CHINA Archives

04/02/2014by EOS Intelligence EOS Intelligence No Comments

Vietnam’s Macroeconomic Environment: FDI Paving the Way for Growth

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2013 was the sixth consecutive year since Vietnam first witnessed macroeconomic instability. With high inflation levels, a collapse of the banking system, and relatively lower growth levels compared with its Asia-Pacific peers, the economy faced immense pressures. However, thanks to continuous efforts by the government to uplift the economy as well as the presence of several inherent benefits that Vietnam offers to foreign corporations, the economy has been resurging, largely on the back of soaring FDI.

Vietnam has faced several economic pressures since 2008, which resulted in high levels of inflation, stagnated growth, and a crumbling financial system primarily led by rising bad debts and loss of liquidity. This also brought a negative impact on the real estate sector and its periphery industries. Over the past few years, the country has struggled to find its ground and has undertaken several policy measures to instigate investor interests. In fact, the Vietnamese government is largely focusing on increasing FDI investment levels and exports as the key tools to pull its economy out of stagnation.

The government made substantial moves with regards to economic policies. These initiatives, which led to a boost in the country’s FDI in 2013, included:

Equitization of 573 state-owned enterprises (SOEs), wherein foreign investors are eligible to hold stake in SOEs with few conditions
Tax allowance that reduces corporate income tax from 25% to 22% from January 2014 and further to 20% in January 2016
The approval of a scheme to enhance FDI management in Vietnam

These efforts by the government appear to have started yielding results, as the registered FDI rose by 95.8% to US$13.1 billion during the first 10 months of 2013, and the disbursed FDI rose by 6.4% year-over-year to $9.6 billion for the first 10 months of the year.

In addition to these initiatives, the government has stepped up to strengthen the country’s banking sector since 2012. Over the past two years it has significantly reduced average lending rates, equitized four state-owned commercial banks, and set up Vietnam Asset Management Company, a state-owned company created solely to purchase bad debt from existing banks in order to clear their books. This company purchased bad loans worth about US$1.6 billion in 2013. In an effort to further speed up the restructuring of the banking system, the government announced that it would increase the allowed limit for foreign strategic investors to invest in a domestic financial institution from 15% to 20% in February 2014.

The government efforts to stimulate FDI have also been supplemented by the existence of several positive intrinsic factors that Vietnam boasts off. The country remains an attractive investment destination thanks to its abundance of natural resources and cheap labor availability (according to JETRO report, monthly pay for general workers in Vietnam is about 32% of levels in China, 43% of that in Malaysia and Thailand, and 62% of that in Indonesia). The country also offers a young and dynamic consumer base domestically, as well as favorable conditions and location to supply within the subcontinent. It also enjoys a stable political environment, a significant advantage over several of its neighbors.

The resurfacing of negotiation talks regarding Vietnam becoming a member of The Trans-Pacific Partnership (TPP) is also positive news for the export sector, which is expected to receive a significant boost with the signing of the agreement (especially in the area of garments, footwear, and wooden furniture). This will also ease investment inflow in Vietnam from other TPP members.

Backed by the aforementioned factors and a robust young population, several sectors in the country are registering a double digit growth and intensified attention from foreign investors.

Vietnam’s aviation sector, for instance, is expected to be the third-fastest growing sector globally with regards to international travel and freight, and the second-fastest with respect to domestic travel in 2014.
The electronics sector has also witnessed keen interest from foreign players. Nokia, a leading telecom handset player, opened its first factory in Vietnam in 2013. Samsung and LG have announced plans to build factories in the country primarily for export purposes.
Retail, consumer goods, and tourism are some of the other best performing sectors with strong growth potential in the near future.
Moreover, in anticipation of the TPP agreement, Wal-Mart is also exploring investment opportunities in Vietnam that would entail sourcing of several products, such as clothing and footwear, entertainment, home appliances, toys and seasonal goods.

