Clothes in Hong Kong are big business. According to figures released by the Hong Kong Trade and Development Council (TDC), the clothing industry is one of Hong Kong's largest manufacturing sectors. It is the city's largest manufacturing employer, with more than 1,600 firms employing some 30,000 plus workers as of June 2004. It is also the leading earner in terms of domestic exports, accounting for about half the total in the first three quarters of 2004.

At the same time, Hong Kong's clothing and accessories exports are growing - by 9 per cent, or HK$178.8 billion, in the first 11 months of 2004. While the city's domestic exports fell by 3 per cent, re-exports of clothing increased by 12 per cent.

"By all accounts it has been a robust year," said Andrew Leung, chairman of the Trade Development Council (TDC) Garment Advisory Committee, in a recent TDC press release on the industry.

But while earnings have been good, Leung believes that the local apparel industry is still facing challenges. With the rapid globalization of the garment trade, makers of apparel need to adapt in order to remain competitive. In order to ensure their survival, local clothing manufacturers will need to improve their design quality and develop their own brands. They will no longer be able to rely on original equipment manufacturing (OEM) but will need to turn their attention to original design manufacturing (ODM) and original brand manufacturing (OBM) as well.

One entity that typifies how this can be done is Fenix Hong Kong Ltd, a group of companies that encompasses the whole gamut of fashion and fashion retailing, manufacturing and marketing. While companies that do not have the ability to diversify have seen their businesses shrinking, Fenix has been one of the fortunate ones, being able to leverage its wide range of competencies to adapt to changing market conditions. The company has also been able to diversify into ODM and OBM by developing its own designs and forming joint ventures with established fashion labels, as well as developing its City Super chain of supermarkets.

"OEM for clothing has been around in Hong Kong since the 1950s," says Anthony Keung, managing director of Fenix and a committee member on the Garment Advisory Council.

"Labour costs in Hong Kong were cheap then, so local companies could produce (quality) goods at a low price. As Hong Kong gradually became more sophisticated and more expensive, we lost this cheap labour (advantage) to other places like the mainland. So we have had to find our own way out. So we started to design ourselves. All apparel companies in Hong Kong began in OEM, but the profit margins for these operations are not high, maybe 10 per cent," he says.

ODM arose as companies started to lose revenue due to being undercut by cheaper mainland products, says Keung. These companies needed to find supplementary sources of revenue, so they added designed items to their range. ODM allows companies to offer designed clothes to their buyers. The buyers can purchase the designs or, as in most cases, they will modify these designs. This allows designs to be adapted to suit local tastes and market conditions.

"I would say OEM and ODM together make up the majority of Hong Kong business at the moment," Keung says. ODM adds to a company's versatility, with profit margins of around 20-30 per cent.

"Original Brand Manufacturing, or OBM, is different again," he adds. "With OBM, companies do everything. They will create their own designs, make the clothes and market and promote them under their own brand. OBM is different from ODM and OEM (in that) it is a separate business model. OBM will develop in Hong Kong, but it will be through new companies opening up that are involved directly in creating and promoting their own brands, not from companies moving from OEM and ODM to OBM.

"OBM offers better profit margins, possibly 50 per cent. So this becomes an attractive source of revenue for clothing companies."

The trend for companies to move to ODM occurred around 15 years ago while the emergence of OBM happened around four to five years ago.

"What we will see is more small companies beginning as OBM (businesses), while the number of companies (now) doing OEM will shrink and some will disappear."

One of the keys to Fenix's success is its competency in every stage of the apparel creation process, which allows it to adapt quickly to changes in market conditions and pursue business opportunities in new markets, as existing markets evolve.

"While our OEM business has shrunk in Hong Kong, we have seen growth in our OEM for Europe take its place," says Keung. "The makeup of our businesses has changed but we have not shrunk. We have been able to enjoy a small (amount of) growth."

