Jonathan Siboni of Luxurynsight says China’s zero-Covid policy hard on company staff, causing many Western executives to leave
The latest financial results posted by luxury groups are clearly showing that, in the last few months, China, which was instrumental in the sector's rebound, has stalled. The country’s zero-Covid policy means that a few major cities and regions have ground to a halt, but there was also a great deal of uncertainty ahead of the Communist Party Congress that ended on October 22. Following Xi Jinping’s re-election, and a reshuffle in the party’s top hierarchy, some of the country's domestic and international economic policies will be redefined. In recent quarters, Chinese consumers were key in driving luxury giants’ results, and the next steps the country will take will inevitably be monitored very closely. Jonathan Siboni, a specialist in luxury and Chinese retail, active in the country with his company Luxurynsight, working for several luxury, fashion and beauty brands, and also busy managing Chinese brand Miniso in Europe for the last two years, has shared with FashionNetwork.com his expert vision of the luxury sector’s transformation under way in China.
FashionNetwork.com: Financial results show that major groups have experienced a business slowdown in China over the past few months. Is Covid to blame?
Jonathan Siboni: China has adopted a zero-Covid policy. The point is simple: the country faces a permanent risk in a territory 2.5 times larger than that of the 27 EU countries, and with a population that is 2.5 times bigger. Faced with this challenge, the authorities decided to close everything down. This policy was quite successful for two years, and it was China that enabled the luxury sector to bounce back. The worry the authorities had to deal with during the more recent waves is perhaps more linked to [the Chinese society’s] highly hierarchical organisation, to its absolute respect for order, and hierarchical commands. It’s multiplier power. When everything goes well, it makes incredible results possible. When the situation becomes complex, everything risks seizing up, especially the economy.
FNW: Do you believe the local political context is to blame too?
JS: Yes, because in addition to Covid-19, China was facing its own peculiar challenges. Notably, the Communist Party's 20th congress. It was a crucial political juncture for the future of the country, and therefore the world. The party has 80 million members, more than the population of France for example. With different visions meeting head on, and the political tensions that go with this.
FNW: Did the prospect of the congress freeze business activity?
JS: What we need to understand is that politics and economics are intimately connected in China. One cannot succeed alone in China, if that were even the case elsewhere. Leading entrepreneurs take an active part in politics, to contribute to a better overall coexistence. The country’s top two retail groups, Wangfujing and Bailian, which operate nearly 100 department stores between them, are state-owned companies. As long as there was uncertainty related to the Congress and elections, and changes at the top of these groups were likely, everything was on stand-by. The approach is ‘we need to strengthen and take care of ourselves first’, settling the situation internally before looking outside. There has been talk of changes in regulatory policies, work has been done on monopoly issues, on the internet and more besides, on major structural transformation. For the last 10 years, China’s economy has been trying to shift from being real estate and export-driven to being driven by domestic consumption. The country has experienced a change in economic model and a retail revolution, impacting the luxury sector. Luxury goods were previously bought abroad, and have now begun to flood the 120 cities in China with a million-plus inhabitants, thanks also to ultra-innovative [retail] concepts like Luxemporium. In a few years, shopping malls have transformed big cities beyond recognition.
FNW: However, you feel that Western groups in China are facing major challenges. Why?
JS: Firstly, because while China’s share in luxury groups’ revenue has increased from 10% to 22% in two years, the consumption of Chinese customers overall has not risen back to its pre-Covid levels. Secondly, because the pandemic has had a significant impact on foreigners in China. Before the crisis, there were more than 20,000 French people living in Shanghai, now there are less than 4,000. China in 2022 feels to me rather like China in 2002, when there were almost no foreigners, and businesses adopted a highly localised approach.
The result is that with fewer foreign executives and staff on site, [Western] groups have much less control over their business in the country. Operations and retail distribution are no longer as closely monitored. China’s zero-Covid policy has been hard on company staff, causing many executives to leave. At groups where about 20 Europeans used to work in the local subsidiary, only the CEO may have remained, and often they ended up leaving this year. Subsidiaries are now remotely managed, and local staff, left to their own devices, need to do a lot of reporting. Only a few early pioneers remain, and also a new generation of ambitious leaders who accept the challenge. Previously, taking charge of [a group’s] US business was a necessary step to reach the very top of the hierarchy. Some people are saying that, in 10 years, it will be necessary to have run the business in China. They are adventurers!
FNW: Isn’t this loss of connection with the teams on the ground in China surprising?
JS: The time to fix the roof is when the weather is sunny. Before the pandemic, it was clear that [luxury groups] had to build stronger business ties with China, and not simply rely on tourist customers visiting Paris. During the Covid pandemic, everyone felt that something had to change, but in reality, little progress was made. The luxury sector’s resilience is extraordinary. Two years later, while change in some areas, like digital and sustainability, has picked up pace, groups often do the same job with the same staff structure. In the last 10 years, more and more customers, and younger ones too, have been buying luxury goods. A result that is the fruit of a great deal of inspiration, but little substantive transformation.
The luxury sector [in France] has been built by great visionaries, men with amazing charisma like Jean-Louis Dumas and Yves Carcelle. They went out and gathered information locally. They had this very direct relationship with staff and markets. Luxury labels’ bosses used to travel all the time. The sector has enjoyed strong growth, together with an acceleration in production pace and in that of product launches. In their time, the world was brand-centric. It has now become customer-centric, and this of course has ended up affecting, and inspiring the luxury sector. I grew up in a world in which we were taught there were no new entrants in luxury. Nowadays, new brands that are capable of working with big data are changing the game. Take for example Kylie Cosmetics and Florasis (HuaXiZi) in cosmetics. If the biggest names are increasingly widening the gap with the rest in recent years, it is also because they are using more metric-based management tools, in order to continue to better control markets and over-perform. Assets that must be used more and more to stay at the top in 2035.
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