Appendix External Analysis 1.1 PESTLE analysis 1.1.

1 Political factors Increasing geopolitical influence Chinese political and economical relationship with Africa has been strengthened enormously, while existing political ties with United States, United Kingdom, and Russia are strengthened over time. In light of occasional setbacks with other Asian countries, Chinas political influence is continually increasing as most Asian countries are seeking to broaden their mutually economical ties. Improved yet patchy relationship with Taiwan After the intense tension during President Chens government and eased relationship during President Mas government, Chinas political image will largely depend on how the issue will be resolved. Lop-sided domestic consumption Domestic consumption is restrained due to undervalued CNY. Economy growth is lopsided with 3.5% points from private consumption and 5% from investment spending in 2010. Unemployment issue Arising unemployment issue, due to rural-urban labor shift (rural labor forces shift from agricultural activities to urban job opportunities in growing manufacturing and service industry) and millions of fresh graduates from Chinese universities, may lead to campus instability and unrest in the country. Increase international trade Expanded and improved economic and trade relations with the rest of the world make China the worlds 2nd largest trading nation, behind the US and ahead of Germany and Japan.

1.1.2

Social factors

Low-income population China has lowered poverty levels from 64% in 1978 to 19% in 2004 by increasing per capita income. After joining the WTO, the process of reducing poverty is much faster. Gender imbalance Gender imbalance has serious impact on social system (floating population) in China with a male-to-female ration of 128:100 in 2000 and estimated to increase 20% by 2025 before falling to normal levels. Aging population Aging population due to population control policy (one child policy) may lead to productive output to slip in the future. People over the age of 65/total population: 8.9% in 2011 to grow to an estimated 12% in 2020. 1.1.3 Technology factors

R&D development and obstacle First, as both presidents, Jiang Zemin and Hu Jintao, have engineer background, China has been one of the most consistent countries in allocation of research expenditure, though far from optimal. In 2008, gross expenditure on R&D was more than 1.3% of GDP (expected to exceed 2.3% by 2020). According to Datamonitor, by April 2011, China has 5,500 state-owned R&D institutions, 3,400 research institutions affiliated with universities, and about 13,750 institutions affiliated with medium and large industrial enterprises. Second, China has increased its international influence over science and technology, as a result of its international co-operation pacts for scientific R&D with 152 countries and its inter-governmental science & technology co-operation agreements with 96 countries. China is also part of more than 1,000 international scientific organizations. Last, over the past 25 years, China has established 15 free-trade zones, 32 state-level economic and technological development zones and 53 new high-tech industrial zones

in med-to-large cities, which paves way for establishing more R&D centers and creates better climate to attract foreign investors. Nonetheless, the scientific researches in China Academy of Science (CAS), the engine of scientific research in China, have often been misdirected to non-priority research to implement the Partys goal. Interference due to government officials corruption and university bureaucrats obstruction hinders professional development of scientific researches. 1.1.4 Economic factors

Upgraded credit ratings Sovereign credit ratings is upgraded to AA- with a stable short-term outlook from A+ by Standard & Poors due to strong foreign reserves, fiscal position, export growth, moderate debt level, and strong foreign investment flows. It reflects a positive outlook over risks to the countrys macroeconomic and financial stability. 1.1.5 Environmental factors

High pollution Chinas pollution levels are among the highest countries, accounting for 12% of global CO2 emissions, thanks to the development approach emphasizing on boosting manufacturing capacity and industrial growth. Moreover, consequently produced toxic waste and hazardous materials pose a big threat to Chinas environment. China needs to take stronger measures to realize its environmental goals.

