Opportunities for Dutch companies

Transcription

1 Mark Hemel + Barbara Kuit, Information Based Architecture, TV Tower, Guangzhou, CN top sector CREATIVE INDUSTRIES: DESIGN, FASHION, ARCHITECTURE China Top Sector CREATIVE INDUSTRIES DESIGN, FASHION, ARCHITECTURE 1

2 China Top Sector CREATIVE INDUSTRIES DESIGN, FASHION, ARCHITECTURE 2

3 2012 Focal point: Consulate-General Shanghai Consulate-General Hong Kong Other participating offices: Embassy of the Kingdom of the Netherlands in Beijing TWA at the Embassy in Beijing Consulate-General Guangzhou Netherlands Business Support Office Wuhan (architecture) The business opportunity reports are a joined production of the Netherlands economic government network in China consisting of the Embassy of the Kingdom of the Netherlands in Beijing, the Consulates-General in Shanghai, Guangzhou and Hong Kong, and the Netherlands Business Support Offices (NBSO s) in Chengdu, Dalian, Jinan, Nanjing, Qingdao and Wuhan. Unauthorized use, disclosure or copying without permission of the publisher is strictly prohibited. The information contained herein, including any expression of opinion, analysis, charting or tables, and statistics has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness. 3

4 Contents 1. Introduction 5 2. China s National Policy: Investment and Development Plans 6 3. Creative Industry Clusters 8 4. Local Market Developments 9 5. Second Tier Cities Dutch Creative Industry in China Dutch Creative Companies Dutch Governmental Support Institutions Subsector Specific Trends Architecture Fashion Design Appendices Creative clusters Contact information 33 4

5 1. INTRODUCTION Both the Dutch and the Chinese government recognize the creative industry as a sector of increasing importance. This document will provide the reader with an understanding of the relevance of the Chinese market for Dutch creative companies. First an overview is provided of government policies initiated by the Chinese national government affecting the creative industry as a whole; secondly, more local developments will be discussed. Both first tier and a selection of second tier cities will be addressed. Subsequently you will find an overview of the Dutch presence in the creative industry in China, including Dutch government support programs. This report deals with three disciplines within the creative sector: architecture, fashion, and design. Each of these segments has its own market developments resulting in specific challenges and opportunities for Dutch companies. Findings are based on a combination of desk research and interviews with industry representatives. For more in depth information about these three disciplines in China please consult the China Mapping by MovingCities, which is available for download via 5

6 2. CHINA S NATIONAL POLICY: INVESTMENT AND DEVELOPMENT PLANS The 12th Five Year Plan by China s central government presents key development targets and policy directives from 2011 onwards and including Regarding the creative industry the 12th FYP acknowledges the importance of the sector for the enhancement of overall competitiveness of China and thus for continuing economic growth. According to the national government, the sector is lagging behind in comparison to other countries, and in need of extra stimulus. The plan therefore pinpoints the creative sector as a growth pillar for the upcoming years. The focus will be on video production, publishing, performing arts and entertainment, digital content and animation industries. The plan also states the importance of supporting the leading industry enterprises, while encouraging the development of small and medium-sized companies and the stimulation of cross-sector collaboration of creative companies, most perceptible through the establishment of industrial clusters. However, objectives presented by the national government are not particularly detailed and function as a general framework of guidelines for local governments. Further specification of these guidelines is up to local governments and can therefore differ considerably per region. According to the central government, the sector is in need of extra stimulus The next FYP will be presented in 2015 and initiated in 2016; it is expected that the government s perception of importance of the industry for the Chinese economy as a whole will remain intact, and that in the 13th FYP the creative industry continues to be categorized as a pillar industry. Furthermore it is important to note that the central government encourages both domestic and foreign investment in the creative industry. There is no specific legislation that states a limit on market access for foreign capital. The central government encourages both domestic and foreign investment in the creative industry More recently, early 2012, the Chinese government released the Cultural Development Plan with the intention to double the added value of the creative industry. The plan describes guidelines on how to push selected parts of the creative industry towards a higher level: the entertainment industry will receive additional support plus the Ministry of Culture aims to build between five and ten entertainment industry brands. Additionally Beijing 6

