As I mentioned and analyzed in my post on the Li & Fung strategy on 16 October 2011, we have just learned of three successive acquisitions of European luxury brands by Fung Brands Limited - an investment fund (attached to Fung Capital Europe) owned by Victor and William Fung:
- The acquisition of 80% of Sonia Rykiel
- The acquisition of a 80% share in Delvaux
- The acquisition of 90% of Robert Clergerie
This phenomenon started about 5 years ago: Chinese companies are purchasing European brands.
- In cars, examples abound: in 2005 Nanjing Auto bought MG, and SAIC (Shanghai Automotive Industry Corporation) acquired the rights of several Rover models. These were redeveloped and marketed under the name Roewe, with great success. Since SAIC had acquired Nanjing Auto, the new group re-launched the MG in Britain in 2009/2010, with models that were well received by critics. The group's portfolio also comprises the rights to Austin Healy, purchased in 2007. In 2010, Geely bought Volvo from Ford.
- In 2008, Weichai Group, the first Chinese manufacturer of boat engines, trucks and construction equipment, bought Motors Baudoin – recognized experts in marine engines AND in 2012 they finalized the acquisition of Ferretti – the world’s largest manufacturer of luxury yachts (with brands like Riva and Ferretti yachts).
- A similar phenomenon is appearing in fashion. In 2008, the group Hembly International bought Sergio Tacchini. In 2009, Zhongfu bought the rights to Pierre Cardin in China. In 2010 Shandong Ruyi (world leader in spinning and weaving, one of the Hugo Boss sub-contractors) acquired 41% of Renown, the Japanese fashion comppany, and Tombolini, the Italian clothing company. And recently Aquascutum - after having entered administration bankruprcy protection - was acquired by its Asian licencee and distributor - YGM Trading based in Hong Kong.
Chinese companies have been building on the low-cost business model so far: the price made the difference, and some even resorted to dumping to get rid of competitors in markets. They have now clearly understood that owning a brand generates higher margins than being a manufacturer for the owner of the brand. This explains why over 20% of company heads surveyed in a recent study by The Economist ("A brave new world: The climate for Chinese M & A abroad", 2010) say they are in search of brands.
However, Chinese companies are faced with significant managerial shortcomings - especially where integration of foreign teams and marketing are concerned. The Economist's survey shows that Chinese companies have acquired 298 foreign companies in 2009 (including 13% in Europe and 13% in the U.S.), but only 39% of top managers surveyed believe they have the skills to integrate these acquisitions. The challenges ahead are therefore significant.
Brand management competencies and skills are not part of the Chinese business culture. As Y.C. Yeh, founder of Taiping carpets said « Chinese are very good at manufacturing, but the culture forbids marketing » (http://sumagazine.syr.edu/archive/winter04-05/features/feature2/). Many important dimensions of brand management have to be mastered – amongst which building brand consistency, respecting intellectual property rights, pricing, quality control, applying a contract-based culture, managing creators and designers, building affluent customer relationship…
These competencies can be learnt through partnerships with European brands and experts and there are three major methods to achieve this :
- Buy European luxury brands and create mixed teams with a European CEO (Fung Capital went this route);
- Adopt the artistic director/CEO or COO model of mixing cultures (Shang Xia and qeelin are examples). A recent example is the development of Sheji Sorgere – a luxury men’s brand developped by China Garments with products designed by Francesco Fiordelli (Fashion Director) and manufactured by Caruso, an Italian company;
- Work with European branding experts on (re)developing existing Chinese brands (an approach adopted by Herborist, a beauty brand of the Shanghai Jawa Group).
These brand management competencies and skills are critical and will be even more so because China is in a transitional phase – moving from ‘made in China’ to ‘designed in China’ (as stated in the 12th 5 year Plan). In its Textile part, the Plan calls for the establishment of between 5 and 10 internationally recognized Chinese brands and at least 100 nationally recognized brands by 2015. It also says more education should be implemented in brand management and brand building in order to bolster China’s fashion industry. As Lin Yun Feng, VP Chinese Chamber of Commerce of Textile Industry said in a recent interview: « Chinese competitive companies will go the quality-way. They will work with European designers. I cannot exclude that those that fail to evolve in this manner will go bankrupt. »
Therefore my advice to Chinese firms who want to create world class premium and luxury brands lies in 3 words: Buy / Hire / Learn.
- Buy expensive brand management expertise and/or buy brands (and respect their business culture)
- Hire international talent in all dimensions of brand management
- Learn from competitors with the help of international business schools.