2. Internal analysis 2.1 Resource based analysis 2.1.1 Financial resources

For INDETIX ZARAs parent company, INDETIX has shifted its focus from Spain to other European countries and Asia. The groups revenue in Asia has consistently increased by at least 22%. The company has been able to keep its gross margin over 56%, net profit margin above 10%, Return on Equity over 26%, and current ratio increasing 1.14 in 2006 to 1.94

in 2010 since 2006. INDETIXs share price has been growing during the past three years except during the end of 2008 due to the global financial crisis. Their financial position is during year 2011 great with a net cash EUR 2.8 mn. The company seems to be financially healthy and will keep expanding. However, we must take note that INDETIXs 2011 annual report has yet to be released. Given INDETIXs vertical integration and lifted sales price, we believe the companys profit wont suffer much. Going forward to 2012, with cotton price falling back to the normal level and companys further expansion in Asia and South America, the profitability of INDETIXs vertical integration operation and oil stain expansion strategy will face great challenges. For ZARA ZARAs net sales have increased every year since 2008. EBIT is not available for year 2008, but did increase with 4,6% from 2009 till 2010.The stores divided into geographic areas has switched i.e. the stores in Europe have decreased rapidly over the three years, from 1188 in 2008 to 991 in 2009 and 1040 the year after. Instead Asia and Africa has become a more important market with 159 stores in 2008 to 279 in 2010. As in China 43 new stores have opened between year 2008 and 2010. ZARAs total revenue has picked up by increasing 7.7% since the decline in 2009 (-9.4%) affected by constrained consumer confidence and Euro zone crisis. ZARA improved its operating margin to 19% in 2010 from 15.6% in 2009 (average 16.2% in 2006-10) on account of INDETIXs vertical integration. However, whether ZARA is able to overcome skyrocketed cotton commodity price (3-fold in mid-2011), supported by vertical integration and inflated price, is a yet to be seen.

2.2 Value chain analysis ZARA is building on a vertically integrated supply chain which has total control of all its business activities from designing, manufacturing, sourcing, distribution to retail stores. The business model is highly capital intensive. It enables company to short turnaround times and achieves greater flexibility, reducing stock to a minimum and diminishing fashion risk to the greatest possible extent. And designers are able to get the idea of what product to design next by means of its sales from stores and customers feedback. The companys success is because of the total control in every aspect of the business, from

designing, to production, and to distribution. By having total control of the entire process, the company can quickly react to the fast changing fashion trend and customer taste, this provides the company an idea of the latest fashion trend. Having total control in all business activities allows ZARA to produce and release new design in a short span of time. ZARA shop managers report to designers in a daily basis on what has and has not been sold. The report is then used to determine if a product is to be kept or altered and whether new lines are to be created. The designers mostly rely on product sales, feedbacks and comments from customers. All in all, ith outsourcing and vertical integration encompassing design, sourcing, just-in-time production, and distribution, the hybrid supply chain gives ZARA two to four weeks on lead-time. 3. Contingency plan:
If the regional distribution center fails to function well, ZARA has to seek for other alternatives. Under this circumstance, ZARA should consider involve a distribution agency which is specialized in the distribution network in Chinas market and able to function well as its own regional distribution center. The involvement can be in the forms of acquisition, alliances and simply employment. In the case of the failure in online shops, ZARA should focus more its resources to its existing stores and consider build a alliance with existing ecommerce agency which is more experienced of the internet shopping in Chinas market.

Tables Market information Table 1 Sales of Apparel by Category: Volume 2005-2010 Units mn Clothing Footwear Apparel
Source:

2005 16,343.6 1,609.7 17,953.3

2006 18,724.9 1,820.4 20,545.3

2007 21,391.4 1,993.1 23,384.5

2008 24,002.8 2,208.3 26,211.0

2009 26,592.8 2,399.1 28,991.9

2010 29,292 2,570. .5 31,862 4 .9

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 2 Sales of Apparel by Category: Value 2005-2010 RMB bn Clothing Footwear Apparel
Source:

2005 671.0 148.0 819.0

2006 770.4 164.0 934.5

2007 874.2 179.1 1,053.3

2008 981.4 193.6 1,175.0

2009 1,088.8 207.5 1,296.3

2010 1,232. 230.1 0 1,462. 1

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 3 Sales of Apparel by Category: % Volume Growth 2005-2010 % volume growth Clothing Footwear Apparel
Source:

2009/10 10.2 7.1 9.9

2005-10 CAGR 12.4 9.8 12.2

2005/10 Total 79.2 59.7 77.5

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 4 Sales of Apparel by Category: % Value Growth 2005-2010 % current value growth Clothing Footwear Apparel
Source:

