Should we build the factory or the brand?

It’s Easter, a season of renewal, rebirth, and willingness to rise again. Last weekend a quiet revolution emerged on the Chinese social media app TikTok, when Chinese factory owners pulled back the controversial veil of trade secrets to expose which global brands they produce for. The result was a digital firestorm as consumers across the world voiced support for the factories and sharp criticism of brands they once trusted. For Jamaican entrepreneurs, this mustn’t be dismissed as online gossip, as it may just lead to a massive pot of gold. Let me explain: the Chinese dropped the ball on the big-name brands like Chanel, Dior, and Lululemon, by breaking down what it costs to produce at their OEM factories, what goods they previously produced for some brands, and inviting new buyers to engage them directly. The gut punch for the global brands was the factory walkthrough, and price reveal. Consumers were astonished at the difference between the cost of popular finished goods and their final sale price which ranged from a whopping 800 per cent to over 5000 per cent. For example jackets that cost US$6 to produce, being sold for US$125 or more.

All of this should lead curious business minds to ask – is it more viable for us to aspire to own the factory or aspire to own a brand?

The rise of Louis Vuitton Moët Hennessy (LVMH) and its owner, Bernard Arnault as one of the richest men in the world is instructive. It’s also a masterclass in the power of branding over manufacturing. As of April this year, Arnault has an estimated net worth of US$163 billion, and is listed among the top 5 wealthiest people on the planet. The group, under his leadership, has morphed into a luxury conglomerate encompassing over 70 prestigious brands, including Louis Vuitton, Dior, Tiffany & Co., and Sephora. The company’s market capitalization stands at around US$275 billion. LVMH doesn’t own all the factories that produce their products. What it owns is brand equity. Arnault built an empire not by making handbags or champagne himself, but by controlling how people perceive value. A Louis Vuitton bag is estimated to cost under US$200 USD to produce – but sells for thousands – primarily because of brand, storytelling, and exclusivity. They also use controlled supply, timeless designs, and artificial scarcity to increase perceived value and increase their prices over time making some people see them as “investments”.

The global consumer market has affirmed that it rewards perceived value, not simply the sum of parts or the efficiency of production cost. Therefore, there may be similar profit potential for local entrepreneurs through white labeling or private labeling. Those who own the brand, the strategy, aesthetic and stories, will devour the margins, like Arnault, and this is the multibillion-dollar study in luxury psychology some of our people will need to pursue.

However, any serious examination of viability must factor in an often-overlooked equation: brands foot the bill for a vast universe of costs before the product can reach the consumer. These costs take a gluttonous bite into the profits you may think they earn. For example:

1. Sourcing and procurement costs, such as Sourcing Agent fees which are commissions paid to agents who help find and vet suppliers. Also fees for supplier audits, quality control checks, travel expenses for business trips to China for supplier visits and negotiations, communication costs and more.

2. Logistics and shipping costs, including sea freight, air freight, and land freight costs for transporting goods from China to various warehouses or distribution centres. There is also customs duties and tariffs, port fees and handling, insurance, among others.

3. Inventory and warehousing costs which have big ticket overheads like rent, utilities, and labour, security, software for tracking and managing inventory levels. Inventory must have an allowance for delays, damage or challenges with production and shipping.

4. Quality control and compliance allow for robust quality inspection costs, and certification – which ensures they meet safety and quality standards.

5. Other major costs such as selling, marketing, customer service and returns, online storefront management, currency rate volatility, and intellectual property protection to name a few.

If you got dizzy or exhausted reading through these costs, please note that this is a snapshot of the universe of costs. It’s not an exhaustive list. In fact, it is typical for the final retail price of a product produces in China to be 3 to 6 times the original manufacturing cost, to account for all the expenses incurred.

Notwithstanding, the reality is that large-scale manufacturing is not going to be our strong suit. We face too many structural barriers such as high import costs, small labour pools, and fragile supply chains. However, we do have an abundance of creativity, a rich culture, and the power to build extraordinary brands. This isn’t just tariff drama unfolding, it may be opportunity knocking.

One love,

Yaneek Page is the program lead for Market Entry USA and a certified trainer in Entrepreneurship