China: Hell or Paradise? Part III


Creezy Courtoy | August 03, 2012

Creezy Courtoy, China-focused luxury consultant, examines the relationship between China's monolith economy and the crisis in Europe

Dior are one of many luxury goods brands to put China at the heart of their strategy, but will its efforts be enough?

Creezy Courtoy, China-focused luxury consultant, examines the relationship between China’s monolith economy and the crisis in Europe

With a population of 1,343 million, China has already become the world’s largest market for many product categories, including cars, beer, cement, elevators, iron ore, mobile phones and luxury goods. In May this year, Chinese car sales rose 22.6% year-on-year, with Audi and BMW seeing sales rise by 44% and 31% respectively.

China’s biggest carmaker, Volkswagen Group from Germany, sold a total of 2.26 million cars in the country in 2011, earning an operating profit of EUR 2.6 billion. The company is now expanding capacity to build four million cars in China by 2015! Volkswagen employs 48,000 people in China and has about 1,500 dealers.

The potential buying power of China’s middle class is already vast. About 247 million Chinese – 18.2% of the population – qualify as middle class, meaning their households spend between USD 10 and 100 per day on average. If current patterns continue, the number of Chinese middle class consumers will soar to 607 million by 2020, when their spending will rival that of US middle class consumers.

“ If current patterns continue, the number of Chinese middle class consumers will soar to 607 million by 2020 ”

Despite the huge opportunities offered by the Chinese market, only 2% of Europe’s export currently goes to the country. This market alone is expected to contribute 40% of world economic growth in 2012. More European multinationals must now expand efforts in China, as well as elsewhere in Asia, to build stronger positions in these economies and to offset their sluggish performance in developed economies.

When Peugeot announced the closing of factory in France, they had opened their factory in China just months before. The Chinese market will become a more important market in future and they are already very late compared to their competitors. To keep factories opened in Europe and to preserve work for European citizens in Europe, Member States should give support and get participation in brands development in China and establish a new regulation for brands developing in China for them not to close their home factories.

Financing French factories to keep their workers when profit is made in China is a mistake made by governments in Europe, showing a lack of knowledge of inside China from the EU and the Member States. If the European economy is slowing locally, brands or brands owners making money in China will re-invest in China or send back profits to Hong Kong and other paradises.

“ Despite the huge opportunities offered by the Chinese market, only 2% of Europe’s export currently goes to the country ”

In China, even if the government seems powerful, strict and rigorous, regulations are not applicable the same way in all regions and cities. They all have their own understanding and ways to manage inside or around regulations.

Big groups have privileged relationships with customs and they will always drive companies to follow their way of entering products inside of the country. Yet many companies are still ignoring this market. It is their choice but if they are number one in their field they risk loosing their global standing if they are not number one in China. In ten years from now it will be too late as someone will have taken the place.

If you are not going to China and if your products are of interest to the Chinese market, in ten years, these products will exist without you. The Chinese will also attack you in your own market when they will come abroad. Therefore a strong presence of the products and of the brand on the Chinese market now is incredibly important. There are 3 strategic approaches in entering the Chinese market.

Going Alone

If you do so, you will have no support from the Chinese, no protection from any powerful group and you can only succeed if you have tremendous funds and a deep knowledge of the market, culture and mind. Never forget that communication is the second biggest problem in China, not only in terms of language but in a divergence of thinking styles. (see China Hell or Paradise part 2).

If you just open one store and want to go slowly, your way, you will not succeed in China as you will be copied before the end of the first year. Do not forget that copying is not bad in China, you can only be copied if you are good and if your product is good. Therefore going alone in China is dangerous. You need to be ready to open minimum 3 stores the first year (Shanghai, Beijing, Hangzhou) and to finance a huge marketing campaign in China.

What you need: Funding or Luxury Fund participation (some European funds are specialising for the Chinese Market)

Adopt an Export Model

Signing with a powerful group to open stores for you, which also buys your production. This group will protect your brand and be your partner. They will control the whole market and signed partnerships with other companies to develop in the whole Chinese market. This can be the easiest way to enter the market, as you do not need to involve yourself in the whole process. You have one partner and he deals with subcontractors.

If the group is dynamic and powerful, you can develop fast. You will still need to have someone with you to guide you as misunderstandings can happen all the way even after signing contracts.

Follow a Dual Platform Approach

Shanghai SME wanted to promote this approach matching mass market Chinese companies with European Luxury brands. This will allow a major Chinese company in your sector to enter in the luxury sector in positioning your brand. The advantage of this approach is that often these companies already have a huge distribution network and know the market. The inconvenient is the transfer of technology, you are never sure that they will always need you.

“ Success is managing a simultaneous game of Chess and Mah Jong. If you cannot play, you don’t play or you enlist an expert to advise you ”

Whatever your choice will be it will be Hell or Paradise as for China there is little middle ground between the two. Nothing will be easy, nothing will never be defined as your European mind would expect. Nothing is never black or white in China. A contract signed can always be reviewed. And never you should let your guard down and assume you won the battle, because whatever your choice will be, whenever you enter in the field, you will need to stay awake at all times to review your position and adapt your strategy.

Success is like playing chess and Mah Jong together for both of the European and the Chinese side. If you cannot play, you don’t play or you need an expert to advise you. If you go to China you will need an expert from the beginning till the end. Not only until the signature of the contract but for the life of the brand in China. The contract signed is only the start of the game and the game has no ending.

To read the complete series of ‘Hell or Paradise?’ on Luxury Society, we invite your to explore the related materials as follows:

- China: Hell or Paradise?
- China: Hell or Paradise? Part II

Cars | China