Hello BoF Professionals, welcome to our latest members-only briefing. China’s colossal size and dynamism makes it a top priority for any global business, but it remains opaque to many in the fashion industry. Leveraging our rare access and local knowledge, the BoF China team demystifies the Chinese market with weekly industry analysis and the wider socio-cultural context you need to sharpen your focus.
BEIJING, China — With other parts of the global economy cooling more rapidly, China is coming under increasing pressure to play nice, not just from the United States, but also Europe.
On March 12, the European Commission set out a plan for what it describes as more balanced economic relations with China. The goal is for the EU “to strengthen its competitiveness, ensure more reciprocity and [a] level playing field and protect its market economy from possible distortions,” said Jyrki Katainen, European Commission vice-president responsible for jobs, growth, investment and competitiveness.
The fashion and luxury goods sector is just one of many ways that Europe and China are closely intertwined economically. China is Europe’s single biggest export market, while Europe is China’s second biggest export market after the US — the Middle Kingdom’s exports to the EU in January rose 14.5 percent year on year, while exports to the US fell 2.8 percent.
The European Commission's latest move puts the relationship between Chinese consumers and European brands into the spotlight. The former are the world's biggest spenders on luxury fashion and accessories, accounting for a whopping 33 percent of the global market, according to a new report by Bain & Company. If figures from the likes of European behemoths like Prada, LVMH and Kering are any indication, the latter continue to rely upon the former for a significant chunk of their revenues. But is the luxury sector safe from the mounting trade tensions between the two powers?
Though China’s economy is growing at its slowest pace in three decades, luxury is still going strong. China’s luxury market grew 20 percent for the second year in a row, according to Bain — it is now worth an estimated 170 billion yuan, up from 117 billion yuan in 2016.
By 2025, Chinese consumers will buy half of their luxury items in China, almost double current levels.
Within luxury, buying patterns are beginning to change. China’s domestic luxury purchases have risen from 23 percent to 27 percent between 2015 and 2018, driven by a reduction in import duties, stricter control over grey markets such as daigou (luxury shopping agents) and brands’ efforts to harmonise their prices globally.
In fact, by 2025, Bain predicts that Chinese consumers will buy half of their luxury items in China, almost double current levels. Coupled with a weakened consumer appetite for luxury, this is already hurting groups such as Prada, who saw an 11 percent share slump (the group’s biggest one-day drop since September 2017) on March 18, which it attributed to Chinese tourists reining in spending in Hong Kong and Macau.
According to Bruno Lannes, a Bain & Company partner based in Shanghai and the author of the report, this repatriation began in 2015 and can be traced to brands' harmonised pricing policies as well as government incentives aimed at boosting domestic consumption. “There are still some consumers that never consider buying outside, particularly millennials because they are looking for newness and they are buying for themselves," Lannes tells BoF. "They’d prefer to buy locally anyway.”
If Beijing wants to keep luxury purchases happening inside the country, it's a win-win for the government's domestic consumption goals as well as Europe's luxury exports. "If the Chinese government decide against those types of products, they already know what's going to happen: they're going to re-trigger consumers to buy those products outside China," Lannes continues. "It's one of those areas the Chinese government will be happy to say, look, we are importing as much as we can, and we're helping by making those purchases more official."
What's more, China's impact on European fashion industry performance is being felt by non-luxury players as well. "What we are currently focusing on is the opportunity that China provides for premium heritage sportswear brands," says Marc-Olivier Arnold, chief strategy officer at RTG Consulting Group. "This category has been experiencing a real renaissance and revival in global markets, where consumers feel that sports heritage is trendy again."
"There’s a whole new generation of Chinese consumers who are not willing to wait," Arnold tells BoF. "They are much more spontaneous with their luxury spending. The increased investment by savvy luxury brands into the shopping experience, whether its physical or digital, makes it more compelling for them to buy domestically."
On first glance, it appears that the luxury sector may be relatively insulated from increasingly thorny trade relations between Europe and China. But there are wider issues at play which could eventually make an impact.
Like the US, Europe has a significant trade deficit with China. It reached €177.7 billion ($200.4 billion) in 2017 (the last year for which data is available). While this is roughly half the deficit the US had with China in the same year, it still represents a formidable gap.
The European Commission’s ten-point-plan is its attempt to narrow this gap, by addressing Chinese subsidies, state ownership and state financing, among other factors they say give unfair advantage to local businesses. It also seeks to raise environmental and labour standards that help keep the prices of Chinese products low. It remains unclear what impact the plan would have on the luxury industry — if any.
Much of the Commission’s recommendations mirrored those expressed further West.
But the plan came too late for Italian prime minister Giuseppe Conte. In a snub to Washington, Conte drafted a memorandum of understanding (MOU) to join China’s Belt and Road initiative out of frustration with the EU’s earlier inaction on the EU-China trade deficit, an eighth of which came from Italy alone. If Italy signs up, it will become the first G7 nation, first founding EU member and the biggest economy yet to join President Xi’s flagship initiative, and four Italian ports could see Chinese investment as a result.
