Hku684 PDF Eng

Alison Bate prepared this case under the supervision of Dr Christine Chan and Professor Ali Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decisions or business processes.

© 2007 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong.

Ref. 07/353C

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CHRISTINE CHAN ALI FARHOOMAND

YUE YUEN INDUSTRIAL (HOLDINGS) LIMITED (A): MAKING 200 MILLION PAIRS OF SHOES A

YEAR AND GROWING As the world’s largest manufacturer of brand-name sports and casual shoes, Hong Kong-based Yue Yuen’s key clients included some of the most recognised global brands such as Nike, Adidas, Reebok, New Balance, Asics, Puma, Merrell, Rockport and Timberland. The company had over 280,000 factory workers and 373 production lines in China, Indonesia and Vietnam, turning out 200 million pairs of shoes per year. Its enormous production capacity was undoubtedly a major factor in its continued success, bringing vast economies of scale and securing its position as a key partner to the global brands. The 2008 Olympic Games also presented Yue Yuen with tremendous opportunities. Its burgeoning retail efforts in China, unified under the retail identity “YY Sports”, were already bearing healthy fruit. The company was on track to meet its planned target of operating 3,000 outlets by 2008. Since its formation, Yue Yuen had pursued a rigorous strategy of vertical and horizontal expansion. But now, it faced a myriad of challenges, including continued volatility in the cost of raw materials, a rapid rise in production costs—a fallout from international trade disputes—constant demands from the big brands for innovation, and enhanced efficiency along the supply chain. As a result, in spite of growing sales, the company’s profit margin had narrowed in the last two years.1 Could it continue to be the innovative, flexible partner its brand-name customers demanded while maintaining its profit margins in the short run? Could it sustain its competitive advantage in the long run through horizontal and vertical expansion?

Global Footwear Market

According to industry estimates, the global footwear market generated total retail revenues of US$159.6 billion in 2005, an increase of 3.8% since 2004. Records showed a compound annual growth rate (“CAGR”) of 3.3% for the five-year period 2001–2005. 1 Toh, H.S. (20 January 2007) “Yue Yuen Allocates US$100 Million for Mainland Acquisitions”, South China Morning Post.

HKU684

Purchased by Remi Elammar ([email protected]) on March 26, 2012

07/353C Yue Yuen Industrial (Holdings) Limited: (A) Making 200 Million Pairs of Shoes a Year and Growing

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The market was forecast to grow at a faster rate over the subsequent five-year period, 2005–2010, with an anticipated CAGR of 4%, expected to drive the market value to US$194.3 billion by the end of 2010.2 Global footwear consumption statistics showed the US heading the tables in per capita consumption, with the populous emerging markets of China and India trailing just behind, signalling plenty of scope for market growth3 [see Exhibit 1 for global footwear consumption statistics]. In 2005, the total global sporting goods retail market was valued at US$235 billion, with the US accounting for almost 40%, the largest portion of sales, and Asia, the largest market based on population, accounting for just 19%. Per capita, the US purchased US$330 of sporting goods, Canadians purchased US$207, Europeans purchased US$85, Asians purchased US$12, Middle Easterners purchased US$6 and Africans purchased US$54 [see Exhibit 2 for branded sporting goods global market values]. The annual global wholesale value of branded athletic footwear grew from US$11.5 billion in 1991 to over US$20 billion in 2006. The average annual growth rate was 7.1% for the branded athletic/casual/outdoor footwear market based on wholesale value5 [see Appendix A for a definition of shoe styles]. The US, as the world’s largest single consumer of footwear, was also the biggest single market for athletic shoes. The 1980s had been the decade of the sneaker, and sales had more than doubled from 183.6 million pairs in 1982 to 379.5 million pairs in 1989. By the 1990s, the increasing popularity of other styles of casual footwear cut into the sales of the number of pairs of athletic shoes, and the athletic footwear market in the US became classed as mature.6 By 2007, 96% of all Americans aged 16 and above owned at least one pair of athletic shoes, while less than 30% of athletic shoes purchased were for use in sports or fitness activities7 [see Exhibit 3 for some US sporting goods market statistics]. In the footwear industry, positive brand recognition was a crucial aspect of gaining market share, and athletic shoes were known to be one of the highest brand loyalty consumer items, particularly among the youth. Athletic products were very closely related to current fashion trends, and held a tangible social significance: the kind of shoes a teenager wore would affect his or her image, on and off the playing field. The teenage market was the fastest growing market sector in the US, growing at almost double the rate of the general population, and around a third of this age group’s personal spending was subsidised by their parents. However, with the US population growth at only 1% per year, sporting apparel and footwear companies—who, like other mature industries, were seeing slower growth due to competition and price sensitivity—were looking outside the US for future marketing opportunities. 8 Overseas, the first generations of branded shoe wearers were being courted as the brands explored opportunities for attracting new customer bases in emerging markets, not least in the two biggest markets in terms of population, China and India. China’s athletic shoe and sportswear market was estimated to be worth US$3.6 billion in 2005 and was expected to pass US$6.2 billion by 2008 if the double digit growth continued.9 Sports participation was greatest among those with a higher disposable income, and predictions for China’s market growth were such that it was forecast to become the largest 2 Just Style “Footwear: Global Industry Guide” http://www.just-style.com/store/product.aspx?ID=46922&lk=wpud34. 3 (6 May 2007) “Hong Kong: Footwear Retailer Belle Int Plans Expansion through IPO”, http://www.jujoe.com/newsfile/20075/20075653020.html 4 “Global Sporting Goods Market Put at US$235 Billion” http://www.nsga.org/public/pages/index.cfm?pageid=1505#four. 5 Yue Yuen company interview, 23 April 2007. 6 Vanderbilt T. (1998) The Sneaker Book, The New Press: New York, p. 26. 7 Orecklin, Michele (11 March 2002) “Sneakers? Not”, http://www.time.com/time/printout/0,8816,1002001,00.html 8 Standard & Poor (4 March 2004) “Industry Surveys: Apparel and Footwear”, http://sandp.ecnext.com/sandp/includes/paper.pdf 9 Zou Marketing (November 2006) “High Scoring Strategies”, http://www.zoumarketing.com/www/en/News%20Center/articles/high-scoring.pdf (accessed 7 September 2007)].



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retail market for sportswear globally by 2010, with an estimated 500 million people playing sports.10 The growing affluence of the urban population had prompted a rise in the consumption of fashion and lifestyle products, and footwear retail sales had increased by an average of 30% per year in the five-year period 2001–2005, although it remained significantly lower than in Western and other Asian developed nations [see Exhibit 4 for China footwear consumption statistics]. Major global sportswear brands, especially Nike and Adidas, had gained a good foothold in the Chinese market, where a growing identification with Western sporting heroes was complemented by the global brands’ endorsement of China’s home-grown athletes [see Exhibit 5 for China’s market shares of the leading sportswear brands]. The fashion and brand-conscious urban youth in particular were being swayed by the global brands’ sophisticated product innovation and targeted marketing strategies.11 In the Indian market, overall footwear consumption was approximately 1.1 billion pairs per year across the 1.1 billion population, translating to a per capita consumption of 1 pair per year. However branded footwear made up around 51% of the total US$2.7 billion market in value terms in 2006, and sports shoe brands in particular made up around 27% of the total market.12 India was predicted to climb from its 2007 position as the twelfth-largest consumer market to become the fifth-largest consumer market in the world by 2025, with its middle class increasing from 50 million people in 2007 to 583 million people by 2025 as the booming economy raised people’s incomes.13

Global Brands

While new brands of athletic shoes would come and go as fashion trends emerged and waned, a few big names had dominated the market for decades [see Exhibits 6 to 9 for statistics on some leading brands]. Nike, the world’s largest producer of athletic footwear by wholesale value, had held a fairly consistent global market share for the last ten years, with sales of athletic apparel and sports equipment also contributing a significant portion to the total revenue. The brand sold an estimated 225 million pairs of athletic shoes worldwide in 2006, with total global sales of US$15 billion, of which US$8 billion was footwear. In 2007, Nike announced its intention to boost its sales by 53% to US$23 billion by 2011, focusing on increasing its international presence, with ambitious expansion plans for Asia. The company planned an aggressive retailing push in China with the opening of ten stores per week in the run-up to the Beijing Olympics, aiming to make China its second-largest market after the US. The company was already the number one athletic products brand in China with almost US$600 million worth of sales in 2006, and was targeting US$1 billion per year by 2008. The brand was also stepping up the pace in the Indian market, where it had grown 40% over the previous year, and had assessed that market to be another potential US$1 billion market, just like Russia and Brazil. The brand, propounding a customised approach, had reorganised its business into six main athletic divisions—running, basketball, soccer, women’s fitness, men’s training and sports culture (officially creating a sector for products

10 Bei Hu (3 May 2007) “Belle May Raise $1.1 Billion in Hong Kong Share Sale”, http://www.bloomberg.com/apps/news?pid=20601089&sid=abil8othfZ_U&refer=china. (accessed 7 September 2007) 11 Belle International Holdings (9 May 2007) “Prospectus”, http://mainednews.hk/listedco/listedconews/sehk/20070509/01880/EWP111.pdf 12 Images (September 2006) “India Footwear Market: The shoe must go on”, http://www.imagesfashion.com/Cover_story1_sep06.html. (accessed 7 September 2007) 13 The Hindu Business Line (4 May 2007), “India set to become world’s fifth largest consumer market by 2025”, http://www.thehindubusinessline.com/2007/05/04/stories/2007050403051300.htm (accessed 7 September 2007)



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intended for casual wear rather than athletic performance)—to replace the more generalised segments of footwear, apparel and equipment. Adidas, a German brand established in 1949, emphasised the technological innovation and design of its products. The brand was divided into three divisions, namely sports performance, sports heritage and sports style.14 In 2005, the company bought Reebok, which had been the world’s number three sports footwear and apparel brand. The acquisition secured its global combined position at a clear number two, with a 26% market share.15 Like its rivals, Adidas had big designs on the Chinese market. The company had fought hard to become an official sponsor and supplier to the Beijing Olympics, hoping to position itself as the brand of choice for the Chinese market. Its Chinese retail sales were US$450 million in 2006, and it had a target of US$1.2 billion by 2010. The company’s network of 1,300 retail stores in China by 2005 was expected to swell to 4,000 by 2008.16 Having acquired Reebok meant that Adidas also owned Rockport, a global casual footwear brand founded in 1971 and bought by Reebok in 1986 for US$118 million. Even before its acquisition, Rockport had been the first company to use athletic shoe technologies and build them into a casual brown shoe, the forerunner of the “athleisure” crossover trend. With only around 30% of its sales outside the US, the company saw its long-term growth in overseas markets and in new product lines as a combination of Adidas footwear and Rockport technology. Rockport saw itself becoming a billion-dollar brand.17 New Balance products were marketed as high performance athletic and active lifestyle products. Having started out as an orthopaedic shoe company, it was the only brand that made shoes in multiple widths to reflect the reality of the human foot. It also differed from the other major brands in that its products were “endorsed by no one”; it claimed that it was focused on manufacturing rather than marketing. New Balance was also the only top brand that remained a private company, immune to the short-term performance pressures of a listed company. It was the only brand still making shoes in the US and the company continued to affirm its deep and abiding commitment to maintain and strengthen manufacturing in the US, asserting that this allowed it to be more responsive to sales demand and more able to ship products to retailers more quickly, more flexibly and in smaller quantities as needed. It was the type of shoe which determined whether or not New Balance could afford to make the shoe in the US; for domestic manufacturing it selected those shoes in the highest price point and was reliant on technology, rather than labour-intensive work, to achieve its market value.18 Still, with worldwide sales remaining around US$1.5 billion, the company had been steadily losing market share.19 Puma, a venerable German athletic shoe manufacturer founded by the brother of the founder of Adidas, had almost collapsed in the 1990s but a decade later had returned to market favour. With sales rising strongly, it had taken the global number three spot, but lagged well behind the two leading brands, with global sales in 2006 reaching US$3.7 billion, of which US$1.9 billion was footwear sales.20 With the brand’s buyout by a French luxury goods retail group expected to be completed in 2007, Puma had announced its desire to become a global iconic

14 Adidas (2006) “Annual Report”. 15 Landler, M. (4 August 2005) “Nike Will Be Facing a Pumped-up Rival”, New York Times. 16 Roberts D. and Holmes S. (14 March 2005) “China’s Real Sports Contest”, BusinessWeek Online, http://www.businessweek.com/print/magazine/content/05_11/b3924072.htm?chan=gl (accessed 7 September 2007). 17 Aronovich H. (January 2007) “Best Foot Forward”, US Business Review, http://www.usbusiness-review.com/content_archives/Jan07/09.html. 18 (2004) “Manufacturing Athletic Shoes in the USA”, http://www.roboticsonline.com/public/articles/archivedetails.cfm?id=1244. (accessed 7 September 2007) 19 Abelson J. (18 April 2007) “Sneaker Company Taps Chief”, Boston Globe. 20 Puma’s website: http://about.puma.com/downloads/05jmnpjxejtjz7ek.pdf.



