Every product must be adapted to the Chinese market, in terms of taste, size and price • Allocate your products with a suitable positioning strategy • Select the right partner evaluating: organizational efficiency financial strength strategic ability • Take into consideration the cross cultural communication differences and differences in business attitudes