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Jun
2015

Government influence is far reaching and immediate

Perhaps as might be expected, the recent party congress has been the subject of gossip over the past few weeks, so we cannot avoid mentioning in this section of Luxury Insights China, what has been said, and presenting some of our views on what this might mean to you and other luxury brands.

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Government purse strings tighten

Perhaps the subject of greatest discussion has been spending by government departments and state owned enterprises, and of course the affect this will have on gift giving. A recent policy strictly stipulates that government departments may not purchase luxury goods, which has directly hit the watch, jewellery and handbag sectors. This stance was reiterated at the congress by Chinese Prime Minister Mr Li who announced a five year ban on government departments spending on capital projects such as office buildings, and spending on receptions, overseas travel and government vehicles is being restricted.

The public has made their voices clear in recent months that the government is wasting too much public money on plush offices, trips overseas and new limo’s all of which serve no visible purpose. Audi which is the preferred official vehicle in China, has already seen the writing on the wall, and started to change their image into one of young and cool, from governmental and reliable as a result. What was interesting to compare was the appearance of the delegates at this years congress to those last year, the Hermes belts and bags were clearly on display last year, yet completely absent this month.

The market response

Many luxury brands here have already resigned themselves to the fact that the frugal policies will continue to affect their business for some time to come, and have adapted their positioning for the new Chinese luxury market by delivering understated messages and products. China is a country in which government policy affects everyone, and often quite immediately, so go with the policy and the people will come to you.

Another unique attribute in China is the way people accept a policy or new rules, find a way around or to ignore them. We see this adaptation in daily life, and take it for granted because it’s ‘normal’. Although the control of spending by government departments and state owned businesses is a recent policy that is being enforced, for some time the process of buying luxury products anonymously has been possible through third parties who make the purchases and provide the necessary receipts against which they can be accounted. The need for the ‘business’ receipts is the reason the purchase of gifts for this purpose must be made in China and not overseas, and hence its importance to the domestic luxury market; this is public money. At this particular time of year, these third party companies would expect orders for very large amounts of money, but this year things were very bleak.

One other purchase route that is talked of as benefiting from the new regulation is e-commerce, because purchasers need not be the recipients of the product. This idea may work for private business owners without the time to visit stores to buy directly. They will want the product delivered to a client or associate, but any receipt provided will not have the correct wording on it for government purchases, so it has limited value in our view. Not to say that e-commerce will not grow dramatically in China, but it’s not a cure all for the current government policy.

Consumption tax, up or down?

The other subject of discussion at the moment is the tax rates for luxury goods, and whether there is something that can be done with them to stimulate domestic consumption. The ideas publically put forward by the government so far seem very farfetched involving an increase and not a decrease in tax because there is a suspicion at their level, that luxury brands make too much money and increase their prices each year. The logic is that an increase in tax would have to be swallowed by the brand, as they cannot keep increasing retail prices Indefinitely.

What we hope the government is taking into account is that the cost of retail space, salaries, logistics, marketing and everything else related to selling product in China is constantly increasing, and that brands have to cover this increase and make money. Luxury brands have also really helped develop the commercial property market in China and drive up its value, and income from taxes. There needs to be a way for both sides to benefit and cooperate in the long term.


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