China's Import Tax Cuts Won't Lift All Brands

A Sephora store in Beijing. (Shutterstock) After years of calls from consumers and high-powered businesspeople like Wang Jianlin to drop import taxes (which have sent millions of Chinese tourist-shoppers abroad in search of lower prices), this week China's Ministry of Finance announced a program to cut taxes for some products beginning June 1. According to Chinese news site 21CBN, this tax cut will mean import taxes for suits and fur garments will drop from their previous 14-23 percent to 7-10 percent, while certain footwear segments will halve from around 23 percent to 12 percent. Meanwhile, import taxes on cosmetics will decrease from 5 percent to 2 percent, and disposable diapers will fall from 7.5 percent to 2 percent. However, this so-called "pilot program" only lessens the import tax, and doesn't touch China's rock-solid 17 percent VAT (zengzhi shui, 增值税), meaning—as Shanghai University of Finance professor Hu Yijian told 21CBN—prices will remain significantly lower overseas for high-priced items. Ostensibly, the moves are aimed at boosting domestic spending and stemming the flow of consumers around the world to purchase everything from diapers and milk powder to luxury goods. Last year, more than 117 million Chinese traveled abroad, spending around $165 billion—up from $102 billion in 2012—and this trend shows no sign of stopping, as international travel becomes far more accessible for millions of Chinese. But shopping overseas isn't all Birkins and Balenciaga. According to the WSJ, 90 percent of Chinese consumers who traveled abroad last year purchased personal-care products and cosmetics, while 85 percent bought clothes and footwear, and 64 percent bought baby food or baby-care products. The luxury-mad big-spenders may get all the press, but it's the ones crowding H&M and Babies"R"Us who do the heavy lifting. Rather than being a godsend for the luxury brands hit hard by an ongoing slowdown in mainland China, this week's moves by the MoF will most likely lend a hand to makers of low-priced personal goods. That said, the reductions— however cursory—have been welcomed by the likes of L'Oréal, which said this week that it would also reduce prices in China, since the tax decrease would have a "very limited impact" on retail pricing. L'Oréal's moves follow news earlier this spring that brands such as Chanel and Prada, and some watchmakers, would "align" prices in the PRC to fight a thriving online gray market. So who will benefit the most from the tax cuts? In all likelihood, it won't be major luxury brands, which have heard all of this before. Simply put, a 7 percent savings on a suit that's already around 40 percent more expensive than in Milan or New York probably won't cause a flood of shoppers at a luxury brand's Beijing flagship. Also, the Ministry of Finance has yet to stipulate whether these cuts will extend across the board, or be limited to a certain (and opaque) group of brands. Rather, these cuts will most likely cause a muted sales increase for the lowest-end products from mass cosmetics brands, and may help e-tailers like JD.com and Tmall move more diapers and baby clothes. Despite its efforts to sweeten the MoF's deal by dropping prices, L'Oréal's challenges in mainland China aren't caused only by prices—they’re also caused by stiff competition from Korean and Japanese brands, and the popularity of short travels to Seoul or Tokyo to stock up on cutting-edge, trendy products. It can't be overstated how much it matters to many affluent Chinese consumers to purchase high-end items in their country of origin—whether that's Korean snail face cream, an Italian suit, or a French handbag. A single-digit tax cut won't change this consumer culture, and there's very little incentive for the MoF in Beijing to do more to assist foreign luxury brands, particularly at a time when Xi Jinping's anti-conspicuous-consumption crusade shows no sign of stopping. As often is the case with highly publicized directives from Beijing, brands need to take this one with a grain of salt. Avery Booker is a partner at China Luxury Advisors.

China's Import Tax Cuts Won't Lift All Brands

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Published May 26, 2015

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China's Import Tax Cuts Won't Lift All Brands