Luxury companies under pressure to find their niche and build credibility amid growing market sophistication in China, KPMG report says (May 13, 2008)

Luxury companies under pressure to find their niche and build credibility amid growing market sophistication in China, KPMG report says.

Source: KPMG China

Hong Kong, 13 May 2008

Pressure is mounting for luxury companies to find their niche and establish their credibility as China's luxury market continues to grow in sophistication and has become measurably more crowded over the past two years, the latest KPMG China report reveals.

"The challenges facing new entrants to China's luxury market are intensifying. The market has become more crowded, as evidenced by the rising number of luxury brands recognised by consumers in China," said Nick Debnam, Partner in charge, Consumer Markets, KPMG China.

On average, survey participants in the report recognised 64 different luxury brands compared to 52 in the 2006 survey. In Shanghai, this rose to 73 brands, while the figure for tier-two cities stood at 62 brands.

The report entitled "China's Luxury Consumers: Moving up the curve", is based on a survey of 15 cities, covering an adult population of 66 million of whom 30 percent are from middle income households. Respondents are between 20 to 44 years of age, and all earn upwards of RMB 3,500 per month, with a minimum income of RMB 5,000 in the larger cities of Beijing, Shanghai, Guangzhou, and Shenzhen.

Over the past decade, income and retail spending have continued to rise strongly in China. In 2007, retail sales in China topped RMB 8.9 trillion, up more than 17 percent year-on-year, which amounts to a doubling of China's retail spend in the space of just six years.

Denoted as the "bling factor" in the report, status remains key to the growth of luxury consumption. However, Chinese consumers are also developing greater appreciation of brand values and heritage, with connoisseurship, trend-setting, and indulgence also emerging as luxury consumption drivers.

"As Chinese consumers have become more sophisticated, luxury companies also need to look beyond conventional advertising to build brand awareness," said Mr. Debnam. "Alternative marketing strategies, including exhibitions, events, and sponsorship can be more effective in educating the market and reinforcing certain values, such as status, heritage and exclusivity."

The fact that Chinese consumers are more able to travel overseas due to reduced restrictions and the renminbi appreciation also contributes to the growing sophistication of the luxury market. In 2006, mainland Chinese tourists made 34.5 million outbound journeys, compared with just 12.1 million in 2001. In the survey, respondents earning more than RMB 8,000 per month travelled overseas on average 2.3 times per year.

"In terms of their consumption patterns, China's consumers are very willing to buy luxury products overseas. This is partly because the high levels of duty and value added tax within China mean that products overseas are often significantly cheaper, but also Chinese consumers want the experience of visiting boutiques or flagship stores," says Mr. Debnam, citing that over half of the survey's respondents also buy luxury goods as gifts for others when travelling.

While Chinese consumers show a strong desire for luxury products, they remain cautious over credit. In most product categories, fewer than 10 percent said they were willing to buy luxury items on credit. Some twenty-nine percent of respondents still do not own a credit or debit card, while only 19 percent own three or more cards.

As China's luxury market continues to develop, luxury companies are also changing their business models. One emerging trend is a willingness to invest directly in China's luxury and retail sectors. However, the report suggests that distributors and joint venture partners can still play a valuable role in helping develop a brand's presence. In terms of franchising and joint venture arrangements, adequate incentives for the licensee are needed as well as clear terms outlining compensation should either party wish to end a joint-venture agreement.

The report also highlights the tax implications brought about by the choice of business models of luxury companies. In particular, China's new Unified Corporate Income Tax Law introduces the need for contemporaneous documentation of transfer pricing, and companies now need to take a serious look at proactively managing their transfer pricing risks.

Note: Please click this link to access the full report:
http://www.kpmg.com.hk/redirect.asp?id=8778

Booz Allen/AMCHAM Shanghai Study (dated on March 4, 2008)

Source: Booz Allen Hamilton

Booz Allen/AMCHAM Shanghai Study Finds Companies Adopting China as Both a Growth Market and Manufacturing Hub Are Two-Thirds More Profitable Than Others
Full global integration of China with global supply chains and boosting operational excellence are keys to countering rise in currency, labor costs.

NEW YORK, March 4, 2008 – The era of China as a low-cost, manufacturing-for-export market has come to an end. Companies that integrate China into their global supply chains as a source of competitive advantage are far more successful than companies that pursue narrower objectives in China, finds a study jointly conducted by management consulting firm Booz Allen Hamilton and the American Chamber of Commerce (AmCham) Shanghai.

More specifically, companies that pursue China as both a growth market and a market for lower-cost labor and sources, and integrate these operationally, enjoy significantly higher profits than companies pursuing just one of those objectives. Companies that employ dual sourcing and sales strategies report an average profitability rate two-thirds higher than those focused on just one of those objectives (29.6 percent compared with 17.8 percent). Despite the returns that this approach can generate, only one out of four companies is able to combine a strong in-country market growth effort with their manufacturing and sourcing operations.

The first annual study, "China Manufacturing Competitiveness 2007-2008,” found that while a stronger Chinese currency and rising wages were putting pressures on manufacturing margins, failures to deploy operational best practices and to fully leverage China as both a growth market and source of labor and products are also limiting profits.

