The Chinese Communist Party recently unleashed an unprecedented regulatory crackdown on some of its most profitable companies. Understandably, many U.S. businesses are wondering if they may be affected. The good news for the fashion industry is that the impact appears to be minimal, at least at this time. While the Chinese government is cracking down on Internet and other technology businesses, it is seeking to strengthen its manufacturing industries.
Chinese Regulatory Action Targeting Internet Companies
In recent weeks, several of China’s most successful technology companies have come under intense scrutiny by the country’s communist government. The crackdown is part of a broader plan to overhaul how the country regulates key industries. Under the Chinese government’s 10-point plan, private enterprise will become increasingly controlled by the Communist Party in the name of “public good.” The government plans to address monopolies, having already fined several of the countries’ largest companies for engaging in anticompetitive behavior. Alibaba is facing a record $2.8 billion fine, while social media and gaming company Tencent must terminate its exclusive music licensing deals with global record labels.
China has also already targeted after-school education and private tutoring companies, as well as online food delivery platforms. Moving forward, other areas of concern identified in the Chinese government’s regulatory reform plan include internet finance, artificial intelligence, big data and cloud computing.
Not surprisingly, shares in many Chinese tech companies have fallen in response to the crackdown, sparking unease in investors around the world. Businesses with extensive dealings in China are also following the situation closely. For U.S. fashion companies that rely on China for production, the good news is that its government has stated that it wants to prioritize the manufacturing segment of its economy. China’s textile and apparel industry has grown to become one of the largest suppliers of global fashion brands. The country plays a key role in several parts of the supply chain, including the furnishing of raw materials, designing and development, weaving, dyeing and processing and garment making.
While many other industries are coming under fire, China is expected to dedicate more resources to its manufacturing sectors and has identified solidifying its supply chains, improving resiliency and becoming more self-sufficient as key priorities. In a 2020 speech, President Xi Jinping stated that China “must accelerate construction of the digital economy, digital society and digital government,” according to a translation by Georgetown University- affiliated researchers. “At the same time, it must be recognized that the real economy is the foundation, and the various manufacturing industries cannot be abandoned.”
The COVID-19 pandemic has likely solidified the government’s commitment to strengthening its manufacturing industries. Like other countries, China is motivated to not only ensure that it can continue to produce and distribute goods during times of global strife, but also decrease its reliance on the outside world.
Wealth Redistribution’s Impact on Luxury Brands
The Chinese government is also targeting wealth inequality. According to President Xi, the Communist Party will pursue “common prosperity” by putting pressure on businesses and entrepreneurs to help narrow the country’s growing wealth gap.
China’s wealth redistribution initiative may impact luxury brands. China is one of the largest markets for luxury goods, and was projected to expand even further in the coming years. According to a 2020 report by Bain & Company, consumers in Mainland China will account for the largest share of luxury spending globally by 2025.
On August 17, 2021, President Xi Jinping’s specifically called for regulation of “excessively high incomes” with the goal of prioritizing “common prosperity.” While the government has not taken any specific actions, potential measures include higher taxes on luxury goods, restrictions on influencers and daigou (personal shoppers) and tighter control over online sellers like Alibaba.
Even without measures in place to address what China perceives to be “excess wealth,” some analysts predict limitation of luxury purchases to avoid scrutiny. Yet other analysts have suggested that a larger and more affluent middle class may benefit the luxury goods sector in the long run. Businesses may want to reconsider how heavily they plan to rely on China to fuel the growth of their luxury brands.
Outlook for Chinese Manufacturers
As of now, China’s crackdown does not appear to be impacting the manufacturing sector, including garment factories and other key components of the fashion industry supply chain. Accordingly, there should be no delays and increased costs as a result of the current regulatory reforms. Of course, Chinese garment companies are not untouchable, and it remains to be seen exactly how far the Chinese government plans to expand its reforms.
Howard D. Bader serves as general counsel for clients in a wide range of industries on an international scale. With over three decades of legal experience, he has represented clients in numerous legal matters, including commercial litigation, intellectual property, bankruptcy and creditor’s rights and mergers and acquisitions, as well as numerous corporate transactions and business law matters.
hbader@sh-law.com
(212) 784-6926
www.sh-law.com
