Chinese consumers in the world’s fashion capital spend more than those from any other country, with 37 percent of their budgets slated for shopping, 18 percent for food and gastronomy and a mere 3 percent for visiting museums and historic sites.
This is not just about Paris, but about how luxury shopping and international travel are inexorably intertwined in the minds of a great many Chinese tourists.
Proof: Paris is not alone. The same applies to Milan, New York, London, Beverly Hills, and any city where Chinese tourists gather. Walk into anything larger than a boutique at the Forum Shops at Caesar’s Palace in Las Vegas, for example, and there will almost inevitably be a Chinese-speaker on duty behind the counter.
The lesson for brands: Chinese are global consumers seeking experience and authenticity. The old formula of name+bling+advertising is dead, and the brands that fail to notice that are heading for hard times in China.
“It would be a big mistake to adapt to a market,” [Patek Philippe owner Thierry Stern] told the Straits Times in an interview. “If people like Patek Philippe, it’s because they like the design and the philosophy of the brand. If you start to adapt yourself to every market, you are going to lose that.”
Thierry should be lauded for not adapting Patek-Philippe for China. This is a man who understands the problems that arise when you start pandering to your market rather than catering to it.
That said, not every company shows up in China with a Patek Philippe brand cachet or customer base, and few brands could get away with imitating Stern’s strategy.
The lesson to learn from Thierry Stern’s approach is that the decision on whether or not to adapt your strategy, your product, or your entire company to China has to be based on a clear understanding of your appeal with Chinese consumers, as well as a recognition of what you might lose globally by making compromises for a single market.
Back in June, Salonpublished a listicle detailing “5 Major Threats to Further Hasten Uber’s Decline.” Listing the sexual harassment lawsuits, the mishandling of a driver rape case, improper driver classification, the Waymo issue, and Greyball, it was better clickbait than it was journalism, doing little more than offering a summary of recent headlines. Thanks for the update, Salon.
While each of these represents a serious crisis, and while the company is being tested in its ability to deal with one, much less all of them, arguably each of these are, separately and collectively, crises that the company can survive.
Rather more ominous is the insight offered by RadioFreeMobile on the accelerating erosion of Uber’s global markets. “First Uber lost China, then Russia, and now it looks as if South East Asia may go the same way.”
He then goes on to detail the strategic investments made by Softbank and Didi into Grab, the dominant ride-hailing platform in Malaysia, Singapore, Indonesia, Thailand, Vietnam and Philippines, with a 97% share in those markets. A dominant market leader fortified with loads of cash means that Uber is essentially locked out of markets with over 560 million people, in addition to the 1.5 billion Chinese and 300 million Russians who will not be using an Uber service soon.
The big question now is where India and Brazil will go.
Uber is on its back foot in international markets. You can argue, as does RadioFreeMobile, that the distractions listed by Salon are not helping, and you’d be right. But those issues are not the cause of Uber’s missteps outside the US: the strategic flaws that have undermined Uber’s global expansion predate Salon’s list and are rooted in the nature of the company.
As I said recently on Twitter, when historians ultimately close the book on Uber, they will agree that the fall began with Uber’s failure in China. Not that Uber’s China missteps will be seen as the cause of the company’s demise, mind you, but as the first clear indication that its strategic miscalculations and flawed leadership left the rest of the world beyond Uber’s reach.
Watching the Sino-US relationship evolve, and then not evolve, since the inauguration of President Donald Trump, I have to confess some disappointment. Let me qualify what follows by noting that I am not a fan of POTUS 45. I not only crossed party lines to vote against him, I left the GOP outright and joined a tiny third party when he was selected as the Republican nominee.
So all of that said, we have reached a point in the relationship between the US and China such that a reset is in order. It has been 44 years since Nixon went to China, and nearly 40 years since Jimmy Carter and Deng Xiaoping recalibrated the US-China relationship.
That relationship was formed when the United States was entering the fourth decade of its Cold War with the Soviet Union and the Sino-US tie-up promised to subtly but importantly shift the balance of power in favor of the West. It was formed when China was crawling out the wreckage of the Cultural Revolution, and out from under the long shadow of Mao Zedong.
