August 29, 2013

Foreign Brands Scramble To Adapt To China’s Thorny Business Environment

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BMW has been having a particularly challenging time in China over the past few months as a result of state-sponsored criticisms.

Recent news has strongly suggested that the Chinese government hasn’t been particularly friendly toward foreign businesses lately, and the luxury industry is no exception. However, thanks to China’s immense profit possibilities, companies are striving to find ways to adjust to the government’s frequent provocations, and are likely to continue to do so in the future.

There has been a consistent stream of reports demonstrating the Chinese government’s goading of foreign companies, especially in the luxury sphere. Today, state-run China Daily released yet another of several recent Chinese reports accusing foreign automakers of charging higher prices in China than elsewhere, citing an investigation by Beijing Youth Daily. Meanwhile, yesterday, Finance Minister Lou Jiwei stated that China would extend its tax on luxury goods, a market that is currently dominated by foreign companies. If you add these reports to the recent news that a senior Chinese official recently pressured around 30 foreign firms to write “self-criticisms”, it appears that the environment for foreign businesses in China is growing more complicated by the week.

When it comes to luxury brands, foreign luxury automakers are being hit especially hard at the moment. A barrage of bad PR from China’s state-run media against importers for alleged price inflation has turned into threats of government action. China’s Ministry of Commerce announced last Friday that it will be making policy changes on imported car pricing that “could include limiting auto makers’ power to demand a deposit from dealers, which would give local dealers more freedom over the vehicles they sell,” according to China Daily. This official statement comes after several media reports of import price inflation that were kicked off by a Xinhua editorial last month calling for an investigation into auto prices, arguing that it’s not tariffs, but automakers’ pricing that is driving up prices to exorbitant levels. Automakers, in response, have publicly denied this claim.

Automakers aren’t the only luxury purveyors feeling slightly harassed at the moment. Foreign wine companies are also under government scrutiny. Although China’s anti-dumping investigation into European wines opened in July was linked to a trade dispute with the EU over solar panels, the quarrel’s conclusion hasn’t ended the wine inquiry. The EU originally believed the wine issue would die when it let up on the solar panels, but a Chinese trade official stated unequivocally in early August that the investigation continues. Meanwhile, the government has also cracked down on mainlanders bringing to China undeclared bottles from Hong Kong in order to avoid the 48 percent wine import tax. According to the Economist:

Allen Zhang, a resident of Shanghai, used to buy expensive bottles of wine in Hong Kong every time he visited the territory, but he has since stopped. He finds that bringing undeclared bottles back home has become “too risky”. So some reckon that better enforcement of the current system will work in Hong Kong consumers’ favour. Speaking to Decanter China, a specialist magazine, Don St Pierre, the chairman of ASC Fine Wines (one of China’s biggest wine importers and distributors) has suggested that a crackdown on smuggling would depress world wine prices. “If [mainland] consumers are going to pay the full tax on their wines, the initial cost of that wine will have to be brought down, as they will not be willing to bear a huge rise.”

Even signs of apparent luxury trade progress are not all they’re cracked up to be. China and Switzerland’s recent free-trade agreement may sound like a counterpoint to the idea that China may be pursuing protectionist policies when it comes to foreign brands, but this pact didn’t fully allow for Swiss watch companies to export freely. In fact, the agreement’s “watch memorandum” to cut tariffs by 60 percent over the next decade was included to lift tariffs on watches much more slowly than on other goods, which saw an automatic elimination. China had the overall advantage in the deal, removing tariffs on only 84 percent of Swiss imported goods, while Switzerland removed tariffs on almost everything imported from China.

All of these moves by the government will, whether intentional or not, give some leeway to Chinese brands to attempt to catch up to their foreign counterparts. The watch memorandum is able to buy time for local watch brands to improve their image before tariffs are eliminated for their competition. According to Campaign Asia, Chinese luxury watchmakers such as Seagull, Shanghai Watch, and FIYTA have been stepping up their marketing efforts to court wealthy Chinese buyers. Meanwhile, Chinese luxury automaker Hongqi has been doing the same when it comes to cars, and Chinese vineyards are slowly working to remove the Chinese drinker’s stigma against domestic wine.

Foreign brands are devising a slew of strategies to deal with these issues. For automakers, joint ventures and sub-brands are ways around the traditional complications of imports. Joint ventures with Chinese brands allow auto companies to sidestep heavy tariffs by manufacturing in the country, and luxury automakers have either been embarking on or expanding local production in recent years. BMW has gone above and beyond the typical Chinese-foreign partnership by introducing the sub-brand Zhi Nuo, which can give the automaker even more legal leeway. Local production benefits expand to wine as well, as foreign winemakers such as Chateau Lafite have their sights set on Chinese vineyards. Meanwhile, foreign acquisitions of Chinese companies are also picking up in spheres such as beauty, with both LVMH and L’Oreal making acquisitions of Chinese brands.

In terms of marketing efforts, brands are also focusing on fostering loyalty to ensure that customers stick with their own brands instead of switching to local counterparts. “To secure brand loyalty in China, they need to adapt more swiftly to changing preferences which are moving away from the gaudy and shiny to classic and elegant,” according to Campaign Asia. In addition, “some Swiss watch brands are focusing on more quality editorial generation and CRM initiatives such as private events where they can build relationships with consumers.”

However, even attempts to adjust have not been without their complications, showing that the Chinese government clearly has its eye on foreign strategies. Several auto joint ventures have seen challenges in recent weeks: BMW, Honda, and Jaguar Land Rover all faced product recalls, and BMW was criticized by China’s environmental regulators for the expansion of its Shenyang plant. Whether or not these issues are a result of government intimidation, serious quality control issues, or both, they highlight the tricky situations that foreign companies must navigate.

For now, consumer preferences still overwhelmingly favor foreign luxury brands. For example, luxury watchmaker Seagull has only sold two of its most expensive watches since 2010, while Sina Weibo commenters recently responded to news of foreign car recalls by stating that they would still avoid Chinese vehicles. The rapid increase of Chinese incomes means that the rewards of navigating the complex China market overwhelmingly outweigh the risks, and it is likely that we will see a host of new ways in which brands confront challenges in the coming years.

Business & Finance / Policy
Tag: automakers, car, china, china luxury... , More
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