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Looking for a Chinese Investor? Consider This. | China Decoded, BoF Professional

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At first glance, Self Portrait and Coppolella have little in common. The former makes influencer-beloved lace party dresses from London while the latter caters to skaters with its Milanese range of hoodies, beanies and graphic tees. Both brands, however, have Chinese investors to thank for a boost to their businesses during an exceptionally turbulent year.

Nationality is not the only thing these investors have in common. Both are local fashion brands looking to capture growth in new value segments after making a fortune in China’s mass market over the past decade.

Last autumn, Shenzhen-based Ellassay announced a 30 million yuan (around $4.5 million) joint venture with Self Portrait in China, a move which is funding the British brand’s physical expansion in cities across the mainland, with a goal of 30 locations by 2022. In May, Coppolella was acquired by Ningbo-based high street giant Peacebird for an undisclosed amount. Its aim is to reach €200 million in China market sales by 2025, before expanding across the rest of the world.

“I couldn’t ask for better timing,” said Self Portrait’s founder and creative director Han Chong. “It’s a completely different system of working. You need local expertise.” He added that growth in the mainland is speeding ahead of other markets; the brand is already on track to exceed its 30-store goal.

Recent collections by Self Portrait and Coppolella, respectively. Self Portrait and Coppolella.

Recent collections by Self Portrait and Coppolella, respectively. Self Portrait and Coppolella.

From recent deals between Supreme and VF Corporation to Farfetch, Alibaba and Richemont, a surge in optimism tied to promising Covid-19 vaccines is injecting life into global M&A. And with a rapid post-pandemic rebound fuelling competition in the Chinese market, experts see more cross-border deals on the horizon.

“We will likely see continuing M&A and/or a brand creation spree in 2021,” said Ben Cavender, managing director at China Market Research Group. Some Chinese investors will be local fashion players looking to diversify or use international brands as a point of differentiation; others will be more opportunistic firms looking for bargains on strong brands in distress due to tumultuous conditions in the US and Europe.

However, a look back at recent high-profile M&A activity suggests that not every deal between a Chinese investor and a western fashion brand is successful. Pairing up with the wrong partner, or the right one on the wrong terms at the wrong time, can do more harm than good. Here’s what brands need to consider before signing on.

All Eyes on China

Self Portrait and Coppolella are among the latest businesses to join a cohort of European players linking arms with Chinese investors — one that has grown, albeit at a slower pace than a few years ago, said Dino Zheng, a partner overseeing deal advisory at KPMG Shanghai.

That being said, the pandemic has only increased global brands’ reliance on the Chinese market. “There are more Italian brands who are reaching out and have started conversations with us for potential partnerships,” says Zhao Yizheng, chief executive of Redstone Group, whose portfolio includes Italian labels Giada, Curiel, Gabriele Colangelo, and Colombo.

Partnering with a Chinese investor can be a win-win situation — but only when the deal is right.

Peacebird’s chief strategy officer Ou Limin echoed that the pandemic, despite its adverse effects, will “let the world see the huge potential and opportunities of the Chinese market.”

For Chinese groups, investing in the right foreign brands can actually help them nab a greater share of their lucrative domestic markets. More than ever, Chinese shoppers are looking to discover niche global brands beyond luxury’s household names but many smaller brands in the west don’t have the expertise or budgets to tap into the world’s largest fashion and luxury market. With this objective in mind, partnering with a Chinese investor can be a win-win situation — but only when the deal is right.

The Cycle Continues

Chinese groups hit pause in 2019 after a years-long buying spree. In 2018, the same year that Fosun bought a majority stake in Lanvin and Icicle Fashion Group acquired Carven, Finnish sportswear group Amer Sports, which owns Salomon and Arc’teryx, was acquired for €4.6 billion (around $5.2 billion) by a consortium led by China-based Anta Sports.

“[Lanvin and Carven] haven’t shown their full potential,” said Mario Ortelli, managing partner of luxury advisors Ortelli & Co. “So far, the companies have done some hirings, they’ve made some decisions, but [when it comes to] regaining their grips on the market and on consumers, it hasn’t happened yet.”

Lanvin and Carven haven’t shown their full potential.

Meanwhile, Amer Sports appears to be off to a strong start under Chinese ownership. In September, Arc’teryx unveiled its largest global store in Shanghai, localised marketing through channels like Tmall and Wechat and began plotting a direct-to-consumer launch. With experts like Zheng expecting Chinese spending repatriation to last well beyond 2020, laying down local groundwork is a prudent move.

“Especially with the lead-up to the Beijing (Winter) Olympics in 2022, we will see strong growth coming from brands like Arc’Teryx and Salomon that have street credit in relevant sports,” added Cavender.

Coppolella, on the other hand, taps into China’s persistent streetwear boom and provides mass-market player Peacebird with a way to shift upmarket, since becoming one of Tmall’s best-selling brands of 2020. “The question will be how long the trend continues for and whether or not the acquired business can continue to be dynamic enough to drive traffic and sales,” said Cavender.

