IHT: China's Luxury Manufacturing

http://www.iht.com/articles/2007/10/01/style/rchina.php

A new luxe take on 'Made in China'
By Alexandra A. Seno
Monday, October 1, 2007

HONG KONG: Say "Made in China" these days and the growing list of manufacturing scandals immediately comes to mind. But the recalls of lead paint-covered toys, news of poisonous dog food and shocking sweatshop stories obscure another reality: a very small but flourishing high-end factory sector that produces top-class goods.

Cheap and nasty fashion gets made a lot in mainland China but increasingly, well, chic happens. "Luxury manufacturing in China is a new trend so there will not be many factories. I would think this number must be less than 100 or even much lower," said Hana Ben-Shabat, a partner and international consumer goods specialist at the London offices of the management consultancy A.T. Kearney.

"In the beginning I was skeptical," said Rafe Totengco, designer of Rafe New York, a label popular among the Hollywood crowd. "I thought: 'Ugh, cheap labor . . . !' and I had all the perceptions of people who are uneducated about manufacturing in China."

A few years ago, hearing what some other high-end brands were doing on the mainland, Totengco began to visit workshops in Guangdong and Shenzhen in southern China. The recipient of several U.S. accessories design awards, he said, "I was blown away."

Totengco said he found tidy, Chinese-owned factories with neat, uniformed local workers and some Italian employees. The equipment tended to be cutting edge and the products, he said, were excellent quality with attention to detail. While he still uses Italian skins, he has had two collections entirely made in China, including the reptile-skin clutches that the "Desperate Housewives" star Eva Longoria ordered earlier this year for members of her wedding party.

Price, however, is not a big advantage in these factories. "It is not cheap. Small runs, under 300 pieces per style, per color, tend to cost the same as anywhere else in the world," said Fiona Kotur-Marin, a Hong Kong-based designer who also is a production consultant and a silent partner in the Tory Burch brand.

"There are different tiers of manufacturing in China," she said, "In the north, it is less expensive production. As you move south, manufacturing gets more refined." Labor for handbags or clothes generally constitutes just a tiny fraction of overall costs, often less than 10 percent, and the average general rates for workers in, say, Bangladesh can be a fifth of those in China.

The main advantage, according to Kotur-Marin: "Chinese factories meet their deadlines, unlike Europe." Chinese workers do not have the vacation allowances of European workers so factories, for example, work through August. And one of the under-appreciated qualities of the mainland's manufacturing capacity, she said, is a sophisticated supply chain infrastructure.

And the best workshops do not work with just anybody, Kotur-Marin said. "They pick you, you don't pick them because they don't need your business."

A recent study by consultants at the international accounting and business consultancy firm KPMG and at Monash University in Australia reported: "While companies are often wary of the 'Made in China' tag, companies such as Coach, Paul Smith and Armani have shifted some of their manufacturing to China in recent years."

Burberry makes up to 10 percent of its products in some of the more sophisticated factories across the border from Hong Kong, including about a quarter of its shirts and some of its accessories.

None of the three brands mentioned in the study would comment on their product sourcing methods.

When queried directly about the percentage of their goods made in part or entirely in China, representatives of other randomly selected European luxury labels were vehement that their goods were made in Europe yet refused to give further details about their manufacturing process.

Their reticence is understandable, analysts say. "One of the selling points of luxury is that the goods are handcrafted in Europe," said Nick Debnam, head of KPMG's consumer group in the Asia Pacific region and an author of the study.

And Ben-Shabat at A.T. Kearney said: "This is something all players will handle with care because of the sensitivity of consumers. Why pay $1,000 for handbag if it's not made in Italy?"

"Typically, you will see that they maintain most production of high-end ranges in Europe but will try to produce a sport line in a low-cost location," she said. "Or they will only do part of the work in the Far East and complete it in Europe."

China's own appetite for luxury goods may drive the country's growth in high-end manufacturing in the future, industry experts say.

Management advisers at Ernst and Young predict that by 2015, Chinese consumers will account for some $11.5 billion of luxury purchases, 29 percent of the industry's sales.

China already is the world's third-largest single market for luxury goods.

Earlier this year, the World Luxury Association predicted that by 2009, 60 percent of all luxury goods would be made in the mainland - and some of that production doubtless would end up being bought by the Chinese themselves.

Yet even that scenario has its own problems. Mainland Chinese, in particular, relish the "exotic" frisson of owning something made in Italy or France, Debnam said.

Aside from the general negative connotation around the "Made in China" tag these days, Kotur-Marin is frank about the other obstacles for a brand using mainland factories. For example, it took plenty of patience and five samples to prototype her bag named Fane Hitchcock. The $575 feathered clutch is now a hit among the East Coast socialites that patronize Kotur but the factory initially could not understand what she was trying to do.

"It is easier to work in Italy because we share the same vocabulary" of design, Kotur-Marin said. In China, "you are working with many people who have never been to Bloomingdale's."

Which partly explains the presence of foreign employees at some of the top-end factories. Of the six that Kotur works with, one has Italian workers; two of the five manufacturers used by Totengco have some Europeans on the payroll.