In the meantime, much of the Commission’s recommendations mirrored those expressed by the US. In addition to similar protections, it also urged China to make greater progress on human rights and climate change, and for the EU to take a unified approach to the security of its 5G networks — all topics that Washington has broached with Beijing.
“The balance of challenges and opportunities China presents has shifted,” the European Commission said in a press release. They described China as “an economic competitor in pursuit of technological leadership, and a systemic rival promoting alternative models of governance.”
Chinese foreign minister Wang Yi disputed the “systemic rival” label, and proffered his own 10-point plan for joint action on bilateral ties in Brussels on Monday.
EU leaders will discuss the European Commission’s plan at the European Council summit in Brussels on March 21.
FASHION & BEAUTY
Supreme Italia Keeps Up Appearances
Supreme Italia — the label that Samsung announced a collaboration with in February, only to have New York-based Supreme deem it a “counterfeit organisation” — has been busy with a perplexing number of so-called store openings. On March 7, local media outlets reported that IBF-owned Supreme Italia opened its first physical store in Shanghai’s Huangpu district, and another opening will take place this week ahead of the seven-story flagship in Beijing’s Sanlitun that was announced at Samsung’s press conference. Images of the store depict a broad range of Supreme knockoffs, from T-shirts to look-a-like suitcases from Supreme’s Rimowa collaboration, with items retailing from the hundred to the thousand-yuan mark. However, Supreme has told Hypebeast that the store has yet to open, bloggers have been paid to “line up” for entrance and the products photographed aren’t legally allowed to be sold, as Supreme Italia does not have a registered trademark in China. Regardless, Supreme Italia’s much talked-about presence in China is growing into an IP nightmare for the American streetwear stalwart. (Hypebeast)
At China’s Largest Trade Show, Domestic Players Dominate
CHIC, China’s largest fashion trade show, was held in Shanghai last week and despite growing labour and environmental protections in China, smaller European brands are still struggling to compete. Although CHIC has tripled in size in the past 20 years, the proportion of international exhibitors has declined from 33 percent to 10 percent and the Italian Pavilion at CHIC Shanghai dropped to 19 exhibitors this year, down from hundreds in the past. “Nineteen is a very small number for us,” said Valentina Petroli, deputy trade commissioner of the Italian Trade Association. “We still don’t know if we will come back,” she told BoF. On the flip side, native brands are enjoying their growing goodwill among local consumers. “We’re very happy to see Chinese consumers are happy with domestic brands,” said Chen Dapeng, president of CHIC and executive vice president of the China National Garment Association. “Before they thought Chinese brands were not good enough, but now they see there are many good brands.”
Labelhood’s Class of Autumn/Winter 2019, Revealed
Shanghai’s leading fashion brand incubator Labelhood has revealed its upcoming roster of designers, slated to show their collections at this month’s Shanghai Fashion Week Labelhood presentations, which are themed “think tank” and set to span March 28 to 31. A few of the 19 names will ring a bell, such as Sirloin, Shushu/Tong, BoF China Prize finalist Caroline Hu and BoF 500-named Angel Chen. Joining the line-up will be Anaïs Jourden, M Super Avenir, Redemptive, Yajun Studio, Märchen, Ming Ma, Museum of Friendship, Oude Waag, Samuel Guì Yang, Susan Fang, Swaying, Thelawn, VIIIII, Yingpei Studio and Yirantian. Of the 19 designers, Caroline Hu and Susan Fang have also been nominated for the LVMH Prize. “Shanghai Fashion Week’s schedule is getting more and more jam packed with exciting new names. For Labelhood’s seventh season, we chose ‘think tank’ as a theme to highlight the importance of the new and now to our work,” Labelhood co-founder Tasha Liu tells BoF China. “What happens after the new isn’t the old, but the professional and mature.” (BoF China)
Additional reporting by Denni Hu.
TECH & INNOVATION
Can Facebook Emulate WeChat?