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sport-lifestyle company, aiming to upscale its offering to differentiate itself from the more sports-oriented Nike and Adidas.21 Li Ning was the foremost Chinese home-grown sportswear brand in terms of retail sales, and the number three brand in China behind Nike and Adidas. Domestic rival brands Anta and Doublestar both sold more shoes than any other brand, but turned over a much lower dollar value as their shoes were priced at a fraction of the price that the three big brands commanded. Founded in 1989 by Li Ning, China’s “Prince of Gymnastics” and a three-time gold medallist in the 1984 Olympics, the company had a network of over 4,300 stores across the entire nation, and dominated the second- and third-tier cities where it had seen a “phenomenal” rise in consumer spending.22 Conscious of heightened competition at home, the company was seeking to raise its brand’s professional image to an international level through the sponsorship of China’s national Olympic squad. In 2005, the company entered into a 50-year co-operation agreement with Aigle, a leading French outdoor-wear brand, under which it had already opened 36 Aigle stores in China. Li Ning was the NBA’s official marketing partner for China, had formed a partnership with the Association of Tennis Professionals (ATP) to promote tennis in China and had sponsorship deals with a number of major Chinese athletes and overseas teams. Of the company’s US$420 million turnover in 2006, 39% was from footwear, with the segment seeing 48.3% growth from the previous year.23 Timberland had been the outdoor leisurewear market global leader for years, engaging in the design, development, marketing, and distribution of footwear, apparel, and accessories for men, women, and children. In recent years, the brand had gained a certain cachet with urban youth. However, rising operating costs, declining margins and tough competition had resulted in annual sales remaining static at around US$1.6 billion over from 2004-2006 Rival brands like Patagonia, Merrell and Columbia had steadily gained market share. Patagonia and Merrell were both owned by Wolverine, who, having taken 120 years to reach US$1 billion in annual revenue in 2006, had announced plans to aim for US$2 billion within the next seven to nine years. 24 The above brands made shoes and boots that were performance focused, targeting buyers who were likely to attempt more rugged terrain than the urban concrete jungle.25 The most powerful companies in the industry benefited from economies of scale since their fixed costs were spread out over a larger volume and their variable costs were negotiable by leveraging the full weight of that volume. Without these economies of scale, it was very difficult for new brands to penetrate the market. Consolidation of the industry seemed set to continue, as companies sought to acquire a basket of brand names with which to expand the scope of their business. The global brands focused their research and development (“R&D”) capacities on developing innovation strategies based on creativity, quality and product differentiation using marketing, celebrity endorsements, advertising, fashion and technology in an attempt to grab market share from their competitors. Major footwear brands had further capitalised on the strength of their brand names by expanding their target market segment into, for example, women’s wear, outdoor and unfamiliar sports, and by diversifying their product portfolios into apparel,

21 Reinhardt, A., (10 April 2007) “Luxury Giant Aims to Take Puma Higher”, BusinessWeek Online, http://www.businessweek.com/globalbiz/content/apr2007/gb20070410_279960.htm (accessed 7 September 2007) 22 Li Ning’s website: http://www.lining.com. 23 Li Ning (2006) “Annual report 2006”, http://www.lining.com/EN/download/pdf/ar2006.pdf (accessed 10 May 2007). 24 Abel, K. (2007) “Passing the Torch: O’Donovan Hands Krueger CEO Spot”, http://www.footwearnews.com/site/article.php?id=23 (accesed 7 September 2007). 25 Bukoveczky, E. (19 April 2007) “Timberland Boots Wearing Thin”, http://research.investopedia.com/news/IA/2007/Timberland_Boots_Wearing_Thin_TBL.aspx (accessed 7 September 2007).



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accessories, and sports equipment, searching out new ways to extend their brand’s reach into the consumer’s pocket.26 With the fast turnover rate of fashion trends and the market-driven nature of the industry, footwear manufacturers had to shorten all stages of the production cycle in order to meet the changing demand. Their ability to predict or quickly respond to changes in fashion trends and consumer preferences was paramount. Shorter product lifecycles and the need to launch multiple collections every year in smaller, fragmented production batches meant the brands needed excellent supply chain management to lower logistics costs and avoid risking stockpiles of unwanted inventory. Seeking to maximise cost efficiencies, the brands had increasingly divested themselves of any direct involvement in the manufacturing process, outsourcing production to contract manufacturers and leveraging the value of their global orders to ensure they got the best service, quality and price. This allowed them to focus on those activities in the value chain where they could display their distinctive competence and, most importantly, the marketing of their brand. Since the 1960s, in their continued quest for low-cost production bases, footwear manufacturers had moved production to those areas that had an abundant labour source and comparatively lower labour costs,. Most of the manufacturing of athletic shoes had been outsourced to Asia, with mass manufacturing moving from Japan in the 1960s, to Taiwan and Korea in the 1970s, then on to Indonesia, Thailand and China in the 1980s, and into Vietnam in the 1990s. The region gained significant competitive advantage from the boom in sustained export growth. The US, the world’s largest footwear consumer in value terms, imported more than 98% of its total footwear market in 2006, with imports from China alone accounting for more than 86%. Total US footwear imports grew 5.3% in 2006 to 2.4 billion pairs, at a wholesale value of US$18.7 billion. Imports from Vietnam continued to grow, increasing by 33% and taking a new position as the second-largest US footwear supplier with 3.8% of all US footwear imports27 [see Exhibits 10 to 14 for key export and import statistics].

Contract Branded Footwear Manufacturing Industry

All contract manufacturing was performed in accordance with brands’ detailed specifications and was subject to strict quality control standards. Under an original equipment manufacturing (“OEM”) arrangement the manufacturer could focus on making a quality product and delivering it to the buyer quickly, efficiently and cheaply, with none of the risks associated with having its own inventory. However, the manufacturer was susceptible to the high volatility in the price of raw materials; the rising costs of labour, electricity and transportation; fluctuations in foreign currency; and the repercussions of export-hindering trade disputes, while also being subject to the unwavering demands of the buyers to keep the prices down. The global brands were unlikely to share the burden of rising costs, as the vigorous competition for contracts meant the brands could flex their muscles when it came to negotiating. To mitigate increasing costs, a manufacturer might implement just-in-time inventory systems or lean manufacturing techniques to eliminate waste across the value stream. However, to gain repeat orders a manufacturer had to be more than cost-efficient. As most manufacturers tended to work with not more than a handful of key customers, sustained growth relied on excellent business relations. Orders had to be completed on time, 26 Standard & Poor (4 March 2004) “Industry Surveys: Apparel and Footwear”, http://sandp.ecnext.com/sandp/includes/paper.pdf (accessed 7 September 2007)]. 27 American Apparel & Footwear Association, https://www.apparelandfootwear.org/Statistics.asp (accessed 7 September 2007).



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precise quality standards had to be met, competitive pricing was fundamental, advanced production techniques had to be followed, excellent technical competence had to be displayed and flexible production schedules to accommodate changing buyer demands had to be evident. Key performance measures also included the manufacturer’s: • Capacity utilisation, to ensure maximum logistical efficiency and to avoid under-

employed workers and production plants • Defect rates, to gauge the quality of the finished product and the effectiveness of the

production facilities • Breadth of product portfolio, to support the customers’ own diversified portfolio • Value-added services, to differentiate itself from the rest. These capabilities combined enabled OEM manufacturers to win orders and establish themselves with global brands.28 To avoid the bitter struggle of competing solely on price, a contract manufacturer able to invest in its R&D facilities and shift from OEM to original design manufacturing (“ODM”), could shift the basis of competition from price to design. While development of the product made by the ODM manufacturer remained buyer-led, as it did with OEMs, the design capabilities of an ODM manufacturer were a critical success factor. Ultimately though, it was the range of value-added services that the manufacturer provided which determined the strength of the ties that bound a brand to a manufacturer, and which would heavily impact the switching costs. Where brands sought to externalise more and more business tasks, the whole cycle of the organisation, production and delivery of products from inception to use to recycling was up for grabs. The contract manufacturer could therefore aspire to take on some or all of the functions of R&D, design, materials and components sourcing, production, and the distribution, wholesaling and retailing of the finished products. The downsides to remaining an OEM or ODM included the fact that the manufacturerould extract no brand premium and was dangerously dependent on the fortunes of the brands it served. To own the brand definitely added value. However, any attempt by a contract manufacturer to move further up the value chain to original brand manufacturing (“OBM”) not only presented it with a whole new set of challenges relating to branding, marketing and inventory control, but by launching its own brand it was possibly competing with its own clients, potentially jeopardising the crucial supplier-customer relationships it had painstakingly nurtured. On balance, being an OBM was generally considered not an easy option for those Asian OEM or ODM contract manufacturers wishing to maintain business with their global partners.29 To remain an OEM or ODM and yet achieve sustainable competitive advantage, a manufacturer had to pursue a differentiation strategy, providing value-creating processes and displaying core competencies that would lock it in tighter with its clients and that its competitors would find hard to emulate.

28 Hollows, J. (2006) “Brand Development: Institutional Constraints on Chinese Businesses”, Management Research News, 29 (7), 386–401, http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=/published/emeraldfulltextarticle/pdf/0210290701.pdf (accessed 7 September 2007) 29 Hollows, J. (2006) “Brand Development: Institutional Constraints on Chinese Businesses”, Management Research News, 29 (7), 386–401, http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=/published/emeraldfulltextarticle/pdf/0210290701.pdf (accessed 7 September 2007)



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Supply Chain

The footwear manufacturing supply chain was a long and complex chain of exchanges which began with the collection of raw materials, continued through component construction, assembly, and product manufacture, then on to a progression of storage facilities, each one smaller and further away than the last, until the product finally reached the consumer. To enjoy maximum gain, the manufacturer needed to integrate the key business processes from original suppliers through to the end user, fulfilling customer demands through the most efficient use of resources, including distribution capacity, inventory and labour. When outsourcing their manufacturing, the global footwear brands needed to be confident that the manufacturer’s supply chain was fast enough and flexible enough to satisfy the quick delivery and shorter product cycle of the fashionable designs demanded by the consumer. To this end, a manufacturer whose IT system could be matched with that of the brand it served ensured a synchronised information flow across the supply chain, including the areas of design, production, forecasting, ordering, manufacturing, transportation, sales and distribution.30 The successful contract manufacturer offered a top-notch full package supply system, enabling it to efficiently carry out and co-ordinate all activities in the production chain for the branded buyer, releasing the buyer from any concerns or pressures related to supply chain management. In return, the contract manufacturer had the opportunity to gain crucial insight into the buyer’s market and form empowering relationships with raw material suppliers, while at the same time locking itself into the global value chain of the brand by becoming a key strategic partner.