It is clearly visible that Vietnam is on the right path of growth and expansion, nevertheless, there is still a long way to go. While the FDI levels rise, the government has to channelize this investment to develop support industries and high-quality workforce to sustain growth. Moreover, while Vietnam enjoys abundant natural resources and cheap labor that attracts FDI, these factors remain exhaustible, especially in the light of new investment hotspots (such as Myanmar) emerging. Therefore, in addition to just focusing on economic policies, Vietnam must work towards creating better investment climate to lure FDI. The country’s legal framework still presents several hurdles to foreign investment and the country ranks very poorly on the global corruption index (114 out of 177 countries). While it is almost certain that Vietnam will continue to see an inflow of foreign investments, it is to be seen if it can use this to achieve sustainable growth for its economy.

27/01/2014by EOS Intelligence EOS Intelligence No Comments

Mongolia – Mining in China’s Backyard

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Mongolia, uninteresting and perhaps almost forgotten to the rest of the world until just recently, has turned out to become of the world’s largest untapped mining centers. The country houses minerals worth over US$ 1 trillion, thanks to which it has the potential to become one of the most prosperous economies in the East. We take a closer look at Mongolia’s potential, its background, most relevant advantages, and challenges that continue to put a brake on the country’s development. Read Our Detailed Report.

28/10/2013by EOS Intelligence EOS Intelligence No Comments

E-commerce in China – Intensive Competition In Spite of Low Penetration

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In the concluding article of our E-commerce Challenges in the BRIC series, we highlight the challenges faced by online retail companies in China. While China is one of the rapidly growing online retail markets, we discuss how aspects such as growing local competition, infrastructure deficiencies, issues with online security for buyers, and heavy dominance of price-based competition hinder the expansion of e-commerce in the country.

Given the Chinese economic growth story, good performance of its e-commerce market comes as no surprise. Exploding middle and upper class, rapidly growing disposable incomes, rising internet penetration, fascination with foreign brands and mobile solutions, all add up to a perfect scenario for online retail to flourish.

According to McKinsey & Company, China’s online retail market, estimated at US$210 billion in 2012, is the world’s second largest market after USA. It is expected that by 2015, it will reach US$305 billion and surpass the US market, having grown at a CAGR of around 34% during the 2010-2015 period. With the size of even up to US$650 billion by 2020, the momentum is expected to continue, especially that industry analysts emphasize that in China’s case, e-commerce has strong effect of generating additional consumption, and not only drives change of sales channels from the otherwise existent off-line sales.

Thanks to the favorable dynamics, Chinese e-commerce has been named the most promising destination for online retailers, which found reflection in China’s first position in AT Kearney’s 2012 E-commerce Index. Unlike in other markets, Chinese e-commerce space is dominated by virtual market places, where a plethora of merchants sell their products, without the need to invest in opening and managing own online stores. However, aspects such as these, along with other specific characteristics of the market, make doing e-commerce business in China a challenge.

