China Business Blog and Podcast

Zakkour to Speak on China Fashion and Luxury Consumers at Confucius Institute in NYC

Michael Zakkour, principal of Technomic Asia a will provide commentary and insights about China’s fashion and luxury consumers for the Confucius Institute, Fashion, China, and You on Tuesday, December 6 from 9am – noon.

The event, being held at the SUNY Levin Global Center at 116 East 55th Street, is part of the State University of New York’s Confucius Institute for Business, which incorporates expertise in innovation, culture and business strategies. Zakkour has more than a decade of experience in developing and implementing business strategies for companies entering or expanding in China. Technomic Asia also recently concluded a year long study of China’s premium brand consumers. He will present these findings and other first hand information about China’s fashion consumer at this event.

The two other members of the panel are Renee Hartmann, co-founder of the China Luxury Network, and the Eno lifestyle apparel brand. Eno has 25 retail stores in China that markets brands to China’s youth market. Also speaking will be Professor Lawrence Delson, president of Delson International, and adjunct professor at NYU and lecturer at the Fashion Institute of Technology.

The panel will be moderated by Janet Carmosky, CEO of the China Business Network and a veteran of 25 years of doing business in China.

Shanghai, China – November 15, 2011 – Technomic Asia, a consulting firm based in Shanghai, is happy to announce that its relationship with Pan Asian Commercial Consulting Group (PA) has been expanded as PA grows its operations in China and other key Asian markets.

Technomic Asia is now the sole in-country consulting partner for Pan Asian, a commercial debt recovery consulting firm, in China and is also now managing the company’s overall expansion in Asia.

“We are pleased that Pan Asian has placed its trust in Technomic Asia to help the company build a dominant market position in Asia. Our work for the company in China has provided the blueprint for our expansion across the region,” said Technomic Asia Principal, Michael Zakkour.

“As the Western economic downturn continues, the need for Pan Asian’s products and services in the region has grown exponentially and Technomic is excited to help steer the company into the future in this most important of markets,” continued Zakkour.

Highlights of the expanded relationship include:

• -Responsibility for all Pan Asian strategies, implementation and operations in China
• -Hosting Pan Asian’s personnel at TA headquarters in Shanghai
• -Opening Pan Asian offices in Vietnam, Malaysia, Thailand and Taiwan

“Technomic Asia has proven itself to be an invaluable asset in every facet of our business activity in China, providing us with the guidance, strategies, infrastructure and relationships for measured, strategic and rapid growth” said Keith Stillings, CEO of Pan Asian.

About Technomic Asia
Technomic Asia, a division of Tompkins International (www.tompkinsinc.com), is a business strategy and supply chain consultancy with more than 30 years of experience helping clients plan and execute Asian growth and operational strategies. Technomic Asia’s mission is to assist globally-expanding companies to build their Asian businesses through high quality market strategy and implementation assistance.

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Length – 12:45

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Jim Tompkins, president and CEO, of Tompkins International, has seen many opportunities that have gone unnoticed by companies in this more than three decades advising Fortune 1000 global companies. In this podcast we discuss Tompkins’ recent trip to China where he spoke with dozens business executives about their China business strategies and improving their supply chain to meet China’s domestic and exporting demands.

China is in a transformation, but perhaps more of an advancement. You’ve read the articles about China no longer being solely a low cost manufacturing center, but that transition will take many years according to Tompkins. Today, he sees a complex and dynamic manufacturing sector in China that must meet their growing domestic consumer demands, which presents unique supply chain challenges and solutions. In addition, as China’s government continues its progress toward incorporating market driven thinking, more integration is taking place among supply chain partners, more businesses are creating joint ventures, and mergers and acquisitions.

Jim Tompkins meeting with executives in China

Tompkins believes this environment combined with a global consumer sensitized to price makes it even more important to find the hidden profits in your supply chain. Profits exist in creating internal efficiencies that will allow companies to be more competitive, more profitable while having little to no impact on the consumer facing side of the business. Supply chain improvements are where many companies that Tompkins’ advises have been finding profits.

Tompkins writes more on supply chain issues at his blog Supply Chain and Logistics Issues. Tompkins International is the parent company of Technomic Asia.

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In this episode of the China Business Podcast, we speak with Michael Zakkour, principal of Technomic Asia, about the unique and growing markets of China for higher end apparel and accessory brands. Zakkour recently presented a study conducted by Technomic Asia to the Fashion Institute of Technology F.I.T. in New York showing how China’s consumers are hungry for luxury and “affordable luxury” brands.

