Awkward seat in the lap of luxury
- By Lu Nengneng
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E-mail Shanghai Daily, March 15, 2012
Almost all the luxury brands sold in China are from the US and Europe. The local luxury goods industry is still in a nascent stage. Most of the hard-earned money Chinese luxury consumers splash out for these status symbols ends up in the pockets of overseas operators of luxury powerhouses. Very little of it trickles down the industrial chain to the Chinese companies who actually make the products carrying high-end names.
Back in 2007, the Chinese media found very pricey handbags and clothes advertised as "handcrafted in Europe" that were actually made in workshops in Guangdong and Zhejiang provinces.
Luxury houses are reticent to disclose where their products are made, fearing that knowledge might blemish their reputation. A label saying "Made in Paris" seems to have more cachet than one that says "Made in China."
However, the World Luxury Association reckons that up to 60 percent of luxury brands had set up their own production lines in China by 2009. Labor reportedly constitutes less than 10 percent of the overall cost of luxury goods.
At the same time, many luxury brands started an aggressive expansion into China's second- and third-tier markets to compensate for lackluster sales in the West. That's been good news for commercial property owners in China, who often offer rent discounts to luxury stores just to get their gleaming storefronts into their portfolios and raise the value of their properties.
That's been bad news for medium and smaller-size brands who struggled with retail rents that last year soared 30 percent, and even up to 100 percent in some cases, according to China Chain Store and Franchise Association.
But that's not what worries me the most. The increase in domestic luxury spending may have little impact on driving China's economy in the near future, but I believe the "pre-mature consumption" it unwittingly encourages will become a whipsaw in the long run.
Bain & Co reckons that growth of luxury consumption in China soared 25 percent to 30 percent last year, far outpacing the nominal increase in per-capita disposable income per capita, which stood at 14.1 percent.
Even though China's per-capita income still ranks around 100th globally, the euphoria of China becoming the luxury-goods capital of the world persists.
I hope everyone is not getting too carried away. Mainland luxury shoppers spent record US$9 billion during the Spring Festival holiday this year, even amid risk of a slowing Chinese economy. Perhaps it's time to create wealth rather than flout it.
Stark reminder
Japan should stand as a stark reminder. The cult of luxury brands started there in the late 1980s amid overheated market speculation and rampant consumerism, after the Japanese government lowered interest rates to try to boost manufacturing upgrades. The cult crashed when the asset bubbles burst in the early 1990s, plunging Japan into a decade-long recession.
In 2009, China unveiled a 4 trillion yuan (US$ 631 billion) stimulus package to stave off the effects of the global financial crisis, reduce the nation's over-reliance on exports and boost domestic demand. I sincerely hope we aren't in the process of squandering that precious money and the chance for meaningful economic transformation along with it.