The Challenges

Strong and consolidating position of local players – the Chinese e-commerce market is dominated by Alibaba’s consumer-serving arms: consumer-to-consumer e-commerce platform, Taobao, and business-to-consumer marketplace, Tmall, which together account for close to 90% market share. Several local and foreign merchants, such as Microsoft, are increasingly joining Tmall and other e-marketplaces (as opposed to opening own online stores) to sell their products online to Chinese consumers, which leads to further consolidation of Alibaba’s position in the market. While the market is growing and space is expanding to absorb new entries, such strong and established local players are a significant challenge for newcomers, as well as existing online retailers.
Dominance of price-based competition – despite strong local players both in the field of direct online retailing as well as e-marketplaces, majority of them do not offer any particular differentiating factor or unique proposition. However, what makes competing with them particularly difficult is their ability to slack the prices and enter into price competition. With price being the key platform of competing, achieving profitability is very difficult, or even impossible, for instance, for retailers who sell imported products subject to high import duties.
Considerable infrastructure deficiencies – Infrastructure woes are a common challenge affecting e-commerce markets developing across all BRIC markets, including China. Only metropolitan areas have sufficient infrastructure to ensure that product delivery can reach in time (and reach at all). In rural areas and locations far from main hubs, there is no guarantee the orders will reach the customer, as the road infrastructure and delivery services tend to be non-existent or fragmented. The infrastructure issues are often indicated as the biggest challenge that hinders realization of the country’s full e-commerce potential, as online retailers are not able to control and improve the entire supply chain. This challenge is particularly difficult, given the already high expectations of Chinese online consumers, who not only expect wide selection and attractive prices, but also excellent and fast services, including short delivery times.
Insufficient security solutions for consumers to shop online – despite numerous industry analysts agreeing that the market will continue to grow with large numbers of consumers joining the online shopping crowd, there is a common consensus that security-related risks in China are still significant. This includes issues such as product quality, payment security, information security, consumer rights protection, illegal transactions, etc. All of these aspects still significantly impact consumer trust, deterring many of them from shopping online. Also, e-commerce providers have little control over these risk factors, as the security of online payment is handled by a third party. Cash-on-delivery method is not very popular due to other risks (robbery, fraud, etc.), which drives some e-commerce companies to partner with security services providers or to double the number of own couriers sent to deliver the order and collect the payments, to eliminate fraudulent activities (which generates considerable costs).
Low internet penetration in rural areas of the country – while the overall internet penetration is increasing, majority of this growth occurs in urban and metropolitan areas. Currently, it is estimated that not more than 35% of Chinese population uses internet, a ratio below levels in many developing countries. As large proportion of Chinese consumers is still located in the countryside, the internet usage growth confined to the cities limits the internet user base growth for the time being. Moreover, rural-based consumers are not very likely to start using the internet and build an interest in online shopping very soon. Therefore, e-commerce players are challenged with having their customer base currently limited mostly to tier 1 to tier 3 cities.

E-commerce in China is booming, in spite of several teething problems around infrastructure, online and offline security, and low internet penetration. The bigger challenges, however, impact new entrants, which are faced by a highly intensive competitive environment and a market driven purely by price competition. E-commerce will continue to grow in China; there is no question about it. The pace of growth will depend on how the market environment changes to mitigate the risks emanating from the current set of challenges.

05/09/2013by EOS Intelligence EOS Intelligence No Comments

Strike On Syria – Potential Impact On Emerging And Frontier Markets

Though there is still uncertainty of the US military action on Syria, global markets seem to have already given an indication of what could be in store if it actually happens. Crude oil prices rallied in the last week of August amid indication of strike, followed by a fall in oil futures, as the fear of imminent action receded. In another instance, share markets showed signs of panic due to a false alarm regarding missile attack on Syria (which eventually turned out to be an Israeli missile testing exercise).

The possible US strike on Syria has implications for global economy, and specifically for emerging economies, which are experiencing economic slowdown. The situation could be a tough test for countries such as India and Indonesia, as both of them struggle to keep trade-deficit under control, and are under the watch of credit rating agencies. For countries such as Brazil and Mexico, the US action may lead to delayed economic recovery. For Russia, being one of the largest oil producers, political implications are more than the economic one in case of a unilateral US action (i.e. without UN backing) on Syria.

While a sense of uncertainty and urgency prevail globally, we take a look at what potential impact the strike might have on select emerging and frontier markets.

27/08/2013by EOS Intelligence EOS Intelligence No Comments

E-commerce in Brazil – Marred By Political and Social Influences

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The opportunities for e-commerce offered by several emerging countries, such as the BRIC, has been analyzed at length, and quite rightfully so, given their expanding economies, growing middle class, soaring disposable incomes, paired with higher internet and mobile penetration. While the opportunities coming from these transformations are plentiful, e-commerce markets in the BRIC countries also face serious challenges to their development, some of them common across all four countries, some unique to single markets.

We explore these challenges in a four-part series to understand the major roadblocks influencing growth of the e-commerce industries across Brazil, Russia, India and China.

Brazilian consumers are still relatively new to e-commerce, with current propensity to shop online often compared with the penetration rate witnessed in the US market in 2000-2001. This might seem like a small market, however, the e-commerce growth in Brazil is strong, estimated at 21% during the first half of 2012. According to AT Kearney, Brazil’s 80 million Internet users spend about US$10.6 billion online annually, the largest online spending across Latin American markets. Brazilians are expected to spend US$18.7 billion per year by 2017. These might be modest estimates, considering that eMarketer, a digital marketing portal, already forecasts that retail e-commerce sales in Brazil will grow by 14.8% in 2013, to reach US$13.26 billion. While the market appears to be poised for a very promising growth period, several challenges will continue to put a break on sudden growth.