That relationship was framed between a large and slightly desperate third-world country that constituted absolutely zero threat the world order and a developed nation that boasted the most prosperous economy in history, the most powerful military on Earth, and leadership of an international system that it had forged with its allies a mere three decades before.
Four decades hence, China has changed, the United States has changed, and the world has changed. Yet we have been conducting this bi-lateral relationship on terms that are increasingly irrelevant and unrealistic. Let me put that another way: the US continues to conduct its side of the relationship on that basis. China has made clear to us for a long time – without ever actually saying it – that it will conduct its relationship with us on terms dictated at least as much by immediate expediency as decades-old agreements.
So it is time for a strategic reset in our relationship that accurately reflects what China is and wishes to become, who we are and what we wish to become, and the fluid state of the global order.
The call that Trump placed to President Tsai of Taiwan, representing as it did a break from diplomatic tradition if not international accords, once appeared to be Trump’s opening gambit in his version of that reset in the Sino-US relationship, and a possible change in the rules that govern that relationship.
That no longer seems the case, and one can hope that the change in tone from the White House reflects a practical desire to compel a resolution to the North Korea question rather than acquiescence to a Chinese view of international affairs. Putting off a reset in Sino-US relations for too long will only make the necessary changes all the more disruptive.
Apropos of my post last week about Wanda, a quick thought.
One of the issues that remains a matter of our ongoing fascination with Wanda revolves around a series of important questions that remain largely unspoken: Do Wang’s purchases in the US constitute a simple diversification of his investments? Are they part of a strategy to globalize his businesses?
Or are we witnessing something quite different, Wang’s slow divestment out of China and the flight of his capital to safer havens abroad? And if not a flight out of China, is he at least shifting his money out of real estate?
The company bears close scrutiny if for no other reason than they are a harbinger of what is likely to be a larger trend, and understanding the forces that drive this trend are going to be essential in helping business address Wanda as a strategic challenge, and policymakers address it from a regulatory standpoint.
All very interesting, but it serves as a reminder that GM is still playing catch-up with Tesla in the space.
I’d still by a Tesla before a Cadillac, and I reckon I’m not alone in either the US or China. What about you?
Apocryphal, to be sure, but it suggests that the venerable marque has a brand problem that innovation alone will not solve. I suspect that winning in China will be critical for the future of the Cadillac brand, determining whether it keeps up with Lexus, or whether it struggles to keep pace with Lincoln.
In 2007, Yahoo agreed to pay millions of dollars to set up a foundation to aid Chinese political dissidents, after the company was accused of turning over information to the Chinese government. A lawsuit filed on Tuesday claims most of the money is gone, and little went to help imprisoned activists.
Yahoo! made billions on its Alibaba investment, and for many years could credit the Alibaba shares in its vaults for much of its market cap. For that reason, a lot of us would mark Yahoo’s efforts in China as a success.
It is probably too early to make that call. The full story of the company’s China experience has yet to be told, and now that Yahoo no longer exists as an independent entity, it will either be told now or buried for a long time.
But some things won’t die, and if this most recent lawsuit actually makes it to a courtroom, we may get to see the details of how successive generations of leaders at Yahoo used China to burn cash, divert the attention of company leadership, and destroy shareholder value.
Sadly, I’m betting this case will settle. Verizon doesn’t need the headache, and it really wants to get focused on turning its collection of Yahoo and AOL leftovers into something profitable. It is a shame: buried in Yahoo’s vaults lies the raw material of a China business “how-not-to” textbook.
Late last year I noted that life after Uber would not necessarily be a picnic for Chinese ride-sharing giant Didi. While an 85% market share looks unassailable, it will need a lot more money to secure its position.
I was prepping a post on why that is the case, but Dr. Richard Windsor at Radio Free Mobile beat me to it. Read the whole post. His bottom line:
Rising prices and lower reliability is likely to drive many users back into the arms of the taxi industry thereby achieving exactly the result for which the rules were created.
Windsor believes that the only logical response for Didi is a change in strategy, but finds it hard to see how any strategic choices open to Didi justify its $34 billion valuation. Fair enough.
Now, second-order effects time. Uber and Apple are Didi investors. As I mentioned in December:
Didi is a rapidly-growing company with a need for a huge war chest in order to secure its market position. Payback to investors will be some time down the line, and others will decide when and if Uber [or Apple] will ever see a dividend. Even if it does, the question will remain as to whether that dividend was a fair compensation for the price and a fair return to investors on the risk.
