$27 Million Worth of Authentic Luxury Goods Seized in Hong Kong, as Price Gaps, Travel Restrictions Prompt Smuggling

Image: Unsplash

$27 Million Worth of Authentic Luxury Goods Seized in Hong Kong, as Price Gaps, Travel Restrictions Prompt Smuggling

On the heels of customs agents in Hong Kong and Mainland China confiscating HK$120 million ($15.5 million) worth of luxury goods in a headline-making raid in June, customs officers in Hong Kong made a record-breaking seizure this week, taking custody of HK$210 million ($27 ...

October 5, 2021 - By TFL

$27 Million Worth of Authentic Luxury Goods Seized in Hong Kong, as Price Gaps, Travel Restrictions Prompt Smuggling

Image : Unsplash

Case Documentation

$27 Million Worth of Authentic Luxury Goods Seized in Hong Kong, as Price Gaps, Travel Restrictions Prompt Smuggling

On the heels of customs agents in Hong Kong and Mainland China confiscating HK$120 million ($15.5 million) worth of luxury goods in a headline-making raid in June, customs officers in Hong Kong made a record-breaking seizure this week, taking custody of HK$210 million ($27 million) worth of luxury watches and handbags, as well as endangered wildlife products, including shark fins, destined for mainland China. Unlike the frequent, large-scale seizures that see law enforcement agencies across the globe intercept shipments of millions of dollars worth of trademark infringing and/or counterfeit goods – from branded sneakers to high fashion apparel and accessories, this growing string of seizures is distinct because the products at issue are authentic.

The most recent seizure – which saw officials take custody of more than 370 designer handbags and wallets from brands including Burberry, Hermès, Gucci and Louis Vuitton, and 60 luxury watches – comes as law enforcement agencies in Hong Kong and Mainland China say that they are working overtime and in a collaborative capacity to crack down on goods that are being shipped to Hong Kong (oftentimes from Europe and the United States) and then smuggled into China. This enables the importing parties to avoid various value-added taxes and customs duties that serve to hike up the prices of foreign brands’ wares for Chinese consumers.

Price Gaps and Travel Restrictions

The increase in collective action from customs agencies and regional anti-smuggling bureaus coincides with what a Moodie Davitt report has characterized as “a recent upward trend of sea smuggling activities,” which is likely being driven, at least in part, by the enduring standstill in international travel that has forced luxury buyers in China to do all of their shopping on the Mainland.  

The Chinese government lowered import taxes in recent years in furtherance of an aim to “upgrade the domestic supply system,” as China’s Ministry of Finance put it in 2017, and induce a repatriation of Chinese luxury goods spending in light of a large-scale practice of Chinese consumers’ acquiring luxury goods during their international trips; such overseas excursions have consistently enabled luxury-happy Chinese buyers to purchase luxury goods for significantly less than they would be able to at home. To put the overarching trend in perspective, an estimated 70 percent of Chinese spending on luxury items – a cool $83 billion of the total $120 billion spent on luxury goods by Chinese consumers – was done in the U.S. and Europe in 2019. 

Yet, despite the narrowing of price gaps that have come as a result of diminished import-linked taxes (which brands have traditionally passed on to Chinese consumers, thereby, significantly upping the price tags), the playing field when it comes to price is still not even in many cases. While some brands, such as Bottega Veneta, Celine and Tod’s, are reportedly looking to follow in the footsteps of Chanel and adopt a global strategy that sees prices harmonized across different markets, and while the Chinese government “has been pressuring luxury brands to reduce the price gap between China and Europe in an effort to corral Chinese spending on these goods on the Mainland” for the past several years, according to Bernstein, not all brands are on board. 

As research and investment solutions firm Bernstein stated in a luxury pricing report this spring, a number of big-name luxury brands continue to increase prices in China faster than Europe, resulting in sometime-striking price differentials. Valentino is a good example of this, according to Bernstein analyst Luca Solca, who has noted that the Italian fashion brand has been increasing prices two-fold in China compared to France. Meanwhile, Balenciaga, Burberry, Tods, Loewe, and Louis Vuitton are among the brands that have exhibited the greatest median price increases on the mainland, resulting in the sizable price differential between China and other markets.

The overall result comes in the form of “persistent high price gaps” and markups of between 60 and 75 percent on luxury goods in China versus Europe, which ultimately sets the stage for a number of potential outcomes. Among them is, of course, the enduring smuggling that has been underway in China and the corresponding practice of parallel importing, which refers to the taking of genuine branded goods obtained in one market (i.e., a country or economic area) and importing them into another market, where they sold without the consent of the trademark owner. Beyond that, the difference in prices is also expected to parlay neatly into the anticipated return of overseas travel and shopping.

The percentage of luxury goods acquired each year by Chinese consumers outside of the Chinese Mainland may not return to the previously-observed figure after all pandemic-related restrictions have been lifted, but Solca, for one, expects that such staggering price gaps very well may prompt luxury spenders to start shopping abroad again. 

Desire for Different Things

Another factor that will likely prompt international shopping once Chinese consumers can travel again, and that very well may have a hand in driving some of the demand for smuggled goods? Their desire to access goods that they view as more unique than the ones being offered up en masse in their home market. “More than merely a way to avoid formerly steep VAT taxes, traveling further afield to Europe enables Chinese consumers to buy luxury goods that enable them to distinguish themselves from their peers,” namely by way of “regional designs that are different than those offered up by the same brands in China,” according to Xiaoqing Chen and Carol Zhang. In furtherance of a survey of post-90s Chinese women, the two academics found that many expressed a preference for luxury goods acquired outside of China over “the basic items that are available everywhere [in China].”

The striking spending rebound that followed from the initial COVID-19 outbreak in China seemed to suggest that consumers were more than willing to buy the luxury goods being offered up on their home turf. However, that may be starting to change. A recent report from China-focused news site Sixth Tone suggests that Chinese luxury consumers in Shanghai, Beijing, Chengdu, and Shenzhen have begun tightening the reins on their spending at home “hoping international travel may soon resume.” The result is a drop in spending as of mid-2021. That slump in luxury consumption is expected to turn around one “wealthy Chinese consumers begin to travel to shop once again, so it could take place very soon,”

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