| Nowadays, always more and more luxury companies are implementing production strategies based on product manufacturing outsourcing from China; these strategies generate a big issue related to the way the "Made in China" country brand is perceived by final product buyer.Firstly, I have analyzed the reasons behind and the advantages of the outsourcing choice for luxury companies. Actually they cannot avoid to recur to cutting cost strategies, such as product manufacturing outsourcing, for reasons strictly related to their financial and business structure.In the luxury business fixed costs are very high and in their supply chain the most expensive part to manage is the end part (retail, marketing, selling...).Product manufacturing outsourcing represents for luxury companies an opportunity both to cut costs both to gain flexibility in production management.The key to successful outsourcing is to retain manufacturing know how within the company and choosing with attention and controlling the suppliers. This is what we called the "luxury solution "Secondly I have analysed the role of Chinese manufacturing industry in the global supply chain of luxury companies; this, in order to better understand why luxury companies select mostly China and not other countries as the "source" of their products.Chinese manufacturing system’s key success factors are:inexpensive lands, labour force and China potential market.According to a2011report published by the U.S. Bureau of Labour Statistics in2008, as measured in U.S. dollars, Chinese hourly labour compensation costs in manufacturing were roughly4%of those in the United States and about3%of those in the Euro Area in2008. Furthermore actually the added value that differentiate China from other "cheaper" manufacturing countries is the level of product quality and production flexibility that Chinese manufacturing companies are capable to guarantee. Luxury businesses work around the brand and the customer value of the brand.In fact we have seen that in the world of luxury more than anywhere else, the creation of value for customers is one of the main objectives of brands that today aim at being recognised as luxury, premium brands.The brand represents indeed one of the most important assets in the portfolio of a luxury company. Actually, the activities that in the supply chain of a luxury company mostly create value for customers and consequently for the brand, are related to brand management. This is because the brand is the idea, the story that exist in customers’mind; it is the element that drive profits.The common goal of branding, communication and customer experience strategies developed by luxury companies is to increase customer equity. Customer equity is the preamble of financial equity:luxury brands have financial value because they have created assets in the minds and hearts of customers, distributors, opinion leaders. These assets are brand awareness, beliefs of exclusivity and superiority of some valued benefits and emotional bonding. We have seen that an important factor affecting customer equity is the country or geographic location from which the brand is seen as originating3. Country branding, leveraging on the "heritage" of a particular country, helps companies to build consumer confidence and it stimulates the desire to buy.About branded products, a quite interesting matter is that of the "perceived country of origin" of a branded product (that could differ from the "perceived country of origin"). The "country of design" or "country of assembly" act much the same as the made-in country in invoking the image of the country as a source of design and triggering and impacting the image of that country as a design location of the specific product line. Consequently today luxury companies practicing outsourcing from China, invest a lot in communication and retail strategies aiming at nourishing the "perceived country of origin" of their products (which may differ from the country where their products are in reality made). Additionally they are "supported" in developing this "misleading" strategy by the lack of a global, uniform legislation or consensus on what made-in means.In a context like this, luxury companies can feel more comfortable and allowed than in the past in implementing production strategies based on the outsourcing of product manufacturing from China in order to cut costs.According to the "Made in China:2007Brand Study"4(based on a survey involving700business and marketing professionals) it is confirmed that the first three attribute that people associate with brands/products having a Chinese origin are:cheap, a good value and youthful. Furthermore, the last three attributes that people associate with brands related to "made in China" are:luxurious, prestigious, high quality. Well, despite these results, there are three factors that actually mitigate the challenge with a "Made in China" label:first of all most consumers do not consistently check for the country of origin label. Secondly, with so many Western companies outsourcing manufacturing from China, and the high costs of shifting production to another country, consumers are left very little choice in the short-term. Thirdly, consumer’s trust in a product brand may counter-balance concerns about the country of origin.This let us conclude that even if the "made in China" label doesn’t fit well with luxury brands’ products, it may have only a limited "negative" effect on brand’s perception. As ABC’s business experience demonstrates, even if luxury companies recur to product manufacturing outsourcing from China they absolutely keep being strongly oriented (internally) towards the product development and design. The new role played by brands and communication implies that the relationship between people and luxury world is defined by the interaction of luxury brands (not products) with customers. Product role is only "functional" to this kind of interaction, it is the tangible element of the interaction. Luxury brands, by enhancing their world of privilege are able to "distract" customers from caring and investigating about the place where product is made or in which way it is technically made; luxury consumers care more about the nationality of the brand.In any case, product manufacturing strategy should follow and be aligned to the brand positioning strategy:this is the golden rule for luxury companies in manufacturing outsourcing from China. Indeed, according to ABC experience, any kind of strategies to be implemented for luxury brands has to face a trade off between accessibility (that drives sales and brand awareness) and exclusivity (that drives image); manufacturing outsourcing from China is a strategy better "aligned" to brands positioned as more accessible instead than exclusive.The fact that branding and communication strategies are exploitable in some way in order to "hide operating details" or "lower the impact of outsourcing on brand" is "truer" in today democratized luxury market than in the uncontaminated supreme luxury market.Several premium brands, like Armani, for example, protect themselves by entering the "Masstige segment" through the second or third line differently positioned through different marketing mix strategy and production strategies. In ABC case, brands in the portfolio are divided into three main groups according to their positioning:Luxury (standing for "authentic luxury"), Premium and Diffusion brands; each strategic choice involving luxury brands in ABC portfolio is a consequence of their positioning. |
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