Major Players

The global contract footwear manufacturing industry, being an intensively competitive business, was dominated by a few major companies. This was largely the result of industry consolidation, with the survivors picking up more business, leveraging economies of scale and growing stronger still. These companies were mainly Hong Kong and Taiwan-owned, with production facilities in China, and additional production bases in the Asian region [see Exhibit 15 and 16 for key competitor data]. Feng Tay Enterprises Company Limited (“Feng Tay”), a Taiwanese footwear manufacturer listed on the Taiwan Stock Exchange, was founded in 1971 and started manufacturing Nike shoes in 1975 under what became an exclusive OEM arrangement. For more than 20 years, Feng Tay made shoes solely for Nike, which required the company’s business development to be very closely aligned to the brand’s development strategy. Feng Tay first moved its manufacturing offshore to Putian in Fuzhou, China in 1988 and was encouraged by Nike to further diversify its operations and open factories in Indonesia and Vietnam in the 1990s. During this time, Feng Tay became a “Nike strategic partner” and was hired by the brand as a “management vehicle”, charged with reorganising existing manufacturing operations owned by third parties.31 The construction, which began in 2006, of an R&D facility for Nike at the Feng Tay headquarters in Taiwan, underlined the partnership arrangement the company enjoyed with the brand, and secured its position at the hub of the brand’s future product development.32

30 Nike’s website: 31 Rothenberg-Aalami, J. (October 2004) “Coming Full Circle? Forging Missing Links Along Nike’s Integrated Production Networks”, Global Networks, 4 (4), http://www.blackwell-synergy.com/action/showPdf?submitPDF=Full+Text+PDF+%28141+KB%29&doi=10.1111%2Fj.1471-0374.2004.00097.x. 32 Economic Daily News (12 July 2006) “Local Manufacturers Building, Hosting R&D Centre for Nike”, http://investintaiwan.nat.gov.tw/en/news/200607/2006071201.htm



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In recent years Feng Tay had diversified its production and expanded its client base, entering the casual shoe market and making shoes for Rockport and Clarks, among others. However the company was still making more than one-sixth of all Nike shoes sold worldwide, with Nike accounting for nearly 95% of the company’s revenue.33 34 By 2006 the company had over 60,000 employees, made 50 million pairs of shoes a year and had an annual turnover of US$725 million.35 In late 2006, Feng Tay signed a Memorandum of Understanding with the Tamil Nadu government to open its first Indian factory and begin production by 2008, aiming to produce 1 million pairs per month within five years. The company had also begun its expansion into retailing in China, establishing its “Quest Sport” retail chain, and it planned to have 300 outlets throughout the country by 2008.36 Pegasus International was founded in 1956 in Taiwan, and listed on the Hong Kong Stock Exchange in 1996. In 1990 the company relocated its entire manufacturing base to Panyu in Guangdong, China and by 2006 it was operating 42 production lines, having spent US$6 million in the previous three years to convert them all to lean manufacturing lines, had 16,000 employees (down from 21,000 pre-lean) and had a production capacity of almost 20 million pairs of shoes per year. The company had a wide footwear portfolio, including shoes for sports, leisure, work and formal wear for a diverse client base including some major global brands. Its largest customer accounted for 65% of the company’s business, and the top five customers accounted for 88%. The company’s retail subsidiary, Guangzhou Pegasus, which was launched in 1998, operated over 100 counters across the mainland and was a licensee for a number of internationally renowned brands and self-owned brands. Its turnover in 2006 was US$141 million, and it made a profit of US$3.12 million. KTP Holdings Limited was a Hong Kong-listed manufacturer of athletic and leisure footwear for international branded customers, with its largest customer in 2006 supplying 75% of its orders (down from 81% a year earlier) and with 60% of its total sales going to North America. The company operated factories in mainland China only, and had suffered a 9% drop in business in 2006 compared to 2005, due to anti-dumping disputes over China’s exports. Its turnover in 2006 was US$102 million, compared to US$113 million in 2005, and its profits were US$5.6 million in 2006 compared to US$5.9 million in 2005. Kingmaker Footwear Holdings Limited was another Hong Kong-listed contract manufacturer of footwear but with a rather different product mix. The company had a target product mix of 4:4:2 for premium casual, baby and children, and rugged footwear. In 2006, its core category, 53% of its footwear output, was for babies and children and only 0.32% was sports shoes. The company had 37 production lines, 25 in China and 12 in Vietnam, and was looking into the possibility of opening a new factory in Cambodia. In 2006 the company had 12,000 employees, down from 20,000 in 2005. In comparison, Yue Yuen was a contract manufacturing giant, the one company that had simply outpaced the competition.

33 Norris G. (15 July 2005) “Companies Still Make Money out of Sunset Industry”, Taiwan Journal, http://taiwanjournal.nat.gov.tw/site/Tj/ct.asp?xItem=21439&CtNode=118 (accessed 7 September 2007). 34 BNP Paribas Research (25 October 2005) http://pdf.galegroup.com/PDF/getPDF?repNum=10699482&appUI=itweb&date=1180926532&digest=A65B3FA903390EF8DEC3C958E8EC691E (accessed 7 September 2007) 35 Taiwan Stock Exchange Listings Information http://emops.tse.com.tw/emops_all.htm.. 36 “Pou Chen, Feng Tay Enhance Presence in Mainland”, http://ec.egsn.com.tw/en/en_business_news_c.jsp?no=3699 2004-12- 29..



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Yue Yuen Industrial (Holdings) Limited

It’s not a matter of bargaining for five more cents, it’s how we can add more value so the customer would become a partner who is willing to pay what is reasonable.

- Steve Li, executive director, Yue Yuen37 Yue Yuen churned out one in six pairs of all branded casual and sports shoes manufactured worldwide, producing 196.4 million pairs in 2006. The company was the OEM and ODM for major international brand name companies such as Nike, Adidas, Reebok, New Balance, Asics, Puma, Merrell, Rockport and Timberland. Yue Yuen—despite its impressive customer base, its listing on the Hong Kong Stock Exchange since 1992 and its inclusion in the blue-chip Hang Seng Index since 2003—was a name largely unknown outside the industry. The company, which only made shoes for other companies’ brands, had attracted global footwear giants by leveraging on its established reputation, production infrastructure and supplier network. Implementing a strategic initiative to form ever-closer partnerships with its clients, the company became an integral part of the major global brands’ value creation network. With an estimated 17% share of the global market, a turnover of US$3.66 billion in 2006 and a staff of 280,000, Yue Yuen’s dominance in the global contract athletic and casual footwear manufacturing was unparalleled, and it was around five times the size of Feng Tay, its closest rival [see Exhibit 17 and 18].

Company History

Yue Yuen’s outstanding performance and success grew from very humble beginnings. The four Tsai brothers were born into a family making straw hats and slippers for a living, on the outskirts of Taichung in Taiwan. In the early 1960s the business began to expand as the family started to diversify the product line, making shoe components for other factories. In 1969 the four brothers launched Pou Chen Corporation, their own footwear company originally making plastic shoes. In the favourable environment of the booming Taiwanese export market of the 1970s, business thrived and the company began to diversify in its products and to establish contacts with the international footwear markets. The company’s focus was on the newly emerged sports shoes market and culminated in an early success with a contract for New Balance. In 1980 the company signed with Adidas and from then on, the company’s revenue and reputation climbed incessantly.

Diversification of the Manufacturing Base

By the early 1980s, to meet increasing market demand, the company needed to build new factories, but its expansion and competitive edge were being impeded by rising Taiwanese labour costs and an appreciating Taiwanese dollar. Setting up production in China’s low-cost manufacturing environment was the answer; there were also the additional advantages of having the same language and cultural background. However, China was at that time out of bounds to investment by the Taiwanese company. So in 1988 the company established a new subsidiary in Hong Kong called Yue Yuen Industrial Holdings in order to start production on the mainland. It was part of the early wave of globalisation and of reaping the benefits of economies of location. The first factory was built in Zhuhai in 1988, and more factories were built in Zhuhai, Dongguan and Zhongshan in the early 1990s. This expansion allowed a large 37 Yue Yuen company interview, 23 April 2007.



11

part of the Taiwan manufacturing to be moved to China. Setting up the factories in China under the export processing partnership scheme, the company provided the materials, brought in the machinery with which it processed the materials, and then exported the manufactured products. As early as 1978 China had begun to allow firms in Hong Kong to offer export processing contracts to workshops in Guangdong province. This was initially limited to a few specific export processing zones along China’s southern coast, but the success of the scheme meant that by the 1980s it was widely available.38 In reality, there was intense competition among localities to attract the foreign investment and the mass employment it provided, and in return the local government levied no income tax on the foreign companies. Instead, they were required to pay a form of management fee to the local government, at a very preferential rate. Thus Pou Chen was free to begin its upstream development into the production of raw materials and continued to conduct R&D out of Taiwan, while Yue Yuen’s Pearl River Delta factories took over the traditional manufacturing business. To limit the business risks associated with having the manufacturing done almost totally in China, Yue Yuen started to build factories in other countries. In 1992 Yue Yuen set up its first factory in Indonesia, by then recognised as a low-cost manufacturing centre, and in 1996 started production from its first factory in Vietnam. The governments of both countries also offered incentives to foreign investors in return for the employment opportunities provided. With its manufacturing bases spread over a wider area, the company was less vulnerable to changes in the host country’s legal and regulatory environment, quotas and tariffs, international trade regulations or fluctuations in its currency. This was something which also concerned Yue Yuen’s customers, as few customers would source in one country only, even if it had the lowest labour costs.39 By virtue of some key acquisitions, Yue Yuen had more recently also started operating manufacturing bases in Jiangxi and Jiangsu provinces, and was considering expanding these newer production facilities subject to market demand. By 2006 Yue Yuen was operating 373 production lines, 193 (51%) of which were in China, 114 (31%) in Vietnam and 66 (18%) in Indonesia, with China accounting for 62% of Yue Yuen’s total dollar value turnover40 [see Exhibit 19].

Striding Ahead Using Economies of Scale

In the increasingly competitive environment of the footwear manufacturing industry, the manufacturers’ profits continued to narrow as global brands leveraged the willingness of manufacturers to sacrifice shorter term profit in their attempts to secure contracts with global buyers. Using its massive economies of scale to lower production costs, Yue Yuen was able to gain market share at the cost of smaller manufacturers unable to compete. It could spread its costs across a much larger revenue base than that of smaller operators, giving it what was to become an unparalleled comparative advantage. Because the company had a much greater production capacity than its competitors, it could react more quickly to rush orders or to changes needed on product line configurations. Yue Yuen could make and deliver shoes faster and cheaper.

38 .http://appli1.oecd.org/olis2006doc.nsf/43bb6130e5e86e5fc12569fa005d004c/00453a0959c58af7c12572340054f6d3/$FILE/JT03218679.DOC. 39 Clean Clothes Campaign (1 March 2004) “Sportswear Industry Data and Company Profiles: Background Information for the Play Fair at the Olympics Campaign”, http://www.cleanclothes.org/ftp/Background%20Company%20Profiles%20Olympics%20Campaign.pdf (accessed 6 February 2007). 40 Yue Yuen company interview, 23 April 2007.



12

Multiple Brand Strategy

Yue Yuen had chosen early on to pursue a policy of co-operation with multiple brands, and addressed any concerns the brands might have had regarding confidentiality or intellectual property issues by strictly segregating the different teams within the Yue Yuen Group working on the different brands. The enormous scale of the production facilities allowed the company to dedicate separate facilities for each part of each shoe for each brand, and the R&D teams to work on different brands were never in the same location, something the brands insisted on. This particular strategy guaranteed that there was never any crossover between the teams assigned to different brands and allowed the customer to feel comfortable and completely secure with the arrangement.

We insist on separating production, including technical specialists, for different brands and clients can trust us with business secrets. This mutual trust enables us to devote ourselves to manufacturing and product development, and to leave the marketing to our clients.

- Tsai Chi Neng, chairman, Yue Yuen41 For its part, the company’s multiple brand strategy and diversification of client base meant the production lines kept rolling regardless of the fortunes of an individual global brand. While the company could capitalise on the success of any or all of its customers, it could also adapt quickly and positively should the tables turn. Those contract manufacturers working with just a handful of branded customers were much more dependent on the fortunes of each brand. Its OEM/ODM status also meant that the company encountered few accounting issues, dealing with a comparatively manageable number of named brands rather than hundreds, possibly thousands, of individual wholesalers, thereby retaining more financial security. Yue Yuen placed enormous value on its business relationships, putting itself in its customer’s shoes to understand and anticipate requirements, identifying opportunities to add value at every step. Since it dealt with multiple brands, Yue Yuen understood the importance of dealing with each on an individual basis. This personalisation of service meant the company was serving the needs of the brands yet was also serving the company’s own strategy of diversification in the manufacturing business.