2009/10

2005-10 CAGR

2005/10 Total

13.1 10.9 12.8

12.9 9.2 12.3

83.6 55.4 78.5

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 5 Forecast Sales of Apparel by Category: Volume 2010-2015 mn units Clothing Footwear Apparel
Source:

2010 29,292.5 2,570.4 31,862.9

2011 32,236.0 2,777.4 35,013.4

2012 35,496.7 3,028.1 38,524.8

2013 38,996.7 3,275.4 42,272.0

2014 42,605.1 3,529.9 46,135.0

2015 46,325 3,781. .3 50,107 8 .1

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 6 Forecast Sales of Apparel by Category: Value 2010-2015

RMB bn Clothing Footwear Apparel

Source:

2010 1,232.0 230.1 1,462.1

2011 1,360.3 249.1 1,609.3

2012 1,498.2 271.4 1,769.6

2013 1,645.6 295.8 1,941.4

2014 1,799.5 321.0 2,120.5

2015 1,959. 346.6 9 2,306. 5

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 7 Forecast Sales of Apparel by Category: % Volume Growth 2010-2015 % volume growth Clothing Footwear Apparel
Source:

2014/15 8.7 7.1 8.6

2010-15 CAGR 9.6 8.0 9.5

2010/15 Total 58.1 47.1 57.3

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 8 Forecast Sales of Apparel by Category: % Value Growth 2010-2015 % volume growth Clothing Footwear Apparel
Source:

2010-15 CAGR 9.7 8.5 9.5

2010-15 Total 59.1 50.6 57.8

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 9 Apparel Brand Shares 2007-2010 % retail value rsp Brand Nike Li Ning adidas Anta Metersbonwe Semir Belle

Company Nike (China) Inc Li Ning Co Ltd adidas Sports (China) Ltd Anta (China) Co Ltd Metersbonwe Group Semir Group Co Ltd Belle International Holdings Ltd

2007 0.9 0.4 0.6 0.3 0.4 0.3 0.2

2008 1.1 0.6 0.8 0.5 0.4 0.4 0.3

200 9 0.9 0.7 0.6 0.5 0.5 0.4 0.4

2010 0.9 0.7 0.5 0.5 0.5 0.4 0.4

361 Degrees Baleno Daphne Aokang Kappa Xtep Jeanswest Peak Septwolves Romon Youngor Yishion Shanshan Levi's Red Dragonfly Teenmix Tata Jack & Jones Kangnai Only Esprit Zara

361 Degrees International Ltd Texwinca Holdings Ltd Prime Success International Group Ltd Aokang Group Co Ltd China Dongxiang Group Co Ltd Xtep International Holdings Ltd Glorious Sun Enterprises Ltd Peak Sport Products Co Ltd Fujian Septwolves Industry Co Ltd Ningbo Romon Group Co Ltd Youngor Group Co Ltd Dongguan Dongyue Caparison Co Ltd Ningbo Shanshan Group Co Ltd Levi Strauss Asia Pacific Co Ltd Red Dragonfly Group Co Ltd Belle International Holdings Ltd Belle International Holdings Ltd Bestseller Fashion Group (TianJin) Co Ltd Kangnai Group Co Ltd

0.1 0.3 0.3 0.3 0.2 0.1 0.3 0.1 0.2 0.2 0.3 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.2

0.2 0.4 0.3 0.3 0.3 0.3 0.3 0.2 0.3 0.2 0.3 0.2 0.3 0.2 0.2 0.2 0.1 0.1 0.2 0 . 2 0.1

0.3 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1

0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Bestseller Fashion Group (TianJin) Co Ltd Esprit Holdings Ltd Zara Asia Ltd

0.1 0.0

Vero Moda Lee Texwood Uniqlo Baoxiniao

Bestseller Fashion Group (TianJin) Co Ltd VF Asia Ltd Texwood Ltd Uniqlo (China) Co Ltd Zhejiang Baoxiniao Group Co Ltd China Liliang Ltd Decathlon China Giordano International Ltd Triumph International (Hong Kong) Ltd Beijing Aimer Lingerie Co Ltd Fapai Group Co Ltd China Resources Enterprise Co Ltd