If you are an investor in either Uber or Apple, and you count the company’s holdings in Didi as a part of the firm’s underlying value or future earnings, have a look at Windsor’s post. You may want to re-run your numbers.
The rule for disruptive companies in China, regardless of provenance, is this: your future depends on more than just being able to make a handsome profit off of disruption. You have to convince a host of powerful individuals and groups that China is better off with the industry disrupted than with the status quo.
Wanda’s Wang Jianlin has now made his fourth major acquisition in the US film industry. To his stable of the AMC and Carmike cinema chains and the Legendary Pictures production company he is now adding Dick Clark Productions. But it is rare indeed that something in China is as it seems, and that is why it is worth probing a bit into Wanda’s US acquisitions.
To their credit, US media are trying to do exactly that. Over the past several months, I’ve spoken to experienced reporters from the world’s leading financial news services, all of whom are trying to discern whether to take Wang Jianlin at face value, or whether there is something happening beneath the surface at Dalian Wanda Group that is at odds with its founder’s public positions.
What they’re getting is frustrated. It is always challenging to get information out of a firm unbound by the disclosure laws that govern public US companies. For what are probably very practical reasons related to its China business, Wanda apparently makes a fetish out of opacity.
When the world’s best investigative financial journalists start coming up empty, we are left with seeking answers based on clues rather than on answers. The best place to look is in the behavior of their partners and subsidiary companies. Some potential clues:
Check IMDB. Does Legendary look like it’s production slate is shrinking, or its production rate is slowing? Is Dick Clark increasing production, or is production on decline?
Check reviews of AMC and Carmike cinemas, especially their bigger, newer, flagship multiplexes in large US cities, on Yelp! and similar sites. Are reviews trending upward, or are they in decline? Are there complaints related to quality of service, of food, of cleanliness?
What is the status of partnerships with companies like Sony and IMAX? Are we seeing any action, or have things gone quiet after big announcements? Is Wanda living up to its commitments?
And, of course, watch for news on major moves in China’s real estate market, or from the government on restricting Chinese investments abroad.
Good reporters are already doing all of this. But journalistic standards won’t allow them to report on such circumstantial indicators. For the rest of us, they can help us gain a general hunch about where the company stands, how it is operating in the US, and where it is likely to go next.
Longer term, though, Wang will have to learn to operate in a part of the world where deep scrutiny of his operations are encouraged rather than prohibited, and where transparency is a necessary precondition for the trust he will need to sow in order to prosper.
Even if LeEco and the rest of Jia Yueting‘s business holdings implode over the next few weeks, those of us who will pick through the wreckage looking for the lessons will surely learn two things very quickly.
The first thing that we will discover will be that anyone who dismisses Jia as a “fool” or an “idiot” will be wrong. Under the bluster, we will find that Jia is an exceptionally smart guy who had a fantastic vision for his company.
The second thing we will find is that the reason for Jia’s failure was not his overall strategy. Let me explain that a bit.
Jia is an implicit subscriber to an ethos that is common among entrepreneurs that I call “conglomeration mystique.” Seeing himself as cut from the same cloth as Elon Musk, Steve Jobs, and Jeff Bezos, Jia sees no reason why he cannot do what they did.
All things being equal, he’s right. Other entrepreneurs, supported by a war chest from a core cash-cow business, have leapt into unrelated fields and surprised their critics. I know of no gift possessed by those people that Mr. Jia might have lacked. So the vision was not wrong.
Jia’s mistake is one that has plagued so many Chinese entrepreneurs: operating in a market that rewards speed and short-termism, he became convinced that he had to do everything right now, or the opportunity would be lost to him.
As the Bloomberg article hints, Jia’s pace of execution outstripped his ability to build the capital to support it. At several points, he likely had the choice to slow down and let the capital catch up. Instead, he chose to risk overextension, to gamble on things working out just right, and in so doing proved Gordon Sullivan’s maxim that “hope is not a method.”
The question this leaves is thus: how do you get an entrepreneur, forged in China’s Make-It-Today-For-Tomorrow-The-Government-Will-Change-the-Rules business environment, to eschew the very thinking that made him money in the first place? I don’t think you can, which means that the kind of grand-scale Hail Mary approach that has tripped LeEco is likely to become a fixture on the China business scene in the coming years.
