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Hybrid hothouse

Western branded firms are pairing with mainland companies to create products combining global excellence with a Chinese flavour. Shirley Lau looks at the hybrid business model

 

Osiao, Zhinuo, Denza … Struggling to pronounce these unfamiliar names? You are not alone. But soon, they will become the talk of the mainland, or so hope Estée Lauder, BMW and Mercedes-Benz, the luxury brands behind these so-called hybrid brands targeting mainland consumers.

Over the past decade or so, Western high-end brands have been vying to expand their share of the massive mainland market with high-profile promotion campaigns and the spread of retail outlets. Now it looks like some of these brands have decided that one way of guarding and expanding their share in the mainland is to create hybrid brands that combine global savoir-faire with local flavour.

Michel Gutsatz, a France-based luxury brand-management specialist and co-author of Luxury Talent Management: Leading and Managing a Luxury Brand, concurs.

"This is a radically new approach. It is a new business model that is now appearing in luxury," says Gutsatz, who is also the associate dean and MBA director of Kedge Business School in France and adjunct professor of China Europe International Business School on the mainland. "At all the conferences I have given on luxury, I often had people ask me: 'When will China have its own luxury brands?' This business model is an answer to this question."

"It is not something we've seen before, especially when it comes to luxury," says Bertrand Ternat, associate director of market research firm Ipsos' Hong Kong office. "As the core of luxury, you never adapt your offer based on one country … because luxury is about legacy and heritage."

One hybrid brand that has already caught the attention of Hongkongers is Osiao (pronounced o-shao), which debuted in Lane Crawford stores in October 2012. An East-meets-West beauty line, it adopts a method "inspired by Chinese medicine and Western dermatology".

At the time of its launch, Fabrizio Freda, chief executive of the cosmetic giant, said the brand "gives consumers a sense of being local, of being really dedicated to them". A string of marketing events have been rolled out in Hong Kong over the past few months involving local celebrities. A 50 millilitre "rejuvenating moisturising cream" retails for HK$1,260. According to a Lane Crawford spokesperson, the brand will be launched on the mainland; the date is yet to be confirmed.

In the automobile market, there is Zhinuo (or Zinoro in English), an electric car created by Germany's BMW in co-operation with Chinese car manufacturer Brilliance Auto. To be available only on the mainland, it will be shown at the Guangzhou Auto Show in November and launched next year.

Another newbie is Denza, co-founded by Daimler - which owns Mercedes-Benz - and the Chinese high-tech company BYD. Based on the Mercedes-Benz B-Class platform, Denza will also make its first appearance at the Guangzhou car show before going on sale on the mainland in the first half of 2014.

The list does not stop here. A relatively older but still fairly fresh hybrid brand is Shang Xia, a luxury lifestyle enterprise established in 2008 by top-of-the-range French brand Hermès and France-educated Chinese designer Jiang Qiong Er.

Retailing out of self-branded shops in Beijing and Shanghai, the label combines Chinese craftsmanship with European luxury.

Pricing for most items is in the luxe category, ranging from around 2,200 yuan (HK$2,800) for a pair of shoes according to Jing Daily, and a whopping 880,000 yuan for a rocking chair made of zitan wood, according to a salesperson from Shang Xia's Beijing shop. Production of the chair involved 5,000 hours of work.

The emergence of hybrid luxury brands in the mainland says a lot about the market's promise and particular politics.

"The Chinese market is huge and China has strong national pride in its history, traditions and achievements," says Gutsatz.

Mainlanders have unseated US shoppers as the world's biggest buyers of luxury goods, said the consulting firm Bain & Company in December 2012. Together, these countries account for one quarter of global sales of luxury goods through purchases at home and abroad.

International firms have commonly used local partnerships to get a foothold on the mainland, for example in finance and carmaking. The arrangement typically keeps majority control in the hands of the domestic partner, easing political concerns that established international brands will swamp local competitors. The domestic partner gets expertise, particularly in marketing, and the international firm gets access.

"European and US luxury brands will now apply their luxury branding know-how, which the Chinese lack, to these new brands that are developed with Chinese partners. We have here an ideal mix: Western branding competence plus Eastern know-how and design," Gutsatz says.

"By setting up joint ventures with local companies, Western companies can make sure they expand their market share without having to start everything from scratch. Things can move quicker. It is a good springboard," says Norman Chan, head of investment at Calibre Asset Management.

Ternat of Ipsos adds that a strong local partner can help an international firm navigate an unfamiliar market. "After a luxury brand has entered China, it may want to go deeper in country. But things get more complicated in terms of distribution. [Collaborating with] a local company helps to widen the distribution network," he says.

If Shang Xia's performance is anything to go by, the outlook of the hybrid brands is rosy. Having established a name over the past five years, Shang Xia is now stretching its tentacles abroad. This month it will open a third store on Rue de Sèvres, a Parisian street lined with high-end French fashion stores.

"They have done a wonderful job in creating a brand with Chinese inspiration. It's very well done. I'm not sure if they are targeting Chinese people or people outside China. But I am sure it will go down very well in France," says Ternat.

Nevertheless, Torsten Stocker, a partner at management consulting firm A. T. Kearney, says Shang Xia is in a league of its own and does not necessarily make a good reference for gauging the success of other Sino-Western brands.

"I wouldn't look at Shang Xia as a luxury brand designed for China. I think part of its vision has been to make high-quality products that showcase and sometimes resurrect Chinese artisans' skills, infuse them with modern design and make them available to a global audience," he says.

As for the outlook of the other hybrid brands, Stocker says: "It is hard to give a general answer here, as they are in very different categories. Denza's and Zinoro's success, for example, will depend as much on how consumers take to electric and hybrid cars as on the brands' own competitiveness."

If there is any risk in the East-meets-West approach, Stocker believes it would be to do with the positioning of a brand. "The risks for hybrid brands include a lack of clarity in how they are positioned, versus their 'global brand brethren' in China, in particular when they compete in a similar space," he says.

Chan, however, believes the lucrative mainland luxury market is worth taking a risk, and he reckons more and more newcomers will join the ranks of the hybrid brigade.

"The joint ventures recently established indicate China is opening up to foreign luxury brands," he says.

"More and more Western brands will want to forge this sort of collaboration."

 

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