How Can Shen Zhou International Achieve A Net Profit Margin Of Over 20%?

Shenzhou International Garment Industry in China has always been a mythical existence, a busy industry benchmark. The industry is also divided about Shenzhou International's achievements today. We have been very curious about the business model behind its high gross margin and high net profit margin.

Shenzhou International is a generation processing company. The term "OEM" is used in a professional term. It refers to a manufacturer's production of products and accessories according to the requirements of another manufacturer, also known as licensed production or authorized OEM production. In recent years, all major brands and even second-line brand computer hardware are generally foundry. Only the vast majority of high-end products are technically confidential, and are produced by brand businesses themselves. However, most of the brand manufacturers are relatively strict in product quality control. Therefore, the number of OEM manufacturers who choose the first line brands is two or three line manufacturers with a certain strength, so it does not necessarily mean that the OEM OEM products are very poor. Shenzhou International is the boss of garment processing industry. According to Shenzhou International semi annual report 2019, Shenzhou International achieved total revenue of 10 billion 200 million yuan during the reporting period, an increase of 12.2% over the same period, a gross profit of 3 billion 175 million yuan, a gross profit margin of 30.88%, a net profit of 2 billion 416 million, and a net profit margin of 22.7%.

For the net profit over 20% this statement, insiders questioned. In garment processing industry, the net profit rate is above 20%, and the possibility is very small. The reasons are as follows.

Garment manufacturing and processing enterprises, the OEM factory is basically maintained at 8%-12%, even the ODM factory will not achieve 20% such a high net profit, because the market is free market, if the threshold is not high, there will be competitors to enter, and then profits will be lowered. Shenzhou International mainly OEM for foreign brands. Even foreign brands will cut costs and develop new foundry factories. Nike, one of Shenzhou's International Foundry brands, has a net profit after tax of only 12%-15% a year.

　　 Why can Shenzhou International achieve net profit margin of over 20%?

According to people in the industry, Shenzhou International is not only a foundry production, they are also doing contract making and wrapping business, knitted fabrics are processed by themselves. This is mainly due to the strong supply chain system of Shenzhou International.

Shenzhou International is China's largest garment manufacturer and exporter. It is known as the "Foxconn" in the clothing industry, and is the main supplier of international brands such as UNIQLO, Adidas, Nike, Puma and so on.

In the late 80s of last century, in order to solve the problem of urban labor surplus, Ningbo Shenzhou International founded by the three party investment was led by the Ningbo Beilang district government.

In 1997, Shenzhou International acquired UNIQLO and became the largest supplier of UNIQLO supply chain. Since then, Shenzhou International has gradually acquired ADI, Nike and other international brands.

At that time, most garment manufacturers were only "acting factories". They could earn money in the short term, but in the long run, they had small added value, low bargaining power and small profits. So Shen Zhou began to extend to fabrics, dyeing and finishing, printing and embroidery, cutting, sewing and other fields, trying to transform from pure OEM to ODM gradually. This allows foundry manufacturers to have intellectual property rights, and the relationship between manufacturers and brands is no longer a simple executor but a collaborator.

Before 2000, almost 90% of Shenzhou's profits were devoted to technological improvements, such as tens of millions of millions of millions of dollars in the world's most advanced knitting machines.

After its listing in 2005, Shenzhou continued to increase investment in technology and invest 50% of its profits in equipment investment. With technical support, Shenzhou soon attracted the attention of the European and American markets, and brands such as ADI, Nike, Puma and so on threw olive branches to them.

Since 2008, labor intensive industries are no longer bodied, and labor prices are rising. Many garment factories have moved factories to Southeast Asia. But in the textile industry chain, spinning and grey fabrics have the lowest profit, followed by fabric, the profit of the whole industry chain is the highest, the more complete the industrial chain, the more money they earn.

The cost of labor and raw materials in Southeast Asia is really low, but the efficiency is also low, unable to form a complete industrial chain, making less money than in China. So Shenzhou International chose to keep the factory at home and invest 400 million yuan to expand its scale and improve its technology. As a result, the annual sales volume of Shenzhou reached 4 billion 800 million in 2008, an increase of 1 billion 200 million over the previous year and an annual profit of 700 million, an increase of nearly 300 million over the previous year.

Later, the whole garment industry entered the depression period, and the fast fashion came to the fore. If we want to survive in the market, "fast" becomes necessary. Industry practice takes 3 and a half months from placing orders to products, while Shenzhou can be completed within 2 weeks. A million orders are only 15 days from order to delivery.

With the continuous improvement of production capacity at home and abroad, Shenzhou International has finally "dared" to shift some factories to Southeast Asia. According to the company announcement, two factories in Southeast Asia will be built and put into production in 2019. In the second quarter of 2018, Vietnamese factories began to recruit workers and put into production. In the second half of 2019, the Kampuchea plant was built and planned to be put into production in 2020.

This is a step by step. Shenzhou International has made the foundry more successful than the brand.

Garment processing industry is indeed not a profiteering industry, but Shenzhou International profit margin is over 20%. We should not be surprised at all. It only achieves the ultimate goal of every link, and gradually improves the industrial chain to achieve a good synergy effect.