For some, it will work. And LeEco is down, but it is not out, yet.
For two years, Jean Liu and Travis Kalanick were mortal adversaries, as their businesses, the world’s two largest ride-sharing companies, fought an increasingly bitter and expensive war. Kalanick, CEO of Uber, the San Francisco-based ride-hailing app, was trying to muscle into China, where Liu is president of Didi Chuxing, Uber’s Chinese equivalent.
Charles Clover at the FT offers this dramatic lede for an article that lays the credit for Uber’s defeat in China at the feet of Didi Chuxing’s Jean Liu.
Ms. Liu and her team at Didi deserve much credit for their victory in China’s shared-ride wars. All of us wish them only the best as they take on what will undoubtedly prove to be the far more formidable adversary: a Chinese government decidedly uncomfortable with leaving in the hands of a privately-owned company an increasingly essential piece of the nation’s transportation infrastructure.
But an honest assessment of the battle must conclude that Ms. Liu was helped at many turns by a series of unforced errors on Uber’s part. I won’t go into them here – take a look at my interview with Jeremy Goldkorn at SupChina, where I lay out Uber’s four most fundamental mistakes in China.
In addition, let’s also remember a few things:
Didi’s financial backers gave the company the war chest it needed to fight a street battle of attrition against one of the planet’s best funded unicorns.
Ms. Liu’s boss, Didi Chairman Cheng Wei, was hardly a figure head in this battle. Not for nothing did Forbes Asia name him 2016 Businessman of the Year.
Didi came to the battle fighting on familiar, home ground, and was in substantial possession of the field already when Uber showed up. Uber was battling an entrenched player as an interloping underdog in a market increasingly unfriendly to outsiders. Uber’s rhetoric and war-chest aside, they were the weaker player.
It was not “Jean vs. Travis.” It was Jean vs. the Uber China team, and as time goes on it will become more clear that Travis and his team were relatively hands-off, allowing the local team to run things. Didi defeated Travis’s partner’s team.
Regulatory changes in the market played a significant role in the driving Uber’s surrender. Unless Didi orchestrated those (not impossible), the government was also a player in the game. And if Didi did orchestrate those, protectionism beat Uber as much as Didi’s executive team.
To the victor goeth the spoils, and Ms. Liu is clearly a capable executive whose career is now pointed toward even bigger and better things. But there is nothing learned by pretending that this was not a far more complex battle than the FT seeks to portray as it graces Ms. Liu with the laurels.
One more interesting point from the article. Ms. Liu and Didi continue to play the outcome as a “win-win” for Didi and Uber. I’ve spent a career in PR in China, and to me that messaging carries a very heavy whiff of spin. I’ll explain why in a later post.
North China Plain On the G11 HST Harmony 0900 hrs.
China has passed what I like to call “Peak Toil,” the point at which the size of the pool of labor available to manufacturing reaches its apogee and begins a long decline. Chinese workers are becoming more educated, their salary, benefit, and lifestyle expectations are rising, and because of the demographics of single-child families, their numbers are shrinking. If cheap labor isn’t dead in China, it is terminally ill.
In the coming decades, China will go from being “THE factory floor” to “A factory floor.” Many things will force that change – a shrinking pool of workers, growing local opportunities in services, tightening environmental regulations, and more expensive energy. The economics, in short, will change, and so must industrial China.
The Big Ones First
Manufacturers are facing a stark choice: raise prices, downsize, or automate. Raising prices isn’t an option in a Wal-Mart world where places like Malaysia, Bangladesh, Mexico, Eastern Europe and even parts of the U.S. are already offering competitive pricing. Downsizing only offers a short-term answer when economies of scale are driving manufacturing, and is really only an option for companies who can make the shift to higher value-added products.
Which leaves automation as the answer for large manufacturers, especially contract manufacturers like Foxconn, Flextronics, and Quanta. Unable to depend on masses of workers lining up at their gates willing to work for a modest daily wage, each is thinking long and hard about automation.