The Challenges

Troublesome and bureaucratic procedures to set up and run e-commerce business – these structural problems make it difficult for local and foreign players to enter the e-commerce market (or set up a business entity in Brazil in general). Burdensome regulations and procedures mean that it might take even 6 months to establish an e-commerce entity. Further, while operating, the entities are often challenged by frequent litigations and lawsuits over variety of issues (e.g. the domain used). Even with no litigations, Brazil has a generally paperwork-heavy business environment, and this is particularly challenging in a relatively new industry such as e-commerce. All these difficulties have led to Brazil being placed at 130 (out of 150) rank in World Bank’s Ease of Doing Business in 2013 (behind countries such as Ethiopia, Yemen, Uganda, or Pakistan).
Inadequate e-commerce regulations – while setting up a business appears overly bureaucratic and regulated, several aspects of e-commerce operations are under-regulated, affecting clarity and smoothness of operation as well as consumer trust. Legislation is slowly, yet gradually being introduced, e.g. only in mid-2013, a seemingly basic and obvious requirement was introduced for e-commerce entities to clearly and visibly display their registration numbers, contact details, purchase terms and conditions, and customer’s rights. While this step is likely to help build customer trust, it covers just a tip of regulations necessary in the market.
Inadequate infrastructure affecting order delivery – the country’s weak and immature infrastructure has a negative impact on orders shipping. Brazil is a country with vast territory, and majority of transportation is done by road. The country’s road infrastructure (both city streets and highways) are in poor condition, many of them unpaved, affecting safety, delivery time as well as damaging the cargo and trucks. Overall, receiving a delivery package by a customer located outside of major Brazilian cities stretches to a week at a minimum, with frequent cases of customer complaints about packages not arriving within two weeks or more.
Underdeveloped shipping and delivery services – while delivery services are available, many of them are provided by small, often family owned companies, that have limited coverage area and lack parcel tracking systems, thus there is generally inadequate availability of reliable courier services. The government-owned national post, (Empresa Brasileira de Correios e Telegrafosand), does not commonly offer parcel tracking options, inviting fraud, and is considered unreliable and slow.
High taxes and complicated tax structure – issues with taxes are often placed amongst top challenges of e-commerce in Brazil. Taxes are high and numerous, which significantly increases overall costs – duties, taxes and fees can double the original price of a product, and can vary considerably depending on product category. Payroll taxes in business innovation sectors reach even 80%. It is estimated that on average, business owners and executives spend 30% of money and 50% of time on dealing with tax-related issues. Further, complex tax structure drives added costs for lawyers and accountants compensation in order to navigate through various issues with the tax regulators and facilitating tax differences between Brazilian states (as there is no uniform tax across the country).
Insufficient talent availability – Brazil’s expanding e-commerce market creates jobs that are difficult to fill, given the shortage of qualified workers, people with e-commerce experience or at least an understanding what a particular e-commerce job entails, e.g. e-commerce web designers, experienced IT and business process professionals or high-quality, competent customer service specialists. The lack of good customer service acts as a deterrent to customer base growth, as according to McKinsey’s Consumer and Shopper Insights from July 2012, Brazilian shoppers who no longer shopped online listed previous bad experience with customer service amongst key reasons for turning away from online purchases.
Online payment security concerns – the lack of trust amongst Brazilian consumers towards safety of online purchases and transactions, deters many of them from buying online and using internet banking in general. Therefore, the predominant payment option that is currently used and preferred by customers is the ‘boleto bancario’, a code receipt that is generated on the website during the purchase, printed by the online shopper and later taken physically to a bank or a post office where the payment for the purchase is made. On the one hand it allows to satisfy consumers concerns about payment safety and to tackle the issue of many users not having credit cards or internet-purchases enabled debit cards. On the other hand, however, it is contrary to the very concept of shopping online (i.e. without the need to physically go to the shop), and extends the entire process of completing the purchase. Further, in order for e-commerce entity to offer ‘boleto bancario’, it should be led by a Brazilian citizen or at least in partnership with a Brazilian citizen. While foreigners can fulfil prerequisites of offering ‘boleto bancario’, the process of filling those requirements is lengthy and difficult, especially when compared with PayPal functioning in several other markets.
Installments shopping culture – Brazilian customers are used to, and hence expect payment options that allow for multiple and no-interest instalments or delayed payment options, resulting in e-commerce entities requiring higher working capital to finance purchases while the customers’ payments for current purchases are received after several weeks. Further, bank involvement to handle the instalments increases costs for online retailers, since bank receives a commission (which is not paid by customers as their instalments are zero-interest).
Language barrier – while this challenge might not be of particular relevance to domestic start-ups, international online retailers find it demanding that the entire e-commerce experience must be provided in Portuguese, and that having previous experience in Spanish-speaking market does not automatically make it easy in Portuguese, as these are two different languages (though western parts of the country have considerable base of Spanish-speaking consumers). This pertains to everything from language used on the online store interface, entire customer service, as well as the fact that many local IT and programming specialist speak only Portuguese (with extremely limited English), making it difficult for foreign start-ups to simply copy their experience and solutions to the Brazilian market.

