Though sun care is a mature industry in Japan, the category hasn’t performed all too well in recent years. According to Mintel, the country’s market for sunscreens, self-tanners and after sun products decreased in value by 12.7 percent in 2022, compared to a surge in other markets, such as the UK, which registered 20.4 percent growth.

Given such figures, it may come as a surprise that Tokyo-based beauty conglomerate Kao Corporation in August announced its acquisition of Australian sun care brand Bondi Sands, which is known for its self-tanning products and sunscreens. Rather than adding to an already saturated sun care space in the Japanese market, Bondi Sands represents Kao’s increasingly global ambitions.

“It is our strategy to grow Kao’s overall business globally, specifically outside Japan,” said Kao’s vice president of business planning and head of its cosmetics business, Yasuhiro Taguro, adding that hair and skin care categories are a focal point for the company with skin protection being a particular emphasis.

The Bondi Sands acquisition fits the bill and is intended to help Kao attain what it describes as a “global sharp top,” or a leading position in the category globally, Taguro added. The company’s portfolio already includes foreign brands Oribé, John Freida and Molton Brown as well as premium local beauty players Kanebo, RMK and Suqqu alongside mass market brands Bioré and Curel.

Kao is not the only Japanese beauty group making international M&A moves. Shiseido’s European subsidiary acquired London-based microbiome-focused skin care brand Gallinée in September 2022 — a year after its chief executive Masahiko Uotani signalled plans to escalate skin care acquisitions and grow its business beyond Asia (more specifically mainland China) in an interview with the Financial Times. Shiseido Company (the group that owns the namesake brand) declined to comment on its M&A strategy for this story.

But Shiseido, which during a major restructuring sold off US beauty brands BareMinerals, Buxom and Laura Mercier, as well as its personal care business to CVC in 2021, appears to have its sights set on the luxury and premium space in line with previous international acquisitions Nars and Drunk Elephant. It is also investing in overseas expansion for its Japan-founded luxury brand Clé de Peau Beauté through travel retail and celebrity ambassador appointments like American actors Diana Silvers and Dakota Fanning and British actor Ella Balinska.

The country’s third largest beauty company Kosé, which owns brands like Decorté, Sekkisei, Addiction, Jill Stuart Beauty and Tarte, is also looking to grow its presence in overseas markets but hasn’t made any recent acquisitions. However, that could change if a recent interview with the company boss is anything to go on.

“Ever since I joined this company, I was strongly of the view that Kosé needed to go beyond Japan and Asia and into a more global market,” group president and CEO Kazutoshi Kobayashi recently told travel retail industry media The Moodie Davitt Report.

“I think that it is essential we do more M&A going forward,” Kobayashi added before underlining his goal for the group to rank among the top 10 global beauty conglomerates. “In order for us to achieve that, Decorté and Sekkisei alone is [sic] not going to be enough.”

Elsewhere, Tokyo-based Pola Orbis, which owns premium anti-aging brand Pola, skin care brand Orbis and French company Jurlique, has also named M&A and venture capital investment as a key part of its management plan for the years 2024-2026.

The motivations for Japanese firms looking to invest overseas may be varied but why are they united in their timing?

Though the country’s beauty market proved more resilient than sectors like fashion, it is still recovering from the pandemic, says Aya Suzuki, senior research analyst at Euromonitor International.

While categories like colour cosmetics, sun care and fragrances saw double digit growth from 2021 to 2022 and “continue to grow in mid-high single digits” in 2023, the first two have yet to return to pre-Covid levels, Suzuki told BoF. Euromonitor data reveals that the combined market size of Japan’s skin care and colour cosmetics markets is projected to be worth 2.6 trillion yen ($17.5 billion) in 2027, well below 2019′s 2.8 trillion yen ($18.7 billion).

Select categories like fragrance and men’s beauty are showing momentum in the crowded domestic market, but dampened consumer confidence — as a result of inflation, a shift towards mid- and lower-priced products and post-pandemic lifestyle changes — continue to hit beauty companies’ bottom lines.

Moreover, hopes for a Covid-induced e-commerce boom fell flat compared to other markets, notes Reiko Hasegawa, a Japan-based senior beauty and personal care analyst at Mintel.

Observers also cite the likelihood that Japanese beauty conglomerates are feeling pressure from dynamic competitors not only in Europe and the US but in other Asian countries, where local giants have increasingly global ambitions. For instance, South Korean group Amorepacific’s 2020 investment in Australian skin care brand Rationale was followed by rival LG H&H’s acquisition of American cosmetics brand The Crème Shop in 2022. Both have also invested in local K-beauty brands with a strong overseas consumer base, some of which are now enjoying a resurgence.

In Japan, where the domestic market remains subdued, local J-beauty companies need to prioritise revenue streams from overseas brands and consumers. In Shiseido’s medium term strategy plan ‘Shift 2025 and Beyond’, announced in February, the group vowed to expand its portfolio in China, “establish a business foundation” in the wider Asia-Pacific region, “build a foundation for growth” in the Americas and “achieve profitable growth” in Europe, the Middle East and Africa.

The Asia-Pacific region accounted for 70.6 percent of Shiseido’s global sales in 2022, making it necessary for the group to grow and diversify by not only acquiring global brands but localising those they already own in key markets. “Global beauty competitors are less dependent on Asia Pacific compared to Shiseido,” Euromonitor’s Suzuki noted, citing L’Oréal’s 26.0 percent, Estée Lauder’s 34.7 percent and LVMH’s 27.7 percent shares.

Thanks to its comparatively high brand awareness and long presence in overseas markets, Shiseido may have some advantages over Japanese groups looking to acquire international brands. However, it must also contend with competition from the big players in western markets.

Most mergers and acquisitions “by Japanese beauty companies are not focused on Asia, which is their current source of revenue, but on Europe or the US, where their sales are relatively small,” said Suzuki. “This is to expand… the next pillar of revenue, as well as to acquire technologies and innovations that are in demand locally.”

Take Kao, which divides its cosmetics business into brands positioned for global development and brands the group plans on developing mainly in Japan and other Asian countries. “We will particularly increase the weight of investment in [our global] brands,” said Taguro, referring to Sensai, Molton Brown and Curel.

Volatility in China is the elephant in the room, and a major risk factor. Sino-Japanese tensions spiked in recent months after Japan began discharging treated wastewater from its Fukushima nuclear plant into the Pacific Ocean. If the ensuing boycott of Japanese products grows beyond a nascent movement, it could hit brands where it hurts. Shiseido, which according to Bloomberg data depends on the Chinese mainland for around 30 percent of its overall business, saw shares fall 3.3 percent in August. Other groups like Pola Orbis and Kosé also saw declines.

“[Patriotic consumption trends in China] and the loss of inbound tourism to Japan during Covid-19 have affected us, as well as other Japanese brands,” Kao’s Taguro said.

Mintel’s Hasegawa notes that where Japanese beauty brands tend to have a more premium positioning in China than Korean rivals, the former need to justify their higher price points to keep up with competition in the cutthroat space.

Considering the dominance of Korean brands across the continent (in particular emerging but lucrative regions like Southeast Asia), it’s no surprise that J-beauty groups are seeking growth away from markets already highly saturated by K-beauty players. Nor is it shocking that the Japanese are angling for luxury and premium priced M&A targets that typically come with higher profit margins than K-beauty’s accessibly priced offering abroad.

For the likes of Kao, targeting overseas beauty brands with a firm foothold in markets like Europe and the US is a faster (and less risky) route to growth than exporting a Japanese name with a highly localised product formulation, USP and brand identity — let alone building a global brand from scratch.

“When a [Japanese beauty company] that’s very well-versed in the domestic market wants to reach the global market, there isn’t the same dexterity in the dialogue,” said Valeria Baker, a Tokyo-based brand and marketing strategist at advertising and PR giant Dentsu. “There’s a different pace, a different way of communicating. Through a global acquisition they can universalise their communications [across the portfolio] to reach a broader audience.”

If investment targets are chosen and developed well, international brands can also help Japanese beauty giants adapt to an increasingly polarised market at home where growth is in the premium and affordable ends of the spectrum. “A significant trend in the Japanese market is the decrease in sales for mid-priced products, which used to be a defining characteristic,” said Kao’s Taguro.

