The China outlook

In recent months doubts have begun to surface about the relative strength of China’s economy, leading some to question whether the country’s voracious appetite for luxury is sustainable. We question whether things really are as negative as they seem.



WORLDTEMPUS - 27 July 2012

Tom Mulraney

“Chinese Luxury Appetite Wanes” reads the headline of a recent article in the Wall Street Journal, yet another in a string of reports that paints a less than ideal picture of the luxury landscape in the world’s second largest economy. This is in stark contrast to six months ago, when consumer and investor sentiments seemed at an all-time high. These reports naturally prompt the question: are things really as bad as they are being made to seem?

In my opinion, the answer is no. Well, at least not when we take a step back and look at the bigger picture. Certainly it is undeniable that China is experiencing something of a slowdown in economic growth, relative to its own high standards, of course. The repercussions of this are already being felt worldwide. Against the backdrop of the continuing European debt crisis, the Chinese National Bureau of Statistics announced on July 13 that gross domestic product grew 7.6 percent in the second quarter, its slowest pace in three years, giving already jittery investors further cause for alarm. But what does this really mean for luxury watch brands in China?




La Montre Hermès opened its latest watch-dedicated boutique in Beijing on June 28 © Hermès



Short-term pain

Arguably, in the short-term it could mean that the major groups like Richemont and LVMH will not be able to rely on bumper sales in China, and indeed Asia as whole, to offset the lackluster performance of weaker European markets. This is not necessarily a bad thing as over-reliance on any one market tends to make investors nervous, leading to irrational responses when those particular markets perform below expectations – as is the case now. Still, it seems somewhat of a reach to suggest that luxury watch sales in China are in danger of experiencing a major drop anytime soon. As we’ve previously reported in The China Syndrome, consulting firm McKinsey & Co. has predicted that luxury spending in China will nearly triple to $27 billion by 2015 from around $10 billion in 2009, accounting for a whopping 20 percent of the global luxury market, which is certainly not indicative of a market on the decline.




IWC is well represented in China with eight boutiques © IWC



Others, however, believe that the phenomenal growth rates of the past are quite simply that: past. Andy Rothman of CLSA Research was quoted in a recent article by the New York Times as saying, “The days of 20 percent growth in autos or luxury goods – that’s mostly over.” A sentiment that was echoed by the National Bureau of Statistics’ Sheng Laiyun when he presented last Friday’s results. “After 30 years of vigorous growth, China’s economy has entered a period of transition. The potential growth will slump, but this is a universal rule,” he said. In other words, the consequences of decades of rapid, and often times chaotic, expansion have come home to roost and must now be dealt with accordingly.



Long-term gain?

For many companies this will mean an adjustment in the way they do business as they may no longer be able to rely on consistent and substantial yearly increases in consumer demand to drive profitability. A scary thought perhaps, but this could actually be a good thing, as it will encourage increased competition, which inevitably leads to innovation. Likewise, despite what the doomsayers may predict, the Chinese market is by no means saturated, with the smaller cities in particular showing huge potential for growth in the coming years, a fact that has not escaped the attention of the world’s best brands. On that basis, it seems likely that we will continue to see large-scale investment by luxury watch brands looking to further strengthen their positions in what will eventually become the world’s largest economy, each vying to capture a greater share of this slowly stabilizing market.

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