7 aims to increase the added value of the animation industry to more than RMB 30 billion by the start of 2016 and to build between five and ten animation brands, which are competitive on an international level. Finally, for the gaming industry similar support and goals have been presented by the national government. Like the FYP, the Cultural Development Plan s directives are open to further specification by local governments. 7

8 3. CREATIVE INDUSTRY CLUSTERS As described the national government s stimulus of the creative sector does not present detailed development plans. However there are signals of concrete actions initiated by the Chinese government affecting the industry as a whole; the most visible is the initiation and support of creative clusters. The most known example of a creative cluster in China is Factory 798 in Beijing. Factory 798 is located at the site of former state-owned factories. Its success inspired other local governments throughout China to initiate redevelopment plans for old state-owned industrial heritage areas. Factory 798 inspired other local governments throughout China to initiate redevelopment plans for industrial heritage areas A selection of creative clusters, which are located in major cities, is presented in appendix 1. These are suitable for establishment of foreign representative offices on flexible basis; furthermore, often these clusters offer favorable tax policies and have developed into breeding places for the creative industry. 8

9 4. LOCAL MARKET DEVELOPMENTS Below is an overview of the recent developments in the established markets of Shanghai, Beijing, Guangzhou and Hong Kong. Shanghai The creative industry in Shanghai is a strong and well-developed sector. According to government statistics the added value generated by Shanghai s creative industry in 2011 was over RMB 167 billion; accounting for 9.75% of Shanghai s GDP. Its growth rate was 5.3 percentage points higher than the average GDP growth rate. The Shanghai government considers an industry as a pillar industry when it accounts for 10% of the city s GDP. The creative industry in Shanghai has experienced a 30% annual growth rate since 2007 and figures point out that it will soon meet the criteria and become a pillar industry. The Shanghai government realizes the importance and potential of the creative industry and actively promotes the sector. The Shanghai municipal government has presented its own 12th Five Year Plan in 2010 in which several specific measures were written down to promote local cultural and creative industries. For example, Shanghai government announced to implement favourable policies to boost the development of the creative industries. The development of the services industry will lead to an increase in demand for creative services The government body that has been established for this task is the Shanghai Creative Industries Demonstration and Service Platform. This institution puts the guidelines provided by Beijing and the Shanghai municipal government into action. Incentives include the establishment of creative clusters, favourable tax policies for companies who decide to locate their office in one of these clusters, as well as tax reduction on R&D activities. Additionally the platform aims to attract foreign investors into the local industry. Finally, in its 12th FYP the city of Shanghai has pinpointed the services sector as a potential growth sector. It is expected that the development of this industry (consisting of varying services ranging from finance, insurances and administration to healthcare and education) will lead to an increase in demand for creative services, such as design and branding and advertising. 9

10 Beijing Beijing s cultural and creative industry generated more than RMB 169 billion in added value over 2010; nearly a RMB 20 billion increase compared to the year before. The output accounted for 12.3% of the city s GDP. The creative industry in Beijing has experienced a 20% annual growth rate since Similarly to Shanghai, the Beijing municipal government established a government institution which task is to stimulate and develop the creative sector. The Beijing Cultural and Creative Industry Promotion Center specializes in promoting the development of Beijing s creative industry in a similar way Shanghai Creative Industries Demonstration and Service Platform is doing that for Shanghai. Guangzhou The creative industry in Guangzhou is primarily focused on industrial design, software and computer animation. Nearly 30% of the countries video animation derives from the Guangzhou region. Hong Kong The creative industry in Hong Kong accounts for HKD 60 billion (EUR 6.2 billion), which represents 4% of Hong Kong s GDP. The companies in this sector are strongly export-oriented, with Mainland China and neighbouring Asian countries as major export markets. Hong Kong s economy was traditionally focused on manufacturing. However, the economy shifted from manufacturing to finance and service-based, which triggered an increase in demand for the creative industry. The creative industry in Hong Kong is strongly export-oriented, with Mainland China and neighbouring Asian countries as major markets In Hong Kong, government investment and support include amongst others: CreateSmart Initiative, Design-Business Collaboration Scheme, Design Incubation Programme, Film Development Fund, and the Film Guarantee Fund. The Chinese central government and the Hong Kong government have entered into Closer Economic Partnership Arrangement (CEPA) since 2006 which means Hong Kong architecture, fashion and design firms have easy access to the mainland market. 10