Robots Don’t Jump
Beyond rising wages, law and custom in China leave companies liable for a range of benefits. Robots, on the other hand, do not require the company to invest in the real estate for dorms, cafeterias, break rooms, and other facilities, enabling the company to utilize all of its floor space for production, logistics, and support. What is more, robots don’t get sick, charge overtime, demand bonuses, or require companies to pay the additional “social” costs to the state that it would be required to pay for each worker.
And equally important, robots don’t jump out of windows. The Foxcon story has proven that there is a perception liability that comes with a larger number of workers. Whether Foxconn has ten thousand workers or two million, a single suicide or accident affects hurts the company just as much. Statistically the likelihood of such incidents rises as the number of employees grows. The coverage given to the company’s HR troubles proves that more workers mean more problems, so the best approach from the company’s point of view is to hire fewer workers.
Not Just Tech
I talk a lot about Foxconn and the technology outsourcing firms, but they are not alone. The automobile industry is a global pioneer of robotics, and Chinese factories are increasing the number of robots they are using. The packaged foods sectors rely on automation.
It is fair to say, though, that every sector is considering automation. Until last June I lived about 400 meters from the Beijing International Exhibition Center, and in 2013 the second most popular trade show – right after the Beijing International Auto Show – was the production automation exhibition. That’s apocryphal, but it is telling, and industrial robotics is about to get very hot in China.
For Better or Worse
None of this is designed to pass moral judgment on automation. The social issues that surround the process are complex, and deserve a wider airing.
But it is safe to say that automation is the beginning of the end of The Factory Girl in China, and that this is a good thing. Having spent a lot of time in factories in this country, met some of the people on the floor, and having read Leslie Chang’s book and Alexandra Harney’s superb “The China Price,” it is hard to get sentimental about The Factory Girls passing from the scene.
For the first time in decades we now have more workers serving people than making things in China. As long as the economy keeps chugging ahead, China’s shrinking pool of young workers will have a wider scope of opportunities than their predecessors. The real question is whether China will provide these young people an opportunity to learn the skills they will need in a changing environment. Given the rigidity of the educational system, that’s an open question.
Even the most automated industries need people on the line. With respect to my friends in the software industry, there are some things that cannot be reduced to code. When it comes to quality, you cannot replace the human senses, especially a critical eye. Smart companies will reprogram robots to keep them flexible. And the best automated processes have humans watching at every step. But humans will need to improve their skills to be a part of that equation.
Whether automation works in an enterprise is a question of management. But the question of whether it will revitalize China’s economy and society or undermine them can only be answered in the realm of industry practice and government policy. The change is coming, and China’s leaders had best be ready.
I had a long talk with Michael Kan at IDG recently about China mobile phone maker Xiaomi and its high-profile hire of Google refugee Hugo Barra to head up the company’s international expansion. The core of our discussion was around whether it would make a difference. Michael was circumspect about his opinion, but I wasn’t: Hugo is a great hire, but he will not easily solve the challenges to Xiaomi’s global ambitions.
Xiaomi has a strong market in China, built on powerful devices that sell at very modest prices, on a slightly patriotic appeal (buy Chinese!), and on some deft PR by founder and CEO Lei Jun. Where the company differs from other Chinese manufacturers of inexpensive Android phones is that it is attempting to build an ecosystem of its own that is meant lock in users and draw revenue on content and services in the same way that Apple has done.
Now that Barra is aboard, the bet in some quarters is that a major international push is in the offing. If it is, I wish Lei, Barra, & Co. best of luck. They are going to need it, because the minute they step outside of their China cocoon, things are going to get different for them very quickly. The three biggest challenges I see aren’t even marketing related. They boil down to distribution, strategy, and resources.
They Can’t Buy What They Don’t See
China is a retail-based mobile device market. This means that any mobile phone manufacturer can get counter space in a retail store and sell an unlocked phone to the public. The only challenge is to get people’s attention so they look for you. Lei has figured that out, which is what draws people into the stores.
Markets like the US, though, are carrier-based. This means that in order to be sold to the public, you must first win over one or more of the mobile network operators, who will then sell your device (locked) for their network both directly and through authorized retailers. As a result, there is a relatively modest number of devices available in the US, and breaking in is tough. Most carriers start out with new manufacturers (think LG and ZTE) in an arrangement where the manufacturer’s brand never shows up on the device: it is branded by the carrier. Over several years, that can change, but it will take time, and there are unlikely to be shortcuts for Xiaomi.