Zakkour says China is not a market where foreign companies can apply techniques or even product lines that are successful in other markets. Further more, he says China is a series of different markets that need to be understood before entering into China’s second, third, and fourth tier cities, areas that are potentially fertile ground for high-end brands. Chinese consumers love for brands is prevalent in Shanghai and Beijing, the opportunities and new territory is in the interior of China. Below is a chart of the regions that are the new growth areas for companies looking to catch the next China wave.


Resource Technomic Asia study One Year on the Frontlines of China’s Apparel and Luxury Markets

Zakkour comments in the podcast about the research necessary to determine what aspects of a product line or marketing strategy should be to Chinafied and which should not. Each of these regions and its consumers may well be very different than other areas of China. Zakkour says what works in Shanghai may not work in Jiangxi, Shaanxi, or Inner Mongolia. “We have seen successes and failures in these markets, what these markets require is a methodological, perhaps even phased approach to expanding into China,” added Zakkour.

Fashion Factoids From China

• China is now the #1 apparel and #2 accessory market in the world
• The Chinese consumer market is exploding as tens of millions of people join the middle class every year (300 million and counting)
• There is a growing appetite for niche brands
• There is a new appetite for “affordable luxury”
• Online apparel sales have boomed in the last 18 months
• Brands and retailers are investing in Tier 2, 3, 4 cities
• Department stores and specialty stores are the major distribution channels for branded apparel
• Casual wear, which comprises 60% of clothing purchases, is growing 19% a year, for example. This reflects a shift toward occasion-based dressing – that is, wearing different outfits for work, social occasions and at home

We are very active in the fashion/accessory/luxury market in China. For a couple of years now I have been telling anyone who will listen that this is the hottest apparel market in the world. Well, we now have this A.T. Kearney report to back up what I have been talking about.

Hat tip to Mr. Robert Shecterle for the summary. To which I would add that in addition to the sales channels mentioned, we found that multi-brand stores, multi-brand boutiques and franchises are starting to creep their way into increasing importance in China. The dominance of the distributor, mall, department store and/or stand alone store model is starting to erode. Add to this the growing importance of e-commerce and concept stores. Part two of this post will discuss these new channels.

There is an an interesting top ten market list at the end as well.

China is now the most attractive emerging market for apparel retailers, according to A. T. Kearney’s latest Apparel Index, and already, several brands have aggressively entered the market.

PHV Apparel Group (perhaps best known for its signature brand, Izod) plans to open 3,000 stores in China over the next five years. Likewise, Italian retailer RDM has invested $910 million to develop five luxury outlet centers there, and Gap, Inc. opened stores in Beijing and Shanghai late last year.

According to A. T. Kearney, China’s growing middle class is expanding its buying behaviors beyond traditional venues.

“Retail formats in China are diversifying beyond traditional department stores. Chinese consumers are beginning to shop at venues such as hyper markets, specialty stores, outlets, discount stores and online,” Hana Ben-Shabat, a partner with A.T. Kearney and co-leader of the 2011 Apparel Index study, said.

The United Arab Emirates ranked second in the 2011 Apparel Index, driven by a population with a high disposable income and immense fashion consciousness. In addition, as A. T. Kearney points out, the expatriate populace and tourism also drive consumption in this market. Plus, the UAE is both a regional commerce center in the Middle East and a preferred market for entering the Middle East, as well as for testing new products and retail formats.

The Retail Apparel Index is calculated on a scale from 0 to 100. It includes analysis of the clothing market attractiveness (60 percent), levels of retail development (20 percent) and country risk (20 percent). Country risk indicators include political and financial risk, business readiness and business cost of crime, terrorism and corruption.

Here are the 2011 Apparel Index “top ten,” along with each country’s overall score:

1. China 61.4
2. UAE 58.9
3. Kuwait 48.6
4. Russia 46.4
5. Saudi Arabia 43.9
6. India 42.0
7. Brazil 40.1
8. Turkey 37.4
9. Vietnam 37.3
10. Chile 36.9

A full copy of the report is available at www.atkearney.com/grdi.

Ignorance leads to resentment, resentment leads to anger and anger leads to conflict.

The job of educating Westerners about the realities of China (good, bad and ugly) is still a big one.  Cliches aside, you do not need to walk a mile in a Chinese native’s shoes to understand his plight.

Andrew Sullivan’s The Dish (in my opinion the best blog in the world)  recently ran a piece on why public works and infrastructure jobs always run over budget.  This led to a sidebar argument about China and the US and their respective abilities to get big projects done. During the discourse one reader ranted on China and in only four paragraphs got about 10 things wrong.

