How China’s Industrial Internet Is Redefining ‘Made in China’
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A manufacturing revolution is underway in China’s apparel industry, pushing fund managers to find similar opportunities in other verticals
When a shopper acquires goods from a store, fulfilment of that order is a process that straddles three industries – manufacturing, logistics, and retail. E-commerce and digitalization have driven profound changes across the logistics and retail industries in recent years, with mobile applications acting as centralized platforms to facilitate real-time data exchange between customers, warehouses, and last-mile delivery providers. But the efficiency gains have ended there. Manufacturing, which has remained separate and disconnected from the new e-commerce ecosystem so far, could be the final piece to the puzzle. Most private equity investors in China have realized that investment opportunities in the consumer internet space are greatly reduced, and that they need to look in a different direction to find new opportunities, in China's manufacturing industries.
To stay on top of consumer demands for shorter delivery times, even for goods with a high level of customization, incremental efficiency gains have to come from innovating the manufacturing process. The rise of the ‘Industrial Internet,’ driven by various industry players, seeks to address this challenge. The term was coined by Tencent founder Pony Ma in 2018. Also known as the Industrial Internet of Things (IoT), it describes the integration of various technologies like 5G mobile networks, big data, and cloud computing with industrial equipment to transform traditional manufacturers into smart factories – where products with a high degree of customization can be manufactured on demand and at scale by digitalized machines. Both the machines and their performance data are managed by a centralized cloud. In China’s apparel sector, a few companies are already giving a new spin to ‘fast fashion’ by leveraging the Industrial Internet to open up a direct channel for manufacturers to engage with retailers, customers, and suppliers or, more specifically, their data.
Upstream, Chinese cloud-enabled fabric maker Smart Fabric has digitalized tens of thousands of spinning machines in South China and Southeast Asia via its self-developed software which incorporates enterprise resource planning (ERP) and IoT technologies. Smart Fabric services 70% of the world’s top 200 original equipment (OEM) clothing makers, consolidating orders sent to them by the largest retailers and high-street brands. The orders housed on Smart Fabric’s cloud are intelligently allocated to specific machines matching their production specifications in hundreds of yarn factories and dyeing mills run by different contract manufacturers. The entire process is closely monitored and the data is saved to the cloud. The finished fabric is then directed, once again through the company’s cloud, to the apparel makers for final production. Capacity utilization for manufacturers is maximized while costs are significantly reduced for retailers and brands.
With high margins and rapidly growing revenue, Smart Fabric is set to become the world’s largest fabric maker without owning a single piece of physical equipment. Naturally, the company’s cloud will also become the cloud for the fabric-making industry. That said, Smart Fabric is not a SaaS company. It is a cloud manufacturing company that earns a take from helping retailers eke out cost savings, using its software solutions to optimize production across its growing network of factories. Similar to how Tesla represents the future of the car industry, Smart Fabric is the future of the apparel industry and should be valued as such.
China’s e-commerce giants are also laying the infrastructure for the Industrial Internet. Downstream, Alibaba recently unveiled its prototype for an intelligent factory, Rhino, which specializes in the mass production of customized clothing. Leveraging Alibaba’s troves of consumer data, Rhino helps small clothing businesses predict which of their items will be top sellers, simplifying production planning. Inside the factory, Rhino’s machines are equipped with smart cameras and workstations are linked by conveyor belts. Every piece of fabric is tagged and tracked, and the entire workflow is recorded digitally on Alibaba’s cloud so merchants can track progress remotely. By digitalizing every process in the production line, Alibaba is laying the foundation for final production apparel makers to adopt a standardized universal operating system to run all their machines.
The future of the Industrial Internet is all about data exchange, systems integration, and the creation of a universal system. Indeed, a partnership between Smart Fabric and Rhino to integrate their two systems is highly anticipated. Their success in using niche demand aggregation to shorten the product cycle is enabling manufacturers to be more responsive to consumers’ changing tastes than ever before, and this could be a model that transforms China’s apparel-making industry in the near term, and factories worldwide in the long term.
Some argue that many manufacturing companies have already digitalized their business by implementing internal systems that streamline their processes and raise their operational efficiency. But they have misunderstood the essence of the Industrial Internet: such systems focus on data collection within a company, rather than data integration of an entire industry. Companies with their own Manufacturing Execution Systems (MES) that store data on their own servers have created ‘data islands’ in isolation from each other. Unless these islands are merged, consumer mass-market manufacturers will continue to sit outside the new retail ecosystem. Until data in millions of factories is collected, processed, and integrated so that it can be readily connected with retail data, the data exchange can only go one way – retail data can be directed to factories but no information flows back to retailers in return.
Current developments in apparel-making barely scratch the surface of what the Industrial Internet will mean for industry transformation and business innovation in China in the years to come. GSMA Intelligence estimates that there will be 13.8 billion Industrial IoT connections globally by 2025, with Greater China accounting for roughly 4.1 billion of these connections, or a third of the global market. Doubtless, not every manufacturing company will embrace the Industrial Internet model. Larger players especially would be opposed to handing over the ‘brains’ of their operation to a monopolistic cloud manufacturer. But the fact is that there are very few large players in any industry. The majority of factories are just utilities operators – manufacturers without a brand. Their margins reflect this reality. What they need is orders – consistent orders. While Smart Fabric is unlikely to dominate the fabric-making industry, those big players that can survive independently outside of their system will be few. Consumer goods will be the first industry that the Industrial Internet disrupts because these products are manufactured in large volumes and relatively standardized. Fund managers are now scouring other industry verticals in search of the next Smart Fabric. Perhaps some kind of centralized cloud will emerge in the home appliances manufacturing space as well.
Over the past few years, we’ve seen how Chinese e-commerce players have erased the boundaries between the online and offline worlds to create a seamless customer experience across all touchpoints. Now that successful consumer internet business models are well understood, the Industrial Internet represents the next frontier of innovation. These same companies are now building out their C2M (Consumer to Manufacturer) strategies to change forever how consumers engage with manufacturers, possibly disintermediating retailers themselves. The manufacturing capital of the world is redefining what it means to be ‘Made in China,’ and as fund managers, we’re excited to back a new wave of Chinese champions in industrial-based applications.