Will the Trade War Offer a Turning Point for Chinese Luxury Brands?

After being banned from trading with American companies, the initial forecasts for China’s sixth most valuable company, Huawei, were that it would be devastated by the U.S.-China trade war. But now, that outlook has changed thanks to the idea that greater Chinese self-reliance may make it possible for the tech giant to grow on its own terms — trade war or not. That same theory equally applies to China’s luxury market. Despite early gloomy predictions, the repercussions for many segments of the Chinese economy after two years of a U.S.-China trade war are much more nuanced than most expected them to be, and the situation is highlighting the changing nature of Chinese manufacture and consumption, particularly in the luxury goods sector. Aside from earnings, these circumstances could also have a direct impact on the development of domestic innovation, as well as the availability of counterfeit goods in the future. Will Economic Restrictions Lead to Chinese Growth in the Luxury Market? At the root of China’s potential scope for opportunity is the country’s growth since 1979, which has also resulted in it having a more robust and diversified fiscal system. While it is still heavily involved in the manufacture of goods for global markets, China’s growth is no longer simply pinned to the income it earns from exports. According to the World Bank, the percentage of China’s GDP generated by international exports in 2018 was 19.5%, which means that its economy has grown despite shrinking exports by almost half since 2006. That means there is a growing level of independence in the Chinese economy, and its companies are not nearly as reliant on international buyers as they once were. The growth of the luxury goods market is one significant indicator of China’s commercial changes. Deloitte’s most recent “Global Powers of Luxury Goods” report in 2019 suggested that although 2018 saw a general slowdown in the economy, luxury goods sales continued to grow, with Chinese consumers now leading consumption for high-end products and experiences. As domestic luxury brands grow within the country this will mean a bigger market for them, resulting in less reliance on money earned through exports. The same Deloitte report also highlighted that China now ranks second globally for the proportion of its GDP generated by international travel and tourism. Considering the increased alignment between luxury businesses and tourism (as with the LVMH acquisition of Belmond’s hotels, trains, and cruise experiences), this is an area that looks set to further drive the connection between Chinese consumers and luxury brands. Outside of pure economics, however, there are additional issues around what an independent-minded China that’s forced to develop its consumer markets, technologies, and luxury products might look like. One indicator of China’s future relationship with the luxury goods market is how some of its domestic brands are protecting themselves in terms of intellectual property and anti-counterfeiting measures. Reinventing ‘Made in China’ for the Luxury Market China’s reputation for low-quality fakes and cheap, IP hijacking replicas is well deserved, and there’s no doubt that the global black market is filled with products originating in Chinese factories. One recent Europol and EUIPO report suggested that 73% of counterfeits seized by EU Customs authorities came from China. This is a situation that will undoubtedly continue for many years. However, increased Chinese prosperity and independence do raise the possibility of some change. With Chinese companies seeking to establish themselves as alternatives to their Western counterparts rather than additional actors, the government’s Made in China 2025 plan for technological and creative self-reliance may become more than a pipe dream. One recent figure suggested that in 2018, China filed 53,345 patent applications, not far behind the 56,142 of the United States. Similarly, the World Intellectual Property Office (WIPO) Global Innovation Index has seen improved positions in China’s rating for the past three years. It’s a situation that’s also reinforced within the realm of domestic IP registrations, which have seen staggering growth in recent years. According to WIPO, between 2006 and 2015, registrations with the Chinese Trademark Office jumped from 766,319 to 2,876,048. On July 8, 2019, it was reported by the state news agency, Xinhua, that numbers for 2019 had increased once again, meaning that China now has more registrations than any other nation. All this is suggestive of a long-term trend where the place of IP and the respect for innovation is changing — brought to a head recently by the situation with trade war talks and the ban on Huawei. Full-scale change, if it is to come, will certainly take decades, but the shoots are showing. For luxury brands, too, there are numerous examples where strong Chinese companies are proving that they can compete with world leaders. In World Brand Lab’s 2018 report on the 500 Most Influential Brands, Chinese brands’ place on the world stage has seen slow but steady progress since 2016. One of the best recent examples of this has been the luxury baijiu maker, Kweichow Moutai, which has grown into one of the world’s most valuable liquor companies, with even more growth in the future looking certain. Perhaps the most telling sign that domestic luxury goods are on the increase in China, however, is the investment many firms are making in packaging. This trend is particularly prevalent among high-end alcohol manufacturers like Kweichow Moutai, who not only have a bottle which cannot be refilled, but who also protect their product through unique serial numbers and radiofrequency methods. It’s a strategy that has also been taken up by baijiu rivals Wuliangye Yibin and premium spirits distributor Oranco, who have developed a blockchain solution to protect the authenticity of their products. Most recently this was seen in the Baoshen Packaging Group’s public commitment to the ConnectIC line of anti-counterfeiting packaging technologies made by the PragmatIC company. The investment in anti-counterfeiting technologies on the outside of a product only becomes necessary when there’s something good enough to protect on the inside — something you’ve invested time and money in producing. For the sake of brands who have had their IP infringed upon and consumers who have received substandard products, this may represent a turn towards fairer competition for all and something which the luxury goods sector in China must depend upon.

Sectors

Insights

Company

Will the Trade War Offer a Turning Point for Chinese Luxury Brands?