China: Hell or Paradise? Part II


Creezy Courtoy | January 30, 2012

Creezy Courtoy, China-focused luxury consultant, shares her thoughts on retaining control of brand image after signing with a Chinese partner

The bustling metropolis that is Beijing, China

In the 1970’s nobody would have ever believed that China would develop so fast. The country has soared to become a superpower, able to compete economically and technologically with the West. Its rise has also lifted an estimated 600 million people out of poverty. China’s economy, which totals 9.5% of world GDP today, is forecast to total 18% by 2020.

The World Bank and the International Monetary Fund expect Asia’s total GDP to grow, on current trends, from around USD 30 trillion now to USD 230 trillion by 2050. This dynamic growth in Asia contrasts starkly with the high budget deficits and debt in most developed economies in Europe and North America.

Urbanization opens up opportunities with new skyscrapers. Some 200 new buildings with shopping malls will arise next year, alongside huge luxury housing developments for the wealthiest. Many rapidly rising cities are in Western and Central China.

“ China’s economy, which totals 9.5% of world GDP today, is forecast to total 18% by 2020 ”

China is developing its own national champions and many of these companies will become ferocious international competitors. Today, the government is encouraging Chinese players to go global and establish their presence overseas.

In 2007, the world’s top 50 metropolitan areas when ranked by total GDP included only eight cities in Asia. By 2025, this “top 50” list is expected to include more than 20 Asian cities. China alone has many new additions to the list including Shanghai, Beijing, Chengdu, Chongqing, Fushun, Guangzhou, Hangzhou, Nanjing, Shenyang, Shenzhen, Tianjin, Wuhan and Xi’an.

According to Peter Lennhag, an expert in Asian forecasting, China’s urbanization rate has increased from around 20% in 1980 to almost 50% in 2010. And in their latest Five-Year Plan (2011-2015), China’s leaders aim to step up the pace even more. The urban population is forecast to continue growing until 2039. Over the next couple of decades, as many as 300 million Chinese people – equivalent to the whole US population – may move from rural areas to cities.

“ Europe & the U.S. expect anaemic growth in coming years, it is more critical than ever to build a strong presence in Asia’s high growth markets ”

Chinese Consumers are in Need of New Brands

Turning hundreds of millions of Chinese people into modern consumers, a recent survey shows that the three favourite luxury brands of Chinese consumers are all European: Louis Vuitton (46%), Chanel (36%), and Gucci (22%).

The Chinese market is in need of new brands coming from the West. Many western brands have been slow to enter the Chinese market – outside of Hong Kong – as a result, Chinese brands are starting to create their own luxury brands. In many cases, purchasing European heritage brands and re-launching them as iconic luxury brands in China.

They are buying trademarks with hundreds of year’s history, opening impressive Parisian flagships, advertising in glossy magazines, commanding interviews with influential editors and promoting these brands as ‘famous’ luxury brands in China. As consumers are not yet highly educated about luxury brands, they buy into this marketing. In the coming years we will see many of these brands in China taking the place of other Western luxury brands who hesitated in entering the Mainland market.

Not existing in China could soon equal losing one’s place in the luxury industry, as China comes to represent a barometer for industry health. The mature markets of Europe and North America are expecting only anaemic growth for years to come; it is now more critical than ever for companies to build a stronger presence in Asia’s high-growth markets.

If a luxury brand is not yet tempted to explore these opportunities and does not plan to think about Shanghai as its second home, it risks loosing its place in the luxury industry in coming decades. Luxury brands will not survive the Western economic crisis without Asia. If brands are known in the West and they want to keep their place under the sun for years to come, they should make the step into China now.

Entering China – A Daunting Proposition?

Entering the Chinese market can be confronting for European brands who find themselves in no mans land, in an unpredictable world. China can really be Hell or Paradise; it just depends from which side you see it. This is a very Chinese way to look at everything: you have the choice to see it with a positive or negative vision.

China has something to bring to you but it is up to you to decide how it will work. This is not easy in a world with very different values to the West. But one must ask if these values are the ones to take into the future? One only has to look at what has happened to our economies in the last ten years to see otherwise.

If you want to succeed in Mainland China using the same tool, that the one you used to conquer Japan, Singapore or Hong Kong and Taipei, China will become your personal hell, as the world is changing in their favour, not yours.

“ In 2000 you could reach 80% of China’s middle class in 60 cities. In 2020 this will require a presence in 210 cities. ”

No Money, No Power

My experience, dealing these past three years with China, suggests that it is not so difficult to find a Chinese partner when you have the right introductions mainland, but that the real problems occur after. China’s complexity is increasing rapidly. A company could reach 80% of China’s middle class in 2000 by having a presence in just 60 cities, whereas achieving that in 2020 will require a presence in more than 210 cities.

It is better to consider joint ventures with Chinese companies to combine your expertise with their market access. But you need to be respected to be successful. If you go to China with empty hands – like many brands going in without any marketing budget, development budget or planned investment – you will be in the pocket of the Chinese.

When brands meet a Chinese Partner, they often believe that they don’t need any more help and they are safe and sound. The Chinese are very good at making others feel safe. They feed you first, they will invest in huge budget in taking you to the most expensive restaurants to win your friendship and make you feel that their involvement is all you need for your launch.

But at the end of the day, many brands are losing control of their brands. The culture and hierarchy systems in China are drastically different to those in Europe and the US, and a locally relevant approach to leadership and negotiation needs to be undertaken.

“ A contract is not the end but the beginning of the negotiation. Becoming a shareholder will not give you the authority to decide anything ”

Shareholdings Will Not Give You A Voice

This can become a major frustration for Western executives, as for the Chinese, a contract is not the end but the beginning of the negotiation. Becoming a shareholder will not give you the authority to decide anything.
After signing a contract with a Chinese group, you will still need to control the brand and manage its image the way you want. As Chinese are less experienced in the concept of luxury, branding and IP protection, it can become very difficult to remain the guardian of your brand. And here problems will start.

The other obvious problem is the associated language barrier, many Chinese natives do not understand English. The rare English speaking Chinese – if learning Chinese on the Mainland – often have a very limited vocabulary leading to growing communication problems.

One way to minimise these problems with your local partner – and allow the necessary authority to keep control of your brand – is to enlist the services of a financial institution, to accompany you in the development of your brand in the Chinese market and to help guarantee the investments of your Chinese Partner.

“ One way to minimise problems with your local partner & allow the necessary authority to control your brand is to enlist the services of a financial institution ”

A New Paradise for Private Investors

Private luxury fund are more and more interested to invest in the development of luxury brands in China. As the European economy falters, more and more private investors are looking to invest in the development of luxury brands in Asia. For example Frando in Zurich is diverting investments in creating Frando Lux Fund in Asia.

The addition of a third-partner increases the available financial resources necessary for geographical expansion and also dilutes the power of the local Chinese partner. Investments derived from funds and financial institutions secure the process, from financial guarantees to strategic issues of marketing, brand image and operations.

Taking these considerations into entering the Chinese luxury market, will ensure China becomes more paradise than hell.