0.1 0.1 0.1 0.0 0.1

0.1 0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1 0.1

0.2 0.2 0.2 0.1 0.1

Lilang Decathlon Giordano Triumph

0.1 0.1 0.1

0.1 0.1 0.2 0.1

0.1 0.1 0.1 0.1

0.1 0.1 0.1 0.1

Aimer Fapai Esprit Others Total

Source:

0.1 0.1 0.2 91.7 100.0

0.1 0. 1 0. 2 89.7 100. 0

0.1 0.1 89.4 100.0 -

0.1 0.1

89.1 100.0

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Company information Table 10 Geographic store location in China, until Feb 17 2012
Area North east Cities Shen Yang Da Lian Tian Jing Chang Chun Ha Erbin Da Qing Beijing Number 4 4 2 2 1 1 11

Beijing

Shanghai Shanghai Hang zhou Zheng jiang Ning bo Jiang su nan jing su zhou chang zhou nan tong tai zhou zhen jiang wu xi huai an shen zhen Guang dong guang zhou hui zhou dong wan ji nan qing dao nan ning cheng du kun ming chong qing hu he hao te yin chuan xi an tai yuan lang fang shi jia zhuang tang shan zheng zhou chang sha wu han xia men fu zhou he fei

15 2 1 1 1 2 1 1 1 2 1 4 3 1 1 2

shan dong West

he bei

1 1 4 * 2 1 2 2 1 1 1 1 1 2 1 3 1 2 1 1

he nan hu nan hu bei fu jian jiang xi an hui

Table 11 Inditex Annual Geographic Segments revenue

USD (000) Spain Other European Countries America Asia and Other Foreign Segment Total Consolidated Total 31-Jan-11 4,855,169.0 29.4 % 7,782,207.5 47.2 % 1,898,369.6 11.5 % 1,967,226.7 11.9 % 16,502,972.8 100 % 16,502,972.8 100 % 31-Jan-10 5,187,817.8 33.5 % 7,303,420.1 47.1 % 1,533,992.2 9.9 % 1,477,537.0 9.5 % 15,502,767.1 100 % 15,502,767.1 100 % 31-Jan-09 5,417,229.3 35.8 % 6,984,126.6 46.2 % 1,507,502.8 10 % 1,204,377.2 8% 15,113,235.9 100 % 15,113,235.9 100 % 31-Jan-08 5,182,395.9 39.7 % 5,661,336.6 43.4 % 1,347,307.6 10.3 % 858,488.5 6.6 % 13,049,528.5 100 % 13,049,528.5 100 %

Table 12 Unconsolidated Annual Inditex business segments revenue

USD (mil) Zara Bershka Pull & Bear Massimo Dutti Stradivarius Oysho Zara Home Kiddy`s Class Segment Total Eliminations Unallocated Consolidated Total 31-Jan-11 10,655.9 86.6 % 1,642.3 13.4 % 12,298.2 100 % 4,204.8 34.2 % 16,503.0 134.2 % 31-Jan-10 9,898.4 85.7 % 1,646.7 14.3 % 11,545.1 100 % 3,957.7 34.3 % 15,502.8 134.3 % 31-Jan-09 10,922.1 87.9 % 1,505.6 12.1 % 12,427.7 100 % -1,086.9 -8.7 % 3,772.4 30.4 % 15,113.2 121.6 % 31-Jan-08 9,213.4 87.8 % 1,280.3 12.2 % 850.8 8.1 % 962.8 9.2 % 720.4 6.9 % 294.9 2.8 % 278.5 2.7 % 10,493.7 100 % -551.6 -5.3 % 528.0 5% 10,470.1 99.8 %

Charts Chart 1 GDP and growth rate in China, 2004-14

Chart 2 Chinas external trade (merchandise), 2006-10

Chart 3 Unemployment in China, 2004-14

Chart 4 Number of Internet users in China, 2002-13