Comparing Luxury: India Vs China
I pen this article in the backdrop of some recent milestones. Opening of Apple’s first store in Mumbai two decades after it entered India, UN report on population pegging India at the top of the population chart over China for the first time ever and LVMH CEO & luxury Moghul Bernard Arnaut pipping Elon Musk to the post as the world’s richest person.
Friends, overseas and Indian, especially in the luxury industry often ask why with a similar 1.4 billion population luxury goods penetration in India is low compared to China. Even at a policy level, it begs a fair question of why a democratic free market mixed economy state scores low on luxury consumption compared to a post-Deng quasi-authoritarian capitalist model. And whether GDP and GDP per capita is the sole indicator of luxury sales.
Pic by Slena and Vladayoung
While it is true that India’s GDP at USD 3.5 Trillion is a little under a sixth of China’s, the gap is not as wide when compared to Gross National Income, GNI or Income Per Capita a more realistic indicator to assess discretionary consumption. India at USD 7000 in PPP (purchasing power parity) terms is just under a third that of China. Yet China outstrips India by many miles in the luxury segment a USD 350 Billion global category constituted of Swiss watches, apparel, perfumes, bags etc. and brands of the likes of LVMH, Hermes, Kering etc.
Pic by Mercedes-Benz India
Let’s look at the scale at which China operates in Luxury. Swiss Watches are a good starter. China imports a whopping USD 2.5 Billion worth of Swiss Watches each year compared to USD 200 Million that India does. That’s roughly 17 Lakh watches annually against 1.25 Lakh in India. Luxury retail is another good indicator. Louis Vuitton has over 30 stores in China compared to just 3 in India. Even Apple which took twenty-five years to open its first store in India already has over 40 stores in China. Annual iPhone sales in India at 6 million units is a far cry from the over 50 million sold in China. Or compare the case of luxury cars. Popular marquee brands like Mercedes Benz, BMW, Audi etc. cobble together a sale of 30000 units annually in India. That number exceeds 3 Lakh in China. China by the way at 24 million units is a 6 times bigger market for cars.
Pic by Patek Philippe
Strangely though there is one segment where India outperforms China. Scotch Whisky! USD 350 Million worth was exported into India compared to USD 290 Million to China in 2022 But that’s for another article!
So, the scale at which China operates in Luxury for a similar population count with only 2.6X per capita income dwarfs India in every category. And this is just the mainland comparison not including Hong Kong.
What then is the reason? Surely GDP & GNI are indicators of the average prosperity of a nation and its citizens but there are other parameters that drive sales, especially luxury sales. These impact parameters are a long list based on demography, psychography, policy, culture etc. While it is difficult to cover all in depth in a short article, I will attempt to offer a flavour. It will only save impatient luxury brand owners from making impetuous business decisions.
For starters, Luxury is a function of urbanization. Only 35 per cent (490 M) of India’s population lives in cities compared to China's 63 per cent (882M). India has only 180 urban agglomerates above 3 Lakh compared to China's 423. Even amongst the top 12 cities, barring Delhi NCR which is more populated than Shanghai, all the rest from Mumbai to Madurai are less populated than Beijing to Dongguan.
Age also matters in Luxury. Older customers apportion more to luxury once life essentials are taken care of. At 38 years, the median age of Indians is a full 10 years younger than of the Chinese at 38.
Experiential retail is important in a luxury brand's strategy and hence rental costs come into play. For a much smaller economy, India’s retail rentals are high. Premium destinations quote around USD 7-10 monthly per Sq. Feet including allied costs which is not far from average mall rentals in China. Besides, China has an oversupply of retail spaces and provinces even offer subsidies to attract anchor brands. In select cases, CP may be more expensive to lease than Wangfujing.
Policy imperative. Luxury Brands prefer total control over their retail operations either directly or through their wholly owned local subsidiaries. In India, 100 per cent control over single-brand retail is prohibited till the brand sources inputs worth 30 per cent locally. Pertinent to note that even Apple set up its stores only once its local manufacturing ramped up.
Alternatively, brands can at best go to 51 per cent which means it has to rely on local partners who may have the money but may not share the vision and hence reduce the brands' enthusiasm. No such hurdles in China. Besides local sourcing and fully owned retail puts less pressure on the stock turn than in India.
Add to the lists attributes like funding costs, duties, freight, taxes, exchange rate etc. that make India an expensive market to operate in than China. Bank lending rates in India at over 11 per cent are double that of China. Unit freight costs to reach luxury goods into China, if they are not locally sourced, are cheaper compared with India. Chinese RMB is a stronger currency making imports relatively cheaper and customs duty and GST on luxury goods in India are much higher than in China. GST on luxury goods is applied at the highest slab of 28 per cent in India whereas the standard VAT rate by comparison in China is a mere 13 per cent.
Operationally India is a much more expensive market to operate in than China and the reason is not just GDP or GNI per capita. Also, the fact that psychographically even rich Indians even today are value-conscious and eschew luxury makes matters difficult for Luxury brands. China by comparison is more Westernised and amenable to copying Western lifestyles.
So, what is the future of Luxury in India? In a single word; Bright. Not in the short term but in the mid to long term, over say the next ten years, luxury will be a sunrise consumer segment to watch. The sheer headroom and that too over a low base is vast. Urbanization will increase, the median age will rise, discretionary affluence will increase, the currency will strengthen, infrastructure supply will increase & interest rates will drop, a socialistic policy mindset will ease, and India will account for an increasing share of the luxury sector.
And as an end note, it is also not far when Both China and India will also dent the European luxury hegemony and the world will see a few luxury brands emerge from both these countries.
Vikram Limsay an entrepreneur and a policy-business consultant. He tweets as @VikramLimsay