To make the most of this, Kao announced in April a unified leadership team for its luxury brands Sensai, Suqqu and Molton Brown across the Americas, Europe, the Middle East and Africa, which will be headed by Mark Johnson, formerly the global president of Molton Brown. Other Japanese players are believed to be considering management shake-ups or restructuring efforts in a bid to extend their overseas ambitions.

Where might Japanese beauty groups focus their M&A efforts next? Dentsu’s Baker raises cruelty-free and vegan products as one likely priority. Acquiring a trusted global name in this space would benefit companies both at home and abroad.

“A lot of the [J-beauty] traditions involve proteins and collagen from animals,” Baker said. “[Now] there’s a desire for [cruelty-free and vegan but] there aren’t a lot of brands with high quality products in the category…People are so ready for it, but very few brands offer it.”

When Joohyun Lim moved back to Seoul in 2014 after living overseas, veganism had yet to hit its stride in the K-beauty space. South Korean beauty exports were still famous for 10-step skin care routines and single-use sheet masks rather than products that aligned with her plant-based lifestyle and the bourgeoning ‘clean beauty’ movement.

Forced to take extra care with the food she ate and the creams she used on her sensitive skin, Lim went on to make beauty products for herself before officially launching the brand Arencia five years later. Her range of vegan, cruelty-free and often plastic-free shampoo bars, soaps and body oils came on the market just before the pandemic.

Riding the subsequent wave of interest in beauty products claiming to contain safe, natural, organic or eco-friendly ingredients, Arencia started selling on Korean mass market platforms like Kakao, Naver, Musinsa and 29cm. Beyond Korea’s borders, however, the understated brand was just one of many in an increasingly crowded market.

Instead of expanding first to another country in Asia, where demand for plant-based beauty is still relatively nascent, Lim launched in the US last year to cater to a much larger audience. But complications soon arose when she discovered that the playbook she developed for Korea was different to the one she needed in the west.

In Korea, Arencia is positioned as a mid- to high-end brand, with products selling for 30 to 40 percent more than the average plant-based beauty business for a customer in their 20s. But in the US, which now makes up around 30 percent of the brand’s sales mostly through Amazon, a more mature market for plant-based goods means many of her customers are in their late 30s and prioritise value for money.

How do Korean brands like Arencia — and their international retail and marketing partners — navigate this apparent disconnect?

Korean Brands vs K-beauty

Years after K-beauty took the world by storm and found an enthusiastic global audience, Korea’s innovative skin care and make-up techniques continue to shape the global beauty industry. By 2020, Korea had risen to third place after France and the US in a ranking of the value of cosmetics exports by country, according to a report in the Korea Herald.

Korean brands like Sulwhasoo, Hera, Laneige and Tonymoly can now be found on physical and digital shelves at Sephora, Bergdorf Goodman and Amazon in the US, and Selfridges and Boots in the UK, to name a few. Many are large companies or brands in a big conglomerate that took a westward pivot to mitigate against an overreliance on the China market. Some have found success abroad; others are starting to struggle.

Arencia is unusual in that few other indie brands have made inroads overseas. Founders say they simply can’t afford to take their eyes off the fast-paced, cut-throat domestic market.

It’s a reality well captured in a TikTok video, where an American user on a shopping trip to Seoul remarked that the K-beauty products going “viral” in the US (like Laneige’s lip mask and Beauty of Joseon’s sunscreen) are just drops in the ocean compared to the vast array of local brands and products available in Korean beauty retailers like Olive Young.

While K-beauty’s meteoric growth phase may be ending, the country’s status as a global trend leader persists thanks to the power of local groups like Amorepacific and LG Household & Health Care (LG H&H), the ‘Hallyu’ cultural wave featuring K-pop music and the growing popularity of Korean celebrities as global fashion brand ambassadors. The problem for Korean beauty brands operating outside this universe is that such reference points are often the only ones that international customers have.

Herein lies the dilemma facing brands like Arencia that don’t fit neatly into those narrow definitions of K-beauty: first, Korean products seen as a success story in markets like the US often trade on hype rather than longevity; second, some founders don’t want to be associated with the high-octane image that western consumers expect from brands marketed as K-beauty.

Meanwhile, back in Korea’s domestic beauty market, competition is even fiercer now than it was before the pandemic. “You’ll see 10 success stories,” said Arencia’s Lim, “but not the thousands and thousands of brands that launched and failed.”

While it’s true that “the [beauty] rituals and everyday routines of Korean people are quite different from shoppers in other countries,” the bigger challenge for Korean brands looking to export is that “trends come and go really fast in Korea, [which means that when brands] launch a brand-new product here, it can fail to sell in other markets” because the product is either too advanced or too specific to cross-over, suggests Elle Korea’s beauty director Younji Jung.

This explains why Lim knows of several Korean brand owners producing locally who skip the domestic market altogether and sell instead to countries like Indonesia, where demand for K-beauty is high. Southeast Asian markets are often easier to navigate than China and can prove to have more market similarities than with the US.

China was nevertheless the biggest importer of Korean cosmetic products as late as 2020, followed by the US and Japan, according to data released by the South Korean Ministry of Food and Drug Safety. Significant growth markets for exporters of Korean cosmetics include Vietnam, Indonesia and Kazakhstan alongside Australia, Canada, the UK and Russia. There are also reports of demand for K-beauty growing in the Middle East.

Unlocking New Categories

It’s not only in the so-called ‘clean beauty’ segment that niche Korean brands are launching. Underdeveloped categories across the board have gained favour as a natural result of oversaturated segments in skin care and make-up, says Jung. It helps that categories like body lotion and shampoo are typically less risky to produce than face creams and serums.

One company carving out a niche is Kouve, which sells nail polishes and Instagram-friendly soft gel adhesives. The brand launched in 2022, after the pandemic strengthened demand for at-home nail products yielding salon-like results, says former chief executive Sangvin Lee.

Korea’s DIY nail market was small at the time and Kouve had few competitors, but that pushed Lee to take the brand to neighbouring markets like Japan, Hong Kong, Singapore and Taiwan.

Lee recalls that while Japanese brands had a big influence on Korean trends in the 90s and 2000s, the tables have since turned for some products thanks to Hallyu and the added value of the K-beauty moniker for certain products. Beneficiaries include Kouve, which through Nugu — an e-commerce platform for Japanese shoppers specialising in products based on Korean trends — is working to tap into the larger nail care market next door.

The growing nichification trend in Korea also signals a departure from beauty business models that relied on keywords and prescriptive routines to oversimplify shoppers’ diverse needs. “We’re accepting and getting used to the [mindset] that everyone is different, and everyone has their own traits,” Jung explained.

And despite the sophistication of branding, packaging and visual identity in Korea — and local shoppers’ famously high standards — things had started to become homogeneous across skin care and make-up. “If I erased brands’ names, you wouldn’t be able to tell which is which,” said Jung, adding that there is more room for creativity and subtlety when branding lifestyle-adjacent categories like fragrance and body care.

This dovetails with a shift away from celebrity endorsements being a default, which Jung is firmly in favour of because “every [celebrity image] in terms of make-up, pose and concept used to be so similar”, and because many up-and-coming brands don’t have the resources to tap top talent.

Not only did major ambassador deals drain budgets and encourage companies to abide by a well-trodden marketing playbook, but stars also hopped from one brand to another once contracts ended, diminishing brand identity in the process.

“Yet there are still brands that do it, and still suffer,” said Arencia’s Lim. “I’d estimate that brands spend around 30, 40 percent of profits on branding, but it could easily go up to 50, 60 percent.”

Across both newer and established categories, eco-consciousness is fast becoming “the most important factor” shaping the Korean industry in the wake of the pandemic, said Hwa Jun Lee, Mintel’s Seoul-based senior beauty and personal care analyst.

Greater demand for responsible business practices is being driven by Gen-Z, but not everyone believes it is the deciding factor for these or other consumer cohorts in the country. “I do think that for people living in the [Korean] capital, a brand being eco-friendly is a key factor when they’re deciding to purchase an item,” said Lim. “I don’t think it’s the first or second reason, but it could be the third or fourth.”

Indie Uprising

The rise of independent brands is arguably the greatest shift the Korean beauty industry has seen in recent years. The closure of offline stores during the pandemic — including major touchpoints for visiting Chinese, like department stores and duty-free outlets — helped level the playing field for smaller and digital native indie players.