Corporate Social Responsibility

Exposure of unethical, exploitative and environmentally unfriendly practices in the footwear manufacturing industry in the later 1990s had led to widespread condemnation of global brands for operating manufacturing sweatshops across Asia. Early attempts by the major sports brands to distance themselves from the problem, blaming instead unscrupulous contracted factory owners, only served to turn the tide of public opinion against them for failing to admit their accountability. With the consumer backlash directed at the major sports shoe brands, the profits of those big brands took a tumble as consumers voted with their feet and left the brands with stockpiles of shoes no one wanted to buy. With the urgent need to protect or repair their public image, the big brands sought to consolidate their manufacturing and form closer working relationships with fewer choice suppliers, so Yue Yuen was able to leverage on its existing relationships to forge ever closer partnerships. Working together with their manufacturers on the implementation of stringent corporate responsibility programs, the brands sought to make sure all factories met their

41 Taiwan Journal (23 February 2001) http://taiwanjournal.nat.gov.tw/ct.asp?xItem=18524&CtNode=118 (accessed 7 September 2007)



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requirement on labour practices, factory standards and environmental protection, to ensure their names were never again sullied by accusations of the poor labour practices of their suppliers. Loss of market for the highest profile global brands, and the accompanying loss of business for the branded sports shoe manufacturers, resulted in more potential business opportunities for Yue Yuen. New smaller hip brands emerged looking for reliable manufacturing partners, while the smaller manufacturing operations, having fewer internal resources to fall back on, suffered the most. Yue Yuen’s enormous production facilities and established affiliation with multiple global brands, all seeking to reassert themselves in a harsh new business environment, meant that less established, less visible smaller operations were shunned and orders were redirected to Yue Yuen. The new branded players, attracted by the major brands’ confidence in Yue Yuen, sought the company out as a partner. Consequently, while Nike’s sales fell by 4% from 1997–1999, Yue Yuen’s sales grew by 5%; while Nike’s profits fell 43% in the same period, Yue Yuen’s profits increased by 24%. Capitalising on the flexibility that was not enjoyed by the big brands manufacturing their own shoes, Yue Yuen was able to increase its market share of the global footwear market from 11% in 1998 to 14% in 2000.42 This flexibility was a continuing major inducement for global brands to work closely with Yue Yuen. In recent years industry watchdogs had continued to monitor manufacturing conditions and in return the global brands had become increasingly transparent about their manufacturing set up. In doing so, the brands were trying to preserve their corporate integrity and underscore their commitment to corporate social responsibility (“CSR”), conscious that CSR had its own role to play in building customer loyalty.

We see corporate responsibility as a catalyst for growth and innovation. It is an integral part of how we can use the power of our brand, the energy and passion of our people, and the scale of our business to create meaningful change.

- Mark Parker, president and CEO, Nike43

Partnering Innovation

One secret of our success is that we try to develop long-term partnerships with our key customers and help them cut production costs.

- Terry Ip, investor relations manager, Yue Yuen44 Following the subsequent refocusing of the industry, the brands poured energy into R&D and inventory control, improving the precision of the supply chain, and the performance of the manufacturing facilities. The resulting technological advances also benefited the manufacturers. The big brands’ need to keep costs low meant more and more of their business processes were outsourced to companies like Yue Yuen. The big brands’ investment in a supplier like Yue Yuen meant such ties would be expensive to sever and this gave Yue Yuen more advantage in the business relationship than they might otherwise have had. 42 Hilsenrath, J.E. (7 March 2000) “Manufacturing Profits: Asian Firms Grab Rewards in the Global Supply Chain”, Asian Wall Street Journal. 43 SportsOneSource Media (31 May 2007) “Nike Sets New Corporate Social Responsibility Goals”, http://www.sportsonesource.com/news/article_print.asp?ID=19389 [DATE OF ACCESS]. 44 Topics Magazine (August 2003), “Pou Chen Corp.: Shoe-in for Success”, American Chamber of Commerce, Taipei.



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Masterful R&D was a way for a contract manufacturer to gain a crucial foothold in the market: the manufacturer who got the product development assignment had the natural priority to be the one assigned to make the shoes. Yue Yuen invested an average of 3% of its annual turnover in its R&D, which amounted to US$99 million in the 2006 financial year and put the company among the 1,000 largest R&D spenders worldwide across all industries. 45 The company’s R&D efforts focused on the development of raw materials and the streamlining of production processes, with the aim of developing advanced footwear and shortening product cycles.46 Many customers were no longer doing their own product development apart from the very initial conceptualisation of the product, which they would then hand over to the manufacturer to develop and produce. Yue Yuen’s R&D capabilities were a very attractive offering, and the supplier-customer relationship thus strengthened and evolved into a strategic partnership, with both sides working together to develop ever more innovative footwear products.

Fully Integrated Supply Network

While the brands were concentrating on offloading functions, Yue Yuen focused on internalising business processes, integrating vertically to take control of the upstream supply chain and thereby improving operating efficiencies. It was estimated that about 40% of Yue Yuen’s material costs were related to petrochemical derivatives, which were used to make artificial rubber, ethylene vinyl acetate (EVA), fabric, phylon and synthetic leather—major raw materials for making shoe soles and uppers. 47 In 2002, Yue Yuen purchased 67 companies, mostly based in China, from its parent company Pou Chen [see Exhibit 20 for the full list of subsidiary companies]. These companies were all engaged in the production of raw materials, equipment and components used in the shoe manufacturing processes. These purchases, coupled with stakes in tanning factories in China, Taiwan and Vietnam, allowed Yue Yuen to aggressively consolidate the supply chain, thereby reducing the company’s vulnerability to volatility in the costs and supply of raw materials. Positioning more of those suppliers near its factories meant it was not reliant on overseas shipments to keep production lines rolling.48 To ensure a steady power supply for its factories, Yue Yuen built flexible power plants in its production bases in China, Vietnam and Indonesia, intending to grow them in line with the development of the production facilities and the consequential increasing need for power. The power was also supplied to some other companies in the same industrial park, providing another revenue stream to the company. Thus gaining better control of quality standards and delivery times, the company maximised production efficiency and cost savings. On a Yue Yuen assembly line, from raw materials to finished product, a shoe now took just hours to make compared to 25 days just a few years earlier.49 In 2001, the company launched SupplyLINE Ltd, a joint venture with Hutchison Whampoa Ltd that provided logistics support for Yue Yuen’s inbound operations. The investment shortened production lead times and gained the company a firmer foothold in its upstream integration efforts. Yue Yuen’s offering of a fully integrated package of services related to

45 (2005) DTI, United Kingdom. 46 Yue Yuen’ website: http://www.yueyuen.com 47 South China Morning Post (7 October 2005) “Footing the Cost”. 48 Hilsenrath, J.E. (7 March 2000) “Manufacturing Profits: Asian Firms Grab Rewards in the Global Supply Chain”, Asian Wall Street Journal. 49 Clean Clothes Campaign (1 March 2004) “Sportswear Industry Data and Company Profiles: Background Information for the Play Fair at the Olympics Campaign”, http://www.cleanclothes.org/ftp/Background%20Company%20Profiles%20Olympics%20Campaign.pdf (accessed 6 February 2007)..



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footwear production had put the company far ahead of competitors who concentrated solely on taking advantage of cheap labour.50

Product Diversification

Yue Yuen had also been focusing on expanding its product line to complement its core athletic and casual footwear manufacturing business. Following its 2002 acquisition of an indirect interest in Symphony Holdings Ltd—a Hong Kong-listed company engaged principally in the manufacturing and trading of footwear—the company had gone on to make several other strategic acquisitions to enhance its business opportunities in areas outside of its primary scope of experience. In 2003 the company formed a joint venture with Hua Jian Industrial Holding Company Ltd, an OEM/ODM of ladies’ shoes, with production facilities in China. Also in 2003, the company bought a 73% (later increased to 92%) stake in sportswear and casual wear maker Pro Kingtex Industrial Company Ltd, with manufacturing facilities in China, Vietnam and Mexico, producing apparel for Northface, Columbia and other brands.51 There were several other joint venture investments with companies including Eagle Nice and Luen Thai (Holdings) Ltd, both makers of sports apparel, with Golden Chang Group which manufactured safety and casual shoes, and with Prosperous Industrial (Holdings) Ltd, an OEM/ODM of sports bags, backpacks, and travel accessories. Buying into the different businesses meant Yue Yuen also bought into the wealth of experience those companies had in the manufacture of a wider range of products than Yue Yuen had previously made.

Diversification of Markets

There was no denying the increasing appetite for Yue Yuen’s products within the Asian market. In 2002, 52% of Yue Yuen’s output was exported to the US, 27% to the EU and 14% to Asia. By 2006, the balance had shifted and the company’s exports to the US now made up only 38% of the total, while 30% of its products were now sold in Asia.52

Retailing in China

In their effort to penetrate the mainland Chinese market, the major vendors have entrusted us with contract production. Our retail outlets can help them tap that market and bring them higher profits, which will encourage them to give us more orders.

- Tsai Chi-Neng, chairman, Yue Yuen53 Since the early 1990s, lured by the potential of the domestic market, Yue Yuen had sought to expand downstream and had established a fledgling wholesale business in China. Over the next ten years, the wholesale arm flourished and in 2004 the company began to aggressively develop its China retail network, aiming at the growing affluence of people in mainland cities [see Exhibit 21]. In 2005, although the disposable income of the average Chinese was approximately US$1,327, around 15 million people had an annual income of over US$32,000. Analysts estimated the size of China’s middle class to be somewhere between 100 and 300 million.54 Under its new retail identity, “YY Sports”, Yue Yuen had begun an aggressive expansion plan, targeting a 50% increase in Chinese retail sales in 2007 (up from US$305 million in 2006, which in turn was up 80% from 2005). The company operated 640 self-run stores or

50 Ibid 51 Yue Yuen’s website: http://www.yueyuen.com. 52 Ibid 53 (30 November 2005) “Pou Chen Expands from Footwear Manufacturing into Retailing”, Taiwan Economic News. 54 China Economic Review (February 2007) “A Shopper’s Paradise”, 17 (2), 24.



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counters and maintained 270 franchised stores or counters in mainland China. In addition, there were 25 self-run stores or counters in Taiwan and two in Hong Kong. Footwear retailing margins were more attractive than those available to traditional manufacturers but a whole new skill set was required [see Exhibit 22 for a breakdown of the costs and profits in the athletic footwear industry]. The company had long nurtured an independent team to concentrate on selling to the Chinese market. Since the 1990s Yue Yuen had been the exclusive licensee in China for Converse, Hush Puppies and Wolverine, and this team managed the wholesale distribution and operated the retail network for these brands, which in 2006 amounted to 1,200 in mainland China, 680 in Taiwan and 230 in Hong Kong. It was this team that the company expanded and made independent in order to allow it to focus on the China wholesale and retail business. The retail network distributed the branded footwear, apparel and accessories, and while most of the self-run stores and counters served individual international brands, the opening of further large-scale multi-brand stores in strategically selected cities was anticipated. Yue Yuen was also planning further acquisitions to consolidate its position as one of the leading sporting goods retailers in China.55

I think from the company’s financial perspective we are in a good position to acquire some of the regional chain stores. They are looking for expansion, and so are we. If you open your own stores one by one it will take a long time, but if you acquire an established existing retail chain, you can take on the existing team and they can work much more locally. Moreover, together you can have better buying power.

- Steve Li, executive director, Yue Yuen56 With the Beijing Olympics just around the corner, the company expected retail sales to contribute more than 10% of total group turnover by 2008 (up from 8.3% in 2006, and 5.4% in 2005) and was on track to increase its number of outlets spread all over the mainland to 3,000 by 2008, aiming to own two-thirds of those new stores and retail counters.

During an Olympic year, for whatever reason, people just seem to feel as though they need to buy more athletic stuff.

- Jim Davis, chairman and CEO, New Balance57 Yue Yuen sought to establish the “YY Sports” retail identity in every store it operated, including those single-brand stores it operated under that customer’s own brand name, so that the consumer would know they were buying from a store owned by YY Sports. Yue Yuen hoped to thus get the name recognised and reaffirm its own corporate identity.58 The mainland retailing network gave the company direct access to the Chinese consumer and opened up a whole new revenue stream, at the same time strengthening the company’s ties with the global brands. Yue Yuen’s localised knowledge of the Chinese market was an invaluable add-on for their branded partners, who could develop their own business in China by partnering with Yue Yuen’s retail arm. The retail development strategy served Yue Yuen well too, satisfying its customers and broadening its own revenue base.

55 Yue Yuen’s website: http://www.yueyuen.com. 56 Yue Yuen company interview, 23 April 2007. 57 Footwear News (11 February 2004) “A Balancing Act”, 60 (6B) 22. 58 Yue Yuen company interview, 23 April 2007.



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We aim to be the leading manufacturer and now the leading retail operator for our partners.

- David Tsai, managing director, Yue Yuen59

The Next Step

The company had made substantial efforts to diversify its business scope in an attempt to offset the narrowing margins available in its core footwear manufacturing business. Did the company’s growth strategies make sense in light of the current environment and the its particular situation? Were they sustainable? What more could it do to ensure its fortunes were firmly under its own control?

