Li Ning: China’s paper tiger begins to roar

Li Ning is now being hailed as a genuine challenger to the dominance of Nike and Adidas in China. In reality, that challenge has been brewing for some time.

Li Ning: China’s paper tiger begins to roar

The eponymous Li Ning hangs suspended from the Birds Nest stadium during the opening ceremony of the Beijing Games.

Chinese sportswear company Li Ning came to global prominence at the Beijing Olympics when its founder and chairman, the eponymous Li, spectacularly encircled the Birds Nest stadium roof before lighting the Olympic cauldron at the opening ceremony. The company is now being hailed as a genuine challenger to the dominance of Nike and Adidas in China. In reality, that challenge has been brewing for some time.

In August this year, Chinese sportswear company Li Ning published its interim results for the first six months of 2009, ending 30th June. The results received limited press coverage and very little fanfare, yet they may have heralded the dawn of a new era in the global sportswear market. Li Ning, it appears, is emerging from the shadows of Asia to truly challenge the powerhouse duopoly of Adidas and Nike.

The results stated that revenue had risen, year on year, by 32.4 per cent to a total of 4.052 billion Chinese Yuan (CNY), roughly US$594 million. Profits had risen by an even more impressive 41.6 per cent to CNY473 million, or US$70 million. Those results were achieved over a period in which Li Ning affiliated retail stores, either entirely owned by the company or simply franchised, increased by 564 to 6,809.

Adidas and Nike have been struck by the recession; Li Ning has not even been feathered by it.

Of course, the financial figures still pale in the face of a direct comparison with Nike and Adidas’ plethora of multi-zero results. The Adidas Group, which includes Reebok and golfing manufacturer Taylor Made, recorded first half revenues of €5.034 billion, but that actually represented a year on year drop of two per cent. The group recorded an operating profit of just €129 million, a 74 per cent decrease on the previous year. That decrease was put down to Adidas’ push in emerging markets and, in truth, a three per cent increase in Asian revenues did attest to that effort.

Nike’s results from the equivalent period make for fairly similar reading. Global revenues were down from US$9.6 billion to US$9.1 billion and profits dropped by some 38 per cent year on year from US$954.3 million to US$585.2 million. Furthermore, as part of a scheme to ‘streamline its management structure’, Nike this year cut its global workforce by five per cent, incurring pre-tax restructuring charges of US$195 million in the process.

The important comparison to make, however, is not between the respective companies’ bottom lines. The fact that both Adidas and Nike have shrunk over the last six months while Li Ning has continued its expansion tells its own story. Adidas and Nike have been struck by the recession; Li Ning has not even been feathered by it.

On the face of it, the paunchy 46-year-old Li Ning is an unlikely figurehead for one of the fastest growing companies in Asia. In fact, Li Ning is a former Olympic gymnast, and a very good one at that. He made his name at the 1984 Games in Los Angeles, taking home a total haul of six medals: three golds, in floor exercise, pommel horse and rings; two silvers; and a bronze. Two years previously, at the 1982 Gymnastics World Cup, Li Ning won six of the seven medals available, earning him the nickname ‘Prince of gymnastics’. In 2000, Li was inducted into the International Gymnastics Hall of Fame, becoming the first Chinese inductee in the process. Mentally, Li is no slouch either. He has a bachelor’s law degree and an executive MBA from the faculties of law and management respectively at Peking University. Li retired from sporting competition in 1988 and, in 1990, at the grand old age of 27, he founded the Li Ning Company Limited.

From the outset Li aimed to build the company into China’s national sports goods brand. Slowly but surely the company began to grow, supplying what need there was for sportswear in the largely nascent market that was China in the early 1990s. Inevitably, however, the company’s early success alerted its bigger international rivals to a Chinese market that was just beginning to find its 2.6 billion feet. Aided by China’s joining the World Trade Organisation in 2001 and the lowering of the country’s trade barriers, Adidas and Nike moved in, and the power of their global brands has held the nation rapt ever since. Indeed, the beginning of the 21st century saw the once dominant Li Ning struggle to muscle back in on its own domestic market.

Then, in 2002, a shift in the company’s marketing strategy, an overhaul of the management and, eventually, some landmark deals brought about the beginning of a Li Ning resurgence that is still gathering pace today.

