Unpopular Opinion, the Fashion Industry Misguided Investment in China

The People's Republic of China (PRC), China - the world's second largest economy and in recent history is counted amongst the leading European and Western economies as a world power. But with its new found position, the state has had to wrestle with internal strife and the fluid nature of the relationships its trade partners.  

One issue the state controlled region is contending with is the rapidly evolving state-society dynamic. One characteristic of a communist state is the amount of liberties afforded to the government. And Beijing's reach extends far beyond the economic activity of firms to that of the household. Case and point, unlike its western democratic counterparts who would not dare "tell a woman what to do with her body" next year  would be the ten year anniversary of the abolishment of China's one-child policy. Toted as a economic imperative at its rollout in 1980 by Deng Xiaoping, the People's Republic of China former parliament leader, said, "We must do this. Otherwise, our economy cannot develop well." Did not age well, as the scheme to restrict births for fear of "...a coming demographic-economic-ecological crisis..." recounted by Geer Jan Olsder, who in 1975 worked as a mathematician at the University of Twente in the Netherlands, for a short time tempered fears of overpopulation but ultimately created today's very real concerns regard China's dwindling birth rate. During the policies inception Mr. Olsder knew and observed leading Chineses academics on the subject of the one-child policy and in the 80s much of his work was inspired by a misguided hypothesis - the warnings about finite global resources and how mathematical models could be applied to birthrates.  

To further compound this self-inflicted catastrophe the government, again, in a heavy handed manner established state sponsored campaigns to coerce Chinese women to bare the burden of saving the Chinese population from total extinction - she is not having it. Today's Chinese woman has reeducated and redefined herself and no longer submits to the demands of her government or her family. According to Wang Fend, a sociology professor at the University of California, Irvin, in a Wall Street Journal article regarding the shift in China's gender roles observed "...there have been two conflicting shifts in Chinese society: a rising awareness of women's rights and increasingly patriarchal policies."   And as of September 2024 the Foreign Ministry Spokeswoman Mao Ning on behalf of the Chinese government announced adjustments to its cross-broader adoption policy "Apart from the adoption of a child or stepchild of blood relatives of the same generation who are within three generations of foreigners coming to China to adopt, China will not send children abroad for adoption." Which during the one-child policy from 1979-2015 saw an exodus of female Chinese babies who were traditionally (and even today) less favored in China over males. 

Additionally, there is a general feeling of demoralization amongst Chinese youth. Aspiring entrepreneurs have witnessed Beijing's continued inference with private enterprises - which the Wall Street Journal surmise it is meant to "...discourage irrational risk-taking and knock powerful business leaders down a peg..." resulting in China stifling its own people's entrepreneurial spirit - the cautionary tale of Jack Ma.  Job prospects are low for this demographic cohort which only compounds the overall drop in consumptions - due in part to Xi Jinping's deep seeded philosophical objections to  "Western-style consumption-driven growth..." Which makes China's government less willing to employ tools to simulate households spending. And more fundamental is Beijing's historic resist to policies that would encourage people to save less and spend more - and as of 2023 Chinese household saving rate consistently ranked among the world's highest. Technological advancements and the Internet is also a sticking point - at times during civil turbulence the government has deployed tools to censor the Internet by suppressing or scrubbing viral commentaries about the weaknesses in the economy. 

Under the leadership of Xi Jinping it has been reported recently that some of the government's own advisors in private whisper about a "Lost Decade." Illustrated by a laundry list of missteps made over the more than 10 years into the Jinping reign. China is also grappling with a tit for tat-back and forth with its main trade partner the United States and its allies - points of contention arising from labor practices, territory/sovereignty claims (the One China policy) and boarder security with regard to Taiwan, China's so-called  "right to development", and its party-state system to name a few.   

Now, how does the fashion industry play into all this? 

Well, executives at the most prestigious fashion and leather goods firms all prop-up China as the luxury market of tomorrow. One of these individuals, Laurent Boillot, the chief executive of Hennessy, when asked about the the next big luxury market after China said "My answer all the time: after China, there is China." 

They invest heavily in infrastructure - and grant it I understand the ebbs and flows of retail however Kering as of the third quarter for 2024 reported its Asia-Pacific region (not including Japan) was down five percentage to this time last year (softness also in line with the region's first half year results for 2024). Yet it recently opened a its largest store in China - a Balenciaga. Balenciaga's business results are collected in the "Other Houses" segment, including Alexander McQueen, which is down to last year about fifteen percentage in the quarter.

LVMH has a unwavering loyalty to its investment in China, reported in March of this year by the Wall Street Journal website the communist state accounted 20% of LVMH's global sales. And although fully aware of what seems to be a bleak road ahead for China the company no less continues to aggressively pursuit its goals with investments in the most premium real estate the region has to offer, enlisting top talent as brand ambassadors, and massaging political favor and goodwill.  As of its half year result for 2024 LVMH reported its Asian region (excluding Japan) was down about four points to the same time last year and accounts for about 30% of global revenue. The company tracks revenue for this region in the Hong Kong dollar which were held stable to last year at 3%. The report also highlighted that the "exceptional growth" in Japan - in respect to the first half of 2023 rose two points now contributing 9% to the business -was driven by purchases made by Chinese travelers. 

China is also a major driver for Only The Brave (OTB) global business according to its consolidated financial statement for 2023 listed second to the United States as a key market for the Italy based fashion and leather goods group. OTB which owns Diesel, Maison Margiela, Marni, and Jil Sander acknowledged the regions stagnant population growth however still pursues Asia as a "high-potential" market. 

 

To circle back to Ms. Boillot, yes the attractiveness and the appeal of China may seem easy to see today. However, the differences as it relates to cultural/societal values and principles and the continued geopolitical aggressions undertaken by the Chinese government and those governments of the head quarters of these fashion firms is not something that should be taken lightly or overlooked.  

Where I would suggest Ms. Boillot look as a viable alternative to China are places like India, varies counties across Africa, the Middle East and Vietnam. As of 2023 India replaced China as the largest population in the world and many journalist and economist see the ballooning birth rate as vehicle that could drive economy growth - with increased consumer purchases and playing a role in global affairs even as it deals with the poverty and lack of jobs. The current picture of India looks similar to that of China during the Xiaoping era when the country open up and participated in globalization. China in recent history has also increased its investment in Africa in part to mitigate the headwind of its own country. 

These regions are seldomly highlighted in the financial recaps offered by the leading international and North America fashion and leather good companies but they offer high upside to the company who is genuine and sincere in there exploration. The economic opportunity in these places have yet to be full realized by the people of these countries or by outside investors - these regions are ripe for momentum change.