59 Yue Yuen Annual General Meeting (1 March 2007) “Hong Kong: Yue Yuen Plans China Retail Expansion”, http://www.just-style.com/article.aspx?id=96627 [PROVIDE DATE OF ACCESS].



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APPENDIX A: THE CHANGING WORLD OF SHOES Athletic shoes went by various names depending on where you came from. They might be called sports shoes, running shoes, gym shoes, tennis shoes, sneakers (US), kicks (US), trainers (UK), runners (Canada), takkies (South Africa) or sandshoes (Australia). Whatever the name, just a few decades earlier, athletic shoes had all tended to look fairly similar and were worn and more or less forgotten about. Today however, the athletic shoe market was one of the most competitive in the world. The modern consumer would find a dizzying array of categories, styles and brands to choose from, with medical science concurring that wearing the right type of shoe was essential to avoid painful shins and joints, or even injury. The American Orthopaedic Foot and Ankle Society identified seven categories of specialised athletic shoes: • Running, training, and walking: including hiking, jogging and exercise walking • Court sports: including tennis, basketball and volleyball • Field sports: including soccer, football and baseball • Winter sports: including figure skating, ice hockey, alpine and cross-country skiing • Track and field sports shoes: including many different models depending on the event • Speciality sports: including golf, aerobic dancing and cycling • Outdoor sports: including hunting, fishing and boating.60 Apart from these official sporting categories, there was a whole range of styles suited to a whole range of athletic activities, with every new sport creating a demand for new shoes with unique features and innovative technology. The shoes were made from a combination of materials, including natural and synthetic rubber, plastic compounds, nylon, leather, canvas, polyurethane films and cushioning materials.61 The cushioning systems, whether foam, silicon, air or gel, were one of the most important aspects of the modern athletic shoe, with manufacturers searching for the ultimate cushioning solution. With the desire for enhanced performance and technological sophistication influencing the style of the footwear and the materials used, modern athletic shoes were designed by experts including engineers, scientists, podiatrists and athletes, with R&D playing a key role in technical innovation. Casual footwear, also known as “brown shoe” styles, had undergone a transformation since the business casual look had started to become more acceptable in the workplace since the early 1990s, when the informal dress policies of the high-tech industries began to infiltrate the general business world. By 2001, a poll by the Society for Human Resource Management found that 86% of US companies allowed some form of casual dress.62 As an integral element of this trend, the casual shoe had risen in popularity, becoming a daily wear shoe rather than something to be worn on weekends only. The convergence of casual and athletic designs which enabled athletes to look stylish while exercising and remain looking sporty in more casual surroundings, had bred a new crossover style of footwear, sometimes known as “athleisure” or “sport fusion”. Whereas the technical, specialised athletic shoes were actually designed for sports, this hybrid shoe style was for those who wanted to look sporty.63 Similarly, sports technology was finding its way into

60 American Orthopaedic Foot and Ankle Society, http://www.aofas.org/i4a/pages/index.cfm?pageid=3393 (accessed 7 September 2007) 61 NIKE, Inc. (2006) “Form 10-K For Fiscal Year Ended May 31, 2006”, United States Securities and Exchange Commission, http://www.nike.com/nikebiz/investors/reporting_sec/ar_06/docs/10k.pdf (accessed 7 September 2007) 62Standard & Poor (4 March 2004) “Industry Surveys Apparel and Footwear”, http://sandp.ecnext.com/sandp/includes/paper.pdf (accessed 7 September 2007) 63 Anderson, M. (26 March 2007) “‘Athleisure’ Trend Fuels Footwear Stocks”, http://biz.yahoo.com/ap/070326/market_spotlight_footwear_cos.html?.v=1.



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casual footwear, further blurring the lines between casual shoes and performance footwear. Furthermore, certain big name designer fashion labels had also developed their own ranges of couture sports footwear, and while some had teamed up with major athletic shoe brands, the emphasis was decidedly more on fashion than on function. Whatever type of activity the wearers engaged in, the range of qualities they looked for in their shoes was universal. Comfort, reasonable pricing, quality of manufacture, design, attractiveness, performance, durability, style and brand name were all common reasons for buying a pair of shoes. With the huge choice of styles available on the market, today’s consumer had come to expect constant innovation from the brands, something which demanded their constant investment.



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EXHIBIT 1: GLOBAL FOOTWEAR CONSUMPTION

Global Footwear Consumption (2002)

REGION MILLIONS OF PAIRS % OF TOTAL China 2,768 22.2 Asia (excluding China) 2,706 21.7 Europe 2,544 20.4 North and Central America 2,381 19.1 Middle East, Africa, Oceania 1,172 9.4 South America 898 7.2 TOTAL 12,469 100

Source: Jordan Investment Board (2004) “The Global Footwear Industry”, http://uploads.batelco.jo.jib/uploads/footwear.pdf.

Global Footwear Consumption (1998–2008)

CONSUMPTION (Pairs)

1998 Total

(Millions)

1998 Per

Capita

2000 Total

(Millions)

2000 Per

Capita

2002 Total

(Millions)

2002 Per

Capita

2004* Total

(Millions)

2004* Per

Capita

2008* Total

(Millions)

2008* Per

CapitaAsia 4,744 1.4 5,222 1.5 5,474 1.5 5,840 1.6 6,528 1.7

Americas 3,011 3.8 3,274 3.9 3,279 3.9 3,433 4.0 3,611 4.1 Europe 2,239 3.1 2,396 3.1 2,544 3.5 2,717 3.7 2,886 4.0

Rest of the World 1,086 1.1 1,187 1.1 1,172 1.1 1,317 1.1 1,399 1.1 TOTAL 11,080 1.9 12,079 2.0 12,469 2.0 13,307 2.1 14,424 2.2

*2004 and 2008 figures are estimated




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Major Consuming Countries and Areas (2002)

* (September 2006) “India Footwear Market” http://www.imagesfashion.com/Cover_story1_sep06.html. Source: Jordan Investment Board (2004) “The Global Footwear Industry”, http://uploads.batelco.jo.jib/uploads/footwear.pdf.

Footwear Market in Financial Terms for Footwear Exporters—The Major Importing Areas (2003)


COUNTRY CONSUMPTION (millions of pairs)

POPULATION (millions)

PER CAPITA (pairs per person per year)

USA 1,939.7 290.3 6.68 Japan 584.4 127.2 4.60 EU 1,666.5 380.2 4.38 Canada 122.4 32.2 3.80 Taiwan 82.7 22.6 3.66 Australia 72.0 19.7 3.65 Korea 165.4 48.3 3.42 Brazil 483.0 182.0 2.68 Thailand 144.4 64.3 2.25 Mexico 180.4 104.9 1.72 China 2,768.7 1,286.9 1.71 Indonesia 350.0 234.9 1.49 India 1,100.0* 1,049.7 1.05

REGION US$ ’000 % OF WORLD Europe 23,362,091 50.15 North America 15,718,585 33.74 Asia 4,256,841 9.14 Latin America 1,022,423 2.19 Middle East 903,873 1.94 Africa 689,675 1.48 Oceania 629,106 1.35 TOTAL 46,582,594 100.00



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China/Indonesia/Vietnam Global Footwear Exports—US$ ’000

COUNTRY 2000 2001 2002 China 9,850,226 10,095,769 11,090,084 Indonesia 1,672,110 1,505,580 1,148,052 Vietnam 1,471,667 1,630,193 1,900,000* TOTAL 12,994,003 13,231,542 14,138,136 Rest of World (72 countries) 26,940,429 27,168,857 24,580,822 CN/IA/VI % share of world exports 32.5 32.8 36.5

* Estimated Source: Jordan Investment Board (2004) “The Global Footwear Industry”, http://uploads.batelco.jo.jib/uploads/footwear.pdf.



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EXHIBIT 2: BRANDED SPORTING GOODS GLOBAL MARKET VALUES TOTAL SALES (WHOLESALE VALUE) (US$ millions)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Global branded athletic footwear market 11,532 12,123 12,023 12,900 13,657 15,082 16,546 15,040 14,995 15,624 15,835 17,012 18,743

Source: Sporting Goods Intelligence http://www.sginews.com/sginews/gifs/SGI_afwint_2003.pdf.

TOTAL SALES (WHOLESALE VALUE) (US$ millions) 2000 2001 2002 2003

Global branded rugged outdoor footwear market 2,095 2,276 2,516 2,825

Global branded lifestyle/fashion casual footwear market 6,495 6,369 7,759 8,338

Global branded sports equipment market N/A 49,790 50,660 51,300

Global branded sports apparel market 42,992 40,577 41,595 43,903

Top 5 Brands Rugged Outdoor Footwear

Global Market Share 2003

Top 5 Brands Lifestyle/Fashion Casual Footwear


Top 5 Brands Sports Equipment


Top 5 Brands Sports Apparel


Timberland 36% Clarks 18.4% Adidas 2.9% Nike 7.5% Merrell 10.3% Skechers 10% Amer 2.43% Adidas 5.4% Hi-Tec Sports 6.5% ECCO 7.1% Shimano 2.25% Reebok 2.9% Wolverine 6.2% Rockport 4.3% Acushnet Cos. 2.19% Russell 2.7% Columbia 4.2% Geox 3.9% Coleman 2.14% Quiksilver 2.2%

Source: Sporting Goods Intelligence http://www.sginews.com



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EXHIBIT 3: US SPORTING GOODS PURCHASES BY CATEGORY, BY AGE AND BY GENDER

2005 US Consumer Sporting Goods Purchases by Category

US$ (Millions) 1999 2000 2001 2002 2003 2004 2005 **2006

Change y-o-y 04/05

Equipment 20,319 21,603 21,599 21,699 22,394 23,328 23,981 24,450 3%

Footwear 12,546 13,026 13,814 14,144 14,446 14,752 15,711 16,268 7%

Clothing 10,307 11,030 10,217 9,801 10,543 11,201 11,650 12,292 4%

Subtotal 43,172 45,659 45,630 45,644 47,382 49,280 51,343 53,010 4% Recreational Transport* 27,965 28,779 28,712 32,106 32,396 36,531 38,493 36,856 5%

Total 71,137 74,438 74,342 77,750 79,778 85,811 89,936 89,866 5% *Bicycles, leisure boats, RVs and snowmobiles **Estimated Source: National Sporting Goods Association http://www.nsga.org/public/pages/index.cfm?pageid=161.

2005 US Sports Footwear Purchases by Age and Gender

Age

As % of Total 2005

US Population

As % of Total Sport

Footwear Purchases

2005

As % of Total Sport

Footwear Purchases

2004

As % of Total Sport

Footwear Purchases

2003

As % of Total Sport

Footwear Purchases

2002

As % of Total Sport

Footwear Purchases

2001 Under 14 19.2 28.4 28.6 30.4 31.4 26.6 14–17 5.7 8.1 8.2 8.4 8.5 8.4 18–24 10 7.4 6.6 6.4 6.3 6.1 25–34 13.6 14 15.2 15 15 11.7 35–44 15 14 14.1 13.7 13.6 14.6 45–64 24.1 21.1 20.6 19.5 19.2 23.2 65 and Older 12.4 6.9 6.7 6.5 6.2 9.4 Total 100 100 100 100 100 100 Male 49.2 45.7 46.5 46.6 46.9 46.2 Female 50.8 54.3 53.5 53.4 53.1 53.8 Total 100 100 100 100 100 100 Source: National Sporting Goods Association http://www.nsga.org/public/pages/index.cfm?pageid=164.



25

EXHIBIT 4: FOOTWEAR RETAIL SALES IN CHINA

Historical and Forecast Footwear Retail Sales in China 2000-2009 (2006-2009 estimated)

103 110 120 129 137 148 161 175 191212

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

RM

B B

illio

n

Source: Belle International Holdings (9 May 2007) “Prospectus”, http://mainednews.hk/listedco/listedconews/sehk/20070509/01880/EWP111.pdf.

