Bain Capital dodges trade war impact as it remodels China cosmetics packaging venture with eye on US$34 billion market

Daniel Ren

On a sunny afternoon in August, hundreds of workers were busy operating the production lines at a factory in Suzhou, a manufacturing base in the eastern Chinese province of Jiangsu.

The cosmetics packaging business is a unit of New Jersey-based World Wide Packaging, both acquired and merged by Bain Capital Private Equity in early 2018. It now supplies integrated solutions – from design to packaging components such as plastic tubes – to some of the biggest beauty brands like Estee Lauder, L’Oreal and Shiseido for the local market.

The buzz at the Suzhou factory shows how businesses are adapting to the impact of the US-China trade war as margins erode. Last June, the US more than doubled the tariffs on US$200 billion worth of Chinese exports to 25 per cent, including cosmetics and skincare products.

“We have been turning the plant into one that mainly supplies to Chinese companies or multinational companies that make products in China for Chinese consumers,” said Jonathan Zhu Jia, a managing director in Hong Kong at Bain Capital. Many global cosmetic brands are made in China, for the Chinese consumers, he added.

The move has enabled WWP to retain a foothold in a US$34 billion beauty market onshore. Retail sales of skincare goods amounted to 212 billion yuan (US$30.3 billion) in 2018, according to Euromonitor, while make-up products were worth 42.8 billion yuan. They grew by 13.2 per cent and 24.3 per cent, respectively.

While China is the second largest market for cosmetic goods after the US, the mainland market is growing at three times faster than in America, according to Bain Capital, which oversees more than US$105 billion of alternative investment assets.

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“When we did feasibility studies, we saw the local market, economy and consumers here,” WWP chief executive Barry Freda said. “We found Chinese demand for cosmetics, and thus packaging solutions, was really on the forefront of starting to explode.”

Besides, China has an immense supply of critical resources, such as the availability of experienced workers, materials suppliers and manufacturing techniques of tools, Freda said.

In China, 4,933 enterprises were qualified to produce cosmetics at the end of June 2019, according to statistics from the National Medical Products Administration. Home-grown labels are concentrated in the mid to low-end segments, while joint ventures and foreign-owned entities dominate the high-end market.

Zhu said WWP has also partnered with a Taiwan-based manufacturer as a supplier. Before the trade tariffs, manufacturing plants in mainland China had a 20 per cent cost advantage over the supplier in Taiwan. Still, its sound infrastructure and strong domestic supply chain is hard to beat, he added.

“You can buy all the equipment nearby,” said Zhu, who highlights electronic manufacturing bases like Shenzhen and Kunshan as an example. Even if multinationals want to move out, it would take them many years and billions of dollars to rebuild a global supply chain that bypasses China, he added.

That is one reason WWP is not churning out goods from a factory in Southeast Asia or India.

WWP currently dedicates about 70 per cent of its mainland capacity to packaging finished cosmetic products for local and foreign brands domestically. The balance is shipped overseas, including to the US.

“The trade war makes things a little challenging,” Freda said. Even with the recent tariff hike, “we can still come in and be competitive”, he added.

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