Three Rising Sectors within China’s Luxury Market
According to Michael Ouyang, CEO of the World Luxury Association’s China office, "China will take the place of Japan and become the world's largest consumer market for luxury goods. More than 70% of the brands will try to accelerate a shift in their development focus from Japan to China this year”. Major groups such as PPR, Titan, Richemont or LVMH have been forced to compensate for lost consumer sales from in Japan after the March 11 earthquake and tsunami by focusing even more on China. Foreign brands dominate high street fashion, top-end automobiles, jewellery and luxury timepieces in China today. What opportunities are there to tap?
A broad market scan shows three under-tapped opportunities, both for local and foreign companies.
Jewellery
The jewellery sector has been growing constantly since the 1980’s when it amounted to a total sales of US$24 million. China's consumer jewellery sales has since risen to US$30 billion in 2010 in spite of economic challenges. According to estimates from the China International Gold, Jewellery & Gem Fair, China is also one of the world's biggest consumers of diamonds, with annual sales of RMB 30 billion (about US$4.3 billion). China is the only nation in the world with increasing demand for gold jewellery. Its demand for gold for use in jewellery manufacturing increased 6 % to 347.1 tons in 2009, from 326.7 tons in 2008. China outranked Japan in 2009 as the world's second largest diamond market. China remains the world's biggest producer of freshwater pearls. Over 95 % of the world's freshwater pearls are produced in China.
China's domestic jewellery consumption in 2011 will grow by 16 percent. At this rate, China is likely to overtake the U.S. in global jewellery sales by 2020, with an estimated market worth of US$50-59 billion. There is currently no major local player of the jewellery sector. This is a missed opportunity considering that China offers 115 billionaires who are familiar with its long history of fine craftsmanship in jewellery.
In the mid-range luxury sector, Fossun, a group active in the tourist and retail industry, recently acquired a 20% stake in the Greek company Folli Follie in May 2011, in order to strengthen its position in the tourist retail market. Fossun could start providing the jewellery at its Yuyuan outlets and target the US$1.2 billion jewellery market for tourists in China.
Local luxury brands produced a total of US$14.6 billion worth of jewellery in 2010 and provide an array of services such as gem polishing and cutting, mass production of simple designs or mass production of river pearls. However, they suffer from a lack of recognition and popularity critical to hit the high end of the Chinese market. Local companies thus mostly act as OEMs and export products that are branded outside China and imported back with more famous names that sell well.
Even major local players such as Caibai Jewel, Colourful Yunnan or Yuewang have achieved almost no international recognition, due partly to weak market efforts that started only in 2004 even for the most pioneering companies and the poor reputation of the “Made in China” label for luxury goods.
Tanishq, an Indian jewellery business started in 1994 by Titan Industries, provides a good case study of how local companies in emerging economies can tap into their domestic jewellery markets. A joint venture between the Tata Group and the Tamil Nadu Industrial Development Corporation, Tanishq contributed over 50% of the 72% in sales growth for the Titan group for the period of April 2010 to March 2011. As a local brand, Tanishq has a keen knowledge of the cultural maze of India and knows exactly when and where to market its products. One of their successful moves was to offer different bridal jewellery lines and collections specifically tailored for each one of the major Indian ethnic groups (Punjabi, Bihari, Gujarati, Marwari, Telugu, Tamil, Bengali, Kannada and Marathi). The brand also markets its products through seasonal discounts and advertisement campaigns during religious celebrations. The stores are also designed to cater to local purchasing behaviour. Instead of a plain and discreet environment, Tanishq offers playrooms for children and comfortable lounges for men where they can relax and catch up on the news.
Yachts
Another and second segment of the luxury market yet to be fully tapped is yachting. The Hurun report from China published a survey in 2010 stating that among the 845,000 US$ Millionaires in China, more than 400,000 intended to acquire a yacht, a huge jump up from the 1,300 current yacht owners in Mainland China. The local market is currently restricted by a 40% tax on imported yachts.
There are 20 local yacht manufacturers and 11 of them have found backing by foreign funds according to an Associated Press report. According to the Italian Federation of Boat Manufacturers, 40 foreign manufacturers are competing for Chinese buyers and have already set up partial operations in China either by WOFE or 50% joint ventures while another 30 are distributing their products through the 30 distributors of foreign yachts in China. Only six companies are producing super yachts today in China, out of which five are owned by foreign entities, mostly from Taiwan and Hong Kong.
Most of them, like Kingship Marine, are only building their first ever super yachts (longer than 24m) and are making the bet that they will sell. Manufacturers also have to contend with the still developing legislation on yachting. The first law on yachting purchase, practice and manufacturing was adopted in 2009 by Beijing and will need some time to be polished.
If manufacturers have made that bet, it is not without reason. Regardless of the domestic market, local production is 30% cheaper than in developed countries and the largely untapped market of super yachts is likely to expand quickly as the local governments are swiftly developing the infrastructures to welcome them.
Haikou for example has already secured 400 berths that are scheduled by the end of 2011. The region’s Plan also scheduled 600 more berths for the next 10 years. Similarly, Tianjin has already invested US$1.4 billion in a new yacht port and aims to become a leading yacht centre with 750 berths, with some capable of handling boats of up to 90 meters long.
Luxury Resorts
The third area is luxury resorts in China. The 12th Five Year Plan in China stresses the importance of developing the ring of Islands around China and, since April 2011, the government offers a lease of 50 years (similar to the Hong Kong lease) for 176 uninhabited islands. Of these Islands, 60 are located in the southern province of Guangdong stretching from the vicinity of Hong Kong to Hainan, 50 in Fujian province (southeast) ideally placed between Taiwan and the Mainland, and 31 in Zhejiang province (east) not far away from Shanghai and Hangzhou.
The remainder are scattered between the other coastal provinces. All of them are close to the overly developed China coastal region and could be linked to the major hubs of China with minimal investment, smaller competition and much lower land prices.
As such, these islands could provide great development opportunities such as “private Island” type resorts as seen in Dubai with its manmade Palm Island or the Florida Keys and Dark Island in North America. These offer secluded retreats for billionaires in search for social statements and privacy or high end tourist resorts.
The program, comprising tax exemptions and investor incentives, is similar to the development plan implemented in Hainan Island which helped the Island’s economy take off as a prime resort location. Since the preferential tax regime began, joint ventures have been flooding Hainan. Examples include the five-star Qingshui Bay Resort, a Morgan Stanley-backed Hilton resort with 500 rooms that is opening in 2013 and the 28 sq km of beach front properties that are being developed by China Strategic Property Holdings. This stretch of Islands promises to form a bridge between the world class luxury centres of Hainan on one side and of Hong Kong, Macao and Taiwan on the other hand.
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