Cover storyHong Kong fashion

10 June 2016

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Globalization and new technol-ogy are usually associated with disruption, but in Hong Kong such modernizations have sparked a revival in the city’s historic textile and garment industry.

Hong Kong was once a major hub for spinning, dyeing and weaving as well as garment cut-ting and stitching. The industry employed nearly half a million workers across 80,000 factories as recently as 1980, until China’s economic opening triggered an exodus, with companies lured by abundant land and cheap labour.

Today, there are only about 800 mostly specialty manufacturers, employing about 6,000 people in Hong Kong. But instead of collapsing under the strain, the upheaval caused by the migration of the industry to the Mainland made the city’s textile and garment industry smarter.

Today, Hong Kong-owned com-panies still control about a quarter of the world’s textiles and garment trade. “As a global sourcing hub in Asia, Hong Kong attracts a number of international trading houses and major retailers,” notes David Lung, Managing Partner for the Con-

sumer Products Retail, Wholesale and Distribution Sectors at Deloitte China and a Hong Kong Institute of CPAs member.

The world’s largest retail chains, including Macy’s, JCPenney, Karstadt Quelle and C&A, maintain Hong Kong offices, as do discount stores, specialty retailers, mail order houses and labels, Lung points out. The city also stands at the forefront of technology, leverages geography as a vital logistics and trade hub, and has a global reputation in the creative side of the business.

Critically for accountants, Hong Kong is an important centre for finance and investment, serv-ing as corporate headquarters for the world’s biggest names in apparel, and as a gateway to the China market. “We still have the money, the experience and the knowledge,” says Rene Luk, Fi-nance Director at Afasia Fashions and an Institute member.

With plants in China, Mada-gascar and Bangladesh, Afasia, a manufacturer of clothing and accessories, locates its manage-ment, sales, planning and quality assurance teams in Hong Kong. “Money, people, as well as servic-es and goods, move among differ-ent jurisdictions quite frequently,” says Luk. “It requires the assis-tance of accounting professionals in managing these moves.”

The money is huge: Hong Kong’s garment industry is esti-mated to be worth US$57.6 billion this year, 2.7 percent larger than last year, according to the Econo-mist Intelligence Unit. That figure, more than twice that of Japan, reflects Hong Kong’s entrepôt sta-tus: more than 90 percent of cloth-ing shipments are re-exported due to tax, duty or logistical con-siderations.

Bricks vs. clicksHong Kong’s sophisticated lo-gistics are one of its most crucial attractions. The rise of online commerce, which relies on prompt delivery and tight inventory con-trol, has given Hong Kong’s apparel industry a new lease on

Once a hub for clothing and accessories factories, Hong Kong has rebuilt its garment sector into a high-tech centre for finance, logistics, sourcing and design. George W. Russell traces the rise, fall and rebirth of the apparel industryIllustrations by Ester Zirilli

BACK IN FASHION

“ We still have the money, the experience and the knowledge.”

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Cover storyHong Kong fashion

life as a distribution and sales centre.

One online clothier, Grana.com, based itself in Hong Kong mainly because of the city’s superior infrastructure. “We chose Hong Kong because it’s a free port and a major logistics hub,” says Cofounder Luke Grana, who signed a deal with an international delivery company before launch-ing the website. “DHL offers us very attractive rates to ship to our global customer base.”

Seamless logistics helped overall global online retail sales grow 20 percent in 2014, while bricks-and-mortar store sales declined or stayed flat, according to a report published last year by PricewaterhouseCoopers, Total Retail 2015: Retailers and the Age of Disruption.

The online store is especially critical when it comes to selling clothes. “The companies that generate the largest portion of their sales from online are apparel stores,” Poonam Goyal, Senior U.S. Retail Analyst at Bloomberg Intelligence in New York, noted in a recent report.

For single-brand stores, online sales can account for as much as 15 percent of their total, with a few, such as Lululemon Athletica, Express and Abercrombie & Fitch, racking up even more online: up to 19 percent of their total sales in 2014 were through their websites.

Despite the growing switch to online, some investors are keen for retailers to have some kind of bricks-and-mortar presence: Grana.com has opened two pop-up stores in Hong Kong and one in Shanghai.

“[The stores provide] Grana with greater capacity to expand its growing fitting room network and product range and develop its strat-egy,” says David Chang, Partner at MindWorks Ventures, a Hong Kong venture capital firm that invested in the retailer this year.

Several brands have opened Hong Kong online stores in recent years, including U.S. retailer American Apparel, British designer Cath Kidston, Hong Kong-based French fashion seller Rue Madame and Australian sportswear maker 2XU. Some, such as former Spice Girl Victoria Beckham and Spanish

giant Zara, have opened Internet outlets in addition to their physical stores.

Other online stores are targeting specific niches, such as the trendy South Korean fashions sold by Yesstyle, or the low-end discount clothing offered by ShopLah!. Even second-hand clothing has found tak-ers, through Hong Kong-based start-ups such as Luxify and Guiltless.

