Dongguan Leather Goods and Jewelry Storage Box Production: The Transformation from Luxury Product Contract Manufacturing to Global Fast-Moving Consumer Goods Production Base (1)
In the early 1980s, the spring breeze of reform and opening up swept across China. Some bag factories in Hong Kong began to invest in the north. In 1982, a bag factory in Shenzhen was established to produce goods on behalf of European and American brand customers. As the business expanded, in 1987, it moved to Houjie Town, Dongguan, and invested to establish a bag factory. At that time, Dongguan, with its superior geographical location, close to Hong Kong and convenient transportation, facilitated the transportation of raw materials and the export of products. At the same time, Dongguan had abundant labor resources and could attract a large number of skilled workers with outstanding manual skills, which provided a solid foundation for the development of the leather goods industry.
In the subsequent development, the leather goods industry in Dongguan rose rapidly. Enterprises like Times Leather continued to grow and expanded their international luxury bag manufacturing business. By the 1990s, Dongguan had become a major outsourcing center for many international first-line luxury leather goods brands. It produced bags for multiple European and American luxury brands, including Gucci, Prada, Dior, and Burberry. These factories processed the materials brought from Hong Kong into finished bags and then transported them to all over the world. The leather goods manufactured in Dongguan occupied an important position in the luxury outsourcing field due to their exquisite craftsmanship and reliable quality.
During this period, the OEM model of the Dongguan leather goods industry had distinct characteristics. Taking Yu Yuan Shoe Factory as an example, it adopted a vertical integration model, completing all processes from the sole, molds, shaping, to cutting, sewing, assembly of finished products in its branch factories in Dongguan. This model significantly enhanced production efficiency. Initially, it took at least 25 days to produce a pair of shoes, but after four years of development, this process was shortened to just ten hours. For leather goods OEM enterprises, the same was true. From the cutting and sewing of leather to the installation of accessories, all could be efficiently completed within the factory.
The advantages of this OEM model are obvious. On the one hand, enterprises can strictly control the production process to ensure product quality. For example, leather goods OEM factories in Guangdong implement 100% inspection in product quality control, which is more reliable compared to Italian factories where only random inspections can be conducted due to fewer workers. On the other hand, the vertical integration model reduces communication costs and logistics costs in the middle links, improving overall production efficiency, enabling Dongguan’s leather goods OEM enterprises to be cost-competitive and attract orders from numerous international luxury brands. At its peak, some luxury leather goods OEM enterprises in Dongguan occupied a considerable share in the global luxury OEM market, such as Times Leather Goods, whose market share in the global luxury OEM industry once reached 5%.
Pressure and opportunities for transformation
After 2006, the leather goods outsourcing industry in Dongguan faced numerous challenges brought about by external environmental changes. The cost of labor kept rising, and with the economic development, the salary requirements for labor in Dongguan gradually increased, which further raised the production costs of enterprises. At the same time, adjustments in tariff policies and fluctuations in exchange rates further compressed the profit margins of outsourcing enterprises. Leather goods outsourcing enterprises that mainly focused on exports often faced the risk of reduced order profits or even losses when facing exchange rate fluctuations. For instance, when the RMB appreciated, orders settled in US dollars would result in a significant reduction in the actual profits obtained by the enterprises after conversion into RMB.
Furthermore, changes in the global economic situation also had an impact on the leather goods outsourcing industry in Dongguan. In 2008, the global financial crisis swept across the world, and international market demand shrank, as did the luxury consumption market. The order volume decreased significantly. Many enterprises that relied on outsourcing orders faced unprecedented survival pressure. Under such circumstances， continuing to rely on the traditional outsourcing model would make it difficult for the leather goods industry in Dongguan to sustain its development.
Apart from external environmental changes, the Dongguan leather goods industry also faces its own development bottlenecks. The long-term OEM model has made enterprises overly dependent on foreign brand customers, lacking the awareness of independent innovation and brand building. The enterprises are at the low-end position in the industrial chain and can only earn a meager OEM fee. Producing a handbag only earns a few dozen dollars in OEM fees. However, when the European and American brand merchants attach brand labels, they can sell at prices of several hundred or even several thousand dollars. This low value-added production model restricts the profit growth and sustainable development capabilities of the enterprises.
At the same time, under the OEM model, the development of enterprises is greatly affected by brand merchants’ orders and lacks stability. Once the brand merchants reduce orders or transfer production bases, the enterprises’ production and operation will be severely impacted. Moreover, due to their long-term focus on OEM production, the enterprises’ capabilities in product design and marketing are relatively weak, making it difficult for them to adapt to the diverse demands and rapid changes of the market. These internal development bottlenecks prompt the leather goods enterprises in Dongguan to seek a transformation path.
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