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Awkward seat in the lap of luxury

By Lu Nengneng: 0 Comment(s)Print E-mail Shanghai Daily, March 15, 2012

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Consumerism with Chinese characteristics [By Jiao Haiayang/China.org.cn]

As China tries to rev up domestic consumer spending as an engine of growth, calls for a cut in the tariff on luxury goods have come fast and furiously.

We are told about the hordes of Chinese bargain-hunters using overseas trips to Paris, London and New York to scoop up luxury goods that would cost up to 70 percent more at home. We are told the Chinese are the world's third largest bloc of luxury-goods buyers, and 60 percent of those purchases are made abroad. We are told that a cut in tariffs would lower the price of luxury goods in China and keep the money here.

Of course, much of the foment for change is stirred up by foreign luxury brands anxious to ring up more sales in China. The issue of tariffs on luxury imports even resulted in some heated discussions at China's annual conference of top legislators this month.

I think it's time to step back and examine the issue more carefully. No doubt, lower tariffs would boost sales of luxury brand handbags, scarves, jewelry, clothing and other items, but would it really create consumer-led economic growth?

It is true that establishing a more self-sustaining economic model starts with encouraging more domestic consumption, which usually means getting people to spend more on non-essentials.

Once sales take off, related industrial activities increase and more jobs are created. With more jobs and prosperity comes greater disposable income to spend on more non-essentials. Thus, a self-renewing cycle is formed.

China helped stimulate car purchases after the world economic crisis in 2008 by offering motorists incentives to buy, such as subsidies and lower vehicle fees. It was a useful jumpstart to keep economic growth on track.

Brand premium

But luxury goods cannot play the same hero role in the economy because they can't deliver the same benefits from production and distribution.

Ouyang Kun, the Chinese representative of the World Luxury Association, notes that luxury goods are high value-added products, with the cost of material, manufacturing, marketing and sales accounting for only about 40 percent of the retail price, excluding taxes.

A large part of the remaining 60 percent is simply brand premium, which Chinese consumers always seem eager to obtain for the prestige value.

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