Sullivan published my rebuttal.  Do you agree with my points?  The original post?  The reader’s opinion?

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It may take some getting used to, but China’s luxury market is making its way into “affordable” luxury items. This trend to meet the needs of the growing middle and upper middle class consumers is creating opportunities for a larger number of brands, domestic and foreign.

We are working with a women’s fashion accessory company to launch a product line this year and the early research shows some surprising aspects of  the affordable luxury brand purchasing among China’s consumers. Chinese buy brands for similar reasons as consumers from other economies, however, there is a sense of a dynamic in this market, compared to the same group of luxury brand consumers in other markets.

My analysis of China’s increasing aspirational consumer is setting up a niche market that is under the top price points, but significantly above the price of average products.  This is driven by the rise in income and employment status of China’s growing middle class who want to buy quality, to convey an appearance of luxury, and who desire to portray being a “global citizen” by purchasing international products.   In some cases, this category of consumer wants to blaze a new path by purchasing non-traditional, high quality products which is creating opportunities for small and midsize foreign companies to jump into China.

This is my other car

Need proof? Get this, Lamborghini contemplates a new “everyday” model. CEO Stephan Winkelmann, told the Reuters Global Luxury and Fashion Summit that increased sales in China are tempting the high-end auto designer to consider an “everyday” model for its current  product line.

A key indicator in any market is to follow the money. China luxury brand categories are no exception to this rule. The line up for Initial Public Offerings and listings on the Hong Kong stock market would delight the most vigorous name dropper, Prada, Coach, L’Occtaine among others. Luxury China jeweler Chow Tai Fook is creating a buzz as its IPO is on the ears and lips of investors.

Our suggestions to those considering an entry into China’s hot fashion industry:

1. Personnel must be here on the ground, China is not a “handle remotely” market
2. Test pricing strategy as the “Affordable” luxury market is new for all parties, consumer, distributor, and manufacturer alike
3. Public Relations in country can help build brand and create excitement around product launch
4. Distribution options while slim a couple of years ago are changing rapidly, be flexible even if you are committed to building your own storefronts.

If you have questions or are a member of the media, contact me at mzakkour AT tompkinsinc DOT com

After the launch of our 2010-2011 China Business Report with AmCham on Wednesday, there was a flurry of foreign media reporting on our survey. Although the coverage was gratifying, I believe the larger story was missed. That story is about the importance of China for most any international company’s growth strategy, regardless of changes in the business landscape in China.

A typical headline was the BBC’s Foreign Firms Complain of China Favoritism. This is a highly selective reading, since more than half of U.S. companies in China see regulations as neutral or favorable to foreign companies. Another characteristic headline was Reuters’ U.S. Firms in China See Regulation as Top Hurdle. Of course, regulations are a top hurdle, but according to our survey data, U.S. companies were just as concerned with regulation last year, and there was essentially no change from 2009. In fact, the greatest business challenge reported by U.S. companies was HR constraints, which have nothing to do with the regulatory environment. The main takeaway from this year’s survey was that profits and revenues were up sharply over 2009, and that U.S. companies turned in record performance in 2010, regardless of the regulatory environment.

The Hu-Obama summit has brought a great deal of attention to the AmCham survey, perhaps it was this political climate in Washington, D.C. that masked the facts we uncovered on the ground in China with US business leaders. An article that we believe was most reflective of the research we conducted was the Shanghai Daily’s U.S. Firms Find China Profitable.

Our press release in this blog has already gone over the record 2010 profits and revenue growth among U.S. companies in China. These were both up sharply over 2009, but were also markedly higher than 2008, which was already a strong year. Not mentioned in our press release is that operating margins were also up, and have risen steadily since 2008. In 2010, fully 66% improved their operating margins, rising from 45% in 2009 and 33% in 2008, suggesting that U.S. companies have internalized efficiencies wrung from the relatively “bad” year of 2009.

An unreported area of “positive news” revolved around U.S.-China trade. Fully 58% of AmCham Shanghai member companies import finished goods or parts from the U.S. which has positive contributions to US jobs. Even if U.S. companies are producing goods in China for export, only some portion of that is Chinese value-added (e.g. the IPhone), and some portion of that is usually imported U.S. components that support U.S. jobs. Our data show that the U.S. value-added of imports from the U.S. to U.S. companies in China accounts for about 20% of their sales in the China market.