The company, which at one time had the rights to the Prada brand in Hong Kong, had to give up its franchise when the Italian fashion label decided to enter the mainland directly and produce its own goods. But Keung shows no bitterness at losing this marque brand: "This gave us the opportunity to secure other brands and involve ourselves more in design and brand development."

The industry heavyweight also agrees that, in order to stay competitive, local companies must improve their design quality and develop their own brands.

Into the centre of this search for quality design comes Hong Kong Fashion Week, one of the public faces of the local industry. Fashion Week, which just finished its Fall/Winter edition, is held twice a year and draws attention to the city's creative talent. The four-day event offers industry players a wide range of activities including fashion parades and a series of showcases where local manufacturers can show off their latest collections.

One highlight of the week is the Hong Kong Young Fashion Designers Contest. The annual competition enables industry players to check out the city's emerging design talent and acts as a platform for the two groups to interact.

The emerging design talent can play an important part, says Keung, but the partnership is by no means one sided. He believes that while apparel manufacturers are in need of quality design, the designers themselves often lack the ability and resources to realize their ideas. "A fashion designer may have good design ability but he may not know how to get his clothes made. Both parties need each other."

One way for talented designers to make their mark in the industry is to be invited directly into a clothing manufacturers business, he says, adding that the company recently hired eight designers to its design department.

Established or outstanding designers might form a joint venture with a company like Fenix, which brings with it a wide range of business expertise.

"We offer our manufacturing, distribution, retailing and logistics skills to the (joint) company," says Keung. "We entered into a joint partnership with the creative designer behind the heroic rendezvous label and the venture has been quite successful."

For many of the city's budding Armanis entering the industry, the only other option is to go it alone. This usually means starting off small, usually by creating designs for family and friends or private clients, until they can set up in their own boutique. After a number of years when, or if, they receive interest from the market, they may be invited to form a business partnership with a company that offers them the support they need.

While local apparel companies are beginning to realize the attractive profit margins offered by OBM and the importance of quality design, they will need to take a long term view, says Keung. While local brands like Giordano, Esprit and Bossini are well known locally and on the mainland, their name recognition elsewhere is minimal. The reality is that most developed markets, like the US, Japan and Europe, know little about Hong Kong brands and the market penetration for local brands in these markets is relatively small.

In the same way, Italian clothing companies in the 1940s and 1950s started life as manufacturers for French and UK brands, before developing in their own right, Keung believes that it may take a long time for Hong Kong brands to build up their image.

With Hong Kong brands having minimal impact in the developed markets, their biggest potential may be on the mainland. In recent years, demand for branded collections with premium designs has been booming in the burgeoning mainland market. A TDC survey has found that mainland consumers believe Hong Kong clothing companies are very strong in casual wear, and clothes made by these companies are perceived as being of good design and quality. Also, the greater number of mainland travellers to the city under the Individual Visit Scheme has increased the awareness and exposure of mainland shoppers to Hong Kong clothes.

"In the mid-market, Hong Kong brands are quite popular on the mainland," says Keung. "For the upper range, European brands tend to dominate. They have the luxury image. For the lower market, we cannot compete with mainland brands. Therefore each producer - Europe, the US and Japan and Hong Kong and the mainland - can get a different segment of the market."

But while the industry veteran is bullish on the potential offered by the mainland, he believes too much has been made of the benefits offered by the Closer Economic Partnership Arrangement (CEPA) and its second phase (CEPA II).

The CEPA, which came into effect on January 1 last year, gives duty-free access to the mainland for over 30 clothing items made in Hong Kong. Under CEPA II, which came into effect in January 2005, another 73 clothing items produced in Hong Kong now enjoy duty-free access, with a further 16 items pending.

Meanwhile, non-Hong Kong made products will remain subject to tariff rates of 14-25 per cent when entering the mainland.

Keung believes the future for Hong Kong original brands on the mainland is bright, with huge potential for brands to do well.

(HK Edition 01/24/2005 page18)