European luxury goods companies have cultivated the notion that their products are made by skilled craftsmen from Italy or France whose knowledge has been passed on through generations of the same family.
Such images, however, are coming under threat. Just as every other manufacturing sector has done over the past decade, the luxury goods industry is starting to contemplate moving some of its production capacity to China.
Given the lure of China’s regimented, low-cost workshops, luxury industry executives have been toying with this idea for some time. But few have dared to make their views public.
Not so for Prada, one of the world’s leading fashion houses. At a recent Financial Times conference in Shanghai, Patrizio Bertelli, chairman and chief executive of the Italian group, revealed that Prada was considering outsourcing some production to China and other countries that can offer cheaper labour.
“The relocation of some production should not be a reason to wage a war of religion,” Mr Bertelli said. “Low-cost labour will pose a threat to European labour over the next 10 years. But using Chinese labour will be seen as an opportunity to contain cost and price, which will be beneficial to consumers.”
Over the past decade, these arguments have become commonplace in the textiles sector, with many manufacturers of T-shirts, running shoes and ties sourcing their production from a number of developing countries, most notably China.
However, for the luxury goods sector, relocation has been something of a taboo – despite in spite of continuing rumours that a few companies are quietly using China for parts of their production.
The risks are obvious. By opting for low-cost Chinese labour, luxury goods companies could lose the whiff of glamour that surrounds their brands and justifies their relatively high prices.
As Umberto Angeloni, chief executive of Brioni Roman Style, the Italian fashion house, puts it: “When you start changing the ‘made in’ label, you create an expectation among consumers of lower prices, because everybody perceives costs in such countries to be 90 per cent lower.”
But the pressures on the luxury industry to consider the China option are growing. According to Michael Zaoui, a managing director at Morgan Stanley and one of the industry’s leading investment bankers, the growth prospects for the sector have slowed over the past four years. This is partly because luxury retailers have nearly reached the limits of potential floor space available to them in department stores.
“Margins have deteriorated because prices have not kept up with [rising] costs, which leaves you with two choices: to act on prices or on costs,” he says. “Can you make luxury more expensive than it is today? I don’t think so, as consumers want to pay less. One solution is to cut costs and relocate.”
A few companies have made a virtue out of their China production. Shanghai Tang, owned by Zurich-listed Richemont, is generally recognised as the first luxury goods company to come from China.
Raphael le Masne de Chermont, Shanghai Tang’s executive chairman, says that there was a strong tradition of what was called “imperial tailoring” in Shanghai before the Communists took over. Of the 18 people left who still retain those skills, he says, 12 work for Shanghai Tang.
“For us, ‘made in China’ is not a theme, it is our strength,” Mr le Masne de Chermont says.
“Of course we will continue producing in China. There are some products that you cannot produce well in China – for instance, leather goods – but one day everything else will be produced here.”
Most outsourcing advocates believe the strategy has to be implemented carefully. “The real problem is integrating Chinese labour with our labour,” says Mr Bertelli at Prada. “The Chinese have excellent labour, but it is possible that some items, like bags and shoes, may continue to be made in Italy.”
He believes companies can minimise the potential damage of outsourcing by changing the labelling policy.
“I think it is feasible that, in the case of a Prada product that is made in more than one country, the ‘made in Italy’ label could be replaced by a ‘made by Prada’ label,” he says. In other words, the company’s brand name would be used as a guarantee of manufacturing quality and not just design.
James McArthur, executive vice-president at Gucci Group, says the reaction of customers will depend on the brand. Old-style luxury brands might face considerable risks. By contrast, products in the Stella McCartney line – a new brand developed by the British designer – are now partially made in Hungary. “There is no customer resistance because the brand is good enough and the price is right,” he says.
Mr Zaoui at Morgan Stanley believes outsourcing does not pose significant dangers for companies with strong brands.
“Even luxury companies will learn to manufacture in China,” he says. “Do not worry so much about the label and its meaning! Your strength is your brand. Cartier’s brand, for instance, is worth three times more than Apple, Pepsi and Nike in terms of sales.”
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