EXHIBIT 5: MARKET SHARE OF MAJOR SPORTSWEAR BRANDS IN CHINA 2005

Market Share of Major Sportswear Brands in China 2005

13.10%

12.30%

9.60%65.00%

Nike

Adidas

Li Ning

Others




26

EXHIBIT 6: INTERNATIONAL BRANDED ATHLETIC FOOTWEAR MARKET (WHOLESALE)

2002 SALES (US$ millions) 2003 SALES (US$ millions) BRAND US Non-

US Licensed Total

% Share 2002

Change y-o-y

2001–02 US Non-

US Licensed Total

% Share 2003

Change y-o-y

2002–03 Nike 3,052 2,753 0 5,805 34.12 4.8 3,005 3,186 45 6,236 33.27 7.4 Adidas 761 1,817 225 2,803 16.48 15.8 750 2,028 215 2,993 15.97 6.8 Reebok 932 631 79 1,642 9.65 -1.0 1,036 725 75 1,836 9.80 11.8 New Balance 910 180 187 1,277 7.51 12.0 891 186 151 1,228 6.55 -3.8 Puma 121 459 188 768 4.51 16.4 173 802 139 1,114 5.94 45.1 Converse 181 24 375 580 3.41 43.9 245 0 570 815 4.35 40.5 ASICS 172 448 36 656 3.86 16.3 178 476 38 692 3.69 5.5 K-Swiss 245 37 0 282 1.66 19.5 372 57 0 429 2.29 52.1 Fila 132 285 62 479 2.82 10.9 135 150 50 335 1.79 -30.1 Vans 220 98 6 324 1.90 -8.2 204 103 5 312 1.66 -3.7 American SG 205 53 30 288 1.69 18.5 200 91 7 298 1.59 3.5 Mizuno 37 182 30 249 1.46 -33.4 43 172 30 245 1.31 -1.6 Keds/Pro Keds 161 24 40 225 1.32 -3.0 153 27 40 220 1.17 -2.2 Hi-Tec 40 108 10 158 0.93 -2.5 50 110 10 170 0.91 7.6 Foot-Joy 125 31 0 156 0.92 -0.6 123 42 0 165 0.88 5.8 Lotto 6 77 32 115 0.68 40.2 7 117 40 164 0.87 42.6 Brooks 36 16 55 107 0.63 4.9 43 22 60 125 0.67 16.8 And 1 95 40 0 135 0.79 13.4 83 40 0 123 0.66 -8.9 Saucony 83 28 0 111 0.65 0.9 82 31 0 113 0.60 1.8 Tommy Hilfiger 102 0 0 102 0.60 6.3 97 0 0 97 0.52 -4.9

Top Brands 7,616 7,291 1,355 16,262 95.59 7.8 7,870 8,365 1,475 17,710 94.49 8.9 Other Brands 200 400 150 750 4.41 0.0 383 600 50 1,033 5.51 37.7

TOTAL BRANDS

7,816 7,691 1,505 17,012 100.00 7.4 8,253 8,965 1,525 18,743 100.00 10.2

Source: Sporting Goods Intelligence http://www.sginews.com/sginews/gifs/SGI_afwint_2003.pdf.



27

EXHIBIT 7: SELECTED BRAND STATISTICS ADIDAS (EUR)

Turnover R&D Spending

Gross Profit

Profit before

Taxation

Net Income

Net Margin

1997 3.4bn 25m 1.4bn 346m 237m 7% 1998 5.1bn 65m 2.1bn 319m 205m 4% 1999 5.4bn 77m 2.4bn 398m 228m 4.2% 2000 5.8bn 91m 2.5bn 347m 182m 3.1% 2001 6.1bn 86m 2.6bn 376m 208m 3.4% 2002 6.5bn 85m 2.8bn 390m 229m 3.5% 2003 6.3bn 86m 2.8bn 438m 260m 4.1% 2004 5.9bn 59m 2.8bn 526m 314m 5.3% 2005 6.6bn 63m 3.2bn 655m 383m 5.8% 2006* 10.1bn 98m 4.5bn 723m 483m 4.8%

* Including Reebok from February 2006 NIKE (US$)

Turnover Gross Profit

Profit before Taxation

Net Income Net Margin

1996 6.5bn 2.6bn 899m 553m 8.5% 1997 9.2bn 3.7bn 1295m 796m 8.7% 1998 9.6bn 3.5bn 653m 400m 4.2% 1999 8.8bn 3.3bn 746m 451m 5.1% 2000 9bn 3.6bn 919m 579m 6.4% 2001 9.5bn 3.7bn 921m 590m 6.2% 2002 9.9bn 3.9bn 1017m 663m 6.7% 2003 10.7bn 4.4bn 1123m 474m 4.4% 2004 12.3bn 5.3bn 1450m 946m 7.7% 2005 13.7bn 6.1bn 1860m 1213m 8.9% 2006 15bn 6.6bn 2142m 1392m 9.3%

* Nike’s R&D spending unavailable

LI NING (US$)

Turnover R&D Spending

Gross Profit

Profit before

Taxation

Net Income

Net Margin

2001 95m n/a 37m 8m 6m 6.8% 2002 124m n/a 56m 12m 9m 7.0% 2003 165m n/a 79m 15m 12m 7.4% 2004 243m 5m 113m 25m 16m 6.5% 2005 318m 9m 146m 35m 24m 7.6% 2006 412m 10m 196m 52m 38m 9.3%

Source: Company Annual Reports.



28

EXHIBIT 8: SELECTED BRAND SALES BY MARKET SEGMENT

(EMEA refers to Europe, Middle East and Africa)

Nike

0

2000

4000

6000

8000

10000

12000

14000

16000

2002 2003 2004 2005 2006

US$

Mill

ions

OtherAmericasAsia PacificEMEAUS

Adidas

0

2000

4000

6000

8000

10000

12000

14000

16000

2002 2003 2004 2005 2006

US$

Mill

ions

OtherAmericasAsia PacificEMEAUS



29

Puma

0

500

1000

1500

2000

2500

3000

3500

4000

2002 2003 2004 2005 2006

US$

Mill

ions Asia Pacific

EMEAUS

Li Ning

0

50

100

150

200

250

300

350

400

450

2003 2004 2005 2006

US$

Mill

ions

International

PRC



30

EXHIBIT 9: SELECTED BRAND SALES BY PRODUCT TYPE

Nike

010002000

3000400050006000

700080009000

2002 2003 2004 2005 2006

US$

Mill

ions

Footwear Apparel Equipment

Adidas

0

1000

2000

3000

4000

5000

6000

7000

2002 2003 2004 2005 2006

US$

Mill

ions

Footwear Apparel Equipment/Accessories

Including Reebok business segment from February 2006 onwards.



31

Puma

0

500

1000

1500

2000

2500

2002 2003 2004 2005 2006

US$

Mill

ions


Li Ning

0

50

100

150

200

250

2003 2004 2005 2006

US$

Mill

ions




32

EXHIBIT 10: MAJOR WORLD EXPORTERS OF FOOTWEAR, 1984, 1994, 2004 (VALUES IN US DOLLARS, REPRESENTING ALL KINDS OF FOOTWEAR EXPORTS TO ALL COUNTRIES)

1984 1994 2004

Country $ billions Country $ billions Country $ billions Italy 3.50 Italy 6.47 Chinab 14.74 Taiwan 2.53 Chinab 5.76 Italy 7.90 South Korea 1.35 Taiwan 2.77 Vietnam 2.69 Brazil 1.03 Indonesia 1.85 Spain 2.18 Spain 0.77 Spain 1.65 Germany 2.02 Yugoslavia 0.58 South Korea 1.56 Belgium 1.93 France 0.51 Portugal 1.56 Brazil 1.81 Czechoslovakia 0.49 Brazil 1.54 Portugal 1.56 East Germany 0.39 Thailand 1.49 Netherlands 1.33 Chinab 0.38 Germany 1.12 France 1.32 World totals 13.58 32.48 46.70

Notes: A. Re-exports have been extracted from all data presented. b. China here is defined as mainland China, Hong Kong and Macau.

Source: Scott, A. J. (20 January 2006) “The Changing Global Geography of Low-Technology, Labor-Intensive Industry: Clothing, Footwear, and Furniture”, World Development, 34 (9), 1517–1536.



33

EXHIBIT 11: EU-25 FOOTWEAR IMPORTS

EU-25 Footwear Imports From Main Source Countries (Value in € ’000s)

2002 2003 2004 2005

Share of 2005 imports

% growth 2004–2005

% growth 2002–2005

World 10,125,480 10,428,489 10,895,615 12,173,661 100.0 11.7 20.2

China 2,286,572 2,633,912 2,959,949 4,796,808 39.4 62.1 109.8

Vietnam 2,109,816 2,155,389 2,194,834 2,076,354 17.1 -5.4 -1.6

Romania 1,342,578 1,437,682 1,372,877 1,378,316 11.3 0.4 2.7

India 603,044 581,707 674,097 702,993 5.8 4.3 16.6

Indonesia 663,367 552,233 521,992 513,664 4.2 -1.6 -22.6

Brazil 236,948 234,880 294,214 374,458 3.1 27.3 58.0

Tunisia 371,168 375,467 339,988 355,587 2.9 4.6 -4.2

Thailand 314,837 262,529 245,466 240,322 2.0 -2.1 -23.7

Bulgaria 184,537 205,075 192,774 201,891 1.7 4.7 9.4

Morocco 205,670 204,361 188,297 187,241 1.5 -0.6 -9.0



34

EU-25 Footwear Imports From Main Source Countries (Number of Pairs in ’000s)

2002 2003 2004 2005

Share of 2005

imports

% growth 2004–2005

% growth 2002–2005

World 1,232,914 1,455,036 1,709,875 1,939,813 100.0 13.4 57.3

China 461,364 682,290 862,603 1,250,802 64.5 45.0 171.1

Vietnam 284,032 285,734 297,968 265,271 13.7 -11.0 -6.6

Romania 66,509 72,019 71,589 71,467 3.7 -0.2 7.5

India 36,073 41,996 52,063 52,629 2.7 1.1 45.9

Indonesia 62,551 55,006 60,192 50,772 2.6 -15.7 -18.8

Brazil 15,094 18,588 28,123 30,978 1.6 10.2 105.2

Thailand 37,427 36,061 33,679 28,056 1.4 -16.7 -25.0

Turkey 25,890 30,803 32,910 24,650 1.3 -25.1 -4.8

Hong Kong 26,067 25,084 31,628 22,654 1.2 -28.4 -13.1

Tunisia 18,226 18,947 17,764 19,766 1.0 11.3 8.4

Source: EU Enterprise and Industry Statistics http://ec.europa.eu/enterprise/footwear/statistics.htm#Production.



35

EXHIBIT 12: US FOOTWEAR IMPORTS 1996–2006; VALUE BY COUNTRY OF ORIGIN (US$ ＇000)

Country 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006 % Share

of Total Imports

China 6,255,454 7,235,968 7,909,327 8,339,971 9,098,588 9,647,478 10,114,068 10,396,087 11,185,922 12,467,866 13,600,167 72.75 Vietnam 39,051 97,503 114,902 145,672 124,491 132,000 223,921 324,407 472,812 716,111 950,833 5.09 Brazil 1,190,555 1,138,983 1,019,866 956,516 1,146,928 1,159,756 1,078,393 1,038,486 1,079,644 1,017,196 893,488 4.78 Indonesia 1,054,805 1,079,953 746,283 751,041 730,982 724,356 730,399 569,203 492,527 510,098 471,113 2.52 Italy 1,185,990 1,183,625 1,157,759 1,175,611 1,250,743 1,251,237 1,175,142 1,233,530 1,241,615 1,128,717 1,101,622 5.89 Thailand 331,443 378,752 341,738 325,304 328,908 314,153 277,076 284,442 286,574 291,618 292,940 1.57 Hong Kong

72,558 97,961 59,873 57,018 66,494 80,741 67,157 60,082 85,754 50,730 70,856 0.38

Mexico 226,340 287,111 261,840 271,336 283,488 250,335 223,788 235,356 201,811 203,886 222,156 1.19 India 84,997 96,726 83,540 93,251 108,820 98,278 92,330 107,879 124,437 138,056 153,343 0.82 Taiwan 236,126 170,718 133,891 102,113 86,356 70,685 67,085 70,072 75,207 56,594 47,370 0.25 Dominican Republic

58,611 78,068 67,913 57,456 65,218 82,808 73,237 71,110 76,624 88,308 106,248 0.57

Canada 86,234 95,444 78,504 75,095 64,941 67,462 56,911 53,346 67,686 86,260 70,466 0.38 Spain 393,045 416,045 390,169 326,096 323,730 273,026 268,545 234,394 224,222 191,702 197,895 1.06 Romania 18,864 28,115 29,692 39,266 27,183 42,244 47,720 59,203 75,643 75,137 72,973 0.39 Germany 61,911 71,021 70,057 82,136 77,266 70,651 89,967 90,041 76,793 74,682 57,074 0.31 Korea 330,020 225,648 174,358 158,384 137,357 100,740 62,089 45,816 46,624 39,759 19,900 0.11 Portugal 60,456 65,821 69,786 97,801 98,695 112,581 94,827 95,467 87,372 73,369 58,605 0.31 Philippines 82,426 102,607 81,537 20,118 18,314 11,541 2,747 3,045 3,158 5,163 3,920 0.02 Poland 15,989 17,382 13,901 15,080 11,953 8,242 8,703 25,120 25,988 26,770 31,194 0.17 Slovak Republic

2,906 5,939 6,677 8,928 14,908 26,454 21,132 32,009 35,956 32,893 44,459 0.24

Subtotal 11,787,781 12,873,389 120811,614 13,098,194 14,065,352 14,524,770 14,775,238 15,029,098 15,966,370 17,274,914 18,466,622 98.78 All Other 392,873 509,383 535,586 533,824 443,552 379,051 303,957 223,871 218,966 218,736 227,148 1.22

Total Values

12,180,654 13,382,772 13,347,199 13,632,018 14,508,904 14,903,821 15,079,196 15,252,969 16,185,336 17,493,650 18,693,771 100.00

Source: AAFA American Apparel and Footwear Association http://www.apparelandfootwear.org/Statistics.asp.