Senior executives from companies such as Avon, Proctor & Gamble and DuPont were brought in and an ultra-modern international design centre was erected in Hong Kong. Ned Frederick, a former research director at Nike and Daniel Richard Design (a company that worked with Converse amongst others), was hired to come up with the technology that could compete with the Nike Air line-up. The result was the Basketball Bow, a shoe that still tops Li Ning’s range, retailing at about US$140. “Our thinking is that as a local brand, we need to have an international image,” explained Abel Wu, who was brought in to oversee Li Ning’s footwear division. He didn’t stop there, however, and revealed the company’s new warlike mentality. “We are familiar with the history of China, with how the Communists defeated the Nationalists.” The firm’s new strategy, he said, was “similar to what Mao did.” Li Ning was beginning to set itself up as a paper tiger, a relatively small Chinese company that masquerades as a global brand in order to entice Chinese consumers.

In July of 2005, Li Ning embarked on a joint venture with French sporting goods manufacturer Aigle, a company specialising in hiking, trekking and mountaineering equipment. As part of the partnership, Li Ning became the exclusive manufacturer of all Aigle goods in China for the following 50 years. The deal with Aigle, a company with revenues of around €120 million and 56 stores already open in Asia, was a shrewd move on Li’s behalf, gaining his company international credibility and a big foothold on a new market.

“If you want to build and be a very cool brand, it happens through basketball”

A year later, in 2006, the company struck ‘strategic alliances’ with the ATP tennis tour, the China University Basketball Association and University Football League and, crucially, the National Basketball Association (NBA). The figures have been well documented in recent months: there are some 450 million basketball fans in China, 300 million playing participants of the sport. Clearly, the battle of the sportswear brands would be fought across the myriad basketball courts the length and breadth of the country.

Around the same time, a survey of college students conducted across Beijing and Shanghai revealed that Nike was, by some distance, China’s ‘coolest’ brand. “We think we have a respectable competitor from the United States,” the tough-talking Abel Wu said of Nike. “They have a good image. They have a lot of sports stars as sponsors. However, we know how to survive in these tough conditions.”

Traditionally, Li Ning’s core market had been the middle-income consumers living in rural areas and provincial cities. These were the people who couldn’t afford the latest US$170 Nike Air Jordans but would settle for the US$50 Li Ning equivalent. By gaining an association with the world’s biggest basketball league, itself one of the ‘coolest’ global brands, massaging that association and leveraging it with one or two carefully chosen personal endorsement deals, Li Ning was able to position itself squarely in the higher end of the market occupied by the technology-focused Nike and Adidas. “If you want to build and be a very cool brand, it happens through basketball,” the savvy Wu attested. Nike and Adidas were using basketball to maintain their market position in China. Now Li Ning was to play the big boys at their own game.

The strategic link-up with the NBA, making a big effort to push itself in Asia, allowed Li Ning to promote its products at the league’s ‘NBA Jam Van’ roadshow events throughout China, and provided the company with invaluable help with the next stage of its marketing strategy: finding an NBA player to endorse Li Ning shoes. Without the budget to sign any of the league’s top stars, and with the sole goal of promoting the player in China, Li Ning worked with the NBA to come up with a list of potential candidates. Having taken his marketing team – all of them English speakers – over to Denver for the NBA’s All-Star game in February 2005 (“the first time I had ever been to an NBA game,” recalls Wu), Abel Wu knew exactly who he needed to link up with to find the man he needed. He hired Jocelyn Monroe, who had previously worked as personal assistant to the former New York Knick Allan Houston, as Li Ning’s liaison to the NBA. With Monroe’s help, eventually they stumbled upon Damon Jones, a journeyman NBA player who was at the time plying his trade at the Cleveland Cavaliers.

Jones, who had done time in basketball’s minor leagues and had been employed by no fewer than ten NBA teams since 1998, was, bizarrely, a perfect fit for Li Ning’s emerging brand. Despite being a talented shooter, Jones had never really found true success in the NBA. He described his career as “all uphill” and, “for a guy who wasn’t drafted, [I’ve proved] that if you work hard enough, something can happen for you.” This was a notion that seemed to chime perfectly with Li Ning’s ‘anything is possible’ slogan. In January 2006, Jones became the first NBA player to endorse Li Ning, signing a two-year contract worth some US$250,000 a year plus bonuses – a snip compared to most NBA shoe deals. Despite wearing shoes that were not on sale anywhere in the US – the deal did nothing whatsoever for Jones’ domestic profile – the contract was nevertheless a sweet one for the player. The royalties clause he was offered is generally only reserved for the NBA’s biggest stars.