Cheap May Not Be Enough
Xiaomi is no stranger to competition: China’s mobile market probably has 70 handset manufacturers offering 800 devices on sale at any given time. In the US, however, it will face competitors who have the home-court advantage that Xiaomi is used to having. Apple, Samsung, HTC, LG, Google, Microsoft, Huawei, and ZTE bring more cash, technical muscle, marketing prowess, and corporate attention to the global markets than Xiaomi can afford.
Certainly there have been David-Goliath stories before: every company in the US mobile phone business with the exception of Motorola started out as an underdog. But against a particularly brutal array of competition – including Chinese rivals who can match and beat any cost advantage Xiaomi can bring to the table – Xiaomi is going to have to figure out what it can offer to non-Chinese users that its well-funded, technological-powerhouse rivals cannot. Will it be innovative, and how? Can it find a neglected niche? Will it grab onto a powerful partner, and if so, whom?
Or will the company try to duplicate its software and services ecosystem overseas?
To his credit, I get the feeling Lei understands that “cheap and cheerful” is not an option.
Going Too Many Places At Once?
China’s entrepreneurs face great temptation. Once they are successful in one business, many of them begin to think they can be successful in other, unrelated lines. There are so many green fields and blue oceans in China that the urge to move into those new areas is almost irresistible. That siren song is too-often fatal. I have watched from the inside of two giant Chinese companies as these sideline businesses sucked capital and attention from the company, allowing more focused rivals (often foreign) to leap ahead.
Xiaomi is showing early signs of entrepreneurial attention-deficit disorder. The company is already in software and services in order to secure profits that it would be hard-pressed to make on its inexpensive devices. Now Lei wants to move into internet-ready televisions, a product line that has become much easier to make but no less difficult to sell to the public, and dozens of local brands already crank them out, undercutting prices. This means that Lei will need to get into a services and content business in order to make profits from any TVs he sells.
Then comes the globalization. Lei has said that he will turn to Barra to run international markets. That would be ideal if it would work. Chances are, though, that it won’t. The fundamental business decisions that will need to be made in order to turn Xiaomi from a Chinese company to a global one are going to draw on the valuable time of Lei and his lieutenants.
All of that distraction will take place at a time where Lei will need to shore up Xiaomi’s position and defend it against the onslaught of competitors keen to rip his market out from under him. The company is number six in China in smartphone sales according to some analysts, but that position is far from secure. One misstep in its core business and it could go very wrong.
Oh, and About that Name…
This is normally the point where I would bring up the fact that non-Chinese outside of China would be able to pronounce “Xiaomi.” The real issue, though, is not getting people to pronounce the name, but getting people to care enough to even try. Consumers around the world have no idea who Xiaomi is, or whether it is a creation of the Ministry of State Security in a plot to listen in on the world’s conversations. Beyond the technical, beyond the strategic, there is the simple issue of getting people to know and care about you. Chinese companies are notoriously bad at this, and as adept as Xiaomi has proven itself in China, it is a long leap to build that faith across the Pacific.
The good news for Xiaomi is that Barra gets all of this. When I saw him at the China 2.0 conference at Stanford earlier this month, he had no illusions. In his offhand remarks you could hear him honing his messages as much for external audiences as internal ones: this is going to be a long slog, and Xiaomi needs to be ready for it. At the moment, though, it is unclear whether Lei Jun has the stomach or the war chest for a long battle against the established names.
The hard decision that the company will face soon is this: are we better off focusing that effort today on winning in China, engaging in a token overseas effort to seed long-term awareness and eventual trust; or do we go whole hog in both directions, aiming for the top spot in China and a dozen international markets at the same time?
If Lei Jun has is way, watch for Xiaomi to try to score some quick, modest wins overseas to generate buzz. The wise move at that point would be for Lei and Barra to start raising serious money to enable them to take on Samsung, Google, Apple, HTC, and Microsoft.
Either way, this is going to be both fun and educational to watch.
The Chinese New Year holiday is a period where many of China’s well-heeled consumers travel abroad, so it was no surprise that CCTV ran a story on how many Chinese consumers use their trips not just for sightseeing and relaxation, but for buying luxury goods. The national broadcaster took China’s 80 million international travelers to task for spending $30 billion abroad last year buying luxury goods, and criticizing them for not spending that money at home.
