Will China Market Luxury Goods

A mechanical watch tells the time rather badly.

A modest quartz watch will usually tell it more accurately. A telephone will do it better still.

Yet people spend £5,000, £20,000 or £100,000 on mechanical watches.

This seems irrational only if we assume they are buying a timekeeping instrument.

They are not.

The same applies to a Ferrari, a Gulfstream aircraft, a Purdey shotgun, an Hermès bag, a Loro Piana coat or a Nordhavn yacht.

All perform practical functions. But usefulness alone cannot explain their prices.

The purchaser is buying an object. He may also be buying craftsmanship, history, trust, taste, belonging, recognition, scarcity, memory and sometimes status.

Luxury begins where usefulness ceases to explain the price.

Two things are being manufactured

Modern manufacturing rarely consists of one factory making everything.

A watch may contain a movement from one specialist, a case from another, a bracelet from another, and springs, screws, clasps and dials from still others. Individual suppliers may specialise in remarkably narrow areas of manufacture.

The same principle applies elsewhere.

A private aircraft contains engines, avionics, landing gear, cabin systems, windows, seats, composites and thousands of other components made by specialist suppliers. Gulfstream openly describes a worldwide supply chain providing materials, parts and services for its aircraft. Bombardier says it deals with approximately 2,800 product suppliers across 40 countries.

A motor car is much the same. BMW describes a global supply network delivering components and materials from numerous production sites, while Mercedes-Benz maintains an international supplier system of its own.

So two things are being manufactured.

The first is the physical product.

The second is its meaning.

China has become extraordinarily good at the first.

European and American luxury companies have historically been extraordinarily good at the second.

That distinction may matter much more than whether a Chinese factory can polish a watch case as well as a Swiss one.

The Chinese component inside the Swiss watch

It is easy to imagine a watch marked Swiss Made as an entirely Swiss object.

That is not what the designation means.

Current Swiss rules require at least 60 per cent of the manufacturing cost of the complete watch to arise in Switzerland. For the movement, at least half the value of the component parts must be Swiss-made and at least 60 per cent of manufacturing costs must be generated there. Technical development must also take place in Switzerland.

That leaves room for foreign components.

And China is plainly part of the supply chain.

In 2024 Switzerland imported approximately $26.8 million of watch-case parts from China. China was its largest individual supplier in that particular customs category. Switzerland also imported around $24.7 million of watch straps, bands and bracelets from China.

This does not tell us that a particular Rolex, Omega, IWC or TAG Heuer contains a Chinese case or bracelet. Customs statistics cannot establish that.

It tells us something more useful.

Chinese components enter the Swiss watchmaking system in considerable quantities.

The label on the finished product therefore tells us something important about origin, expertise and regulation. It does not provide a map showing where every screw, spring and semi-finished component began life.

China no longer merely makes things cheaply

The old Western image of Chinese manufacturing was cheap labour producing inferior copies.

That description increasingly fails.

In areas such as machining, polishing, brushing, tolerances and mass-production engineering, Chinese manufacturers can work at extremely high levels when the customer is prepared to pay for them. The final few percentage points of refinement can become disproportionately expensive because they involve tighter quality control, more labour and more rejected components.

This is not peculiar to watches.

China has created dense industrial ecosystems in which toolmakers, component suppliers, electronics specialists, finishing companies, packaging businesses and logistics operations sit close to one another.

Their advantage is not simply cheaper labour.

It is the network.

Some companies that shifted production away from China have subsequently discovered how difficult this manufacturing ecosystem is to reproduce elsewhere.

This makes the old question — Can China make it cheaply? — increasingly obsolete.

The better question is:

How much of the physical value does China already know how to make?

Even aircraft is an assembly of other people's expertise

Consider private and pleasure aircraft.

A Gulfstream, Bombardier Global or Dassault Falcon represents one of the highest-value manufactured objects a private individual can buy.

The name on the fuselage matters enormously.

Someone buying a Gulfstream does not usually describe himself as having purchased a collection of Honeywell, Rolls-Royce, Collins, Parker or other components assembled into an aeroplane.

He bought a Gulfstream.