36

EXHIBIT 13: US FOOTWEAR IMPORTS 1996–2006 BY COUNTRY OF ORIGIN (＇000 OF PAIRS) Country 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 %

Share of Total Imports

2006 China 942,264 1,037,960 1,116,447 1,248,909 1,380,305 1,415,709 1,542,590 1,622,483 1,791,289 1,941,796 2,062,822 86.14 Vietnam 2,282 6,526 7,175 8,660 7,319 8,285 21,047 34,018 47,098 67,435 90,066 3.76 Brazil 92,926 90,626 83,294 85,563 98,540 97,462 101,627 103,275 98,834 79,318 66,714 2.79 Indonesia 92,023 89,839 74,279 79,454 76,145 75,163 73,103 56,947 46,728 46,288 42,185 1.76 Italy 50,101 53,162 48,688 48,074 52,287 48,555 43,551 40,256 35,264 27,783 25,490 1.06 Thailand 24,561 28,045 27,805 28,063 29,182 27,198 27,654 25,329 25,340 24,450 23,578 0.98 Taiwan 21,759 22,602 16,543 15,222 13,750 11,102 10,186 14,120 13,139 9,092 8,965 0.37 Hong Kong

10,349 13,248 8,326 8,799 10,583 10,939 10,686 9,996 19,154 10,078 12,688 0.53

India 7,274 7,604 5,958 6,598 7,096 6,757 6,566 7,372 8,037 9,513 10,383 0.43 Mexico 37,082 44,270 44,676 38,701 36,107 31,505 26,357 28,437 15,759 10,338 11,095 0.46 Spain 21,995 24,500 23,051 18,655 18,162 14,982 13,020 9,534 7,206 6,370 5,397 0.23 Canada 5,109 5,606 4,766 3,942 4,190 3,875 3,787 4,206 5,110 7,046 5,438 0.23 Dominican Republic

14,757 16,519 13,199 8,307 7,117 8,885 8,192 7,800 7,262 8,795 8,506 0.36

Germany 2,806 3,284 3,444 3,839 3,947 3,436 3,987 3,790 3,076 2,948 2,206 0.09 Romania 878 1,045 1,209 1,417 1,150 1,932 1,891 2,008 2,636 2,508 2,327 0.10 Korea 17,562 12,045 10,915 9,214 7,516 6,030 4,668 3,702 3,586 3,283 1,810 0.08 Portugal 3,273 3,366 3,504 4,157 3,973 4,287 3,698 3,289 2,706 2,185 1,602 0.07 Philippines 9,359 9,309 7,622 2,696 2,408 1,852 830 1,075 940 1,329 1,582 0.07 Poland 1,201 900 877 950 801 578 632 1,493 1,166 1,128 1,268 0.05 Slovak Republic

107 275 318 380 535 1,209 1,350 1,217 1,143 907 1,184 0.05

Subtotal 1,357,667 1,470,730 1,502,098 1,621,599 1,761,111 1,779,741 1,905,422 1,980,348 2,135,473 2,262,590 2,385,305 99.61 All Other 18,412 21,307 23,757 21,997 18,913 16,897 14,420 12,519 10,694 10,809 9,454 0.39

Total Pairs

1,376,080 1,492,037 1,525,855 1,643,596 1,780,024 1,796,638 1,919,843 1,992,867 2,146,167 2,273,400 2,394,759 100.00

Source: AAFA American Apparel and Footwear Association http://www.apparelandfootwear.org/Statistics.asp.



37

EXHIBIT 14: US NON-RUBBER FOOTWEAR IMPORTS

US Non-Rubber Footwear Imports by Product Class Non-Rubber Footwear by Product Class (’000s of Pairs)

2001 2002 2003 2004 2005

Men’s 199,539 205,551 213,284 220,484 225,551 Work 23,778 24,366 26,544 27,766 31,544

Women’s 623,775 676,127 730,534 814,354 879,901 Juveniles’ 218,566 234,436 251,454 259,821 291,269 Athletic 293,483 347,686 345,271 361,836 374,119 Slippers 75,890 68,461 84,510 124,871 120,789 Other 7,757 6,877 9,391 9,605 14,028 Total Non-Rubber 1,442,787 1,563,503 1,660,988 1,818,737 1,937,201 Originating from: China 78.37% 79.83% 81.54% 83.46% 85.51%

Brazil 6.57% 6.25% 5.88% 5% 3.71% Vietnam 0.30% 0.79% 1.47% 2% 2.75%

Indonesia 3.93% 3.88% 2.96% 2.19% 1.98% Italy 3.28% 2.72% 2.34% 1.74% 1.31%

All Other 7.55% 6.53% 5.81% 5.61% 4.74% Total 100.00% 100.00% 100.00% 100.00% 100.00%

Source: AAFA American Apparel and Footwear Association https://www.apparelandfootwear.org/UserFiles/File/Statistics/Trends2005Annual.pdf (accessed 4 May 2007).

US Non-Rubber Footwear Imports and Values by Country of Origin Non-Rubber Footwear

2005 Number of Pairs

(millions)

2005 Total Value

(US$ millions)

2005 Value

Per Pair (US$

millions)

2006 Number of Pairs

(millions)

2006 Total Value

(US$ millions)

2006 Value

Per Pair (US$

millions) China 1,656.48 10,951.81 6.61 1,771.30 11,968.14 6.76 Brazil 71.93 998.63 13.88 59.40 870.13 14.65 Vietnam 53.32 552.92 10.37 72.75 749.46 10.30 Indonesia 38.43 417.77 10.87 37.94 418.46 11.03 Italy 25.47 1,089.87 42.79 22.75 1,062.64 46.71 All Other 91.57 1,495.82 16.34 92.93 1,550.92 16.69 Total 1,937.20 15,506.82 8.00 2,057.07 16,619.75 8.08

Source: FDRA Footwear Distributors and Retailers of America http://www.fdra.org/Statistic%20Charts/stats.html.



38

EXHIBIT 15: KEY COMPETITOR FINANCIAL DATA

Kingmaker Footwear Holdings Limited US$ (’000) 2002 2003 2004 2005 2006 Revenue 132,783 159,058 174,469 183,639 163,909 Profit (loss) before tax 15,064 16,039 13,966 11,897 9,021 Tax 843 536 749 628 1,311 Profit (loss) for the year 14,221 15,503 13,217 11,269 7,710

KTP Holdings Limited

US$ (’000) 2002 2003 2004 2005 2006 Revenue 92,119 115,219 116,300 112,666 102,245 Profit (loss) before tax 3,030 6,937 5,263 5,929 5,597 Tax (7) - - - - Profit (loss) for the year 3,023 6,937 5,263 5,929 5,597

Pegasus International Holdings Limited

US$ (’000) 2002 2003 2004 2005 2006 Revenue 115,405 129,552 143,704 141,242 141,465 Profit (loss) before tax 5,715 4,389 (1,321) 2,757 3,550 Tax (223) (172) 421 (290) (430) Profit (loss) for the year 5,492 4,217 (900) 2,467 3,120

Feng Tay Enterprises Company Limited

US$ (’000) 2002 2003 2004 2005 2006 Revenue 564,077 576,402 606,236 723,997 724,635 Profit (loss) before tax 52,708 55,055 56,743 67,734 41,873 Tax (3,966) (1,115) (3,295) (6,374) (7,308) Profit (loss) for the year* 48,742 53,940 53,447 61,360 34,820

* Excluding minority interests loss

Source: Listed Company Information.



39

EXHIBIT 16: KEY COMPETITOR MARKET AND PRODUCT DATA

Kingmaker Sales by Geographical Market (% of total) 2002 2003 2004 2005 2006 North America 66.5 63.2 61.1 57.7 61.1 Europe 27.8 30.5 29.9 33.0 33.1 Others 5.7 6.3 9.0 9.3 5.8 Pegasus Sales by Geographical Market (% of total) 2002 2003 2004 2005 2006 North America 65.6 71.8 72.8 61.8 53.1 Europe 10.0 7.8 7.1 17.3 26.9 Asia 18.9 16.6 16.3 14.6 15.3 Others 5.5 3.7 3.8 6.3 4.7 KTP Sales by Geographical Market (% of total) 2002 2003 2004 2005 2006 North America 49.1 63.5 67.4 61.3 61.3 Europe 17.2 17.5 12.4 12.1 12.8 Asia 28.5 15.5 17.9 23.2 22.6 Others 5.2 3.5 2.4 3.4 3.3 Kingmaker Turnover by Product Category (% of total) 2002 2003 2004 2005 2006 Athletic Shoes 2.3 1.7 1.0 0.5 0.3 Casual Shoes 31.6 31.3 31.7 28.0 30.8 Rugged Shoes 25.6 22.9 24.7 24.3 15.5 Baby and Children’s Shoes 40.4 44.2 42.7 47.1 53.4 Pegasus Turnover by Product Category (% of total) 2002 2003 2004 2005 2006 Athletic Shoes n/a n/a n/a n/a 56.0 Casual Shoes n/a n/a n/a n/a 26.0 Sports Sandals n/a n/a n/a n/a 12.0 Others n/a n/a n/a n/a 6.0 KTP Turnover by Product Category (% of total) 2002 2003 2004 2005 2006 Manufacture and Sale of Footwear Products 100.0 100.0 100.0 100.0 100.0

Source: Listed Company Information.



40

EXHIBIT 17: YUE YUEN PRODUCTION

Yue Yuen Production

14841691 1780

1938.6

2509.52720

3154.8

3657.4

0

500

1000

1500

2000

2500

3000

3500

4000

1999 2000 2001 2002 2003 2004 2005 2006

Turn

over

US

$ M

illio

ns

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

% N

et P

rofit

Mar

gin



41

EXHIBIT 18: YUE YUEN TEN-YEAR RESULTS

YUE YUEN 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Turnover (US$ Millions) 1414 1430 1484 1691 1780 1939 2510 2720 3155 3657 Gross Profit (US$ Million)

n/a n/a 418 441 467 512 654 649 727 841

Profit Before Tax (US$ Millions)

161 176 201 212 213 230 312 300 308 376

Net Profit (US$ Millions) 158 171 195 210 213 229 308 303 298 354 Net Margin 11.2% 12% 13.1% 12.4% 12% 11.8% 12.3% 11.2 9.4% 9.7%

By Product Category: Athletic Shoes 79% 73% 77.6% 75.9% 73% 74.9% 65% 61.2% 60.2% 57.7%

Casual/Outdoor Shoes 13% 18% 13.1% 15.3% 19% 18.3% 17.2% 18.5% 18.4% 17.8% Sandals 0% 0% 0% 0% 0% 0% 1.2% 1.4% 1.4% 1.3%

Sole and Components 8% 9% 9.3% 8.8% 8% 6.6% 15.1% 14.9% 13.1% 13.2% Retail 0% 0% 0% 0% 0% 0.2% 1% 2.7% 5.4% 8.3%

Others 0% 0% 0% 0% 0% 0% 0.5% 1.3% 1.5% 1.7% By Market:

USA 67% 64% 61% 53% 55% 51.6% 41.5% 41.2% 39.8% 38% Europe 14% 16% 20.8% 27% 26% 27.2% 30% 27% 26.4% 24.7%

Asia 13% 13% 12.5% 13% 13% 13.8% 22.7% 25.8% 27.3% 30% South America 2% 2% 1.4% 1.5% 2% 3% 2% 2% 2.1% 2.6%

Canada 2% 3% 2.9% 3% 2% 2% 1.7% 1.7% 1.9% 1.9% Others 2% 2% 1.4% 2% 2% 2.4% 2% 2.3% 2.5% 2.8%

By Number of Production Lines:

China 128 129 136 146 148 148 161 170 182 193 Vietnam 8 15 19 32 36 55 78 88 104 114

Indonesia 24 23 27 37 43 51 51 51 56 66 Total 160 169 182 215 227 254 290 309 342 373

Number of Pairs of Shoes Made (Million)

74 78 87.8 103.1 113.5 130.4 157.7 167.2 185.9 196.4

R&D Spend (US$Million) n/a 39 48 53 55 60 84 89 94 99 Number of Staff n/a n/a 154,000 190,000 187,200 205,000 242,000 252,000 265,000 280,000

Source: Yue Yuen Annual Reports.



