By  on February 22, 2006

MILAN — A major new player in the Italian fashion industry is on the horizon, and it's none other than China.

Chinese companies no longer want to be considered merely low-cost manufacturers, but are keen to become investors and brand developers. To fulfill that goal, Chinese companies are looking either to acquire textile mills here, which are often in financial trouble caused by China's low-cost labor; to take over established brands, or, more often, to set up joint ventures to launch new brands or distribute Italian labels in China.

"China is no longer content with producing goods — it wants to go to the next level, to share brand vision, to be part of a distribution plan and bring added value to a project," said Alfredo Canessa, chairman and president of Ballantyne, which is launching a new brand for fall called Chinese Cashmere Company, in a joint venture with the Hong Kong-based firm Fenix.

"This venture is part of a long-term strategy," said Canessa. "Over the past seven or eight years, the Chinese have increased their production of finished products. We want to be part of this scenario, if and when China will no longer be a low-cost manufacturing country."

CCC, a young sportswear brand for men and women, bears the Made in China label and its retail price is positioned 50 percent lower than an equivalent Italian piece. The brand will be distributed in China by Fenix and in the rest of the world by Ballantyne. The Scottish brand is controlled by Italian equity fund Charme.

"The feedback has been positive so far, as the market appreciates the fact that we clearly state that the product is not made in Italy," said Canessa.

In Europe, there is still no regulation that requires a fashion company state the country of origin of a product, although obviously designers and manufacturers for years have traded on the cachet of the Made in Italy label. There was a push by the European Union to drop nation-specific labels in favor of a Made in Europe one, but this was put on the back burner after an outcry from such countries as Italy and France.

"Surely, the Chinese will not stand for being only fashion manufacturers for long," said Laura Tsui, vice president of Shanghai InterChina Consulting, which was established to assist Westerners in their businesses in China. The consultant has offices in Shanghai, Beijing, Shenzhen, Hong Kong, Spain and Italy."This already happened in the consumer-electronics sector, in a market that was once dominated by Japan and Germany. It will happen in fashion, too. Today, we are beginning to deal with [mergers and acquisitions]," she said.

According to Tsui, the Chinese only now are starting to look at expanding abroad as their mentality is changing and their businesses are no longer driven purely by sales figures. Tsui also said that, over the past year, there is a much stronger brand marketing awareness in China. "There are magazine and newspaper articles on style and how to improve design, which was unheard of before. And people are interested in reading them," said Tsui.

"Style and design are the only things that interest the Chinese today and CCC is the perfect example of a successful venture, where Italians keep innovation and know-how," said Luca Birindelli, at Birindelli & Associati, which specializes in legal and commercial transactions between Italian and Chinese companies. One of the first studios to open in China, today it counts offices in Beijing, Shanghai, Hong Kong and Southeast Asia. Birindelli was also a consultant for Prada's Luna Rossa venture in New Zealand during the last Louis Vuitton Cup.

"You have no idea how many phone calls I receive from textile mills or medium-sized Italian companies asking me to find a buyer [in China] for their assets," he said.

That said, a transaction between Italian and Chinese companies is much more complex than expected for reasons mostly connected to bureaucratic and political reasons, according to Birindelli. "The red tape connected to even opening a bureau in Italy is inconceivable for a Chinese businessman," he said.

"There has been a strong improvement in management, which is well prepared today, but the speed in [dealing with transactions] is very different and even excessively simplified in China," concurred Michele Norsa, chief executive officer of Valentino Fashion Group, in a phone call from China, where he was finalizing an agreement with a partner in order to open two women's stores there next year. "In any case, the best way to do business is with one-on-one knowledge of the managers, not by fax or e-mail."Birindelli also said Italian mills are often in financial difficulty and have no clear corporate governance. Thus, the Chinese are not ready to buy just for the sake of buying an Italian firm. One consultant who requested anonymity said oftentimes these mills are "empty shells," as they have sold their know-how and machines to Chinese companies over the past 10 years to "make a quick buck." Another source said "the Chinese want to have a hand in Italy and a foot in Europe and are more interested in firms that have a brand and a reputation, or a commercial and distribution network that they can take over."

Case in point: In 2003, the Ermenegildo Zegna Group, which has been present in China for more than a decade, acquired 50 percent of SharMoon, establishing a joint venture that controls that company's apparel business, with the goal of reinforcing its presence in China. Last year, the joint venture SharMoon EZ, signed an agreement to exclusively produce and distribute the existing men's wear brand Piombo in China.

Franco Penè, chairman of Gibò, the Italian manufacturer that produces collections for Viktor & Rolf, Hussein Chalayan and Paul Smith, among others, believes it is "inevitable" that China's evolution will bring it from a manufacturing-oriented country to one that will have a direct presence in various Western markets.

"The way to do that is to buy brands. That's what happened with white goods, and IBM [laptop computers] is a perfect example — first they produced it, then they decided to buy the label. I am 100 percent sure that the Chinese will enter Europe this way, not with their own brands, but buying international brands that have their own distribution network," said Penè, citing Pringle as an example. The Scottish brand is now controlled by the Hong Kong-based S.C. Fang & Sons.

According to Vittorio Missoni, sales and marketing manager at the family-owned company, the Chinese are more interested in signing licensing contracts or forming joint ventures to produce collections locally and then distribute them in Asia. "We are currently not considering this option, it's not a priority or a goal for the time being," said Missoni, concurring with Norsa on how the level of education and preparation of managers in China has tremendously grown over the past 15 years. Missoni also praised the level of craftsmanship achieved in certain categories."We have our [Missoni Home] carpets made there, as they are highly specialized in making these by hand," he said. "Today, our partners there would like to take it to the next level and be in charge of distribution, but we feel it's premature."

Most executives agreed that it is too soon for the Chinese to develop a fashion brand from beginning to end and that, while the quality of their products have improved, they still depend on Italians and others for creativity and style. "You can't improvise creativity. The Chinese know it and with intelligence they depend on someone who will add value to their products," said Alberto Del Biondi, whose design studio, Industria del Design, works with fashion houses in Italy, the U.S. and China, including Pirelli PZero, Stonefly and Riva.

"The way the Chinese can imitate business models is impressive — their learning abilities are extraordinary and so is their economic potential. What will help us? The brand and our tradition, good taste and quality. We believe ideas are the most valuable asset on the market and, fortunately, those abound in Europe," said Del Biondi.

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