• Download China's Shifting Competitive Equation – How Multinational Manufacturers Must Respond
  
  
• Download Integrating China into Your Global Supply Chain – Lessons Learned from Global Supply Chain Integrators

“The manufacturing philosophy employed by many foreign multinationals in China in recent decades is in need of an overhaul,” said Ronald Haddock, Vice President, Booz Allen. “China’s changing cost and currency structure have shifted, forcing companies to rethink how they structure their Chinese operations and how they perceive China in their overall global strategy. At the same time, China is increasingly a major source of product and business model innovation. We’re seeing globalization at work and China’s role has changed.”

More than half of the surveyed foreign-owned or foreign-invested companies manufacturing products in China believe that the country is losing its competitive edge in manufacturing to other low-cost nations. As a result, nearly one in five manufacturers surveyed has concrete plans to relocate or expand China operations to other countries, with Vietnam and India seen as the top alternatives to China.

Among the study’s key findings:

• Operations management is a factor: The study found that three out of four companies lack fundamental best practices in their China operations, including integrating the dual functions of export platforms and domestic market penetration. Survey respondents cited a number of best practices that have yet to be fully applied in China. Just 11 percent reported fully applying integrated planning systems such as enterprise resource planning (ERP) software and material requirement planning (MRP). Even fewer companies – only 7 percent – had fully deployed analytical inventory calculation tools and processes, and 4 percent employed best practices for supply chain risk management.
  
  
• Declining competitiveness: More than half, or 54 percent, of companies surveyed believe that China is losing its competitiveness to other low-cost countries. Seven out of 10 respondents cited the rising renminbi as a major reason for China’s decline, while wage inflation was cited by 52 percent of those polled. Wages for white-collar managers and blue-collar workers have jumped 9.1 percent and 7.6 percent, respectively. Staff retention is also a major concern, with 33 percent of respondents citing it as a reason for lost competiveness.

At the same time that costs are increasing, China is lagging behind global standards in many operational dimensions, most notably in logistics infrastructure, trade environment, access to technology, management capabilities, and protection of intellectual property.

• Companies eyeing Vietnam and India: Nearly one in five companies surveyed (17 percent) say they have concrete plans to relocate at least some of their China-based operations to other countries. Although 88 percent of these corporations say that they originally chose China for its lower labor costs, they are finding that cheaper labor and tax benefits have made alternative locations more attractive. Among these corporations, Vietnam is the top alternative to China, according to 63 percent of this group, while 37 percent say India is their first choice.

Among all respondents, when asked to compare China to alternate countries, they cited lower labor costs in those other countries as the largest differentiator, at 3.7 out of a scale of 5, indicating that China’s reputation as a source of cheap manufacturing labor is diminishing. However, the alternative countries lag China in market potential and infrastructure.

• Majority staying in China: Despite the rising costs of manufacturing in China, 83 percent of manufacturers said they will maintain their operations in the country. China’s vast domestic market was cited by 78 percent of respondents as the reason to maintain the status quo, while 39 percent were unwilling to establish a new supply chain, motivating them to remain in China.

“China’s phenomenal economic growth and market reform story, together with a dynamic and challenging business environment, will continue to put pressure on manufacturing companies,” said Brenda Foster, President, AmCham Shanghai. “They will have to focus on continually improving their competitiveness and devoting more resources to innovation as they pursue their strategies and plans in China.”

Study Methodology

Booz Allen and the American Chamber of Commerce Shanghai surveyed 66 of the largest foreign-owned or foreign-invested manufacturers in China, representing more than 10 percent of the 600 largest foreign-owned or foreign-invested manufacturers in China. Online survey questions, on-site visitations, and in-depth interview methods were all deployed. Of the companies surveyed, 81 percent were wholly owned by foreigners, 10 percent were joint ventures between multinationals and Chinese partners, and 9 percent were categorized as “other.”

The manufacturers’ industries included consumer, industrial, healthcare, and materials. The study was conducted between September and November of 2007. The countries of origin of these manufacturers included the United States, Japan, and several in Western Europe. Approximately 30 percent of the respondents have an additional major presence in China beyond their manufacturing footprints, including representative offices, regional or global headquarters, regional or global procurement centers, and regional or global R&D centers.

Along with our partners at the American Chamber of Commerce in Shanghai, this work was completed by a Booz Allen team including Dr. Christoph Bliss, Ronald Haddock, Kaj Grichnik, Conrad Winkler, Ken Zhong, Raymond Yeung and Ashish Ranjan. Grichnik and Winkler, along with Jeffrey Rothfeder, are the authors of the upcoming book entitled "Make or Break: How Manufacturers Can Leap from Decline to Revitalization," which will be published on April 17th by McGraw-Hill.

List of Chinese ADRs and Their Performances

List of Chinese ADRs and their performances in 2007. In general 2007 was a great year for Chinese stocks and ADRs; 2008 has so far been very difficult for Chinese stocks and ADRs.

Source: http://bespokeinvest.typepad.com/bespoke/2008/04/list-of-chinese.html

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