GENERAL FRAME

Since Deng Xiaoping's “Open Doors Policy” (改革开放) in 1978, China has been consistently achieving significant economic growth which has been constant at an average of 10% for the past 35 years or so.

Today China became the largest exporter, the largest manufacturer and the second largest importer and economy in the world (only right after the USA).

With the increase of GDP, the consumption of luxury goods, and therefore the growth of the luxury market, also increased, and increased to the point that China is now among the top nationalities in terms of total sales of luxury goods.

In recent years, as a consequence of the increasing of personal wealth, the consumption of luxury goods in Mainland China has been growing, until last year, 2014, when the sales decreased to 15 billion euros (negative growth you -2%) due to three main reasons:

the first one the slowing of Chinese economy;

the second the tendency of Chinese people to purchase products either abroad or via cross border online platforms since the taxes on the products are lower than in their country;

and the last one the government's anti-corruption drive (started two years earlier, in 2012) Regarding this point it is interesting to notice how this particular fact mainly affected the men watches sector, which recorded negative yoy growth rates of -13% (gift giving concept: probably the most popular gift for men).

BUT...

Nevertheless the small decrease in consumption, the luxury market is still going strong, and the purchase of luxury goods is in the hands of two big groups: wealthy individuals (being them millionaires/billionaires) and upper middle-class individuals (or white-collar workers). The number of both these two categories is growing year by year and economists predicted that it will reach extremely high levels by 2022.

FEATURES OF CHINESE LUXURY MARKET

So now the question is why this rapid growth? Why do chinese splurge on luxury goods?

This rapid growth can be understood only if taking into account Chinese's psychology and traditional Chinese culture. In fact, in Chinese mentality, 面子 = “face” is a fundamental concept, meaning the personal sense of dignity or prestige in social contexts. Acknowledged what just mentioned, it is now easy to understand how brands play a fundamental role in the society, since they are strictly related to a certain social status, a sense of hierarchy and collectivism.

Chinese people will then tend to purchase luxury products in order to promote themselves to the outside world as successful people belonging to the upper social class. It does not matter how wealthy they are, regardless their individual income, they will consume these goods, even if this means, for less affluent groups, spending several months’ salary in order to buy a luxury product.

THE CONSUMERS

The Bling Dynasty

The “post-90 generation”, which refers to those young adults born after the 90s, also called “little emperors” because they are willing to splurge on luxury goods.

White-collar Workers

THE DEVELOPMENT OF THE MARKET

Given these types of consumers the Chinese market is changing accordingly to their tastes and preferences. Chinese are becoming more sophisticated and therefore the arising of the tendency of buying low-key, unique products instead of those with easily recognizable logo.

In big cities, middle-aged and older people prefer to purchase quality products, and care more about the history and heritage of a certain brand, while younger generations tend to seek goods with a more exclusive design in order to show their personal style and sophistication. In smaller cities, though, people still look for brands with visible logos.

With Chinese developing their individual tastes, and searching for unique products and more diversification, Chinese luxury brands are becoming more and more popular, especially those that emphasize local craftsmanship and Chinese culture and traditions (ex. NE•TIGER, SHIATZY CHENG and Shang Xia).

When talking about the development of the luxury market we cannot not take into consideration the importance of the Internet and Social-media

This is especially true for the “post-90s generation” which, being born in the XX century, is more aware of brand names and latest trends compared to the older generations.

With all these information regarding not only the brand itself, but also brands prices, and different taxation for each country, Chinese luxury goods consumers are nowadays more discerning than they were in the past, and therefore the products consumed and the way they are consumed is changing, and its changing fast. Regarding brands prices, Chinese buyers, especially the post-90 generation and the middle-class, are more and more incline to purchase affordable goods, look for alternative more affordable luxury brands, and switch from a brand to another, which results in the rise of some brands' popularity and diffusion (ex. Coach, Kate Spade, Tory Burch).

Moving now on to the taxation point, in the past few years it has become clearer how many Chinese prefer to shop luxury products overseas where taxes (import tariff, VAT and consumption tax) on goods are lower (Mainland China 30%), and where higher pricing strategies are not applied. Buying overseas the buyers can enjoy cheaper products, as well as a greater variety, and the certainty of the product authenticity. Another way to reduce the price discrepancy between luxury goods in China and abroad is the so-called “海淘”, a type of cross-border e-commerce activity. This method, though, has its cons such as relatively long delivery time, hidden costs, difficulty of product return and so on.

In order to regulate the above mentioned ways for not paying additional taxes on luxury goods, Chinese government has approved seven pilot zones (Shanghai, Chongqing, Hangzhou, Ningbo, Zhengzhou, Guangzhou, and Shenzhen) to carry out cross-border e-commerce services. Moreover, it has established four free-trade zones (FTZs: Shanghai, Tianjin, Guangdong and Fujian) to facilitate trade services.

FAKE GOODS PROBLEM

This problem is spreading very fast and it is not just related to clothing, but also shoes, food, drugs and alchool.
The fake goods problem is not just present in shops or fake markets, but also online. Nowadays the main channels for the so-called online “gray-market” are on the following e-tails: (阿里巴巴) Alibaba's (淘宝) Taobao and Tmall (天猫), and their biggerst rival (京东) Jingdong. Gray-market goods take either the form of 代沟 sales, which is the practice of buying products abroad (lower tariffs) and smuggle them into the Chinese market, or take the form of counterfeits, which sellers will clame as real in order to have higher profit.
This results in two big demages to the firms producing luxury goods. First of all, if fake goods believed to be autenthic encounter quality problems, the firm brand's image risks to be diluted, secondly the selling of fakes as reals leads to a loss of profit for the original firm.
In response to this huge problem, many firms started taking action and looking for effective measures. At the moment three are the main schemes used by luxury firms: improvement of the products' quality, which results in the rising of the price of the final product. Analyzing this circle (original product-fake product-improved quality of the original product-original product more expensive) we can then conclude that buyers of fakes impose a cost on people who want to buy the real thing. They both make brands less exclusive and more expensive. agreements between luxury brands companies and Alibaba. Example: Alibaba and LVMH. Alibaba promised to strengthen its efforts to fight fakes. All the items flagged as fake will be automatic removed from the website. opening of original shops on Taobao, Tmall etc. Example: Burberry who become the first major international luxury fashion house to do so.

Even though the above mentioned measures seem working pretty well so far, but the battle against counterfeit is far from over. In fact, as it always happens, when luxury firms try to protect their products from being copied, fakers find new escamotages to bypass the new obstacle. This is the case of a well-known mobile messaging app,WeChat, which has been recently discovered selling counterfeit goods.