Mainland materialWhile Hong Kong’s eight million relatively well-heeled residents are reason enough for the global interest, another factor is soar-ing sales to Mainland customers. “Hong Kong is one of the most popular shopping destinations for tourists from the Mainland,” Lung at Deloitte notes.

The Mainland’s importance was underscored by recent data: total spending and total retail sales of clothing, footwear and allied products in Hong Kong peaked in 2014. “It started to slide in 2015 partly because of the decrease in Mainland tourist arrivals,” he adds.

However, even those Mainland-ers who don’t actually visit Hong

Hong Kong serves as corporate headquarters for the world’s

biggest names in apparel, and as

a gateway to the China market. The number

of all regional headquarters

rose from 1,285 in 2010 to 1,401 in 2015, according

to the latest figures from Hong

Kong's Census and Statistics Department.

Market demand for clothing

Source: Economist Intelligence Unit Figures for 2014 onwards are forecasts. Prior years are actuals or estimates

Kong

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Cover storyHong Kong fashion

“ The city is uniquely positioned among Asia-Pacific markets [with] very high Internet penetration and very low e-commerce adoption.”

Kong are buying clothes from here. According to Hong Kong Trade Development Council data, 63 percent of Mainland consum-ers under the age of 45 frequently visit Hong Kong websites, up from 29 percent in 2009.

“As incomes have risen in China, consumers have stepped up their purchases of imported goods,” says Xia Chenan, Principal at McKinsey & Co. “Impatient for the latest products and better prices, they can buy directly from foreign retailers and suppliers at the click of a mouse or the swipe of a screen.”

Some Hong Kong retailers who already have export-oriented manufacturing operations in China are looking to expand their share of the domestic Mainland market. “A few well-established local manufacturers have entered into the retailing business in major cities like Beijing and Shanghai,” says Lung at Deloitte, citing Baleno, Bossini, Croco-dile, Episode, Esprit, G2000, Giordano, I.T and Moiselle as examples.

The emergence of more domestic Mainland brands is unlikely to erode Hong Kong’s influence. “Hong Kong is still the fashion gateway to China,” says Edwin Keh, Chief Executive Of-ficer of the Hong Kong Research Institute of Textiles and Apparel and a former chief operating offi-cer of Wal-Mart Global Procure-ment. “Mainland consumers still look to Hong Kong for direction and indication.”

Not all online apparel retailers are counting on Mainland sales to guarantee success. The Singa-pore-based multi-brand retailer Zalora is focusing on markets in Southeast Asia, Hong Kong and Taiwan. “We don’t have a short-term plan for entering the China market,” says Luca Barberis, Managing Director of Zalora Hong Kong.

He adds that, like Singapore, Hong Kong’s tax and legal systems are beneficial to online business start-ups. From a market perspective, Hong Kong, he adds, is an ideal location in which Zalora can grow. “The city is uniquely positioned among Asia-Pacific markets [with] very high Internet penetration and very low e-commerce adoption,” Barberis says.

Looking sharpSuch optimism permeates the entire industry, even in the wake of economic threats. Luxury goods, for example, are under pressure from a slowdown in Mainland spending and the Chinese government’s anti-corruption measures. However, expansion by so-called “fast fashion” brands, such as H&M, Gap, Zara and Uniqlo, is offsetting such losses. “[These brands] sit in a sweet spot that blurs the distinctions between midmarket apparel and low-end luxury,” says Michael Cheng, Asia-Pacific Retail and Consumer Leader at PwC and an Institute member.

The city benefits from its global reputation. “We found that Hong Kong is working hard on building architec-tures to enable talent to thrive and build an international creative economy from home soil,” says Chris Hunt, Director of Scotland Re:Designed, a fashion indus-try lobby group, and who visited Hong Kong on a recent trade mission.

Hong Kong’s accounting sector will be key in driving the fashion industry’s future. “CPAs will sup-port the healthy development of the sector,” says Lung at Deloitte, citing investment and capital raising, open-ing new sites and shops, and manag-ing production bases as important aspects.

But globalization has its downside. CPAs will have to react to complex eco-nomic problems. “A slowdown could be a threat to the apparel industry in Hong Kong because it is export-oriented,” Lung says.

Ben Simpfendorfer, Managing Director of Silk Road Associates, a business consultancy, says accounting

Foreign companies have looked to Hong Kong as a

means of tapping into Mainland retail

tourism, despite high rental costs. Topshop opened in Hong Kong in

June 2013 as part of a strategy to

establish flagship stores in key global cities. J.Crew from the United States opened two new stores in Hong

Kong in 2014, their first in Asia.

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and other professional services are “critically linked” to China. They will have to address the issue that China is losing market share in the apparel sector to Bangladesh and Viet-nam, he adds.

Hong Kong can fight back with innova-tion. Keh’s HKRITA has created such tech-nology as self-cleaning apparel and adding scrap metal to synthetic fibres to produce degradable fabrics.

Indeed, Luk at Afasia believes tech-nology will hold the key to the garment industry’s future, emphasizing that his comments are personal rather than that of his company. “Stakeholders in Hong Kong and in China are all looking for new directions to where this industry will move.”

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