By Chen Jing

With export still sluggish, exporters that have long been engaging in OEM are forced to shift their focus onto the domestic market. This time, online shopping is becoming more and more conspicuous in their sight.

Online shopping helping OEM exporters to switch to the domestic market may sound a little bit clich��d. But these exporters, who lack internet marketing experience, have been having difficulty surviving by merely opening an online store on Taobao. As B2C platforms grow and conventional enterprises have better understanding about e-commerce, OEM enterprises' role in the online shopping industry chain is changing quietly. They may not only become the main force that sustains online brands, but also begin to take advantage of this brand-new consumption pattern to draw the "smile curve" and thus achieve substantial reform and upgrade.  

Online brands' big orders

In Dahong Village, Malu Town, Jiading District of Shanghai, the workshops of Shanghong Shoes smell of rubber. On its two production lines, 500 workers are busy sealing up, painting glue, and molding... Each day, 4000 pairs of canvas shoes are churned out here, most of them being packed in brown paper boxes marked with "VANCL" on them and sold to all over the country through the internet.  

This is a typical OEM enterprise. With a 16-year history, it has produced Huili shoes, and has grown bigger thanks to export orders, just like Shanghai's over 40 other shoes companies that make vulcanized shoes and canvas shoes. Since 2008, however, the international financial crisis and raising materials cost and labor cost have forced them into great difficulty. "Now, there are only 5 enterprises of our size left in Shanghai", said Hu Qilong, chairman of the board of Shanghong Shoes, with sentiments.

"We must turn to the domestic market." Hu Qilong used to try to introduce his own brand. Having no experience in domestic sales channel, he soon discovered that he could not solve the problem of dealers' delayed payment, and neither could he afford the advertisement cost. "I could not sustain the operation. It was the most difficult time for the company."

In March, 2010, an order from the internet turned up. VANCL, the online brand, came to Hu Qilong, and placed an order of 50,000 pairs of shoes. "I couldn't believe it. In export, an order of 20,000 pairs would be a huge one. Not to mention a domestic brand". What Hu Qilong didn't expect was that these shoes sold out within 48 hours after they were posted on VANCL's website. "Only until then did I realize that e-commerce is different from our past operation". From then on, orders kept coming. 100,000 pairs, 200,000 pairs, 300,000 pairs. In 2011, Shanghong Shoes produced 2.3 million pairs of canvas shoes for VANCL, accounting for 80 percent of the factory's total output.

"The quantity of an order from an online shopping brand is large, and this can lower the cost. Besides, payment comes faster than conventional brands, the payment cycle being only 60 days, the same as in export. OEM enterprises live on cash flow. So these two are very important factors", Hu Qilong told the reporter. However, the money didn't come easy. Internet brands depend on reputation marketing, which poses extremely severe requirements on quality. "For example, the national standard for the tensile force of the foxing strip is 1.8 kg, but VANCL requires 3.5 kg".

There are so many more enterprises besides Shanghong Shoes that have successfully turned to the domestic market thanks to large orders from internet brands. Generally, those fast-growing online brands, such as VANCL, Moonbasa, 7gege, and Mbaobao, take their own designs and look for proper OEM factories. They only do the designs themselves. Li Yonghua, executing manager of AOZZO, which is dubbed "the top lamp brand on the internet", said frankly that an important standard in seeking an OEM company is the countries the company has exported to and brands it has worked with. "For OEM enterprises, their profit margin in producing for us is a little higher. In addition, payment is made on delivery. This is more compatible to common practice in conventional export production". 

Low cost pushing the "smile curve" higher

Online shopping has brought significant business growth to some OEM enterprises and helped them to survive. For other larger OEM enterprises, their ambitions do not cease there. They are trying to make use of online shopping to build up their own brands, pushing both ends of the "smile curve" higher with unprecedentedly low cost. 

The performance of these self-developed online brands has been eye-catching. OLOMO, an online dress brand, achieved sales of more than RMB 100 million Yuan in the past 3 years. Wu Shihui, chairman of the board of Sportica, which is also a self-developed brand transformed from a dress OEM enterprise, suggests that their gross profit margin was 10 to 20 percent when they were doing export, and now the gross profit margin of Sportica is over 30 percent.

Such intensive growth explosion indicates that the volume of online shopping has been expanding precipitately. It is also an indication that conventional OEM enterprises are beginning to grasp the "knacks" in this industrial chain.

One of the "knacks" is the closer tie between online and offline operations. Guangzhou Pearl Group is one of China's largest manufacturers of watches and clocks, capable of producing 500 million quartz watches every year, among other products. Last December, the online watch brand, Time100, with Guangzhou Pearl Group as its largest share holder, went online. Within 3 months, its monthly sales have exceeded 3000 watches. Lei Chifeng, CEO of Time100 E-commerce Company Limited, said that: "Our offline resources include our access to Casio's engineers on the design end, and access to fittings factories of good reputation and quality on the manufacturing end, as well as offline promotion channels". According to him, with the help of its existing resources, Time100 is now engaged in business customization. There is an online coupon in the package of every custom-made watch. Such coupons will also appear in the finished clocks that the group produces, as a means of promoting its brand. 

Another knack is making full use of diversified online shopping channels. Genanx, an e-commerce dress brand, seeks out large sellers on Taobao.com, like an offline brand seeking dealers, and distributes its products to these online stores. In 3 months, its sales revenue exceeded RMB 10 million Yuan. Lei Chifeng showed the reporter Time100's numerous channels, including: B2C platforms such as Tmall, 360buy, and Suning.com, group buying sites such as didatuan.com, and even providing scores exchange on tourism websites such as 9588.com. Sales on its official website account for only 20 percent of Time100's total sales, the other 80 percent scattering in other channels. "Marketing methods in different channels are different, too. For example, we could use purpose promotion tools on B2C platforms, but on group buying sites, we lay particular stress on performance, such as 30-meter water-proof". Conventional OEM enterprises, which used to be at a loss in front of computer screens, have a pretty firm grasp of the rules of the whole game now.