Soon after Facebook’s Mark Zuckerberg announced his plans to integrate Facebook’s messaging services to form “a privacy-focused messaging and social networking platform,” commentators were quick to draw parallels to Tencent-owned super app WeChat. Tech users outside China have come to rely on standalone apps to access various services, so Facebook is unlikely to execute a full-blown single-app ecosystem. However, certain pages can be taken from Tencent’s book to elevate its platforms: for starters, replicating WeChat’s mini program model (via integrated web-based apps) to allow user access to other goods and services, upping the ante on virtual payments and continuing to monetise and grow its ("WeChat moments"-like) WhatsApp stories function. (The Street)
Lawsuits A-Coming for Chinese Start-Ups
Chinese start-ups have a patent problem. In spite of the trademark and patent registration boom that has accompanied the growth of Chinese innovation, patent attorneys and agents are filing lackluster patents that offer weak protection against competitors and could expose their clients to big IP lawsuits. A lack of experience is to blame: Chinese start-ups only began filing major patent claims in the last few years, and attorneys are paid in a lump sum (rather than by an hourly rate), encouraging them to get the job done as quickly as possible. Meanwhile, start-ups are subsidised according to the number of patents in their name, rather than the quality of their IP protection, resulting in a large number of extraneous registrations, easily circumvented by competitors. Many companies will soon be learning the hard way that quality — not quantity — will arm them with the rights to compete in China’s tech sector. (Technode)
High Tech Enables Beauty Buys
For companies looking to meet growing demand from China’s tech-savvy customers, beauty is the next frontier. Beauty brands are scrambling to make it easier for customers to try on their products — take Alibaba’s beauty mirror, equipped with an AI-powered smart speaker that offers beauty tips and can order cosmetic products on the e-commerce giant’s Tmall platform. While cosmetics are continuing to defy China’s economic slowdown, retailers are betting on tech to keep up the momentum and it is working: according to Mintel, one in five respondents had tried virtual makeover services using augmented reality tech. (Nikkei)
CONSUMER & RETAIL
Hermès’ Birkin-Hungry Shoppers Prove Their Loyalty
Six-figure price tags aside, it is notoriously difficult to buy an Hermès bag. But according to a March 15 report by the Shanghai Morning Post, the Parisian fashion house is taking this to new extremes, whereby staff in its stores made bestselling Birkin, Kelly and Constance styles available to customers only after they spend 60,000 to 80,000 yuan (approximately $9,000 to $12,000) on scarves, jewellery and other leather goods. On March 14, reporters phoned Hermès China’s customer service hotline to ask about these so-called “accessorial buys,” and was met with a firm denial by the representative, who went on to state that the store in question had violated its rules and would be dealt with accordingly. (Shanghai Morning Post)
Lipsticks and Down Jackets Make Consumer Rights Day Headlines
On March 15, state-run broadcaster CGTN aired its annual “315” consumer rights show, which serves to remind China’s increasingly diligent shoppers not to let their guard down. In Nanjing, local police uncovered an underground factory which made and sold counterfeit cosmetics resembling L’Oréal and SK-II products. The run-down factory produced over 10,000 lipsticks a day, and has reportedly sold its products through influencers, livestreams and other social media marketing channels. Meanwhile, a shopper that bought a Canada Goose jacket on NetEase-owned e-commerce site Koala caused a social media scare when she doubted the product’s authenticity on Weibo, though the brand later verified the jacket’s authenticity. (Sina, Jiemian)
JD.com Boosts Brand Sales with Consumer Insights
Since partnering with JD.com, the likes of Huggies and Head & Shoulders are benefitting from the Chinese e-commerce giant’s wealth of consumer feedback data. Since incorporating JD.com’s data into its R&D process, sales of Huggies’ new collection accounted for over 62 percent of the brand’s sales on JD, while Head & Shoulders’ new natural hair care line (a move influenced by JD.com’s customer analysis findings) hit sales of over 10 million yuan in its first four months. It’s almost certain that the Chinese e-commerce giant will go on to roll out consumer insights for foreign fashion and beauty brands on its platform, which already boasts storefronts for the likes of Adidas, Uniqlo and Levi’s. (JD.com)
POLITICS, ECONOMY, SOCIETY
Goths Protest Discrimination With Selfies
On March 10, a netizen posted on Weibo about how she was made to remove her goth makeup at a Guangzhou metro station after a female security guard said her look was "problematic" and "horrible." Upon a further web search, she found that she wasn't the only one, and the Guangzhou metro authorities have apologised for mishandling the incident. In the meantime, the topic #ASelfieForTheGuangzhouMetro has been discussed 8,368 times and viewed 7.4 million times, as goths have flooded in to protest the alleged discrimination by posting selfies of their bold makeup looks. (Sina)
Greater Bay Area Plans Threaten China’s Largest fabric Market
Following the implementation of President Xi Jinping’s Greater Bay Area plan — aiming to turn Guangzhou and surrounding cities into an innovation, industry and finance hub to rival Silicon Valley — rapid urbanisation will replace Guangzhou’s Zhongda fabric market with an international innovation centre. Spanning five square kilometres (one and a half times the size of New York’s Central Park), the market is China’s largest and houses 20,000 merchants, who will be relocated 100 kilometres away, or an hour and a half’s drive from its current location. The market’s ecosystem has come to represent traditional low-tech trading and manufacturing, and the upcoming move could disrupt the procurement process for garment companies and factories in the province — one merchant warned that “Guangdong’s entire garment factory could fade away” as a result. (SCMP)
Beijing Retaliates in US-China Human Rights Spat
Beijing has fought back about secretary of state Mike Pompeo’s statement to reporters that China was “in a league of its own when it comes to human rights violations,” following the release of the US State Department’s annual Country Reports on Human Rights Practices. On March 14, the Chinese foreign ministry spokesman Lu Kang deemed the US’ report prejudiced, and encouraged the nation to “take a hard look” at its own record of gun deaths, racial discrimination and media freedom. Considering Beijing’s lack of concern about its so-called detention camps in Xinjiang and the administration’s crackdown on human rights lawyers and activists, it’s safe to say that neither country is in the clear, but as trade tensions are mended, other sources of conflict can just as easily arise. (The Guardian)
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