Brands from Amorepacific and LG H&H groups were already feeling the heat, having in some cases overextended their physical footprints in mainland China, where complex geopolitics and controversies led to boycotts and strengthened demand for Chinese alternatives to Korean brands.

But insiders suggest that even Korean indie brands with high-growth potential can fall prey to short life cycles or attract the wrong kind of attention.

“Once you make a product, take photos and launch it online, other brands take notice and do something similar,” says Lim. “It saturates the market, so you have to move on to the next chapter really fast.”

Much of the time, bigger and better-funded companies are also watching. It’s common practice for Korean conglomerates to acquire indie brands as a way of catching up with demand in that niche — or launch a similar brand, if their offers are turned down. Lim says that she has already received three acquisition offers since Arencia launched in 2019.

This climate encourages entrepreneurs to quickly inflate and sell their brands, rather than run and own them for the long-haul. “You either exit [through a sale] or die off, and [very few indie brands] make it to the end,” said Lim.

For those that do and decide to take the plunge abroad, there is enough mileage left in the K-beauty moniker for some to find success in individual products. But to make a more holistic international breakthrough, Korean brands will need to start transcending consumer expectations without alienating too many customers with a pre-existing interest in all things Korean.

After three years of shopping for luxury goods at home — both through apps like WeChat and boutiques across China — twenty-nine-year-old Jojo Wang was thrilled to be back in Paris during Chunyun, the travel period that bookends the Lunar New Year festivities.

“I’ve been back to all the stores and restaurants I used to visit; it’s hard to believe so much time has passed,” the Shanghai native told BoF after exiting Chanel’s Rue Cambon flagship, where she purchased one of the brand’s iconic leather flap bags in time for Chinese New Year on Jan 22. “I’ve invested in bits and pieces in the last couple of years but spending during a long-awaited trip abroad does feel different.”

Wang is just one of the Chinese visitors who returned to international luxury retail hubs for the week-long Spring Festival national holiday period during Chunyun, after the easing of strict isolation requirements for inbound travellers was announced on December 26 and put into effect in January. According to Trip.com, search rates for outbound flights were up 83 percent in the 10 days after the sudden changes to the government’s zero-Covid policies.

But the bulk of mainland Chinese visitors aren’t flocking to far-flung luxury meccas in Europe just yet. Rather, they’re opting for shopping hubs closer to home: Macau, Hong Kong, Thailand, Taiwan and South Korea were, in that order, the most popular outbound destinations during the holiday, Trip.com data reveals.

The lion’s share of Chunyun travel has always been domestic and centred around visiting hometowns for family reunions. This year was no exception: China’s Ministry of Transport reported that over 42 million domestic trips took place on January 21, up 57 percent from the same day in 2022. In contrast, international departures from China remain almost 90 percent below pre-pandemic levels, according to aviation data firm Cirium.

“In the immediate term, we’re talking a lot more about domestic travel,” said Jacques Roizen, managing director of consulting at digital marketing agency DLG China.

When it comes to Chinese travel and spending, a global return to pre-pandemic numbers is going to take more time — especially considering the cloud zero-Covid policies cast on consumer confidence. Moreover, flights are scarce and expensive with airlines taking a wait-and-see approach to China’s reopening, and a significant number of citizens now hold expired passports and visas after a years-long suspension of issuances and renewals.

Hotels and other businesses in the travel sector are also facing capacity challenges, which prompted LVMH-owned travel retailer DFS Group to take a “cautiously optimistic” approach to performance during the holiday, said chairman and CEO, Benjamin Vuchot.

There’s also an undercurrent of wider anxiety around long-haul travel and catching or spreading Covid-19. Numerous reports indicate that infection rates within China have surged as hospitals overcrowd and drugs shortages hit pharmacies, but Beijing has said that critical cases and deaths are down 72 percent and 79 percent respectively from last month’s peak.

Nonetheless, for many luxury businesses around the world, the reopening of China’s travel corridors is — however tentative — a relief.

Investment bank Citi forecasts that global tourism will start to see a solid recovery in Q1 and a rebound in Q2; in a memo published mid-January, the United Nations World Tourism Organisation predicts that global tourism will recover to 80 to 95 percent of pre-pandemic levels this year. Other estimates are more conservative, particularly those for China. This month, McKinsey partner Steve Saxon told CNN that Chinese outbound air passengers would recover to around 50 percent of 2019′s 12 million per month by the summer.

“2023 is going to be a transition year,” says Roizen. Once less risk-averse travellers start posting about their trips on social media, “there’s going to be a tsunami of Chinese tourists who [also] say, ‘I’m ready.’”

Great expectations

Luxury industry executives are feeling increasingly encouraged by early signs of pent-up demand for travel, known as ‘revenge travel’, among Chinese shoppers and expectations that some will return to ‘revenge spending’ sprees akin to those seen in 2020.

LVMH chairman Bernard Arnault said during the group’s results conference on January 26 that “we have every reason to [be] confident, indeed optimistic, on the Chinese market,” adding that the outlook hinged on the continuation of the Chinese government’s current reopening trajectory. Though he remarked on Chinese tourism’s strong recovery and high footfall in cities like Macau, Arnault predicted that mainlanders won’t be travelling to France in large numbers until at least the second half of 2023.

The mood was recently summed up by Hong Kong-based Imke Wouters, partner at consulting firm Oliver Wyman, who said that while brands and retailers are readying themselves for a “bumpy ride to the start of the year...we are much more positive about 2023 now than we were a few months ago.”

China’s reopening comes at a crucial juncture for the global economy, with European and American shoppers expected to tighten their belts due to the ongoing energy crisis and high interest rates among other factors.

“No one should expect the floodgates to suddenly open and an instant return to pre-pandemic 2019 travel levels,” says Martin Moodie, Hong Kong-based founder of travel retail business intelligence publication, The Moodie Davitt Report. “But make no mistake, the Chinese are coming back as a pivotal force in the global travel and travel retail sectors.” Moodie noted already seeing upswings in destinations like Thailand, Indonesia, Vietnam and the Philippines.

Due to heightened risks around the virus, Bernstein’s Luca Solca expects the first quarter of 2023 to be the hardest for luxury brands, before a “western-like rebound” buoys the sector. Brands are set to benefit from both a boost in foot traffic in China, as well as the return of Chinese visitors in boutiques and travel retail outlets overseas.

Beijing’s previously strict measures make a strong recovery all the more likely, even if it ends up being more gradual than some expect. Pent-up demand for outbound travel is “intense” among the Chinese, says Moodie, as is a pent-up appetite to spend, where many consumers have saved money throughout the pandemic.

Some brands are erring on the side of caution before pinning their hopes on a dramatic rebound. “The reality is that we are planning for Q1 to be a relatively challenging environment from a footfall perspective, which may spill over into Q2,” says Sarah Rotheram, CEO of Anglo-French perfume brand Creed, which in addition to its online channels operates 14 locations across mainland China, Hong Kong and Macau. A further uptick in coronavirus cases, particularly after the Chunyun travel spree, could hit physical stores hard.

But the long-term view remains optimistic for Chinese travel retail spending. Rotheram expects duty free sales to be a victory for Creed both domestically and globally, and considering this expects the brand’s China business to double in size this year.

“The numbers may still be small compared to pre-pandemic levels, but you will find that Chinese travellers are already having a transformative impact on average spends,” says Moodie.

Tilting the Balance

Pre-pandemic, Chinese shoppers made up a third of global luxury spending, according to Bain; two-thirds of that was happening outside the mainland. Demand has suffered in the wake of last year’s extended lockdowns, rising youth unemployment and a nationwide property crisis. This month, official data revealed China’s economy grew 3 percent in 2022, much less than in 2021 and below Beijing’s target of 5.5 percent.

Yet the mainland is still expected to surpass the US and Europe as luxury’s biggest spending geography by 2025. Indeed, a recent McKinsey report predicts that China will gain 71 million upper-middle and high-income households in the next three years, signalling major reserves for consumption growth, particularly when it comes to premium and luxury goods.

That does not mean luxury will be reverting back to its 2:1 ratio in favour of Chinese spending overseas in the long run. “Habits have been formed, and [companies] are aiming for 50-50 or 60-40 in favour of spending domestically,” said Roizen.