42

EXHIBIT 19: YUE YUEN PRODUCTION FACILITIES AS AT 2006

Operations Commenced Location Size (sqm) of manufacturing facility

1988 Zhuhai, Guangdong, China 97,000

1989 Dongguan (Gao Bu), Guangdong, China 1,400,000

1991 Zhong Shan, Guangdong, China 745,000

1992 Serang/Tangerang, Indonesia 627,000 1996 Ho Chi Minh City, Vietnam 1,312,000

2001 Dongguan (Huang Jiang), Guangdong, China 480,000

2003 Taicheng, Jiangsu, China 100,000

Source: Yue Yuen Annual Reports.



43

EXHIBIT 20: YUE YUEN’S PRINCIPAL SUBSIDIARIES, ASSOCIATES AND JOINTLY CONTROLLED ENTITIES AS AT 30 SEPTEMBER 2006

Yue Yuen’s Principal Subsidiaries (as at 30 September 2006)

Name of subsidiary

Place of incorporation

Issued and fully paid share capital/ registered capital

Proportion of issued and fully paid share capital/ registered capital held by the company indirectly

Principal activities*

A-Grade Holdings Ltd

British Virgin Islands

US$100 70% Sales and marketing of footwear and sportswear in the PRC

Bestful Properties Ltd


US$1 100% Property holding in the PRC

Bortum Holdings Ltd


US$1 100% Investment holding

Champolian Investments Inc.


US$10,000 100% Investment holding

Chiya Vietnam Enterprise Ltd

Vietnam US$700,000 51% Manufacture of foamed cotton

Dah-Chen Shoe Materials Ltd

Vietnam US$437,500 51% Manufacture of shoe pads

Dedicated Group Ltd



Escon Enterprises Ltd


US$1 100% Leases machinery, equipment to Prime Asia, provision of sub-contracting services for manufacture of leather in the PRC

Farquharson Holdings Corp.



Forearn Co. Ltd British Virgin Islands

US$1 100% Manufacture of shoe moulds in the PRC

Friendsole Ltd Hong Kong Ordinary – HK$1,000 Non-voting deferred – HK$1,000

100% 100%

Provision of management services

Fu Tai Co. Ltd British Virgin Islands

US$1 100% Manufacture of shoe moulds and EVA mid-sole for shoes in the PRC

Giacinto Investments Ltd



Great Pacific Investments Ltd



High Shine Investments Ltd



Highfull Developments Ltd



Impressive Developments Ltd





44

Key International Co. Ltd



Multiform Enterprises Ltd


US$200 100% Manufacture of moulding equipment in the PRC

Murata Profits Ltd British Virgin Islands


Overboard Investments Ltd


US$1 100% Manufacture of shoe pads in the PRC

P.T. Nikomas Gemilang

Indonesia Rp56,680,000,000 99.38% Manufacture and sale of footwear

P.T. Pou Chen Indonesia

Indonesia Rp49,872,000,000 90% Manufacture and sale of footwear

P.T. Sukespermata Indonusa

Indonesia Rp3,500,000,000 90% Manufacture of mould and cutting for shoes

P.T. Variadhana Citraselaras

Indonesia Rp625,000,000 55% Manufacture of injection moulds for shoe components

Patterns Developments Ltd



Pou Chen Vietnam Enterprise Ltd

Vietnam US$36,389,900 100% Manufacture and sale of footwear

Pou Chien Chemical (Holdings) Ltd



Pou Chien Chemical Company Ltd

Taiwan NT$668,100,000 100% Manufacture of shoe materials (chemical products)

Pou Ming Paper Products Manufacturing Co. Ltd


US$1 100% Manufacture of paper carton boxes and investment holding in the PRC

Pou Sung Vietnam Industrial Enterprise Ltd


Pou Yuen Industrial Holdings) Ltd

Hong Kong Ordinary – HK$12,000,000 6% cumulative preference – HK$433,600,000

100% 100%

Investment holding and property holding in Hong Kong and the PRC

Pou Yuen International Ltd


US$1 100% Manufacture of footwear in the PRC

Pou Yuen Marketing Company Ltd


US$1 100% Sale and marketing of footwear in the PRC

Pou Yuen Trading Inc.


US$1 100% Sale and marketing of footwear in the PRC

Pou Yuen Vietnam Enterprise Ltd


Prime Asia (S.E. Asia) Leather Corp.


US$1,000 100% Leather trading in Vietnam



45

Prime Asia China Leather Corp.


US$1,000 100% Leather trading in the PRC

Prime Asia Leather Corp.



Pro Kingtex Industrial Company Ltd


US$13,792,810 91.68% Manufacture of apparel in the PRC

Selangor Gold Ltd British Virgin Islands


Solar Link International Inc.

USA US$9,000,000 100% Manufacture and sale of footwear

Technic Holdings Corp.


US$1 100% Manufacture and sale of footwear in the PRC

Top Units Developments Ltd



Upturn Investments Ltd


US$1 100% Manufacture of paper inner boxes and carton boxes in the PRC

Valuable Developments Ltd



Wellmax Business Group Ltd



Wet Blue International Corp.


US$50,000 100% Wet blue trading in the PRC

Yue Yuen Industrial Ltd

Hong Kong Ordinary – HK$1,000 Non-voting deferred – HK$47,000,000

100% 100%

Investment holding and property holding in the PRC

Yue Yuen International Ltd


US$1 100%

Manufacture of footwear in the PRC

Yue Yuen Marketing Co.


US$1 100%

Sale and marketing of footwear in the PRC

Yue Yuen Purchasing and Supply Co. Ltd


US$1 100%

Raw materials sourcing in the PRC



46

Yue Yuen’s Principal Associates (as at 30 September 2006) Name of associate Place of

incorporation/ operation

Proportion of issued and fully paid share capital/registered capital held by the company indirectly

Principal activities

All Saints Enterprises Ltd British Virgin Islands

37% Investment holding

Asia Air Tech Industrial (Pte) Ltd

Singapore 30% Investment holding

Bigfoot Ltd British Virgin Islands 48.76% Cloth product trading/cloth dyeing and processing/cloth shoe material binding

Eastlion Enterprises Ltd British Virgin Islands

35% Property holding in the PRC

Eastlion Industrial Ltd British Virgin Islands 35% Manufacture of PU Plastic/hardeners/ processing agents/lotion plaster/powder coatings

Eagle Nice (International) Holdings Ltd (“Eagle Nice”) (Note (i))

Cayman Islands 44.96% Investment holding and its subsidiaries are engaged in manufacture and trading of sportswear and garments

Just Lucky Investments Ltd British Virgin Islands

38.30% Property holding in the PRC

Liberty Bell Investments Ltd British Virgin Islands 49% Manufacture and sale of chemical for leather use

Nan Pao Resins (China) Co. Ltd

The PRC 37% Manufacture of glues/liquid coatings/powder coatings

Nan Pao Resins (Holdings) Ltd



Nan Pao Resins (Vietnam) Enterprise Ltd

Vietnam 37% Manufacture of liquid coating/glues

Natural Options Ltd British Virgin Islands

38.30% Manufacture of foamed cotton

Oftenrich Holdings Ltd Bermuda 45% Investment holding and its manufacture and sale of safety and casual shoes (Continued on next page)



47

Original Designs Developments Ltd

British Virgin Islands 47% Manufacture of shoe lasts

Pine Wood Industries Ltd British Virgin Islands


Platium Long John Co. Ltd Taiwan 48.76% Cloth product trading/cloth dyeing and processing/cloth shoe material binding

Prosperous Industrial (Holdings) Ltd

Cayman Islands 30% Investment holding and its subsidiaries are engaged in manufacture and sale of sports bags

Rising Sun Associates Ltd British Virgin Islands


San Fang Chemical Industry Co. Ltd (“San Fang”) (Note (ii))

Taiwan 44.34% Manufacture and trading of synthetic leather

Talent Pool Management Ltd British Virgin Islands

30% Provision of school services

Teco (Dongguan) Air Conditioning Equipment Ltd

PRC 30% Manufacture of central cooling system, commercial air conditioner and accessories

Notes: (i) Eagle Nice is incorporated in Cayman Islands with its shares listed on the Hong Kong Stock Exchange. (ii) San Fang is incorporated in Taiwan with its shares listed on the Taiwan Stock Exchange. (iii) Exchange rates on 7 September 2007 were: US$1 = HK$7.8 ; US$1 = IDR9,406 ; US$1 = NT$45.19



48

Yue Yuen’s Principal Jointly Controlled Entities (as at 30 September 2006) Name of jointly controlled entity

Place of incorporation/ operation

Proportion of issued and fully paid share capital/ registered capital held by the company indirectly

Principal activities

Best Focus Holdings Ltd British Virgin Islands 50% Investment holding and its subsidiaries are engaged in manufacture and sale of paper carton boxes in the PRC

Blessland Enterprises Ltd British Virgin Islands 50% Manufacture of shoe pads China Ocean Resources Ltd

British Virgin Islands 50% Investment holding and its subsidiaries are engaged in manufacture and sale of sports footwear and apparel products

Cohen Enterprises Inc. British Virgin Islands 50% Manufacture and sale of leather products for shoes

Great Skill Industrial Ltd British Virgin Islands 50% Investment holding and its subsidiaries are engaged in manufacture and sale of plastic shoe injection in the PRC and in Indonesia

Hua Jian Industrial Holding Co. Ltd

British Virgin Islands 50% Manufacture and sale of ladies shoes

Ka Yuen Rubber Factory Ltd

British Virgin Islands 50% Manufacture and sale of rubber soles in the PRC

Rising Developments Ltd Islands

British Virgin 23% Sale of petrochemical products in the PRC

Smart Shine Industries Ltd

British Virgin Islands 50% Investment holding and its subsidiaries are engaged in manufacture and sale of footwear and apparel

Topmost Industries Ltd British Virgin Islands 50% Manufacture of counters for shoes

Twinways Investments Ltd

British Virgin Islands 50% Manufacture of injection moulds for shoe components

Well Success Investments Ltd



Yuen Thai Industrial Company Ltd

Hong Kong 50% Manufacture and trading of sports and active wear

Source: Yue Yuen’s website: http://www.yueyuen.com



49

EXHIBIT 21: CHINA’S URBAN POPULATION

Urban Population in China 1995-2005

300

350

400

450

500

550

600

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Mill

ions

0%5%10%15%20%25%30%35%40%45%50%

Urban Population in China% of Total Population


Per Capita Disposable Income of Urban Households in China 1995-2005

0

2000

4000

6000

8000

10000

12000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

RM

B




50

EXHIBIT 22: BREAKDOWN OF SHOE COST Nike/Carnivore shoe introduced in 1993: Retail Store selling price approximately US$130 Nike would pay the South Korean subcontractor US$29.50 of which: US$4.50 (15%) to pay line workers US$18 (60%) to purchase shoe components US$1.50 (5%) indirect labour and handling US$2.95 (10%) factory/admin/overheads Balance US$2.95 (10%) profit for factory owners Nike would pay US$29.50 plus US$1.40 shipping costs leaving South Korea US$5.90 US customs duties Total cost to Nike: US$36.80 Nike would sell to retailers at up to US$70 per pair, but most got volume discount Nike made a profit: US$25 per pair on average Then they had to pay: US$4 taxes US$15 to run Nike US operations Total profit for Nike US$5.50 per pair Source: Katz, Donald (1994) “Just Do It”.


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