11 5. SECOND TIER CITIES The following section will present an overview of second tier cities and their economic relevance for the creative industry. Dalian Dalian is a harbour city in the North-East of China and is regarded as the economic centre of the booming Liaoning province. The city has had a continuous annual double-digit percentage increase in GDP since In 2009, Dalian s GDP registered a 15% increase, reaching nearly RMB 442 billion (EUR 55.6 billion), while per capita GDP hit almost RMB 72,000 (EUR 9,058). According to a nationwide appraisal by the National Bureau of Statistics, Dalian ranks eighth among Chinese cities in terms of overall strength. The Dalian International Fashion and Garment Festival has been held in the city over the last 20 years Dalian s main relevance for the creative industry lays in fashion and garment. The Dalian International Fashion and Garment Festival has been held in the city over the last 20 years, and is attended by a small but growing number of international designers and companies. Many local Dalian garment companies have their own design and brands, and are quite active on the international market. Recently, the Dalian International Brand Agency Center (IBAC) has been fully operational, a platform supported by Dalian government to promote foreign garment brands that want to enter the Chinese market, and also promote local garments to make their own design. Until now some garment brands from Spain, Japan, France, etc. have entered the Chinese market with the support from IBAC. Changchun, capital of Northeastern province Jilin province, is an important city for the Chinese film industry Also Dalian provides opportunities for creative software development. Most advanced software companies of the Northeast are in this city, and there are ambitious plans for the development of Dalian s software industry. The real estate sector in Liaoning province is very strong, which provides opportunities for Dutch architects, which have already secured a number of projects in the area. Some locally famous architecture institutes are located in both Dalian and Shenyang (the capital of Liaoning). Lastly, it is important to note that Changchun, capital of Northeastern province Jilin province, is an important city for the Chinese film industry. The 11

12 Changchun Film Group is one of the studios transitioned from the 1940s, and has been considered one of the cornerstones of the Chinese film industry. Currently, the Changchun Film Group Corporation has one of the largest film production bases in China. Jinan In 2010, the GDP of Jinan was RMB 391 billion (EUR 49.2 billion); the total added value for cultural and creative industries reached RMB 18.5 billion (EUR 2.3 billion), accounting for 4.73% of Jinan s GDP. The rough number of companies active in cultural and creative industries is over 10,000, and total employees in the industry exceeds 100,000. In the 12th Five Year Plan of Jinan, the official objective for Jinan s cultural and creative industry is to gain the total added value of RMB 42 billion (EUR 5.3 billion) by 2015, and its percentage in GDP will increase to over 6%. The service industry is experiencing strong growth in Jinan, the creative sector is included in this development. The rough number of companies active in cultural and creative industries in Jinan is over 10,000 Jinan s main relevance for the creative industry lays in software development. This sector is playing an important role in the Jinan local economy. In recent years, comic-, animation- and game design have been growing and so far Jinan has established three key development bases focusing on 2D/3D animation. The production capacity of the comic and animation industry in Jinan represents over RMB 2 billion (EUR 252 million). Currently no Dutch companies are active in the creative industry in Jinan. However there exist some opportunities within the software development industry in providing training programs and consultation services on both technical and managerial levels. Moreover Jinan is a suitable location for outsourcing software development in order to benefit from its low development costs. Nanjing The creative industry has developed rapidly in Jiangsu province and is mainly concentrated in its capital Nanjing and a handful of other cities such as Wuxi, Suzhou and Changzhou. There are three main reasons for this. Firstly, the GDP per capita reached USD 6,475 (EUR 5,177), which logically also means personal consumption on cultural products will increase tremendously. Secondly, the urbanization has exceeded 70% in the southern part of Jiangsu. Thirdly, the government has put many efforts to stimulate industry development. Nanjing municipal government has established an 12