Likewise, Bombardier sells the Global and Challenger families. Dassault sells Falcon aircraft such as the Falcon 10X. The finished aircraft becomes the organising identity within which the contributions of hundreds of specialist businesses disappear. Bombardier explicitly describes engines, wings, avionics, fuselage parts, mechanical systems and electrical systems as products sourced through its global supplier network.

This is not a weakness.

Nobody seriously expects an aircraft manufacturer to mine the aluminium, manufacture every microchip and make every tyre.

The manufacturer's expertise lies partly in choosing, specifying, integrating, testing and accepting responsibility for all those things.

The brand therefore becomes a promise about the whole.

At this level, that promise may be worth millions.

The motor car crossed this bridge years ago

Luxury cars provide an even clearer example.

Ferrari, Rolls-Royce, Bentley, Aston Martin, Porsche, Mercedes-Benz and BMW are powerful identities. Yet no modern motor manufacturer makes every component in its own factories.

BMW needs around 36 million parts every day across its worldwide manufacturing system.

Chinese technology is increasingly inside that system too.

CATL, for example, has long-term battery relationships with BMW and Mercedes-Benz. CATL and BMW agreed that new cylindrical cells for BMW's Neue Klasse would be produced in both China and Europe, while Mercedes-Benz has used CATL battery technology within its electric vehicle programme.

Yet nobody buying a BMW imagines he has bought a CATL.

The supplier manufactures an important physical component.

BMW manufactures the meaning of the finished car.

Ferrari demonstrates this even more clearly.

There are many cars capable of extraordinary acceleration. Some cost considerably less. Yet Ferrari's value lies partly in Maranello, Formula One, the Prancing Horse, racing history, restricted production and the accumulated stories of people who have owned Ferraris before us.

The car moves the owner from one place to another.

The Ferrari takes him somewhere else.

Clothes perform the same trick

A jumper keeps us warm.

A Loro Piana cashmere jumper may cost thousands.

The difference cannot be explained solely by the amount of wool required to cover a human torso.

Material quality genuinely matters. So do fibre selection, weaving, finishing, cutting and longevity. Loro Piana has built much of its reputation around rare fibres, textile expertise and understated Italian craftsmanship.

But the customer also buys something less tangible.

He buys Loro Piana.

Brunello Cucinelli operates in much the same territory. So do houses such as Kiton.

Their most effective clothes sometimes carry almost no visible branding.

Status does not always shout.

Sometimes the pleasure lies precisely in knowing that most people will not recognise the garment while a small number of knowledgeable people will.

The absence of a large logo can itself become a luxury signal.

The object says:

I know.

And, occasionally:

I know that you know.

Leather goods make the distinction obvious

A handbag has a wonderfully simple engineering requirement.

Things should remain inside it.

Thousands of inexpensive bags accomplish this perfectly.

Yet an Hermès Kelly or Birkin occupies an entirely different economic universe.

Hermès can make a strong case for genuine craftsmanship. Its Kelly bags involve around forty pieces of leather, extensive handwork and the company's traditional saddle stitch. Hermès states that all of its bags are handcrafted in France.

But craftsmanship alone still fails to explain the full phenomenon.

The purchaser may be buying the leather, stitching and construction.

She is also buying Hermès.

Louis Vuitton, Bottega Veneta and other leather houses operate variations on the same idea. Each has developed recognisable visual codes, histories, retail environments and associations.

The bag carries possessions.

The brand carries meaning.

This distinction becomes particularly interesting because not all luxury supply chains resemble Hermès. Luxury fashion production can involve complicated layers of contractors and subcontractors. Investigations in Italy have exposed how some prestigious labels depended on manufacturing networks far removed from the immaculate boutiques in which their products were eventually sold.

Again, the shop and the factory need not be the same world.

A Purdey is not simply a mechanism for firing cartridges

Sporting guns provide an unusually clear example because their technology is old.

A Purdey or Holland & Holland shotgun performs a function that considerably cheaper guns from Beretta, Browning and other manufacturers can also perform extremely well.

So why commission a bespoke London gun?

Partly because the gun can be fitted to its owner.

Partly because of its balance, engraving, wood, metalwork, hand-finishing and longevity.

