A Louis Vuitton store in Hong Kong. (File photo/CNS)
The love-hate relationship that wealthy Chinese consumers have with "made in China" luxury products has created huge profit-making opportunities for international suppliers of expensive luxury products, which are now directly manufacturing and marketing their products in the country. But some analysts say the practice could land these foreign firms in trouble, including possible accusations of tax evasion.
Industry analysts believe China will soon become the world's largest market for luxury goods. Yet many of the country's wealthy still make massive purchases of foreign goods while on trips overseas in order to save on customs duties.
Market surveys show that Chinese consumers are both willing and able to pay for pricey items. But one shows that they are also disdainful of products carrying "made in China" labels, regardless of brand or authenticity. Up to 86% of those surveyed said they would "definitely not" purchase such items when traveling abroad. While abroad, they say, there is no reason to spend high costs on products made at home, reported the Beijing Business Daily.
But almost all top international brands have already set up manufacturing operations in China. LVMH, which produces Louis Vuitton products, established a production center in China five years ago. Other brands — including Armani, Gucci and Prada — are also churning out large volumes of their products at plants in the country's eastern coastal provinces.
The multinationals are known to use bonded warehouses — duty-free zones — to apply impressive labels such as "made in Italy" or "made in France," despite the goods having been produced in China.
Regulations stipulate that in order to have such labels, partially processed products must be shipped abroad for the final phase of production. But these products will have the added costs of Chinese customs duties and shipping. There are also rules prohibiting sales of foreign products made at bonded warehouses in the domestic Chinese market. These rules have often been neglected, say industry analysts.
Domestic luxury goods suppliers in China say that these practices are unfair. Officials are now viewing the practice as a form of tax evasion subject to criminal penalties.
Some foreign firms ship products to nearby Hong Kong and then haul them back to the mainland market in order to evade taxes, say sources. Many simply park the finished goods at their bonded warehouses for a few days before finding ways to sell them as "foreign-made" to meet the huge market demand.
Many consumers are willing to pay comparatively high prices for these luxury goods, so long as they don't know (or choose to ignore) that the products are actually made in China.
Analysts say that in addition to violating customs tax rules, the practice will suffocate Chinese luxury goods suppliers and distort economic data, most obviously import and export figures.