13 annual fund of RMB 35 million (EUR 4.4 million) to promote and support cultural industries, including the cultural creative industry, which made the added value of the culture industry to reach RMB 19 billion in 2010 (EUR 2.4 billion). Main relevance of Nanjing and its surroundings for the creative industry lays in architecture and design, primarily industrial design. There are around 1,100 companies in Jiangsu who are doing architecture design and survey. In 2010 the completed residential buildings were million m 2 with value of RMB billion (EUR 46.1 billion) which was the highest nationwide. These figures indicate great opportunities for architects. Main relevance of Nanjing and its surroundings for the creative industry lays in architecture and design Qingdao The main relevance for the creative industry in Qingdao is architecture and urban planning. There are 139 architecture design institutes in Qingdao. Many of these institutions are transformed from traditional state-owned companies and therefore have connections with relevant government agencies. They often participate in city construction projects such as residential buildings, schools, hospitals etc. Some architecture design firms are associated with major real estate companies or as a subsidiary of a group company. The cultural creative sector, which includes cartoon and animation, media, culture and advertising related businesses, is another important area promoted by the government. The goal is to build an Island of Cartoon and Animation. According to the plan, by 2015 there will be over 100 companies in this sector and the industry value is expected to exceed EUR 500 million. In 2006, Qingdao opened its first Creative Industry Park: Creative100, which was also the first Creative Industry Park in the whole of Shandong province. At present, there are more than 18,600 cultural and creative industry related enterprises in Qingdao, and the total added value is over RMB 50 billion (EUR 6.3 billion). Wuhan The GDP growth ratio of Wuhan over 2010 was 14.7% and its relevance for the creative industry is primarily the increasing interest the Wuhan government shows to invest in sustainable urban development. Wuhan is designated as a pilot city for sustainable urban development, according to the so called two model society principle, with the two models being environ- 13

14 mentally friendly and energy saving. In 2010, the per capita residence area in Wuhan is m 2. It is expected to reach 36 m 2 in the year of 2015, according to 12th Five Year Plan. Thanks to the huge revenues from redevelopment and sales of land, the local government now has enough financial resources, and is willing to give assignments to international companies for the landmark buildings. Wuhan is designated as a pilot city for sustainable urban development Current opportunities for Dutch architecture firms are the following; involvement in the development of Wuhan East Lake High-Tech Zone, for instance in an Eco City project and preservation and redevelopment of the old city centre in Hankou District. Later in this document attention is given to architecture and sustainable building; Wuhan is an important hub for this specific development. Chengdu In Chengdu the creative industry contribution to GDP was 3.4% in This ratio is expected to increase to 4.2% in 2012, and to 6% in 2020.The government has ambitious plans to shift the city s economy from production based to design and development based; from made in Chengdu to designed in Chengdu. Revenues from creative design are aimed to reach RMB 30 billion (EUR 3.8 billion). Growth ration in the creative design in the past years is around 20%. The government has ambitious plans to shift the city s economy from made in Chengdu to designed in Chengdu Chengdu is seeing a fast development of the cultural and creative industry in the areas of media, cultural tourism, creative design, performances & entertainment, literature, artistic creation, animation & games, and the publishing industry. These are all based in specific parks and specialized buildings, driven by major projects in the sector and supported by key enterprises. In 2010 there were 24,400 cultural and creative enterprises including key enterprises like Shanda Entertainment, Kingsoft, Tencent, and Newplan Design, employing 200,800 employees. Chongqing GDP growth was 17.1% in 2010, against 10.3% national average. With the population of around 28 million, and as a pilot city to integrate the development in rural and urban areas, Chongqing will witness more immigration from rural areas to the city centre. This creates huge market potential for sustainable architecture, being the main relevance for the creative indus- 14