But also because James Purdey & Sons has been making sporting guns since 1814. Its London workshops, apprenticeships and long association with British shooting form part of what the customer purchases. Purdey itself describes each bespoke gun as an opportunity to own part of that history.

A fine sporting gun therefore becomes something more like a Stradivarius than a cordless drill.

Its mechanical function matters.

But function provides only the beginning of its value.

This is also why such firms can expand naturally into tweed, shooting clothes, luggage and leather goods. Purdey now sells all of them.

The customer is not merely buying products.

He is buying entry into a world.

Yachts may provide the best example of all

Yachting exposes the same process on a larger scale because almost nobody buys a serious yacht by comparing specifications alone.

AMEL, Nordhavn, Fleming, Pursuit, Invincible, Nord Star and Scorpion

They do not all sell the same dream.

AMEL represents French blue-water sailing, long-distance independence and a distinctive approach to safe, manageable cruising.

Nordhavn represents ocean passage-making: the idea that an owner can point the bow towards a distant horizon and keep going.

Fleming occupies a different space again — traditional-looking, refined motor yachts developed around long-range cruising and incremental engineering improvement.

Pursuit mixes offshore capability with American luxury and recreational boating.

Invincible is much more strongly associated with serious offshore fishing and performance.

Nord Star brings a Finnish, all-weather approach: strong pilothouse boats intended to remain useful when conditions become uncomfortable.

Scorpion builds its reputation around bespoke high-performance RIBs.

The steel, GRP, engines, electronics and upholstery matter enormously.

But those ingredients do not completely explain why one owner wants an AMEL and another wants a Nordhavn.

They are buying different versions of themselves.

A yacht also destroys the simple idea of national manufacture

Fleming provides a particularly useful example.

The brand is inseparable from Tony Fleming and its distinctive cruising philosophy, yet every Fleming has been built at the Tung Hwa yard in Taiwan since production began in 1985. Fleming describes the Taiwanese yard and its craftspeople as central to the quality of the product.

Nobody needs to regard that as a contradiction.

It simply means the intellectual, commercial and manufacturing identities of a product do not have to occupy the same country.

Nordhavn provides another variation.

A Nordhavn shows the brand contributes includes design philosophy, accumulated experience, specifications, testing, reputation and the expectations attached to the name.

This distinction becomes increasingly important in a world of international manufacturing.

Where was it made?

and

Who made it?

are no longer necessarily the same question.

Luxury is partly the management of risk

There is another reason brands matter more as prices rise.

Risk changes.

If a £50 purchase disappoints us, the damage remains limited.

Spend £5,000 on a watch, £100,000 on a car, several million on a yacht or tens of millions on an aircraft and the buyer asks a different set of questions.

• Will it work?

• Who will repair it?

• Will parts remain available?

• Will the company still exist?

• Who answers the telephone when something goes wrong?

• Can I sell it again?

• Will anyone want it?

• Will owning it become a pleasure or a burden?

The luxury brand therefore acts partly as a psychological guarantee.

A Gulfstream is accompanied by a worldwide support organisation and a parts network. A Nordhavn buyer is purchasing a body of knowledge about long-distance passagemaking. Ferrari buyers enter an established dealer and servicing system. The purchaser of a Purdey can send a gun back to the same house whose name appears upon it.

This reassurance has economic value.

It is one reason an unknown manufacturer cannot necessarily defeat an established luxury business simply by producing an equivalent object for half the price.

At high prices, cheapness can even introduce doubt.

Luxury is expensive to sell

This creates a paradox.

A luxury object may have a very attractive gross margin while the company selling it has surprisingly modest profits.

The problem lies in everything surrounding the object.

Luxury requires expensive premises, trained staff, advertising, sponsorship, research, events, inventory, after-sales service and increasingly elaborate customer experiences. High-end audio demonstrates the problem particularly well: the individual product can carry a large margin while the showrooms, installation, technical support, promotion and future development consume much of it

A £200,000 loudspeaker system does not merely have to be built.

• Someone has to make the customer want it.

• Someone has to provide a place where buying it feels natural.

• Someone may have to install it.

• Someone has to arrive when it stops working.

• The showroom therefore does something very similar to the factory.

• The factory manufactures the object.

