As the Chinese state media’s recent attack on Starbucks’ coffee pricing in China demonstrates, the business environment for a foreign company in the country can certainly be tricky. In order to analyze just what the obstacles are for international brands in China, the U.S.-China Business Council recently released a report listing the top 10 challenges for foreign businesses.
This list, which includes problems with cost, intellectual property, competition with Chinese companies, and uneven enforcement of laws is meant to cover a wide range of industries, but several items on the list ring uniquely true for luxury companies in particular. Below are four of the listed challenges that are particularly irksome to luxury brands:
Intellectual property problems. From counterfeits to trademark trolls, intellectual property violations are a huge problem for luxury companies whose success relies on brand perception. When it comes to fakes, the bigger the brand, the more there are, and too many counterfeits can dilute its image. Recently, Louis Vuitton took a major step to counteract this problem by signing an agreement with Alibaba to crack down on the sale of fakes on Taobao. This business-to-business strategy was a smart move for LV, as the Chinese government doesn’t seem to be doing much about it: 58 percent of foreign business representatives surveyed said that the intellectual property situation for foreign companies in China has either “greatly deteriorated” or “remained unchanged.”
High costs. Currently, Chinese consumers only buy one third of their luxury products on the mainland, instead opting to travel to Hong Kong or abroad due to the fact that prices are around 40 percent more expensive at home. This is due in large part to the country’s tariffs, which are high when it comes to imported goods. With an affluent customer base, luxury brands have responded with various strategies aimed at giving its top spenders a customized, “VIP” experience to show that the price is worth it, such as a recent dinner hosted by Hublot which allowed some of its top buyers to meet with basketball star Kobe Bryant in Beijing. Brands are also working hard to court Chinese travelers buying goods abroad, and even fly high-spending customers to Hong Kong or Europe to take advantage of cheaper prices.
Finding qualified staff. According to the report, demand for qualified workers “continues to outstrip availability.” This problem, which is the third-largest challenge for foreign companies across the board, is especially acute for luxury brands trying to expand their stores into lower-tier cities. The quality of service at a brand’s stores is vitally important to its overall image, and it is currently difficult for companies to find staff in smaller cities that are able to represent the company at the same standard of service as in larger cities. This means companies may need to allow for more hiring time and make stronger investments in training if they want to be pioneers in China’s smaller, yet rapidly growing cities.
Protectionism. China’s state-run media often runs criticisms of foreign companies. Starbucks may be the latest brand to come under attack, but it isn’t the only one feeling the heat. Recent criticisms of Apple and foreign auto companies have also occurred this year, as have numerous reports of luxury brands reportedly selling defective goods and refusing to refund their customers in China. These issues put brands in a tricky situation, and Apple eventually decided to issue a vague apology as a result. However, bad PR campaigns by Chinese tend to be relatively unsuccessful at the moment, as the anti-Apple and Starbucks campaigns both caused extensive criticism of CCTV on Sina Weibo, and recent auto company attacks prompted users to simply say that Chinese models were worse.
In addition, one issue on the list that is not yet—but may soon be—a challenge for foreign luxury brands is competition with Chinese companies. As of yet, Chinese luxury brands such as fashion designers, automakers, and watchmakers have not been able to compete with foreign luxury giants, but this is likely to change as local talents continually rise. This doesn’t necessarily mean one will replace the other, but rather that luxury brands will have to market with a deep knowledge of Chinese culture and continuously adapt to changing tastes.
Visit Jing Daily’s reports page for more access to the latest research on the luxury industry in China.