Brands will be kept busy as this plays out. Once consumer anxiety around long-haul travel eases and logistical factors catch up with demand, retailers are likely to see a spike in spending overseas and will need to adapt. London department store Harrods, for example, is stocking up on products designed to meet Chinese consumers’ specific expectations for fit for the first time since 2019, its managing director Michael Ward recently told the Financial Times.

Most companies have built up impressive customer relationship management systems in the mainland over the last three years, which should make connecting clients with Chinese speaking sales contacts abroad (particularly in 2023 travel hot spots like Thailand, Taiwan and South Korea) straightforward. Beyond that, making the most of flagships to boost awareness around heritage and craftsmanship, as well as renewing discussions around price gaps between regions, will be crucial to capturing demand elsewhere.

Luxury brands’ price harmonisation efforts will continue to be a factor in where Chinese travellers decide to shop. The likes of Chanel have steadily increased prices throughout the pandemic (including three hikes in 2021 alone) to reduce price gaps between markets and account for inflation and currency fluctuations. Others, like LVMH and Prada, indicated in 2022 they were monitoring gaps but weren’t in a rush to amend differences to achieve parity.

As currency fluctuations continue to distort prices amid the resumption of international travel, some Chinese shoppers could be encouraged to buy through sellers known as daigou, a grey market trade that was disrupted by the pandemic.

Winners and Losers

It’s clear that the long-term repatriation trend for luxury spending is great news for Chinese retail hubs like Hainan, as well as downtown duty-free destinations in cities like Shanghai and Chongqing.

According to a recent report by KPMG and DLG, Hainan was listed as the most sought-after domestic destination with 30 percent of respondents interested in visiting the island. The island “will not only hold but strengthen its place in the travel shopping firmament,” said Moodie, noting the allure of its 100,000-yuan ($14,500) annual duty-free allowance and proximity to the rest of the mainland. Another boon to the island is the fact that the estimated 87 percent of Chinese citizens who do not hold passports can travel there.

Around 32 percent of respondents to the joint survey chose domestic cities as their go-to destinations, beating cities in Europe, which were chosen by 26 percent, and America, with just 6 percent. Asian shopping hubs will continue to benefit most in the short-term, especially as fears persist of another surge of Covid-19, with the report finding that Singapore had overtaken Paris in planned destination rankings for the first time.

Complications to this picture have emerged though, with countries like Japan, South Korea, and the US instating negative Covid-19 test requirements for Chinese travellers. Beijing has deemed such moves discriminatory, and on January 10 retaliated by suspending the issue of short-term visas to China in South Korea and Japan; Chinese netizens have also criticised policies requiring Chinese inbound travellers to wear colour-coded tags at airports.

“These things don’t tend to last; countries will realise they’re missing out,” said Roizen, pointing to Singapore and Thailand, which announced they would not adopt special measures for Chinese tourists; Thailand has even introduced a red carpet and souvenir hand-outs, sometimes fronted by dignitaries. “This is the smart way to go.”

In recent years, most big luxury brands have gotten better at pivoting to meet Chinese shoppers wherever they go. With the global travel industry in a state of flux and China still in an early phase of its reopening, major players will need to draw on this flexibility even more in the year ahead — and sometimes at short notice. Brands with a smaller global footprint, however, will need to find creative solutions to tap into China’s gradual outbound travel rebound.

THE LATEST NEWS FROM CHINA

by Annachiara Biondi

时尚与美容

FASHION & BEAUTY

LVMH Optimistic on China’s Rebound After Government Policy Reversal

Strict ‘zero-Covid’ restrictions put in place by the Chinese government last year hit sales at Richemont, Burberry and LVMH in the last three months of 2022. At Richemont and Burberry, revenue from China dropped 24 and 23 percent respectively in the period. At LVMH, sales in Asia (excluding Japan) fell 8 percent in the fourth quarter. Despite the headwinds in China, luxury executives are confident that the country will see a v-shaped recovery in the new year as it leaves behind Covid-19 curbs and the government puts in place measures to spur consumer spending. “There’s been an extremely strong start to 2023…if it continues like this it should be a very good year,” LVMH chairman Bernard Arnault told analysts. (BoF; BoF)

Swatch CEO Bets on Full Recovery of Chinese Watch Market

According to Nick Hayek, CEO of Swatch Group, a strong rebound in China could propel the company’s revenue to a record 9 billion Swiss francs ($9.8 billion) in 2023, above analysts’ expectation of 8.1 billion francs. A recovery would be good news for Swiss watchmakers, who are significantly exposed to the Chinese market. China used to be the largest export market for Swiss watches, but lost its crown to the US in 2022, with exports falling 13.5 percent to 2.6 billion Swiss francs ($2.8 billion) last year. Luxury watches also lost as much as 50 percent of their value on the secondary market in China in 2022 as consumers cut spending. Sales at the Swatch Group, which owns high-end brands such as Omega, Tissot and Longines, in addition to its more affordable namesake, increased 2.5 percent to 7.5 billion Swiss francs ($8.16 billion) in 2022. (Bloomberg; Forbes; Financial Times)

Luxury Brands Go Beyond Clichés to Celebrate Year of the Rabbit

Luxury brands including Prada, Miu Miu and Bottega Veneta were less obvious in their Chinese New Year capsule collections and campaigns this year, espousing a more sophisticated approach. In Prada’s ‘Memories of Beauty’ campaign, singer Cai Xukun, actress Chunxia, actor Bai Yufan and model Du Juan were shot next to objects reminiscent of cherished Chinese New Year moments in a celebration of memory. Miu Miu opted for a subdued take on the theme with its ‘Shine A Light’ collection, which featured only subtle nods to the Year of the Rabbit. At Bottega Veneta the focus was on the journey made by many to rejoin family and friends in celebration of the holiday, especially significant this year as Chinese citizens were allowed to travel without restrictions for the first time since 2020. The brand’s ‘Reunion in Motion’ campaign included a short film by director Jess Jing Zou depicting train, car, bus and ferry journeys across the many different landscapes of China. (Jing Daily)

Louis Vuitton Taps Patriotic Pop Star Jackson Wang

Louis Vuitton named singer Jackson Wang as its latest brand ambassador, after the popstar made an appearance at the brand’s autumn/winter 23 menswear show in Paris. The celebrity is one of China’s most internationally renowned stars and has already collaborated with fashion brands including Fendi, Cartier and Armani Beauty, as well as launching his own fashion label Team Wang. Wang, who was born in Hong Kong and owes much of his career to his K-pop training in Seoul, is well-known for his staunch patriotic stance, which he recently reiterated during a gig in London, where he fiercely criticised the coverage of China in Western media. (LifeStyleAsia)

消费与零售

CONSUMER & RETAIL

Chinese Consumers Travel and Spend Locally for New Year

Chinese citizens made 226 million domestic trips during the Lunar New Year holiday, the highest number since 2020. Many also decided to travel abroad, choosing close-to-home destinations such as Hong Kong, Macau, Bangkok and Singapore for a total of 2.88 million international trips. Both sectors lagged behind pre-pandemic levels — in 2019 domestic trips reached 421 million and international trips hit 12.53 million — but the results signal a positive recovery of tourism. Luxury brands in particular are hoping that the recent lifting of travel restrictions will lead Chinese consumers to travel and shop overseas in droves again, but analysts expects a growing share of China’s luxury spending to remain in domestic locations such as Hainan. (CNN, BoF)

Shein Valuation Could Be Slashed in New Fundraising Round

China-based ultra fast-fashion e-commerce platform Shein is reportedly looking to raise new funds from existing investors such as Abu Dhabi’s sovereign fund Mubadala, venture capital group Sequoia China and private equity group General Atlantic. The sum, $3 billion, would bring the platform’s valuation to $64 billion, a decline of more than a third from its peak $100 billion valuation in April 2022. Shein denied the accuracy of some of the information in reports. Like other tech and tech-adjacent companies, Shein has been negatively impacted by a funding crunch caused by a series of headwinds including the war in Ukraine and a decline in venture capital funding. The company’s growth has also seen a slowdown in the US and it paused plans for an IPO at the beginning of 2022. (BoF, Financial Times)