The media coverage of this transnational luxury buying spree implies that a hunt for bargains is all that sends these buyers abroad. Yet while price is doubtless an important motivator, there is more to it. What most analysts – and probably a few brands – are missing is the unarticulated value luxury consumers place on the experience, those intangible factors that makes buying the purse, the shoes, the watch, the dress so deeply satisfying.
One factor for Chinese in particular is mental comfort. It is not much fun consuming conspicuously in an environment that heaps growing opprobrium on bling buyers. Better to go somewhere where your purchase is at least taken in stride, if not celebrated. These days, that means buying in Hong Kong, Tokyo, Singapore, New York, Beverly Hills, London, Paris, or Milan – not Beijing or Shanghai.
But there are other factors that make up the luxury buying experience, factors captured in such post-buying questions as:
Where did I buy this?
What was the service like?
Did the salespeople make me feel at home?
Why was the experience special?
What was different about buying there than in China?
What was I able to get there that I couldn’t in China…or anywhere else?
Any and all of these factors have the potential add greater meaning to the purchase, make its acquisition more gratifying, and deepen the relationship with the brand. Equally important, they add to the “show-off” or “shai” value of the item. The new owner not only gets to show-off the bauble to her friends, she also gets an excuse to relate the trip, the circumstances, and the feelings she took from the purchase process itself, all to the admiration (or envy) of the people whose respect is important to her.
Some Brands Get It
On a vacation trip in 2008, my wife bought a limited-edition LeSportsac Tokidoki handbag designed by Simone Legno at the LeSportsac store on Waikiki. The store was a delight, the location superb, the service was so good that even my son and I felt good about coming into the store, and that is saying something. My wife had never heard of Tokidoki before, but the whole experience of buying the bag was such a delight that she came back the next day to buy one for her mom. To this day, five years later, she still talks about the bag, and has a deep affinity for LeSportsac.
Christine Lu of Affinity China is out ahead of the industry. She has begun leading luxury shopping tours of the U.S. for Chinese ladies that go beyond high-end store-hopping. Shops on Rodeo Drive, Park Avenue, and Waikiki are prepared in advance, provide engraved invitations, put on private fashion shows with Chinese narration, serve champagne and chocolates, and arrange to have purchases taken back to hotels while the ladies continue their day. As a bonus, Christine will bring along a Chinese celebrity or two, and tweet/blog/weibo aggressively, raising the profile of the trip and making mere attendance prestigious. The stores who work with her get it: the experience is every bit as important as the quality or design of the items that go in the bag. Expect these kinds of events to grow into a trend, traveling trunk shows where the groups come to the stores.
So all of this is interesting to be sure. Here is why it is important.
Today, it’s Price, but Tomorrow it Won’t Be
Understanding the non-price factors that drive Chinese to buy abroad is going to grow in importance. At some point the Chinese government will figure out that it needs to take steps to keep the luxury dollar at home beyond lame propaganda campaigns to shame buyers as unpatriotic. That will mean eliminating the price difference for buying at home. Either the government will have to start levying duties at airports and ports of entry (insanely hard to do and guaranteed to cause congestion at China’s overwhelmed airports and borders,) or they will need to eliminate duties altogether.
It is anyone’s guess on which course Beijing chooses, economic logic notwithstanding. When that happens, luxury brands will have their own choice to make: they can either play the zero-sum game, doing nothing and watching overseas purchases slowly leech back into China; or they can play the growth gambit, sustaining patronage overseas while building sales in China.
I’m betting the brands will want to do the latter, so I expect to see them taking steps to improve and even differentiate the buying experience for Chinese luxury consumers. At the very least, we will see more luxury stores with Chinese speakers and creating the kind of buying experiences that Affinity China is teaching them to offer.
I expect it will (or should) go beyond that. The brands will realize that simply offering a cookie-cutter experience in every store worldwide misses the point for their clientele. Each city, each store has to offer a different but equally compelling experience that reflects the brand in a unique way. This starts with store layout, but also speaks to decor, merchandise, and layout that reflects the location, and even offering items that are exclusive to that store. Let’s face it: even Disneyland has learned to differentiate its parks worldwide. Can luxury brands be far behind?