While there are several challenges that currently undermine the growth potential of e-commerce in Brazil, the gradual changes in regulatory environment, customer service and improvement in infrastructure should positively influence the demand for e-commerce services in the future.

24/07/2013by EOS Intelligence EOS Intelligence No Comments

Auto-Financing in China – A Valuable Business Proposition

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From a humble beginning in 1998, when state-owned banks were first allowed to provide car loans, automotive financing has come a long way in China. Vehicle loans are now available through commercial banks and automotive finance companies (AFCs), which are mainly non-banking financing companies (captive subsidiaries of automotive OEMs, both domestic and foreign). According to a 2012 report by Minseng and Deloitte, outstanding car loans are expected to grow over five times to reach US$ 160 billion during the next decade, from US$ 31 billion in 2011.

China has been a late bloomer when it comes to automotive finance, mainly because of its cultural mindset, which has been against credit-based consumption (houses are still paid for in cash, so a cash purchase of a car isn’t considered a big deal). However, in the last few years, the Chinese have become more open to the idea of credit and the trend of automotive finance has caught up, mostly with younger generations. About 80% of automotive financing consumers in China are individuals in the 20-40 years age group, according to a survey conducted by China Europe International Business School. The survey also found that 30% of buyers in this age group are likely to choose some form of auto financing, compared to only 10% of buyers over the age of 40.

Auto loan penetration rate currently is about 10% and is expected to triple by 2017. Developed automotive finance markets such as USA, UK and Germany boast of penetration rate of 92%, 74% and 70%, respectively; thereby highlighting the underlying potential in the world’s largest automotive market.

This potential hasn’t gone unnoticed and China now boasts of having close to two dozen automotive finance companies; however, these AFCs only account for one-fifth of the car loans market. The market is instead dominated by commercial banks, mainly the big four state-owned banks, largely thanks to their significant first-mover advantage over AFCs (state owned banks have operated in this segment since 1998, while AFCs started offering auto-financing in 2003).

Another disadvantage for AFCs vis-à-vis commercial banks is their inability to raise funds through bank deposits or by issuing bonds. In China, AFCs are only allowed to raise funds through inter-bank lending. Consequently, interest rates offered by AFCs to car buyers are higher, making their services less competitive. Moreover, AFCs also face a mismatch between the maturity of short-terms loans they have to take from banks and the maturity of the long-term car loans they provide to their customers. With such unfavourable financial conditions, AFCs find it tough to compete with commercial banks.

In spite of the many constraints, AFCs continue to set up their businesses in China (almost 10 new entrants over the past 24 months). One luring factor is China’s gradual opening-up of its domestic financial markets to foreign investors. The world’s second-largest economy is also considering allowing foreign AFCs to issue financial bonds in China. Moving from bank loans to bond financing, should help AFCs reduce funding costs and become more competitive. Bond issuance will also help them in extending the average maturity of their liabilities and create a better maturity match between their assets and liabilities.

