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Luxury shopping heaven: Paris? London? Think China
By Mark Bishop |
00:00 UTC+8 March 6, 2012
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Print Edition
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REPORTS show that Chinese spent nearly US$9 billion on luxury consumption over the 2012 Chinese New Year, but US$7.2 billion of that was spent abroad in the US, Europe, and other parts of Asia.
Anyone who has lived in China can guess why. On average, luxury products cost 20 percent to 50 percent more than they do in other countries. The question luxury brands and the government, both eager to drive domestic consumption growth, are now facing is: How do we attract more luxury consumers to shop in China?
One of the challenges, undoubtedly, is the high cost of luxury in China. What drives prices so high? There are a number of factors, but it's no secret that China's tax rates on imported luxury products are among the highest in the world. The major contributor to the tax cluster on any luxury product is the consumption tax, which has traditionally been set superficially high. Jebsen knows that the consumption tax for yachts is at around 10 percent, luxury watches at 20 percent, and cars at as high as 40 percent.
After the import duties (yachts at around 8 to 10.5 percent, watches at around 11 to 12.5 percent, cars at 25 percent), VAT (all at 17 percent) and other components are added on, the tax on yachts comes to around 37 percent, that for watches comes to around 49 percent, while that for cars can come up to even over 100 percent. It's not unusual to see luxury products cost substantially more than what they do in the West.
Gradual drop
The reasons for maintaining these tax rates are understandable, given that taxes are an important source of revenue, and given the economy's breakneck pace of growth and China's widening income gap. The pursuit of wealth should not become more important than taking care of one's fellow citizens, and we all hope to see a successful balance between market regulation and openness.
As China transitions to a consumer-based economy, however, tax rates may need to decline to spur consumption, encourage innovation and create new opportunities for more players to enter the market. Having more players means greater competition, which will gradually cause prices to align with what we're seeing around the world.
"Gradually" is the key word here. Market forces will keep prices inflated until supply catches up with the sudden increase in demand brought on by lowered taxes. But the benefit is clear. Tax cuts will keep more luxury consumption in China. The increase in sales will actually increase tax revenues, despite lowered rates, and increased domestic luxury consumption will increase demand for Chinese employees as well, significantly benefitting China's jobs market.
Domestic consumption does not depend only on Chinese consumers, either. Nearly 56 million foreigners travelled to China in 2010, presenting a valuable opportunity for China to become a prime tourist shopping destination.
With analysts predicting China will become the largest tourist destination in the world after 2015, the government should strongly consider offering inbound travellers tax rebates and other incentives on Chinese luxury items, such as high quality jade, tea, art calligraphy and other luxury products that can be found only in China.
Tax holiday
The easiest and simplest way for China to do this is an annual tax holiday during the peak inbound tourism periods, typically in early autumn or spring, when the weather is mild and most suitable for travelling. A tax holiday would reduce or eliminate taxes on select luxury goods the government wishes to promote, quickly attracting more global travellers to choose China as their travel destination and spend more during their visit.
Tax holidays provide both the short-term benefit of boosting tourism revenue as well as the long-term benefit of branding China as a consumer-friendly destination for luxury goods, providing an effective and innovative strategy for expanding China's luxury market over the next several years.
To attract more Chinese to purchase luxury goods domestically, luxury brands should focus more attention on second-tier cities, where incomes are rising rapidly but where fewer opportunities to buy luxury products exist.
Most consumers in these markets will be first time luxury buyers and are less likely to shop abroad, giving brands a valuable opportunity to build a presence and educate buyers on their brand value. Cities such as Shenyang, Liaoning Province, and Chongqing have excellent consumption potential, even competing with Beijing and Shanghai in the automotive, watch and jewelry sectors.
Despite the challenges, China's fast growing love of luxury is great news for the economy and for luxury brands doing business here.
Reduced barriers on luxury consumption will help, but real long-term success will require brands to discern new and more profound ways to win over potential Chinese and global customers. And once they do, don't be surprised if Beijing and Shanghai, rather than New York or Paris, become the global luxury shoppers' destination of choice.
