$ 27 million of genuine luxury items seized in Hong Kong as price differentials and travel restrictions encourage smuggling

In the wake of Hong Kong and mainland customs officials confiscating luxury goods worth HK $ 120 million ($ 15.5 million) in a headline-grabbing raid newspapers in June, Hong Kong customs officials made a record-breaking seizure this week, taking custody of HK $ 210 million ($ 27 million) in luxury watches and handbags, as well as merchandise endangered wildlife, including shark fins, destined for mainland China. Unlike the frequent and large-scale seizures that see law enforcement around the world intercepting shipments worth millions of dollars of trademark infringing and / or counterfeit merchandise – from designer sneakers to clothing and accessories of haute couture, this growing series of seizures is distinct because the products at issue are genuine.

The most recent seizure Рin which authorities seized more than 370 handbags and wallets from designer brands including Burberry, Herm̬s, Gucci and Louis Vuitton, and 60 luxury watches Рcomes as forces from the Order of Hong Kong and Mainland China say they are working overtime and in a collaborative capacity to crack down on goods that are shipped to Hong Kong (often from Europe and the United States) and then smuggled in China. This allows importing parties to avoid various value added taxes and tariffs which serve to increase the prices of foreign branded products for Chinese consumers.

Price differences and travel restrictions

The increase in collective action by customs agencies and regional anti-smuggling offices coincides with what a report by Moodie Davitt called “a recent upward trend in maritime smuggling activity”, which is likely due , at least in part, to the persistent status quo. in international travel which has forced luxury buyers in China to do all their shopping on the mainland.

The Chinese government has lowered import taxes in recent years with the aim of “upgrading the domestic supply system,” as the Chinese Ministry of Finance said in 2017, and inducing repatriation of goods. Chinese luxury goods spending in light of large-scale practice. of Chinese consumers buy luxury goods during their international trips; such overseas excursions have always enabled Chinese luxury buyers to purchase luxury goods at a much lower price than they could at home. To put the general trend in perspective, it is estimated that 70% of Chinese spending on luxury goods – $ 83 billion of the total of $ 120 billion spent on luxury goods by Chinese consumers – was made in the United States. and in Europe in 2019.

Yet despite the narrowing price differentials resulting from lower import-related taxes (which brands have traditionally passed on to Chinese consumers, thereby significantly raising prices), the price rules of the game are still not even in place. many cases. While some brands, such as Bottega Veneta, Celine and Tod’s, would seek to follow in Chanel’s footsteps and adopt a global strategy of harmonizing prices in different markets, and while the Chinese government is “putting pressure on luxury brands to reduce the price gap between China and Europe with the aim of locking up Chinese spending on these products on the mainland ”in recent years, according to Bernstein, not all brands are on board.

As investment research and solutions firm Bernstein said in a luxury pricing report this spring, a number of top luxury brands continue to increase their prices in China faster than in Europe, resulting in sometimes striking price differences. Valentino is a good example, according to Bernstein analyst Luca Solca, who noted that the Italian fashion brand has doubled its prices in China compared to France. Meanwhile, Balenciaga, Burberry, Tods, Loewe and Louis Vuitton are among the brands that have posted the largest median price increases on the mainland, leading to a significant price differential between China and other markets.

The overall result comes in the form of ‘high and persistent price differentials’ and mark-ups of between 60% and 75% on luxury goods in China compared to Europe, which ultimately paves the way for some number of potential outcomes. Among these are, of course, the ongoing ongoing smuggling in China and the corresponding practice of parallel importation, which refers to the taking of genuine branded goods obtained in a market (i.e. a marketplace). country or economic zone) and their importation into another market, where they sold without the consent of the trademark owner. Beyond that, the price difference is also expected to play a big role in the expected return of overseas travel and shopping.

The percentage of luxury goods acquired each year by Chinese consumers outside of mainland China may not return to the previously seen figure after all pandemic-related restrictions were lifted, but Solca, for its part, expects to that such price differentials encourage luxury consumers to start shopping abroad again.

Desire for different things

Another factor that will likely drive international shopping once Chinese consumers can travel again, and which could very well help stimulate some of the demand for contraband? Their desire to access products which they consider to be more unique than those offered en masse in their national market. “More than just a way to avoid once high VAT taxes, traveling further in Europe allows Chinese consumers to purchase luxury goods that set them apart from their peers”, including through “designs different regions from those offered by the same brands in China, “according to Xiaoqing Chen and Carol Zhang. Following a survey of Chinese women after the 1990s, the two academics found that many of them have expressed a preference for luxury goods acquired outside of China over “basic items which are available everywhere [in China]. ”

The sharp rebound in spending that followed the initial COVID-19 outbreak in China seemed to suggest consumers were more than willing to buy the luxury goods on offer on their own turf. However, that can start to change. A recent report from China-focused news site Sixth Tone suggests that Chinese luxury consumers in Shanghai, Beijing, Chengdu and Shenzhen have started to tighten the reins of their spending at home “hoping international travel can soon. to resume”. This results in lower spending from mid-2021. This drop in luxury consumption is expected to turn into “wealthy Chinese consumers are starting to travel again to shop, so it could happen very soon.”

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