The market potential for automotive financing in China is obviously huge, and with the gradual easing of regulatory barriers, foreign financing companies are much more comfortable setting up a shop in the country. This will lead to more competitive financing options for automotive consumers and will also go a long way in popularizing automotive financing concept in China.

27/06/2013by EOS Intelligence EOS Intelligence No Comments

Future of Global Solar Power Industry – Tense, But There’s Still Hope.

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The global solar power industry was always viewed as one based on flawed business principle of artificial sustenance. With prolonged low economic growth, the artificial support base disintegrated, resulting in shutdown of multi-million dollar business across the globe.

Several leading players, such as Siemens, Solar Millennium, First Solar Inc, and SunPower Corp and Suntech Power, have either filed for bankruptcy or pulled out of their loss-making solar power businesses. Others, such as Germany-based Bosch, have decided to wrap-up solar operations at the end of 2013 after having “tried unsuccessfully to achieve a competitive position”.

A 60% fall in solar panel prices between 2010 and early 2013, as well as the rapid expansion of natural gas production in the USA and curtailment of subsidies in the EU were some of the key reasons for growing losses. What is also worth noting is the overcapacity in the market – global production capacity for photovoltaic panels reached about 60 GW in 2012, while expected demand was only 30 GW. Driven by such unsustainable market conditions, no wonder solar power companies went out of business.

Industry experts, however, view the above factors as simply the result of China’s growing dominance in the global solar power industry. Driven by government subsidies, China became the largest solar panel supplier, accounting for 60% of global solar power production capacity. This domination of the industry has, however, come at a price. Amidst growing unhappiness with China-made products leading to local companies becoming uncompetitive, USA imposed a 40% anti-dumping duty in 2012 while in May 2013 the EU imposed provisional duties of 12% (likely to increase to 47% in August) on imports of Chinese-made solar panels. Whether this will deter China or encourage local growth is unknown; this might however have a negative effect of pushing the industry further into crisis.

Beneficiary of the present situation are likely to be manufacturers in countries like Taiwan which are not yet subject to US/EU import tariffs. About 90% of solar cells manufactured in Taiwan are exported to the USA, Europe, and China. Taiwan might also benefit from the EU’s imposition of duties on China made products, driving Chinese investment into Taiwan for setting up manufacturing plants to then directly export to the EU from Taiwan without having to pay the duties. Recent activities of some Chinese companies have indicated Turkey and South Africa being possible destinations for setting up manufacturing units.

The Chinese will find ways to get their products into the US and EU markets, even if it means moving their operations to Taiwan or other countries which are not subject to the high duties. The real issue, however, is the state of the global solar industry – with some of the major players shutting down operations and funding of solar power depleting, is the end of the road? We doubt it.

There is still hope for the solar power industry, largely driven by favorable policy measures in emerging Asian and Latin American countries. The first half of 2013 witnessed solar power investments in several countries, including Kuwait, South Africa and Chile. The industry received a major boost from Middle-East when Saudi Arabia announced a US$100 billion investment plan in 2012, to generate one-third of the country’s electricity demand through solar energy. Although current demand in these emerging markets is relatively low and may take about 10-15 years to develop into a sizeable market, the scope for growth is immense.

22/04/2013by EOS Intelligence EOS Intelligence No Comments

Can ‘Made In China’ Become a Desirable Label in the Luxury World?

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If you type ‘Chinese luxury’ in your search engine, you are very likely to get a plethora of information on China being a hot spot for Western-produced luxury goods, as the demand for luxury is strong and continues to grow. What you are unlikely to find amongst your top searches, is information about recognized and valued China-originated luxury brands. Is this likely to change any time soon?

Over the next 5-7 years, China is expected to move up to become the second largest luxury market in the world, after Japan. Luxury market growth in China is forecast at a healthy 10-15% during 2013, driven by aspirational consumers whose financial position is rapidly improving and who originate from a cultural background where image, social stand, and respect from others are important values. The concept of luxury falls well within Asian cultural context, as luxury goods are a great tool to wordlessly manifest one’s high stand in the society.