China’s 2022 Retail Sales Decline 0.2 Percent

According to the National Bureau of Statistics, China’s retail sales, including apparel, cosmetics and jewellery, dropped 0.2 percent year on year to 43.97 trillion yuan ($6.51 trillion) in 2022. Better than expected results in December, when sales fell 1.8 percent as opposed to the expected 8.6 percent, helped to soften the decline. China’s online retail sales registered a positive 4 percent year-on-year growth to 13.8 trillion yuan ($2 trillion). The country’s consumer price index (CPI), a measure of inflation, increased 2 percent last year but Kang Yi, director of the National Bureau of Statistics, said he is confident consumer prices will be stable in 2023. CPI was flat on a monthly basis in December. (CNBC, Fibre2Fashion)

科技与供应链

SUPPLY CHAIN & TECH

JD.com to Shut Indonesia, Thailand Shopping Sites

Chinese online retailer JD.com is closing its Indonesia and Thailand e-commerce sites as the company shifts its overseas strategy toward supply-chain and logistics services. JD.id in Indonesia will stop accepting orders from mid-February and all services will be stopped by the end of March, while JD Central in Thailand will cease its operations from March 3, according to statements on the businesses’ websites. The company, which is Alibaba Group’s biggest rival, is pivoting its international businesses toward services such as supply chain management and warehousing. It is among Chinese tech giants that are curbing spending to weather slowing growth caused by three years of Covid restrictions and the government’s crackdown on powerful internet firms. (BoF)

Cotton Imports from US Surge in China After Xinjiang Ban

Following last year’s US ban on cotton and cotton products from the Chinese region of Xinjiang, China has increased the amount of cotton that it imports from the US. In the first eleven months of 2022, China imported cotton worth $2.899 billion, compared to a total value of $1.601 billion in 2021. Meanwhile in the UK, a high court judge ruled against the World Uyghur Congress and the Global Legal Action Network in a case claiming that the UK government had failed to investigate conditions in which cotton imported in the country was produced. The judge, however, said that the ruling didn’t “in any way undermine the striking consensus in the evidence that there are clear and widespread abuses in the cotton industry” in Xinjiang, “involving human rights violations and the exploitation of forced labour.” (Fibre2Fashion; AP News)

China Textile and Garment Exports Show Modest Growth in 2022

China’s textile exports grew 2 percent year-on-year to $145.1 billion in 2022, while exports of apparel grew 3.2 percent to $175.4 billion, according to the General Administration of Customs of China. The modest increase in the textile and apparel sectors mirrors a widespread slowdown in China’s exports, which in 2022 grew 7.7 percent compared to 29.6 percent in 2021. Meanwhile, weaker global demand for Chinese goods, as well as labour shortages and factory closures caused by the recent surge in Covid-19 infections in the country, are leading shipping carriers to avoid Chinese ports because of fear of delays or insufficient available cargo. The industry expects to receive a boost from the recent loosening of Covid-19 restrictions and a possible drop in infections. (Fibre2Fashion; Reuters; Financial Times)

Vote on US TikTok Ban Confirmed for February

The US House Foreign Affairs Committee confirmed that in February it will hold a vote on a bill that, if passed, will aim to block the use of ByteDance-owned TikTok in the United States on the basis of national security concerns. The bipartisan legislation was introduced in December by Republican Senator Marco Rubio, but the US has long been concerned about the app’s collection of US citizen data and the influence of the Chinese government on the app, which has more than 100 million users in the US. In 2020 President Donald Trump signed an executive order to block users from downloading the app, followed by an order for ByteDance to divest its US operations, but they never came into effect. Some 25 US states have already banned TikTok on government-owned devices. Meanwhile, TikTok CEO Shou Zi Chew agreed to appear before the House Energy and Commerce Committee on Mar. 23. (Bloomberg; Wall Street Journal)

政治,经济与社会

POLITICS, ECONOMY & SOCIETY

China Population Sees First Drop in 60 Years

China’s population decreased to 1.4118 billion in 2022, a drop of 850,000 from 2021 and the first fall in 60 years. The country also reported its highest death rate since 1976, with 7.37 deaths per 1,000 people, and a record-low birth rate, with 6.77 births per 1,000 people. China’s demographic decline is expected to continue, led by economic uncertainty, rising cost of living, growing unemployment and social changes, as well as the long-standing effect of the government’s one-child policy, which was in effect between 1980 and 2016. The country’s demographic crisis is expected to have long-term consequences on both the domestic and global economy. (BBC)

China Says Covid Wave Has Peaked

According to the Chinese Centre for Disease Control and Prevention, hospitals across the country registered 6,364 deaths linked to Covid-19 between Jan. 20 and Jan. 26, almost half the number recorded the previous week. The CDC also said that Covid-19 related deaths and the number of critically ill patients in hospitals declined by more than 70 percent after peaking in early January, but experts suggest numbers could be higher as China only reports deaths occurred in hospitals. Earlier this month officials revealed that more than 1.1 billion people had been infected since restrictions were lifted in December. (Bloomberg)

China’s ‘Revenge Spending’ Key to Global Economic Recovery

Chinese consumers are expected to boost international growth as they give way to pent-up demand after a year dominated by stringent restrictions and financial difficulties that have led citizens to accumulate a record 17.8 trillion yuan ($2.6 trillion) in new savings. Optimistic economists believe that Chinese households will unleash as much as 4 trillion yuan of excess savings, driving a recovery in global economic growth that will start to materialise at the end of 2023 and continue in 2024. Other analysts are more cautious pointing to lingering uncertainties in the economy. (Financial Times)

China, US Seek to Enhance Cooperation, but Tensions Remain

After meeting for the first time in person in Zurich on Jan. 18, China’s Vice Premier Liu He and US Treasury Secretary Janet Yellen said the two countries would improve cooperation on issues such as the economy and climate change, enhance communication and strive to maintain the overall stability of Chinese-US relations. The meeting followed a speech by Liu at the World Economic Forum in Davos, where the politician urged global leaders to abandon the “Cold War mentality” and reassured the audience that China was recovering and ready for business. Still, relations between the US and China remain fraught over issues including technology, trade and Taiwan. (Reuters, New York Times)

China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to robb.young@businessoffashion.com.

Expectations for this year’s Singles’ Day were muted, to say the least.

Continued Covid lockdowns, regulatory uncertainty in the technology sector, a real estate crisis and wider economic woes all helped to dampen forecasts for the world’s largest online shopping festival, which took place across China in the run-up to November 11th, also known as Double 11. (In one sign of the malaise, major tech platforms cancelled the star-studded galas, typically streamed nationwide, that have long served to generate consumer excitement ahead of November 11th).

Ten days later, it’s still hard to pinpoint just how bad sales were. Neither Alibaba-owned Tmall nor rival JD.com published precise Singles Day figures for the first time since the holiday’s commercialisation more than ten years ago. JD.com said that gross merchandise volume (GMV) hit a record high, without offering details, while Tmall reported volumes on par with last year (540.3 billion yuan or $74.56 billion).

But it’s no secret that sales growth has slowed significantly since 2020, when Alibaba and JD.com generated a combined $115 billion in Singles Day sales volume, and despite bracing themselves for lacklustre numbers, most fashion and luxury players were unhappy with this year’s results.

“2022 has been challenging, so brands entered Double 11 with higher inventory levels and a greater need to chase revenue,” said Jacques Roizen, the managing director of Digital Luxury Group China’s consulting arm. “The brands we’re talking to are disappointed.”

Part of the issue was the evolution of Singles’ Day itself. “Double 11 used to be the peak of excitement in the Chinese consumer calendar,” says Roizen. “It’s losing some of its panache, and is starting to become more of a seasonal sales period.” The length of the event, which this year kicked off across most channels on November 1, is one key factor, said Stuart McLennan, senior vice president, APAC, at Rakuten Advertising, who works on Singles’ Day marketing for the likes of Matchesfashion and Nordstrom. “Advertisers are increasingly using it as the campaign hook and hosting their own events much earlier to capture sales,” he explained. Rakuten advertising data revealed increased sales in early November, followed by a “tailing off” towards the 11th. While Singles’ Day remains the world’s largest online shopping event, its power is “levelling off,” added McLennan.