• The showroom manufactures confidence.

• The last five per cent costs a fortune

• Luxury manufacturers also encounter another difficulty.

• Getting something reasonably good is often inexpensive.

• Getting it very good costs more.

• Getting the final few percentage points right can become extraordinarily expensive.

• Surfaces must align. Paint must be flawless. Stitching must remain even. Switches must feel right. Doors must close with the correct resistance. The inside of something that almost nobody sees may have to be finished because the customer paying the price expects it.

A Chinese manufacturer capable of producing a component to 90 per cent of an elite Western standard may therefore offer astonishing value.

Getting from 90 to 97 per cent might cost considerably more.

Getting from 97 to 99.5 per cent may cost more again.

At that point the argument ceases to concern basic manufacturing competence.

It concerns whether customers care about the difference.

Some do.

Others merely care about the name.

Most probably care about some combination of both.

Scarcity can be part of the product

Ordinary businesses try to meet demand.

Luxury businesses sometimes have to resist it.

If everybody who wants an object can have one immediately, some of its symbolic value may disappear.

Loro Piana provides a particularly clear contemporary example. Its management has deliberately resisted simply maximising sales of some successful products because preserving exclusivity matters to the long-term value of the brand.

Ferrari has long understood something similar.

So have watch houses.

So has Hermès.

The waiting list, allocation process or limited production run can seem commercially absurd.

Yet scarcity itself communicates something.

Luxury companies sometimes manufacture absence almost as carefully as they manufacture products.

This explains why China cannot simply undercut Rolex

A Chinese manufacturer may eventually produce a watch whose measurable qualities rival an Omega or Rolex.

Indeed, in cases, bracelets, machining and finishing, the technical gap has already become surprisingly narrow in some parts of the market.

But an equivalent object is not necessarily an equivalent luxury product.

Suppose a Chinese manufacturer produced a watch equal to a £10,000 Swiss watch and offered it for £2,000.

An engineer might reasonably call that excellent value.

A luxury buyer might ask:

Who are you?

• He may be asking about history.

• Resale.

• Recognition.

• Servicing.

• Taste.

• Community.

• Continuity.

• Whether the maker will still matter twenty years from now.

Above a certain price, identity becomes part of the product.

China therefore faces a curious challenge.

It may master the difficult engineering before mastering the apparently easier story.

Yet China is also learning to sell meaning

There is no reason to believe that luxury heritage has to be European.

China possesses thousands of years of artistic, technical and cultural history.

Chinese companies do not have to build better imitations of Rolex, Hermès or Ferrari.

They can create objects whose desirability comes from being unmistakably Chinese.

That may prove far more disruptive.

Western businesses spent decades asking whether Chinese companies could manufacture their products cheaply enough.

Then they asked whether China could manufacture them well enough.

Increasingly, the answer to both questions is yes.

The next question is much more interesting:

Can China create things that affluent consumers desire precisely because they are Chinese?

Once that happens, more of the profitable part of the value chain moves east.

• Not merely the battery.

• Not merely the case.

• Not merely the clasp, casting, circuit board or machined component.

• The story moves as well.

• The factory makes the object. The customer helps make the luxury

• A Rolex is made from metal, glass and tiny mechanical components.

• A Purdey is made from steel and walnut.

• An Hermès bag is made from leather and thread.

• A Loro Piana coat is made from fibre.

• A Ferrari is assembled from thousands of components.

• A Gulfstream contains an industrial supply chain of bewildering complexity.

• An AMEL, Nordhavn, Fleming, Pursuit, Invincible, Nord Star or Scorpion combines hull, machinery, electronics, upholstery and hundreds of bought-in systems.

Yet none of these lists explains the finished product.

Luxury appears somewhere between the material object and the human mind.

It lives in reputation, expectation, memory and comparison.

It depends upon what the owner believes he has bought and what other people believe he owns.

That is why the origin of every screw cannot settle the question of value.

Components matter.

Craftsmanship matters.

Engineering matters.

Country of origin matters.

But so do history, trust, recognition, scarcity and story.

China has become extraordinarily accomplished at manufacturing objects for the world's brands.

The more consequential question is: "what happens when it becomes equally accomplished at manufacturing desire?"