It is a truism (or should be one) that long after the price of an item is forgotten, the experience is remembered. Price will bring China’s increasingly sophisticated luxury customers in your door, but the experience will form the basis of a lasting relationship.
If this forum has been silent for the past month, we* have had good reason. It is now evident to anyone watching that China is on the cusp of change so large that its own leaders likely still do not grasp it. We’ve spent the last month trying to do so, and we’ve realized it is time to make some changes.
The End of Harmony
The particulars have been summed up at great length and eloquence elsewhere. In short, China has enjoyed 35 years of relative harmony enabled by acquiescence at home, accommodation abroad, and consensus within the Party. The past five weeks have made clear that this period of harmony is now at an end.
In fact, China is entering a period of great disharmony. The implicit promise of growing, shared prosperity looks increasingly difficult for the Party to keep, just as revelations emerge that suggest widespread malfeasance among the Party’s highest ranks. The willingness of Chongqing’s citizenry to accept Bo Xilai’s microwaved Maoism hints at a national mood that continues to sour. Suggesting that China is on the verge of a new revolution would be hyperbole, but the days of acquiescence are over, and the days of a more vocal, demanding populace are here.
The consensus-building approach that has characterized Party decision-making for the past 25 years appears to have reached its limits as well, and for good reason. When the way ahead was sustaining the status quo, consensus was easy to establish. The way forward is now unclear, and different political end economic visions are battling for precedence. Building general agreement among all leaders, even within the Politburo Standing Committee, will become difficult if not impossible. The choice will be between paralysis and the end of the consensus-based system. Either direction will have vast repercussions.
As China takes its place among the leading nations of the world, especially in the wake of the Global Financial Crisis, the nation’s leaders have begun to address the world based on two implicit assumptions. First, that as an emerging world power China is entitled to change the rules of the global system to suit its needs, or ignore those rules if they obstruct China’s goals. Second, that the rest of the world will – or should – continue to accommodate China’s growing international assertiveness, even to the point of appeasement. That such assumptions place China at loggerheads with the rest of the world is of little concern. Japan, Europe, and the U.S. are too saddled with domestic troubles to effectively oppose China’s ambitions.
The Tale of the Merchant and the Dragon
If you watch China, none of the above should come as a surprise. And unless we’re living under a rock, we have to take notice. And we have. As we have done occasionally over Silicon Hutong’s decade in publication, we have taken a strategic pause in order to assess how we need to evolve this forum in light of China’s development. You will begin to see the results immediately.
First, you will see an evolution in our focus. Following the direction of my clients, this space has been moving beyond the original confines of technology, media, and public relations for some time now. We will now take the next step. Whether you do business in China or not, China will alter your playing field, and understanding why that is the case and what to do about it will be essential to everyone’s success. Our focus will become that why and the what. To that end, our five major topic areas will be:
China’s Breakout: The emergence of China, Inc., and its role in global industry;
China Rules: The effort by Beijing, Chinese companies, and Chinese executives to alter business norms, practices, and regulator behavior to favor Chinese firms;
China Goggles: The globalization of China’s media industry and how that will enhance China’s economic and political influence;
China Rewires: China’s consumers are going to alter the world’s business landscape, both for companies and consumers;
Strategy, Action, Behavior, and Communications: Ideas and approaches to help executives and entrepreneurs deal with challenges of China’s rise.
Some of this, especially the last, is a recognition of the direction we have been taking for some time. The other four themes match the major directions I’ve taken in my own research and advising since 2008. It is now time to start delivering those insights.
Discussions about China’s national security, politics, arts, culture, history, and international relations will shift to The Peking Review, and will be delivered in the context of reviews of books, articles, and scholarly works about those topics.
There are more changes as well, but this post is long enough. Expect periodic updates in the coming weeks.
In the meantime, thanks for reading, and keep the feedback and comments coming.
* When I use “we” here, I do so not in the sense of the “royal ‘we,'” which would be a nauseating affectation, but “we” in the sense of myself and my wife and partner. While she does no writing for this forum, she is and has always been my sounding board and editorial adviser. Also, my time is our asset, so any expenditure of that asset needs sign-off. Finally, she has become a deep supporter of this forum (and The Peking Review). For those reasons, any major decision is ours, not mine alone.