SHANGHAI, China — Chinese investors have become a powerful force on the global M&A scene. While outbound acquisitions saw an overall drop last year due to Beijing’s crackdown on capital flows, Chinese investors targeting key industries and markets like those earmarked for the One Belt, One Road initiative have closed a steady stream of deals. The fashion industry may not be a lynchpin for this colossal global infrastructure project but there has nevertheless been a flurry of activity from Chinese firms investing in the sector.
Companies such as La Perla, C&A and Bally are all reported to be courting Chinese capital. This chimes well with BoF’s 2018 The State of Fashion Report, published in partnership with McKinsey & Company, which predicts that Asian firms will assert their power and leadership even more aggressively this year through global-scale investment and expansion.
Chinese investment in European luxury and fashion labels, in particular, comes on the back of rising spending by the Chinese consumer on clothing and footwear, says consumer analyst Nainika Singh at BMI Research. The research firm forecasts that the clothing and footwear segment in China will grow by an average 10 percent annually between 2018 and 2022.
To this end, last year saw Fujian Septwolves Industry Co. Ltd. acquire a stake in Karl Lagerfeld Greater China Holdings while Shenzhen Ellassay Fashion Co. Ltd. purchased a majority stake in Vivienne Tam’s China rights. One of the pending deals involves luxury footwear and accessory brand, Bally. “Shandong Ruyi Group, currently based in Shanghai, has been increasing its investment in the fashion segment and is now looking to acquire the Swiss luxury brand for a price of approximately $700 million,” says Singh.
Bally declined to comment on the deal, which analysts believe is imminent. An injection from Shandong Ruyi, a textile firm, could make sense for Bally given the former’s growing portfolio that now includes Gieves & Hawkes, Aquascutum and the company behind French contemporary brands Sandro and Maje. Meanwhile, Bally’s current owners JAB Holdings are said to be offloading most of their luxury assets.
Gordon Orr, senior advisor to McKinsey & Company and former chairman of the firm’s Asia division, believes that the value upside of reaching just a fraction of the hundreds of millions of middle-class consumers in China is often worth creating an option by buying a brand with local exposure. “For smaller brands, the acquiring company may also have a scale that allows them to move to new levels of efficiency in sourcing and production,” he explains.
While some recent investees are brands with well-established divisions in China, others are not. But Orr believes that the common theme is a belief in the Chinese investor and in the value-creation opportunity to grow the investees business in China. “This is often on the basis that the investor has access and capabilities in China that the investee does not,” he told BoF.
In particular, Chinese consumer-facing companies can also bring distinctive digital capabilities to a non-Chinese target as a result of their experiences in what Orr describes as the “online everything” China market.
However, he cautions that “if Chinese investors are not familiar with the industry or are making their first international acquisition, they can become frustrated by things like the volatility of returns and the high, seemingly arbitrary cost of talent. Depending on their sources of funding, they may have allocated a specific amount of capital to the acquisition and if further capital is needed post-acquisition, they may not have ready access [to] more funds [thereby] delaying expansion.”
Orr also warns that it can go wrong if the investor has minimal experience in the relevant industry in China or if the cultural mismatch between owner and management is insurmountable. “The latter has more chance of occurring if the transaction is the Chinese company’s first international deal. If they have a portfolio already, they will have gone through a learning curve and the chances of success are higher. Well executed, these deals are a win for both parties.”
Fosun International recently entered into exclusive acquisition talks with high-end Italian lingerie brand La Perla. And at the affordable end of the spectrum, German-Dutch fashion chain C&A is reported to be close to selling the company to an undisclosed Chinese investor.
In December, Chow Tai Fook heir Adrian Cheng made a significant stake in Moda Operandi through two of his investment vehicles, K11 Investments and C Ventures. Through the former, Cheng invested $10 million in US-based artificial intelligence company ObEN and through the latter, he has taken stakes in luxury fashion rental start-up Armarium and upscale fitness brand Bandier, among others.
Meanwhile, in London, Chinese investor Wendy Yu revealed details of her minority stake in the Mary Katrantzou brand. The deal was carried out in October 2017 by Yu Capital, a division of Hong Kong-based Yu Holdings, founded by Yu, who also serves as chief executive.
Chinese investors tend to set high targets and let management get on with the day-to-day operations, says Orr. “Provided management hits the targets, intervention from new owners or investors is likely to be modest. If targets are not hit, oversight becomes closer, although they tend to be slow to move to actually replacing management in the investee company.”
The announcement last week of Shanghai-based Masha Ma International securing an additional $40 million funding from Korean and Singaporean investors illustrates that that not all investment is outbound. The local Chinese fashion sector is also proving attractive to Asian investors and observers believe that Ma could evolve into a global talent under the leadership of new chief executive Jimmy KW Chan.
As an expert in nurturing talent across brand management, retail and technology from his Hong Kong-based company Semeiotics, Chan thinks investments are coming inbound to China because it is a relatively blank canvas with a greater possibilities for innovation. Speaking of Ma’s new injection, he says, “Commercially speaking, I have no doubt there will be a significant emphasis on the domestic market due to its consumption power. But from its inception, Masha Ma International was set up to compete on a global platform. So we are looking forward to executing a duel strategy.”
In Other News…
New York Fashion Week reveals ‘China Day’ line-up. Looking to put Chinese fashion brands on the map, Alibaba’s e-commerce platform Tmall is hosting the first “China Day” at New York Fashion Week. The event, which will be held on February 7 and focused on menswear, will include participation from mainstream brands Li Ning and Peacebird to private labels Chen Peng and Clot by Edison Chen. Tmall is also rolling out a “Designer DT Innovative Plan,” which aims to support five private Chinese labels with revenues exceeding 100 million RMB this year.
Fashion brands clamp down on pollution in China. A new joint project by the Institute of Public & Environmental Affairs (IPE), a non-profit environmental research organisation in Beijing, and the Natural Resources Defense Council (NRDC) enables brands to capture their pollution record in mainland China. Essentially a map that shows pollution production in real-time, the initiative updates every two hours and aims to enable companies to benchmark their suppliers. Mass-market fashion companies such as Inditex, Target and Gap, as well as sportswear brands like Puma, have all signed up to the venture.
Mo&Co launches menswear line. The Guangzhou-based EPO Fashion group’s Mo&Co. has launched a menswear line with a runway show in Shanghai. Entitled “Common Gender,” it is styled by Xander Zhou and is aimed at males aged between 20 and 40, with product lines available from August 2018. The launch comes as the menswear market is experiencing steady growth in China; according to Euromonitor, China's menswear market is predicted to reach 585 billion RMB ($89 billion) by 2020.
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Editor's Note: This article was revised on 2 February, 2018. A previous version of this article misstated that Xander Zhou was the creative director of Mo&Co's menswear line, 'Common Gender.' This is incorrect. Zhou is the stylist for the label.