Budding Chinese Brands

For several years now, China has been an attractive market for European luxury products, but it is yet to build its own set of valued, recognized luxury brands that can figure alongside the likes of Hermes or Louis Vuitton. While there seems to be some activity on this front, with some truly Chinese brands struggling to up their game and attempting to compete in the luxury market, the question is whether they are capable of succeeding.

Undoubtedly, there are some established high-end labels that have originated from Hong Kong and China, including Shanghai Tang, Ne-Tiger, Longio, Ascot Chang, Qeelin, Shang Xia, or Mary Ching. But for now they are known and appreciated mostly locally, and even in their domestic market, they lag behind the Western luxury brands. Chinese consumers are instinctively patriotic, so those Chinese luxury brands that are able to build associations with status statement are likely to win domestic consumers over period of time. But will these brands become as relevant and influential internationally as the brands in the LVMH portfolio?

Two Great Challenges

The first challenge for aspiring Chinese luxury houses is to develop great quality brands that will represent superior materials, flawless craftsmanship, unique and relevant designs, consistent quality management, and luxury-level service. This might be relatively easy to do, with proliferation of young creative Asian designers, who often gain their experience abroad. With several high-end and luxury European brands having some parts of production located in China, the know-how and skill set is already being transferred. In some regions, e.g. Southern China, manufacturing is shedding its image of low-cost, mass-produced, low-quality manufacturing center.

The second challenge is to change consumer attitudes, both domestically as well as internationally. Fighting the ‘made in China’ image requires revamping consumer perceptions, which oftentimes, once built, are very difficult to alter. For years, China has been associated almost exclusively as the source of cheap, substandard, unoriginal, and mass products. Even in China itself, while the attitudes towards Chinese-made apparel in mid range segment have improved, domestic high-end brands have not gained good recognition and acceptance, and many domestic luxury customers still prefer well known European brands. Local brands simply cannot provide the status that Chinese luxury shoppers look for. At least not yet.

The negative connotations are particularly strong in Western markets, where it will take a very long time before consumers are ready to accept a ‘made in China’ luxury brand. A European aficionado of luxury couture brands such as Louis Vuitton, Hermes, Gucci, Chanel, or Prada is unlikely to be open to trying luxury products originating from China, a land known for counterfeit goods, bad quality and cheap equivalents available for the masses.

Regardless of the geography, majority of purchases of luxury brands are driven by the desire to conspicuously communicate the belonging to the high, rich, and exclusive sphere in the society, and LV or Hermes logo communicates it in a matter of seconds. Purchasing a piece with a logo that is not instantly recognized by others appears pointless and contrary to the very essence of luxury logo display. This is also true (though to somewhat lower extent) for far more sophisticated, mature, and less conspicuous consumption-oriented European luxury consumer, who also value great quality in luxury products (and Chinese-made products are known for lack of it).

Fighting the Stigma

There are some industry voices cheerfully claiming that today ‘made in China’ is perceived differently than 10 years ago, but it appears more of a wishful thinking. As of now, many Chinese brands still need to exhibit some European connection to get through to the luxury customer both in domestic and foreign markets. This might be a finishing touch added to the product in Europe or internationally-recognized celebrity endorsement (e.g. Angelina Jolie ‘being a fan’ of Shanghai Tang luxury brand). But this is far too little to break the stigma of the Chinese label.

Interestingly, some brands opted for a different approach to nurturing their brand culture. Instead of piggybacking the European luxury heritage, they are trying to highlight Chinese roots, rich tradition of great quality going way back to pre ‘made in China’ era as we know it. This might be a good way for brands to start building on, and execute very careful moves when creating brand based on the Chinese ancient heritage when expanding in foreign markets.

It still remains a long term perspective to see Chinese luxury brands becoming as influential as Prada, Gucci, LV, and other big names in the luxury arena. For the time being, most brands are likely to opt for associating their products with European luxury as a less risky way to win customer base. Only a handful of visionary Chinese brands will be able to put long term brand building ahead of short term gains.

It is worth keeping an eye on Chinese luxury brands, striving hard to win market presence internationally, but their path to success will be long and rocky.

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