Perfecting the Follow-Through

But the challenges faced by big-spending investors like erstwhile LVMH-wannabe Ruyi Group (previously known as Shandong Ruyi) serves as a warning for others in the space. The group, which snapped up the likes of French contemporary fashion house SMCP and Aquascutum in a $4 billion buying spree that began in 2015, is scheduled to repay 2.9 billion yuan (around $409 million) in debt by the end of the year after two extensions. Ruyi declined BoF’s request for comment.

Zheng noted that while the group’s problems have been exacerbated by the pandemic, Covid-19 isn’t to blame. “Don’t [assume] that you can do better than others,” he said, noting that many investors start off with lofty, idealistic plans to turn around ailing brands.

Companies invest in firms that may have wildly different management structures or core business models.

Many Chinese firms have learnt the tough lesson that managing foreign companies — in particular reconciling their often different perspectives on corporate culture — is a task much easier said than done.

Struggling to get strong returns on investments is more common than many expect. “It’s very difficult to create value because companies invest in firms that may have wildly different management structures or core business models,” said Cavender. “It can be very difficult to realise value in the short term.”

Mind the Gap

Compared to the earlier Chinese investment boom, deals happening next year and beyond have more at stake for all parties involved. US-China trade tensions and the pandemic are just two factors at play.

The pandemic will widen the gap between buyers and sellers’ desired valuations and make negotiations trickier to navigate, said Zheng. Sellers, whose revenues may have been hard-hit by Covid-19, may think the impact is temporary, whereas buyers may wait for more certainty before making big commitments. “I’ve seen a few cases where the buyer withdrew at the last minute because of the pandemic” he added.

Moreover, Zheng and others like him believe that the election of Joe Biden as US president is unlikely to mean an immediate influx of investment between the two superpowers..

Another challenge facing prospective partners is the likelihood of differing views on growth. Managing expectations of a Chinese investor is crucial, Zheng suggested. With China’s recovery speeding ahead of other markets, coming to a common understanding of global sale targets will be more important than ever. “In China, every industry is still facing rapid growth… [companies] are accustomed to double-digit growth in China, whereas in Europe or the US it’s a different story.”

A Brand Balancing Act

Alongside ROI and company culture, there is the impact of a deal on brand equity and direction to consider.

Zheng reckons that Chinese groups are well-positioned to operate mid-tier brands, but high-end labels, like Lanvin, prove a challenge. For all of its local expertise, Fosun has yet to transform Lanvin into a covetable brand to resonate with China’s Balenciaga- and Dior-loving fashion crowd. Brands with a focus on heritage run an especially high risk of losing their value in the eyes of consumers under new Chinese ownership, he said.

A look from Lanvin Spring/Summer 2021. Lanvin.

A look from Lanvin Spring/Summer 2021. Lanvin.

According to Zheng, the only real solution is for a firm to “become a luxury brand locally, then buy luxury brands overseas.” For many in the China market this option remains out of reach, but there are other ways parties can minimise conflicts when it comes to creative direction.

For Chinese firms, “the trick is recognising a trend before it has completely run its course and investing in brands that are leading rather than following that trend,” said Cavender. For Peacebird specifically, this meant conducting brand inspections across the fashion and youth culture markets to determine the staying power and potential of skate brands in the country, said Ou.

For the brand being acquired, Cavender added that a robust product development and logistics strategy can help maintain brand identity while catering to consumer needs both at home and in China. In Coppolella’s case, Peacebird has taken over a big chunk of operations from product development planning to domestic sales and branding, with the brand’s Milan-based team overseeing global media and European sales. Whether this model succeeds, however, remains to be seen.

“[Ours] was a very very long contract,” said Self Portrait’s Chong, who has the final say in all major decisions, design-related or otherwise. “But it’s very important to respect their point of view as well. You learn from each other, it’s not a one-man show.”

Before signing on the dotted line, brand founders should consider how an investor fits into their long-term roadmap and come to terms with all aspects of the business they would lose control of. For those unwilling or unable to sell the business outright, setting up a joint venture or making the Chinese party your distribution partner in the market can buy time for executives to make decisions further down the line.

There are two possible outcomes from using these intermediate tactics. “One, sales in China go really well and the seller can increase their valuation,” said Zhang. “Second, sales in China don’t go as well and it’s easier for them to exit the market.”

时尚与美容

FASHION & BEAUTY

Angelica Cheung. Vogue China.

Angelica Cheung. Vogue China.

Angelica Cheung Left Vogue China. What’s Next?

Angelica Cheung is resigning as Vogue China’s editor-in-chief. Cheung announced the news on her Instagram account today and a memo was reportedly sent to staff at Condé Nast China to announce the move, which also said there were no replacement candidates ready to be confirmed yet. Condé Nast has confirmed the news of her departure. Cheung’s departure is a pivotal moment for Vogue China and the country’s wider media landscape. The news trended on social media site, Weibo, with netizens and industry names calling it the end of an era. (BoF)

Tiffany Beats Profit Expectations as China Demand Soars

The US jeweller benefited from an over 70 percent rise in sales in China and an uptick in demand at home, quarterly results revealed on November 24. The numbers are a good omen ahead of the holiday season for the jeweller and other luxury retailers, while underscoring the growing importance of sales within mainland China as shoppers repatriate the shopping they would otherwise be doing in Milan and Paris. Under a new deal agreed last month, Tiffany is still slated to be bought by LVMH at a slightly lower price of $15.8 billion, or at a $425 million discount. (Reuters)

科技与创新

TECH & INNOVATION

Alibaba CEO Daniel Zhang speaks at the World Internet Conference in Wuzhen on November 23, 2020. Getty Images.