Fortunately for Li Ning, the company’s ‘paper tiger’ strategy has coincided with a five-year period in which China’s domestic sportswear market has grown at an average of between 30 and 40 per cent per year.

Nevertheless, it wasn’t long before people started viewing Li Ning as a genuine challenge to Nike and Adidas. Indeed, the new-look Li Ning brand seemed to have positioned itself in direct opposition to its global competitors simply by aping most of their major characteristics. The company’s logo, a stylised rendering of Li Ning’s ‘L’ and ‘N’ initials bears a striking resemblance to Nike’s famous swoosh, and the company’s slogan ‘anything is possible’ is just a slip of the tongue away from Adidas’ ‘impossible is nothing’ (though Li Ning’s slogan did precede Adidas’ by some years). Even Li Ning’s sparkling corporate campus near Beijing, bedecked as it is with an indoor swimming pool, basketball courts and a climbing wall, resembles a Nike advert.

The Damon Jones deal, combined with the technological excellence of Frederick’s Basketball Bow designs, quickly began to earn Li Ning the street cred it craved in China. More importantly, the Jones deal paved the way for the company’s next landmark move.

Indeed, eight months after Jones signed, Shaquille O’Neal, indisputably one of the NBA’s biggest stars, put pen to paper on a five-year contract to endorse Li Ning in China. At around US$1.25 million, it was by some distance the biggest deal in the company’s history. With Shaq onboard, Li Ning had well and truly announced itself to the world. But more importantly it had announced itself to China.

Sales rose sharply quarter on quarter before, by the time of the Beijing Olympics in the summer of 2008, Li Ning was in position to strike its biggest coup yet.
With a handful of prominent but still relatively minor sponsorship deals in place with the likes of the Spanish basketball squad, the Sudanese track and field team and the American table tennis team, it was up to the company’s chairman and founder, the eponymous Li, to enact the defining moment of the Games for his company. The incident has been well-documented but bears repeating. Li, quite possibly China’s most famous athlete, was chosen to light the Olympic cauldron at the opening ceremony of the 2008 Games. For ten minutes the eyes of the world were on Li as he hung suspended on a wire, circling the roof of the Birds Nest stadium clad, everyone assumed, in his own sportswear. Adidas, who had paid some US$80 million for their official sponsorship of the Games, were understandably miffed. Nobody quite knows how and why Li was chosen to light the flame. Even a day before the event, he was only one of several candidates for the job. Some speculate that the Chinese government was sensitive to criticism having passed over his domestic company in favour of giving Adidas the official Games sponsorship. Some insiders have even suggested that Li cut a deal with the authorities in return for dropping his efforts to get television newscasters to wear his company’s apparel. Indeed, there is still some confusion as to whether Li really was wearing his own clothing during that famous performance. It is of little consequence now. At the time, everyone thought he was.

Zhang Xiaoyan, a Li Ning company spokesman who clearly fell into the camp that believed Li was wearing his own brand, denies that the opening ceremony was the marketing coup the rest of the world perceived it to be. “The Olympics is not a platform for Li Ning’s marketing. The reason he wore our shoes is because the Olympic Committee did not provide shoes.

“Rather than promoting the products,” he continued, “we care more about advocating sportsmanship and inspiring people’s participation in sports.”
Terry Rhoads, a former Nike executive in China who founded his own agency, Zou Marketing, in China, and an expert on sports marketing in the region, said that Li Ning’s Olympic performance in Beijing had got his brand recognised in the West “five to ten years ahead of time.”

After Li’s performance, the company’s share price rose three per cent during opening trading hours the morning after the opening ceremony. When the figures for the year came in, the company’s profits had registered a 54 per cent increase, a huge rise that many attributed directly to the events at the Beijing Olympics. The latest half year results and a further 41.6 per cent rise in profits, however, attest that 2008 was no flash in the pan for Li Ning. “The market is growing so quickly that no one is taking market share off each other”, Rhoads said, suggesting that Nike and Adidas might not be shaking in their boots just yet.

That may well be so. The latest financial results, however, suggest that Li Ning is gaining ground quickly. It may not be a paper tiger for too much longer.