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China enters new luxury market era

Publication Date : 12-05-2014

 

If you want to get some idea just how important China has become as a luxury consumer market you don't have to go further than the recent Beijing auto show.

What started out as a low-key event in 1990 has grown into the biggest and most important stage for the world's auto makers, especially those at the luxury end where models are tailored to China's affluent.

Wander the streets of Beijing and Shanghai and you are sure to see BMWs, Mercedes-Benzes, Porsches, and Ferraris - just about any top-end auto brand that comes to mind.

By 2020, China is expected to be the world's biggest luxury auto market, according to Dan Ammann, president of United States auto giant General Motors, who shares this view with many of his competitors in North America and Europe.

The explosive growth of China's emerging middle class has brought with it sweeping economic change and social transformation and will continue to do so, says global consulting firm McKinsey & Co. By 2022, more than 75 per cent of China's urban consumers will be earning 60,000 yuan ($9,600) a year.

McKinsey says that in terms of purchasing power, that is between the average income of Brazil and Italy.

In 2000, just 4 per cent of urban Chinese households were within that range.

Analysts say the middle class and upper middle class will be the principal engines of consumer spending in the decade ahead.

More than a third of the money spent around the world on high-end bags, shoes, watches, jewelry and ready-to-wear clothing now comes from Chinese consumers either domestically or abroad when they travel.

Within the next year, Chinese tourists could be spending as much as $194 billion annually in Europe, the US, Asia and other vacation spots, according to Morgan Stanley in a research note on luxury companies.

Chinese travellers are already the world's biggest spenders, according to the United Nations World Tourism Organization.

The UN group says that by next year the number of Chinese travelling abroad will exceed 100 million, although some analysts say that may happen this year.

Earlier this year, The Economist said: "How much China spends is striking. Even more so is the way it spends".

China is now one of the world's most sophisticated consumer markets, heavily skewed toward expensive goods, the publication said.

"Local property barons are now building half the world's new shopping malls in China, many of them in smaller cities, because even punters without big incomes are becoming big shoppers," it added.

For luxury brands, China has been a natural magnet over the last decade or more, especially as home markets in Europe and North America haemorrhaged in the wake of the global financial crisis.

But the 20 to 30 per cent growth many of the brands enjoyed has fallen significantly in the last couple of years, however.

Bruno Lannes, a partner with management consulting firm Bain & Co, says he expects China's luxury market to grow at around 2 per cent this year.

"(And that is) much the same as last year," Lannes told China Daily, who is also Bain & Co's head of consumer goods and retail practice in Greater China.

He says growth last year was around 2 per cent compared with 7 per cent in 2012.

"The government's policy on frugality and anti-gifting has impacted on the sector, especially watches and menswear," he says.

Another factor is the growing number of Chinese who are now buying many of their luxury goods overseas. China's tax and tariff policy makes most luxury brands more expensive.

Bloomberg recently said, "Many of these travellers buy Western or designer goods abroad because import duties and other taxes add up to 60 per cent of their prices in China, compared with cities like London, Paris or Hong Kong."

Lannes says overseas purchases by Chinese last year grew by 67 per cent.

According to Bain & Co's latest survey on China's luxury market, Chinese travellers now account for 29 per cent of global luxury spending. "Chinese consumers, especially women, are becoming more sophisticated and informed about brands," Lannes says.

Nick Debnam, Asia-Pacific chairman for consumer markets with KPMG China, says China is experiencing a slowdown in the luxury market but is not going backwards or in decline. "True, you are not seeing the 20 to 30 per cent annual growth rates in luxury sales you saw a few years back."

 

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