Certain categories performed better than others. Menswear shone, according to Elena Gatti, managing director of Europe for Azoya, a Shenzhen-based e-commerce provider, with Yeezy Gap items (which sold out in an hour) proving covetable despite ties to Kanye West. Meanwhile, demand for sustainable goods was strong: during the weeks-long programme, over 16.3 million shoppers purchased products marketed as eco-friendly on Taobao and Tmall. Alibaba’s Wang notes the strong appetite for hard luxury goods, with bracelets and watches proving “extremely popular.”

Not Just About Sales

If Singles Day was traditionally about deep discounts, many brands are changing tack, using the event as a marketing moment. “11.11 is not just about sales,” says Wang. “Shopping festivals are evolving from discounting drives into an opportunity for brands to connect with new consumers and build a loyal fan base — this is particularly true for the luxury sector.”

Membership programmes have become increasingly important in China’s luxury sector. Female shoppers, who drive the bulk of luxury sales on Tmall, are especially engaged by membership benefits, said Janet Wang, head of Alibaba’s luxury division. According to Tmall, 82 brands including Nike, L’Oréal, Uniqlo, Anta and The North Face recorded 100 million yuan in member-generated sales on November 1st alone, while 2,700 companies saw members account for over half of their GMV figures.

Burberry, Moncler and Alexander McQueen were among the brands that leaned into novelty, revealing fresh product in the lead-up to Singles’ Day. Canada Goose used the event to talk about its collaboration with local designers Fengchen Wang and Xu Zhen, while Adidas and Balenciaga marketed their crossover collection.

Swiss watchmaker IWC Schaffhausen even used Singles’ Day to introduce its Year of the Rabbit special edition model months in advance of January’s Lunar New Year celebrations. “There’s no better moment to introduce novelty than the one moment a year when traffic peaks,” said Roizen.

For its Singles’ Day debut, Vacheron Constantin took a loyalty-centric approach: alongside inviting users to discover its limited edition 222 model (a modernised take on a 1976 design), the watchmaker tapped into a 3D showcase feature on the Tmall app. Members could register for pieces, book one-on-one sales consultations, access exclusive interest-free instalment payments and international warranties, says Frank Braillard, Vacheron Constantin’s managing director for China. No discounts and gifts were involved, but the company saw a 70 percent uptick in sales year-on-year, with a 46 percent increase in members.

Though Braillard says demand for luxury watches remains strong in China, Singles’ Day has yet to make waves on the company’s balance sheet. “Double 11 is interesting for us as a way to reach out and bring excitement to Tmall and our brand. Does it change our business fundamentally, in terms of sales? No.”

THE LATEST NEWS FROM CHINA

by Annachiara Biondi

时尚与美容

FASHION & BEAUTY

China’s Luxury Sales to Recover in 2023

According to a joint report from consultancy Bain & Co. and Altagamma, the Chinese luxury market won’t recover to 2021 levels until at least mid-2023, with the impact of Covid-19 regulations and a slowing domestic economy weighing on consumer confidence. Personal luxury goods sales in the country dropped 1 percent at current exchange rates to €59 billion in 2022, while globally sales increased 22 percent to €353 billion. China’s delayed recovery, as well as possible recession in Europe and the US, will impact personal luxury goods sales next year, with growth expected to slow to between 3 and 8 percent. (Business of Fashion)

Brands Struggle to Offset Weak Performance in China

Covid-19 restrictions and economic uncertainty in China continue to impact brands’ financial results. After reporting a 27 percent drop in revenue in the Chinese market for the third quarter (and following troubles with its Yeezy line), Adidas slashed its revenue and operating margin forecast for 2022. American conglomerate Capri Holdings, which owns Versace, Michael Kors and Jimmy Choo, also pointed to China’s “dynamic zero-Covid” policy as it lowered its forecast for fiscal 2023 revenue to $5.7 billion from a previous estimate of $5.85 billion. Slower spending in China, as well as a strong dollar and inflation, hit e-commerce platform Farfetch, which reported its first year-on-year decline in sales as a public company. Swiss luxury conglomerate Richemont saw positive signs of recovery in the Asia Pacific region, but chairman Johann Rupert stressed the high uncertainty of the current political, economic and social landscape in the company’s key markets. (Business of Fashion)

MyTheresa Launches ‘China Designer Program’

MyTheresa has launched its ‘China Designer Program,’ an initiative aimed at supporting and promoting emerging Chinese designers in their home country and beyond as part of a larger push to grow awareness in the key market. Designers Didu, Jacques Wei, Susan Fang and Xu Zhi will receive mentorship by industry leaders and design an exclusive capsule collection for the German luxury e-tailer, which in turn is committing to stocking their mainline collections for three seasons. MyTheresa is significantly under-penetrated in China compared to peers, but it has recently heightened its focus in the country with the opening of an office in Shanghai and the hiring of Steven Xu as president of China and Asia Pacific. (Business of Fashion)

Alibaba Veteran Wei Zhang Joins Ralph Lauren

Ralph Lauren has elected Wei Zhang to its board of directors, in what president and CEO Patrice Louvet describes as a “timely and relevant addition,” highlighting Zhang’s knowledge of business operations in Asia, business development, media and digital transformation. Zhang, who was most recently senior advisor and president of Alibaba Pictures Group, joined Alibaba in 2008 and worked for the company for the next 14 years, covering roles including senior vice president of investment and acquisition. Ralph Lauren has reported positive results in Asia for the second quarter of 2022, with revenue increasing 17 percent to $316 million. (FashionUnited)

消费与零售

CONSUMER & RETAIL

China’s Economic Slowdown Hits Singles’ Day

For the first time since the commercialisation of Singles’ Day in 2009, this year Alibaba didn’t disclose sales results from the shopping event it pioneered, suggesting a dramatic slow-down in growth. According to the Chinese e-commerce giant, the results were “in line with last year’s GMV performance despite macro challenges and Covid-related impact.” Research from consultancy Bain & Co. shows that between 2014 and 2020 Singles’ Day sales grew between 25 percent and 50 percent each year, but in 2021 growth dropped to 13 percent. The change of pace comes as Chinese consumers rein in their spending following the country’s economic slowdown and on-going Covid-19 restrictions. Rival JD.com also didn’t publish sales results, but said “growth rate exceeded the industry average.” (Financial Times)

Gap Sells Its Greater China Business to Baozun

After 12 years in the region, Gap has agreed to sell its Greater China business to Chinese e-commerce operator Baozun for between $40 and $50 million. The deal includes the American retailer’s Shanghai and Taiwan subsidiaries, which in 2021 reported net losses of $35 million and $6.3 million respectively. Like other mass-market brands, such as Forever 21, H&M, Nike and Adidas, Gap has struggled to find solid ground in the market, running into controversies and growing competition from domestic brands. The deal, which comes after Gap launched a strategic review of its worldwide business two years ago, is expected to close in 2023. (Business of Fashion)

Alibaba and JD.com Report Quarterly Results

Weak consumer demand and logistics issues caused by Covid-19 lockdowns across the country impaired Alibaba’s sales and earnings in the quarter ending Sept. 30. The company’s revenue increased 3 percent to 207.18 billion yuan ($28.96 billion), missing analyst estimates of 208.62 billion yuan. The group also reported a net loss attributable to shareholders of 20.56 billion yuan ($2.88 billion). Operations at rival JD.com, which has invested in building its own logistics network, were less disrupted. The company reported a 11.4 percent increase in third-quarter revenue to 243.5 billion yuan ($34.21 billion), with a net income attributable to ordinary shareholders of 6 billion yuan ($837.37 million). (Reuters, Business of Fashion)

科技与供应链

TECH & SUPPLY CHAIN

Private Markets Slash Xiaohongshu Value

The value of China’s social media app Xiaohongshu in private markets has dropped from $20 billion last year to between $10 billion and $16 billion, according to private equity data provider Altive. Analysts are questioning the app’s commercial strategy after it shelved plans for an IPO in New York following a government probe in car-sharing app Didi’s IPO earlier this year. Despite having 200 million active users and launching an e-commerce operation in 2014, Xiaohongshu is still heavily reliant on advertising, a sector which in China has seen spending decrease 10 percent in the eight months to August. (Financial Times)

