Manufacturing mecca of cheap.
This story first appeared in the August 15, 2011 issue of WWD. Subscribe Today.
China’s ascent to global manufacturing powerhouse owes much to that reputation, once adhered to nowhere more strongly than among that country’s own elite consumers. The emergence of a well-heeled customer with serious spending power triggered a huge interest in, and deep knowledge of, Western luxury brands that produce primarily in their native France or Italy. The perception was clear: Quality hails from Europe; the cheap stuff is made at home. A series of food and product safety scandals over the past several years further underscored this fundamental belief that imports are superior.
As China becomes more confident in its new role in the world economy and more diversified as a manufacturing base, that perception is gradually starting to change. While wealthy Chinese still crave Western luxury goods and the storied luxury houses still crave the wealthy Chinese, those consumers are increasingly open to the Made in China label they once shunned.
“I get the sense that Chinese consumers are getting prouder and prouder,” says Charles de Brabant, founder and ceo of luxury consultancy Saint Pierre, Brabant, Li and Associates and a professor of luxury branding at China Europe International Business School. “We’re at a turning point in the thinking that products have to be manufactured outside of China in order to be luxury brands.”
McKinsey & Co. estimates that Mainland China’s luxury leather goods market was worth about $2.8 billion last year and should grow an average of 20 percent annually over the next five years.
The figure for all luxury goods—leather, watches, jewelry—is a staggering $12.43 billion. Undoubtedly, there is plenty of room for accessories brands from all over the globe to stake their claim in China. Most agree that foreign-produced labels still dominate the top-tier luxury segment but Chinese production can work for a strong brand at the appropriate price point.
Tali Wu, the Shanghai-based designer behind the rock-’n’-roll-inspired leather goods brand Flying Scissors, notes a real market for Made in China handbags. “For my brand and other young Chinese brands there are definitely patriotic consumers who want to buy something Chinese—if it’s of equal quality and they like the design. I know I have that feeling,” Wu says. “We get customers who want something new.” Wu acknowledges that acceptance is a process; prices for bags most popular among his Chinese clientele average about $500. “We occasionally make bags around the $1,000 range, and they do sell, but I think it’s still too soon and too high-priced for younger consumers here. That really high-end luxury market takes even longer to crack,” he says.
Launched in 2008, Heirloom is witnessing a similar trend. Asian-Americans founders Tiffany Wu and Lynn Lu and their bags are becoming an increasingly common sight on the pages of Chinese fashion magazines. The bags are made in a factory owned by Lu’s parents in the southern Chinese city of Guangzhou; China’s leather goods and footwear manufacturing is concentrated in the Guangdong Province surrounding the city. Wu stresses that the bags, which retail for about $300 to $500, do not come off a production line. She says a craftsman works on one bag at a time using materials imported from Europe and the U.S.
Tiffany Wu concedes that labels and logos are still extremely important in China, and it can be a challenge to convince certain shoppers to buy a bag that will go unrecognized on the street. At the same time, consumer tastes are evolving quickly and shoppers are getting used to the idea of quality products made on their own home turf. “If you look at the labels on Coach bags, they say Made in China; they don’t try and hide it. More and more people are recognizing that Chinese-manufactured products can have the same quality,” she says. “I already see a big change from when we started, because more and more boutique designers are coming to China now and consumers are becoming more educated.”
Avery Booker, editor of Jing Daily, a Web site focusing on the business of luxury and culture in China, agrees. “Particularly in cities like Beijing and Shanghai, a small but growing niche is starting to appreciate local designers whose products are obviously made in China,” Booker says.
But as every purveyor of luxury goods knows, there’s more to attracting the customer than flagging country of origin. Pierre Xiao Lu, professor of marketing at Fudan University and an expert on luxury brand management and consumer behavior, says a brand’s reputation is a major factor. “If your branding is weak and you produce in China, the Chinese high-end consumers won’t value the brand,” he says. “If they don’t know the brand, [you face] a major problem.”
The advantage that major European brands have long held in China and elsewhere is that quality is, to a strong degree, a given. The branding has been intense over decades or longer, and the perceived quality, maintained. Carrying a bag from such a house telegraphs a certain level of success, sophistication and status. Younger consumers in China are not immune to the lure of the tony label; their appetites for status brands are fueling China’s current luxury boom, much as happened in Japan in the Eighties and Nineties. “The 25- to 35-year-old consumers are not where the wealth of society is yet,” notes Irene Yu, an analyst with China Market Research Group. “But these consumers are driving luxury sales because they want them, and are willing to spend all of their disposable income on buying luxury. They will save several months of salary to buy a luxury bag to show their status and project an image of success to others. It is very often a secretary making $600 a month who is buying thousand-dollar Gucci handbags.” Yu argues that it’s the brand’s allure that motivates these consumers. “The status gained from toting the right brand is far more important than where the product was made,” she explains.
To be sure, Chinese brands still have a long way to go before they can capture consumers’ imagination and money in the same way as the storied European labels. “There’s only one LV, one Hermès, one Chanel,” says de Brabant. “For each of those there’s probably been another 15 attempts that haven’t succeeded. For China, I would say Chinese luxury brands will emerge, but they will have to follow the key success factors of luxury branding. People want to go so fast in China, and you can’t build a luxury brand quickly.”
Xiao Lu says he thinks Chinese brands will become much more the norm for luxury consumers in the coming years. “The key point is whether Chinese brands can deliver the right quality and design in line with the luxury brand positioning themselves in the Chinese market,” he says.
While Chinese brands are working to upgrade the overall image of the local manufacturing prowess, some Western houses are also producing certain items in China. Burberry makes one of its handbag ranges and its pumps in China. “We do use Chinese production because it’s fantastic quality, and what the consumer would expect from us,” says Stacey Cartwright, Burberry’s chief financial officer, while noting that all runway shoes are still made in Italy. “As you move down through the product pyramid, there is less sensitivity to goods being made in China,” she says.
Prada does about 20 percent of its manufacturing outside of Italy, a small percentage of that in China. The brand’s IPO prospectus states that two of its biggest external manufacturers include a Hong Kong-listed footwear company and a Taiwanese footwear company for sport brands. Chief operating officer Sebastian Suhl stresses that regardless of country of origin, the quality of merchandise is consistent, the manufacturing “controlled by Prada inspectors, with an average of two factories per inspector.” He continues: “What is important to our customers is that our products are made by Prada.”
Last year Hermès became the first, and so far only, European house to establish a new, exclusively Chinese luxury brand. Shang Xia, which launched last year with a Shanghai flagship, features a full range of home furnishings, jewelry, clothing, footwear and other lifestyle products with clean, modern lines rooted in distinctly Chinese influences. About 95 percent of Shang Xia’s products are manufactured in China. Prices for the brand’s most popular accessories range from about $232 for a pair of slip-on leather shoes to a “Big Dragon Pearl” necklace in gold-plated silver for $1,054.
Shu Shu Chen, communications director for Shang Xia, skirted a question about the young brand’s performance to date. “It needs input and patience more than an immediate business result,” she says, noting that one of the tenants of the brand is the preservation of ancient Chinese craftsmanship. “The world has used China as a cheap manufacturing land. This has been the defining thing for the past 10, 20, 30 years,” she says. “The time has come to move on from that idea. I’m not sure whether [future generations] will still value the international designer brands available today, but [they] will appreciate these things because this cultural link is timeless.”
De Brabant takes a less philosophical view. “The second-generation luxury consumers in China are an average 24 years old and they have a lot of money,” he says. “What defines Chinese luxury consumers is that they are extremely educated and will grow out of that bling-bling stage incredibly quickly.”