Mark Bishop is Director at Jebsen Group, which distributes yachts, watches and sports cars on Chinese mainland.
Anyone who has lived in China can guess why. On average, luxury products cost 20 percent to 50 percent more than they do in other countries. The question luxury brands and the government, both eager to drive domestic consumption growth, are now facing is: How do we attract more luxury consumers to shop in China?
One of the challenges, undoubtedly, is the high cost of luxury in China. What drives prices so high? There are a number of factors, but it's no secret that China's tax rates on imported luxury products are among the highest in the world. The major contributor to the tax cluster on any luxury product is the consumption tax, which has traditionally been set superficially high. Jebsen knows that the consumption tax for yachts is at around 10 percent, luxury watches at 20 percent, and cars at as high as 40 percent.
After the import duties (yachts at around 8 to 10.5 percent, watches at around 11 to 12.5 percent, cars at 25 percent), VAT (all at 17 percent) and other components are added on, the tax on yachts comes to around 37 percent, that for watches comes to around 49 percent, while that for cars can come up to even over 100 percent. It's not unusual to see luxury products cost substantially more than what they do in the West.
Gradual drop
The reasons for maintaining these tax rates are understandable, given that taxes are an important source of revenue, and given the economy's breakneck pace of growth and China's widening income gap. The pursuit of wealth should not become more important than taking care of one's fellow citizens, and we all hope to see a successful balance between market regulation and openness.
As China transitions to a consumer-based economy, however, tax rates may need to decline to spur consumption, encourage innovation and create new opportunities for more players to enter the market. Having more players means greater competition, which will gradually cause prices to align with what we're seeing around the world.
"Gradually" is the key word here. Market forces will keep prices inflated until supply catches up with the sudden increase in demand brought on by lowered taxes. But the benefit is clear. Tax cuts will keep more luxury consumption in China. The increase in sales will actually increase tax revenues, despite lowered rates, and increased domestic luxury consumption will increase demand for Chinese employees as well, significantly benefitting China's jobs market.
Domestic consumption does not depend only on Chinese consumers, either. Nearly 56 million foreigners travelled to China in 2010, presenting a valuable opportunity for China to become a prime tourist shopping destination.
With analysts predicting China will become the largest tourist destination in the world after 2015, the government should strongly consider offering inbound travellers tax rebates and other incentives on Chinese luxury items, such as high quality jade, tea, art calligraphy and other luxury products that can be found only in China.
Tax holiday
The easiest and simplest way for China to do this is an annual tax holiday during the peak inbound tourism periods, typically in early autumn or spring, when the weather is mild and most suitable for travelling. A tax holiday would reduce or eliminate taxes on select luxury goods the government wishes to promote, quickly attracting more global travellers to choose China as their travel destination and spend more during their visit.
Tax holidays provide both the short-term benefit of boosting tourism revenue as well as the long-term benefit of branding China as a consumer-friendly destination for luxury goods, providing an effective and innovative strategy for expanding China's luxury market over the next several years.
To attract more Chinese to purchase luxury goods domestically, luxury brands should focus more attention on second-tier cities, where incomes are rising rapidly but where fewer opportunities to buy luxury products exist.
Most consumers in these markets will be first time luxury buyers and are less likely to shop abroad, giving brands a valuable opportunity to build a presence and educate buyers on their brand value. Cities such as Shenyang, Liaoning Province, and Chongqing have excellent consumption potential, even competing with Beijing and Shanghai in the automotive, watch and jewelry sectors.
Despite the challenges, China's fast growing love of luxury is great news for the economy and for luxury brands doing business here.
Reduced barriers on luxury consumption will help, but real long-term success will require brands to discern new and more profound ways to win over potential Chinese and global customers. And once they do, don't be surprised if Beijing and Shanghai, rather than New York or Paris, become the global luxury shoppers' destination of choice.
Mark Bishop is Director at Jebsen Group, which distributes yachts, watches and sports cars on Chinese mainland.
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