Chinese Textile Companies Report Revenue Increase, But US Exports Lag

China’s largest textile companies, those with an annual revenue of at least 20 million yuan ($2.76 million) reported a 3.1 percent year-on-year increase in revenue to 3.86 trillion yuan ($538.71 billion) in the first nine months of the year. In the same period, China’s textile and garment exports increased 9.1 percent to $248.4 billion, but the country has been losing market share in the US since June, when a ban on cotton imports from Xinjiang came into effect. China exported $78.9 million worth of fabrics to the US in September 2022, down from $120.76 million in June 2022. Overall, China’s textile exports to the US were down 26 per cent in the third quarter of 2022 compared to a year earlier. (Fibre2Fashion)

Tencent Reports Revenue Drop

WeChat-owner Tencent reported a second consecutive quarter of revenue decline, with sales falling 2 percent to 140 billion yuan ($19 billion). China’s regulatory crackdown on the internet sector, initiated in 2020, has affected the company’s advertising and gaming operations, which have struggled with weaker sales. Known for aggressively investing in start-ups and tech businesses, Tencent has changed course following the government crackdown. In the last year, the company has shed shares of e-commerce JD.com and Singapore-based firm Sea Ltd., while on Nov. 16 it announced it would distribute more than 958 million shares of food-delivery company Meituan as a dividend to shareholders. (Wall Street Journal)

China Doubles Investment in Virtual and Augmented Reality

According to research firm Tuoluo Research funding, merger and acquisition volume in the virtual and augmented reality industries in China increased 67 percent in the first half of this year compared to 2021, reaching 6.19 billion yuan ($871 million). Earlier in November, the Chinese government unveiled its ambitions to grow the output of the country’s virtual reality industry sixfolds by 2026 to 350 billion yuan ($49.16 billion) and sell 25 million units of VR devices, compared to 3.7 million in 2021. Beijing has classified the virtual reality industry as one of the seven key industries of the digital economy and it aims to push it past its current focus on hardware manufacturing. (South China Morning Post)

政治,经济与社会

POLITICS, ECONOMY, SOCIETY

Joe Biden and Xi Jinping Lower Tensions in Bali

In their first in-person meeting since Biden took office last year, the US President and China’s leader Xi Jinping expressed a shared desire to stabilise relations and reopen communication channels after years of deteriorating US-China relations. During the meeting, which lasted three hours and took place the day before the start of the G20 Summit in Bali, the politicians discussed pressing issues such as Taiwan and North Korea, the war in Ukraine and the climate crisis. The conciliatory nature of the meeting was welcomed by stock markets and analysts, who described it as a “baby step” towards better relations between the two superpowers and a positive sign for global stability. (NPR)

Beijing Publishes Measures to Support Economic Growth

The Chinese government is softening some Covid-19 restrictions and easing its crackdown on the property sector as it tries to revive the domestic economy. On Nov. 11, Beijing unveiled a series of measures to help the struggling real estate sector, including allowing banks to extend maturing loans to developers. The government also reduced quarantine for close contacts and inbound travellers by two days. Both policy changes were welcomed by markets, but analysts sounded a note of caution on the impact of the new Covid-19 regulations, describing the changes as “marginal” in the context of China’s domestic economic activity. The country is battling against a worrying Covid-19 outbreak, with more than 26,000 new cases on Nov. 20 and the first Covid-19-related deaths since May, while restrictions are still in place in large city centres including Beijing, Shijiazhuang, Guangzhou and Chongqing. (CNN, The Wall Street Journal, Reuters)

China’s October Economic Data Disappoints

Data published by China’s National Bureau of Statistics missed analysts’s expectations, highlighting China’s ongoing economic slowdown and the impact of Covid-19 related restrictions on the domestic economy. Retail sales fell 0.5 percent over a year earlier, against an expected growth of 1 percent, while industrial output grew 5 percent, below the expected 5.2 percent. Property investment and property sales also fell 16 percent and 23.2 percent respectively compared to October 2021. Following the release, JPMorgan and Citi revised their forecast for China’s fourth quarter year-on-year GDP growth to 2.7 percent and 3.7 percent respectively, from a previous 3.4 percent and 4.6 percent. (Reuters)

Super-Rich’s Total Wealth Drops 18 Percent in China

Only 1,305 people figure in this year’s Hurun Rich list, the annual ranking of China’s wealthiest people, an 11 percent drop from last year. Many of the country’s super rich didn’t reach the minimum threshold of 5 billion yuan ($690 million) in net worth needed to be included, as Covid-19 restrictions, a crisis in the local property market and a slowing economic growth impacted personal wealth. The decrease reflects an 18 percent drop in the super rich’s total wealth to $3.5 trillion. The list also shows the consequence of the government tech crackdown, with Tencent’s founder Pony Ma and Alibaba’s founder Jack Ma sliding to fifth and ninth position respectively. (The Guardian)

China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to robb.young@businessoffashion.com.

In markets that are especially opaque, business leaders glean insights from wherever they can. When the market in question is China, a one-party state and the world’s second-largest economy, fashion executives would be wise to listen carefully as the government puts forward its vision for the next five years — even if it is delivered at a ceremony peppered with unfamiliar choreography and ambiguous metaphors.

The National Congress of the Chinese Communist Party not only sets the tone for the CCP’s policies and defines its key personnel, but also shapes China’s economic outlook and the market environment in which companies operate. The 20th edition of the event ran from October 16 to 22 and saw around 2,300 delegates flock to Beijing’s Great Hall of the People.

All eyes were on president and general secretary Xi Jinping, who as expected secured a precedent-breaking third term, highlighting his consolidation of power across the CCP’s top echelons. During the week, other key officials were elected to the party’s central committee, politburo and elite standing committee, the most powerful decision-making body in the mainland.

Though much of the congress was held behind closed doors, Xi’s opening speech did shed some light on Beijing’s plans for the coming years including its zero-Covid policy, geopolitical relations with the US, Taiwan and Hong Kong, international trade, issues shaping the national culture and regulatory crackdowns looming over the tech and property industries. All these factors have a direct or indirect impact on the future complexion of the Chinese fashion market, which remains the largest in the world.

Many business leaders and investors were hoping for at least some shift in direction — particularly to the government’s stringent zero-Covid policies which have dampened consumer demand and made it even harder to operate in China — but Xi’s speech only cemented the CCP’s ongoing stance and dashed hopes for a short-term improvement in the Chinese consumer market and people’s mobility.

Market reaction to the congress was swift and unambiguous. By the end of last week, the yuan had slumped amid a 2.6 percent decline in the CSI 300 Index, a benchmark of the top 300 stocks traded on the Shanghai and the Shenzhen stock exchanges. That brought the year-to-date decline to more than 24 percent in what Bloomberg called a “dreadful year for Chinese markets” getting even worse because “expectations for stimulus measures at the… congress were left largely unfulfilled.”

At one point, Chinese stocks briefly rallied following news of a report circulating that officials may have debated about whether to reduce the time that inbound travellers must spend in quarantine, but gains were short-lived. Details of the rumoured report remain unclear and, more importantly, the duration of inbound quarantines is not the main issue hobbling the economy.

More of the Same

For months leading up to the National Congress, analysts and insiders predicted that Beijing’s zero-Covid policies, characterised by mass testing and sudden lockdowns, would remain in place to not rock the boat before the big event. But based on the lack of a direct statement on the ending or easing of China’s zero-Covid policy — and its disruptions to both the fashion market and supply chains in the country— the anti-virus strategy is very much here to stay, says Dr Xin Sun, senior lecturer in Chinese and East Asian business at King’s College London’s Lau China Institute.

In his near two-hour-long address, president Xi made no indication of how zero-Covid might even evolve saying instead: “we have demonstrated China’s sense of duty as a responsible major country, actively participating in the reform and development of the global governance system and engaging in all-around international cooperation in the fight against Covid-19.”

Despite concerns voiced by many in the international community, including the World Health Organization director general who said in May that he did not think China’s approach to Covid-19 would be sustainable and that “a shift would be very important”, president Xi made claims to the contrary. “All this has seen us win widespread international recognition. China’s international influence, appeal and power to shape have risen markedly,” Xi declared.

Xi’s speech didn’t spotlight many significant changes to policy in other areas either. “It demonstrated very strong continuity with what’s happened over the last two to five years,” said Sun. This meant a focus on terms like security and common prosperity, with fewer mentions of reforms or economic opening, excluding mentions of China’s trading prowess and plans to “expand institutional opening up with regard to rules, regulations, management, and standards.”