As for the “bad news,” it was often reported that “63% of U.S. companies think that the regulatory environment in their industry is not changing or getting worse.” What the foreign press ignored, however, is that 37% think that it’s improving, and that this was more than the 15% who think it’s getting worse. While it is true that “80% think that the regulatory environment is not transparent,” fully 25% think that this still doesn’t hinder business. This underscores our point that U.S. companies now have a more seasoned or mature confidence about business in China. They know that they are great challenges, but they have learned to profit despite them.

The hottest topic among the “bad” news was China’s Indigenous Innovation Policy, which got a lot of coverage partly because Hu agreed to delink government procurement from domestic industrial policy. Some articles cited the 47% of U.S. companies that are “concerned” about the Indigenous Innovation Policy. Yet, more significant is that only 10% report a tangible negative impact so far, and that those suffering the most are in predictable industries: healthcare (25%), Chemicals (21%), and Energy (18%). (These numbers are all significantly higher, in statistical terms, than the 10% average.) What’s most revealing is that we don’t see this kind of entirely predictable variation across industries among the 47% who are just “concerned” about indigenous innovation. Why is that? The most likely explanation is that they are reporting a fuzzier feeling of unease about the future, which may or may not impact their businesses.

Not mentioned at all in the China Business Report (because it didn’t make the final draft) was our statistical modeling of our three indices: business success and confidence, and the degree to which China’s regulatory environment is welcoming to foreign businesses. These indices each aggregate several questions in the survey, so as to measure broad business concepts and avoid idiosyncrasies in the wording of any one question, thus making them more objective. From our modeling, we discovered that there was a strong causal relationship between pairings of each of these indices, except for confidence and welcoming. Put differently, a friendly or fair regulatory environment doesn’t make U.S. companies significantly more confident about the future, since China’s regulatory environment is only one part of the evaluation of long-term opportunities and market potential in China. Statistically speaking, our analysis confirms what we have learned from our work at Technomic — that opportunities for our clients in China justify a high degree of confidence, and that U.S. companies have found ways to succeed despite the challenges.

From our perspective at Technomic Asia, there are at least three takeaways from the survey data relevant to U.S. companies thinking about entering China, especially SMEs.

First, they should keep in mind two kinds of risk. There are certainly risks that China-entry could result in IP infringements, shifting interpretations of regulations, and policy changes favoring local competitors. Our data confirm that these are concerns for U.S. businesses here in China (as they always have been). Potential China-entrants should also keep in mind, however, the risk not coming to China. Especially since the 2008-2009 recession, our SME clients have found that they have little choice but to have a China play, if they want long-term growth.

Second, do not be daunted by the China market. Most of the business news coming out of the summit headlined how the China market is getting more onerous in terms of regulation, indigenous innovation policy, and favoritism toward local companies. This completely ignores the good news in the report. The fact is that U.S. companies in China are thriving in China, and confidence in the China market – and the investment based on that confidence – is not directly related to how welcome U.S. businesses feel in their specific industries and product categories. At Technomic Asia, we can help China-entrants, especially SMEs, navigate the complexities of their specific industries, and arrive at the performance U.S. companies reported in 2010.

Third, an objective picture of the China market is necessary. Although reports of solar panel makers, wind turbine makers, and other U.S. businesses hurt by domestic protectionism are certainly a cause for concern, they are not necessarily representative of all U.S. businesses in China. Our rigorous, representative survey data show that this is not the whole picture. Again, while about half of U.S. companies were “concerned” about indigenous innovation, only 10% report negative impact, and there was no variation among those who just feel “concerned.” There are large swathes of the China market where government policy is not nearly as relevant and growth potential remains enormous, and Technomic Asia can help identify these opportunities.

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Length – 20:39

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We are in the middle of a series of conversations with Steve Crandall, Vice President for Implementation Services here at Technomic Asia, based in Shanghai.  We’ve addressed a wide variety of topics, from setting up your company in China to HR issues to dealing with the China Price Syndrome.  In today’s conversation, we are talking about probably the most important topic a company could face in China: building a sales pipeline.  And I start off with a very basic question for Steve …

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Length – 15:31

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We are working through a series of conversations with Steve Crandall, Vice President for Implementation Services here at Technomic Asia, based in Shanghai.  In Steve’s nearly 20 years of working in China, he has helped many foreign companies – primarily small and mid-sized ones – to establish operations in China.  We’ve been addressing a number of topics in this series, but today’s hits very close to home for a number of companies as Steve and I talk about the “China Price” syndrome …