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Home » Opinion » Biz Commentary

Awkward seat in the lap of luxury

AS China tries to rev up domestic consumer spending as an engine of growth, calls for a cut in the tariff on luxury goods have come fast and furiously.

We are told about the hordes of Chinese bargain-hunters using overseas trips to Paris, London and New York to scoop up luxury goods that would cost up to 70 percent more at home. We are told the Chinese are the world's third largest bloc of luxury-goods buyers, and 60 percent of those purchases are made abroad. We are told that a cut in tariffs would lower the price of luxury goods in China and keep the money here.

Of course, much of the foment for change is stirred up by foreign luxury brands anxious to ring up more sales in China. The issue of tariffs on luxury imports even resulted in some heated discussions at China's annual conference of top legislators this month.

I think it's time to step back and examine the issue more carefully. No doubt, lower tariffs would boost sales of luxury brand handbags, scarves, jewelry, clothing and other items, but would it really create consumer-led economic growth?

It is true that establishing a more self-sustaining economic model starts with encouraging more domestic consumption, which usually means getting people to spend more on non-essentials.

Once sales take off, related industrial activities increase and more jobs are created. With more jobs and prosperity comes greater disposable income to spend on more non-essentials. Thus, a self-renewing cycle is formed.

China helped stimulate car purchases after the world economic crisis in 2008 by offering motorists incentives to buy, such as subsidies and lower vehicle fees. It was a useful jumpstart to keep economic growth on track.

Brand premium

But luxury goods cannot play the same hero role in the economy because they can't deliver the same benefits from production and distribution.

Ouyang Kun, the Chinese representative of the World Luxury Association, notes that luxury goods are high value-added products, with the cost of material, manufacturing, marketing and sales accounting for only about 40 percent of the retail price, excluding taxes.

A large part of the remaining 60 percent is simply brand premium, which Chinese consumers always seem eager to obtain for the prestige value.

Almost all the luxury brands sold in China are from the US and Europe. The local luxury goods industry is still in a nascent stage. Most of the hard-earned money Chinese luxury consumers splash out for these status symbols ends up in the pockets of overseas operators of luxury powerhouses. Very little of it trickles down the industrial chain to the Chinese companies who actually make the products carrying high-end names.

Back in 2007, the Chinese media found very pricey handbags and clothes advertised as "handcrafted in Europe" that were actually made in workshops in Guangdong and Zhejiang provinces.

Luxury houses are reticent to disclose where their products are made, fearing that knowledge might blemish their reputation. A label saying "Made in Paris" seems to have more cachet than one that says "Made in China."

However, the World Luxury Association reckons that up to 60 percent of luxury brands had set up their own production lines in China by 2009. Labor reportedly constitutes less than 10 percent of the overall cost of luxury goods.

At the same time, many luxury brands started an aggressive expansion into China's second- and third-tier markets to compensate for lackluster sales in the West. That's been good news for commercial property owners in China, who often offer rent discounts to luxury stores just to get their gleaming storefronts into their portfolios and raise the value of their properties.

That's been bad news for medium and smaller-size brands who struggled with retail rents that last year soared 30 percent, and even up to 100 percent in some cases, according to China Chain Store and Franchise Association.

But that's not what worries me the most. The increase in domestic luxury spending may have little impact on driving China's economy in the near future, but I believe the "pre-mature consumption" it unwittingly encourages will become a whipsaw in the long run.

Bain & Co reckons that growth of luxury consumption in China soared 25 percent to 30 percent last year, far outpacing the nominal increase in per-capita disposable income per capita, which stood at 14.1 percent.

Even though China's per-capita income still ranks around 100th globally, the euphoria of China becoming the luxury-goods capital of the world persists.

I hope everyone is not getting too carried away. Mainland luxury shoppers spent record US$9 billion during the Spring Festival holiday this year, even amid risk of a slowing Chinese economy. Perhaps it's time to create wealth rather than flout it.

Stark reminder

Japan should stand as a stark reminder. The cult of luxury brands started there in the late 1980s amid overheated market speculation and rampant consumerism, after the Japanese government lowered interest rates to try to boost manufacturing upgrades. The cult crashed when the asset bubbles burst in the early 1990s, plunging Japan into a decade-long recession.

In 2009, China unveiled a 4 trillion yuan (US$ 631 billion) stimulus package to stave off the effects of the global financial crisis, reduce the nation's over-reliance on exports and boost domestic demand. I sincerely hope we aren't in the process of squandering that precious money and the chance for meaningful economic transformation along with it.


 

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