Xi did spotlight the role innovation — across fields like manufacturing, aerospace and cyberspace — will play in driving China’s economic growth, as well as the importance of sustainability initiatives like clean energy, both of which are already hallmarks of his tenure.

According to Liqian Ren, director of Modern Alpha at WisdomTree Investments, the impact of any new policy born out of the closed-door sessions at last week’s national congress will depend on how it is implemented in practice at a local, provincial and bureau level.

All in all, Ren characterised the speech as a “boilerplate” but for fashion brands, she said, Xi reiterating the government’s commitment to common prosperity could signal increased demand for discreet, rather than ostentatious, types of luxury goods consumption. This started affecting users on social media as early as May, when Xiaohongshu cracked down on so-called “wealth flaunting” (posting “misleading” photos of luxury goods like bags, watches and cars without useful information).

It also suggests there is no end in sight for tighter regulations on the entertainment sector, nor takedowns of internet personalities and celebrities like livestream stars Viya and Li Jiaqi (aka Austin Li). The former faced a tax evasion fine and the latter appeared to have disappeared for several months after a controversial livestream featured a tank-shaped cake ahead of the anniversary of the 1989 Tiananmen crackdown.

Unlikely Spike in Demand

The overall outlook for China’s luxury sector remains almost as uncertain as it was before the congress, not least because of the state of the wider economy.

The latest economic growth figures were released on Monday, after officials delayed publication until the congress had concluded. Analysts who had speculated that the delay was probably because the figures were not particularly strong were proven right. Third quarter GDP in 2022 expanded 3.9 percent year on year, slightly better than the forecast of 3.3 percent from analysts polled by Bloomberg but still far below that of China’s full-year target of 5.5 per cent, which is its lowest in three decades.

That doesn’t bode well for the economy, nor for global brands relying on Chinese shoppers to boost their bottom lines. Earlier this month the International Monetary Fund cut its forecast estimate for China’s 2022 GDP to 3.2 percent, down from 8.1 percent in 2021. Looking forward, China’s median growth is projected to be 5.2 percent in 2023 and 4.8 percent in 2024, according to Bloomberg’s quarterly survey of economists.

“Expectations for stimulus measures at the congress were left largely unfulfilled.”

“In the short-term there’s this big uncertainty due to [zero-Covid],” said Mario Ortelli of luxury advisory firm Ortelli & Co. But in the long-term, he suggested, brands could see an upside in both the government’s push for common prosperity — which if successful could eventually lead to a larger portion of the Chinese population able to spend more on luxury — and the lack of negative messaging regarding foreign brands.

The net result seems to be that there are two important takeaways for global fashion players: don’t expect a sudden influx of Chinese tourists to the shopping hubs of Europe, the US or other Asian countries, and don’t expect a spike in Chinese consumer sentiment either, any time soon. Though moderation is possible, it is unlikely that there will be any back-pedalling. “Many of these policies come from Xi himself, and if he delivered a U-turn, it’d be a huge blow to his personal credibility,” noted Sun.

Besides, there will be few serious challenges to Xi’s position on most issues since he is now the most powerful Chinese leader since Mao Zedong. After being re-elected as communist party general secretary over the weekend, the announcement of his presidency of the country in March of next year is nothing more than a formality. Xi has filled the politburo and standing committees with loyalists, a move which shifts the country back to one-man rule after decades of power-sharing among the party elites.

The move is hardly surprising, given that a key thread running through Xi’s speech was the prioritisation of security over economic growth.

Security Above All

The term “security” was mentioned some 80 times during the address, but rather than confining it to geopolitical, military, food and economic security, Sun adopts a broader interpretation tied to the political survival of the communist party and the centralisation of government control.

This goes some way in explaining the ongoing property crackdown, where China’s heavily indebted real estate sector was seen as a major risk to the regime. Tech platforms and the influence they wield over public opinion are also a “serious threat,” said Sun: just last week, photos and videos of an anti-Xi banner on Beijing’s Sitong Bridge calling for “freedom, not lockdowns” were posted on Chinese social media before being promptly deleted.

In recent months, optimistic analysts heralded an end to the years-long tech crackdown, which in 2020 claimed e-commerce giant Alibaba’s Ant Group and its $34 billion IPO as its first big catch. But it is more likely to be a temporary break, says Sun. “Once the party decides it’s not facing serious economic challenges, it’s very likely that the policies will be re-emphasised, and new ones will be imposed.”

“Many of these policies come from Xi himself, and if he delivered a U-turn, it’d be a huge blow to his personal credibility.”

Renewed or new crackdowns would have knock-on effects for fashion companies, which have to adapt to tech sector laws around content and data, while reckoning with dampened discretionary spending caused by the real estate crisis. A huge share of China’s household wealth, 70 percent according to investment management firm Loomis Sayles, is invested in real estate, roughly double the 35 percent share seen in the US.

The culture of heightened scrutiny is spilling over into the fashion sector in other ways. Fosun International, whose Lanvin Group subsidiary includes namesake brand Lanvin as well as Sergio Rossi, Wolford, St. John Knits and Caruso, recently lowered its equity valuation and was downgraded by the S&P, after a visit by its in-house CCP secretary to the Beijing branch of SASAC (State-Owned Assets Supervision and Administration Commission of the State Council) sparked fears.

Culture Wars Continue

While no mention was made of Xinjiang province during Xi’s speech, his comments on Taiwan, Hong Kong and the US indicated — in a similar vein to zero-Covid and regulatory scrutiny — that the CCP would stay on course. Beijing’s elimination of political opposition in Hong Kong was deemed “a major turn for the better,” and a pledge to return Taiwan to mainland control drew a long round of applause, during which Xi reiterated that he will never renounce the right to use force to do so even if he prefers a peaceful resolution with the island.

An escalation of Chinese military action in and around Taiwan, an outcome which experts continue to deem as improbable, would almost certainly prove calamitous for not only the global economy but the fashion and luxury sectors. Though the geopolitics at play differ greatly from this year’s invasion of Ukraine by Russia, comparisons of a potential invasion of Taiwan by Beijing are understandable. Bernstein’s Luca Solca predicts a 40 percent drop in luxury sales on the back of sanctions targeting China over such a conflict.

Inextricably tied to this, of course, is Beijing’s increasingly rocky relationship with Washington and US allies, which has had and will continue to cast a long shadow over fashion brands’ supply chains.

On these relationships, Xi committed to strengthening China’s “mechanisms for countering foreign sanctions, interference, and long-arm jurisdiction.” Self-sufficiency, especially in relation to innovation and supply chains, was reiterated as a cornerstone of this stance.

For fashion, the comments are likely to hasten the decoupling of some global firms’ supply chains from the mainland. This will not be easy considering how much western brands continue to rely on China, the world’s largest exporter of apparel, according to World Trade Organisation data. It doesn’t help that the link between the two — as exemplified by the Xinjiang cotton backlash, which saw the likes of Adidas and H&M boycotted for voicing concerns over forced detention and labour allegations — is getting more complicated.

As China’s economic and foreign policies become more inward-looking, Xi wants its so-called “advanced socialist” culture to follow. “Fine traditional Chinese culture is undergoing creative transformation and development,” he said. “Our young people are filled with greater optimism and enterprise, and there is a notably stronger sense of cultural confidence and a higher level of morale throughout the party and the nation.”

For brands familiar with guochao, or national wave, which refers to the growing pride Chinese shoppers feel in buying locally designed and made goods, Xi’s speech should ring a bell. It signals more room for growth for domestic firms, which have taken market share from foreign competitors in categories like fast fashion and sportswear in recent years. Though there are opportunities awaiting global brands that reference and celebrate Chinese culture in the right ways, says Ren, doing so will continue to be risky.

Ultimately, this goes to the heart of what most fashion brands are (or should be) working to finesse: selling to the Chinese market in bold yet thoughtful and respectful ways that boost brand equity in China while aligning authentically with global brand values. That’s a tall order in an increasingly complex and turbulent global business environment.

Playing it safe is a tempting option, especially at a juncture when the president used his national congress speech to warn his people to be prepared for “dangerous storms” ahead and when there is heightened sensitivity and vocal criticism of perceived indignities by Chinese consumers. But it is not an approach that will help fashion players stand out in an increasingly competitive market.