Alibaba CEO Daniel Zhang speaks at the World Internet Conference in Wuzhen on November 23, 2020. Getty Images.

Alibaba CEO Calls China’s Draft Anti-Monopoly Rules ‘Timely and Necessary’

These were the words Daniel Zhang told the World Internet Conference on Monday, after Alibaba affiliate Ant Group’s blockbuster $37 billion IPO was halted by regulators. It isn’t just Ant: firms including Alibaba, Tencent Holdings and Meituan are bracing for increased scrutiny from Beijing. Zhang added that though government policies made it possible for Chinese tech giants to give global firms a run for their money, regulations are due for an overhaul “to ensure a more orderly and healthy development of the internet and the digital economy.” (Yahoo Finance)

Do China’s Gen-Z Need Another Social Media App?

Despite super apps like WeChat claiming screen time from over 1.1 billion global users, upstarts catering to China’s younger netizens are still gaining traction. Besides video platform Bilibili, four-year-old platform Soul is a space for users to express themselves and interact with one another in a stress-free, largely anonymous ecosystem. According to iResearch data, Soul is already more focused on Generation Z than any other major social network in China, with 35.6 percent of the app’s users falling in the age group. Whether the app can beat Bilibili to become the new go-to for younger netizens remains to be seen, but it’s clear that there’s no such thing as too many platforms. (Technode)

消费与零售

CONSUMER & RETAIL

Beauty blogger Austin Li Jiaqi applies lipstick while livestreaming on the e-commerce platform Taobao. Getty Images.

Beauty blogger Austin Li Jiaqi applies lipstick while livestreaming on the e-commerce platform Taobao. Getty Images.

New Curbs Ban Chinese Teens From Spending on Livestreams

Amid reports of data manipulation, fraudulent sales and pornographic content on livestreaming platforms, China’s media watchdog is further cracking down on the multi-billion-dollar industry. On November 23, the National Radio and Television Administration announced new rules where hosts and gift-givers must register their real names, companies impose a limit on “tips” for hosts and teenagers are prohibited from gifting altogether. The move will limit a major revenue source for livestreaming hosts and platforms, which have seen sales soar off the back of Covid-19 and social distancing measures. The regulator, which also asked firms to improve training for content moderators and hire more censors, will create a blacklist of hosts found in violation of the rules and ban them from livestreaming on any site or app. (Nikkei Asia)

Reports: JD Logistics Eyes $5 Billion IPO

The e-commerce giant’s logistics arm is readying itself for a 2021 public offering that would give it a valuation of $40 billion, according to a person familiar with the matter — a big leap from its reported $30 billion valuation late last year. According to sources, JD Logistics is choosing between Hong Kong and the US for the IPO. It isn’t the only JD subsidiary with plans to go public in the near future. Next month, its healthcare arm JD Health could raise up to $4 billion in a Hong Kong listing, which will value it at up to $28.5 billion and will likely be one of the world’s biggest this year. (IFR)

政治、经济、社会

POLITICS, ECONOMY, SOCIETY

The Indian Flag. Naveed Ahmed.

The Indian Flag. Naveed Ahmed.

India Expands China Tech Ban

This month’s border spat between the world’s most populous countries has escalated into a full-on tech conflict. After India banned a group of firms including WeChat, TikTok, Weibo and AliPay, it added 43 to the list on November 24. Now at over 200 companies, it includes Alibaba’s global marketplace AliExpress, Taobao’s livestreaming arm Taobao Live and other dating and gaming players. India’s Ministry of Electronics and Information Technology again cited national security as the reason for the bans, which are a huge hit for the likes of TikTok. India is TikTok’s biggest market for downloads and analysts estimate that it will lose up to 150 million downloads if the ban is enacted and lasts through 2020. (Bloomberg)

Ten Words That Defined 2020, According to Chinese Netizens

Youth Digest magazine has released a list of words that dominated the Chinese internet this year. Among the terms are dagongren, or working people, a label popularised by burnt out millennials, weikuanren, or balance-owed people, referring to cash-strapped young shoppers who can’t afford trendy items and opt to lease them or buy them on credit. Other highlights include nixingzhe, or those going against the norm, used to describe front-line workers; wangyiyun, or NetEase depression cloud, alluding to the phenomenon where streaming service NetEase Cloud Music’s comment section became a hot spot for bleak and sentimental stories; and gongjuren, or human tool, coined by people feeling used in romantic or professional contexts. (Sup China)

China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to our Shanghai-based Asia Correspondent [email protected].

Looking for a Chinese Investor? Consider This. | China Decoded, BoF Professional

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