15 try. The target for the next five years is to reduce emission drastically, so therefore great effort is put into green buildings: 1) 20 million m 2 to be built in the next five years; 2) 4.5 million m 2 with renewable energy; 3) renovation of 4 million m 2, mainly public buildings. Chongqing is designated by the central government as one of the low carbon cities. The city is in the midst of an extensive construction period. In the next five years, development will further accelerate. Firstly because of high expectations and investment from Beijing, since Chongqing is a municipality directly under the central government. And secondly, very ambitious social development plans for Chongqing will bring more opportunities to the construction/building industry. Important to note is that Chongqing established strict legislation on building standards, even before legislations were improved on a national level. Immigration from rural areas to the city centre creates huge market potential for sustainable architecture In 2010, Chongqing invested RMB 255 billion (EUR 32 billion) in the construction sector. The city has currently 140 million m 2 of housing under construction. With a municipality population of around 28 million; the urbanized area is estimated to have a population of 6 or 7 million. Tianjin The total GDP of Tianjin in 2010 was RMB billion (EUR 116 billion). The contribution of the creative industry was RMB 45.5 billion (EUR 5.7 billion), taking 5% of the total. There are about 19,000 companies and 300,000 people working in this sector. The Municipal Government of Tianjin is placing much emphasis on the development of the creative industry. By 2015, Tianjin plans to make the creative industry income RMB 60 billion (EUR 7.5 billion), and contribute 10% to the total GDP. By then, there will be fifty creative parks in Tianjin that can accommodate enterprises; and ten large enterprises with an annual income of over RMB 1 billion (EUR million). The economy of Tianjin is developing fast, but the city is still at the initial stage of the development of creative industry. The scale of the industry is relatively small. In 2010, the scale of Tianjin was 1/4 of Beijing, and 1/3 of Shanghai. Secondly, the industry is not consolidated. Most of the relevant R&D, controlling, testing software and services are from abroad or other places in China. Local companies in the field are not as competitive as their counterparts in Beijing, Shanghai, Shenzhen and Hangzhou. Finally there are not enough human resources needed for a growing creative sector. 15

16 6. DUTCH CREATIVE INDUSTRY IN CHINA 6.1 Dutch Creative Companies The Dutch design, fashion and architecture disciplines each have their industry legends, which are well known on a global scale. Examples include Rem Koolhaas (architecture), Marcel Wanders (design) and Viktor & Rolf (fashion). But also quite a number of lesser-known companies have successfully entered the Chinese market and in general Dutch design is becoming a strong brand, considered to be innovative, conceptual and pragmatic. Nonetheless there is still a large amount of the Chinese market left to conquer for Dutch creative entrepreneurs. In addition to the aforementioned industry stars there are over 72 Dutch creative companies active in China in the areas of architecture, design and fashion. In 2009 the Dutch Design Fashion Architecture programme (DutchDFA) presented the results of research conducted by Glocal Strategy PR Consulting Co. Ltd. Results of this study tell us that Dutch design in general is appreciated by Chinese industry experts, but as noted above there is still some ground to conquer for Dutch companies when it comes to brand recognition and market share. 6.2 Dutch Governmental Support Institutions The Dutch government has earmarked the creative industry as one of the nine top sectors. Prime example of institutionalized governmental support is the Dutch Design Fashion Architecture programme (DutchDFA). The programme aims to strengthen the international position of Dutch design, fashion and architecture, by building long-lasting international partnerships and increasing the overall position of Dutch creative companies active in India, Germany, Turkey, and China. The four-year strategic project comes to an end on the 31st of December Over the years DutchDFA has funded two important initiatives in China Over the years DutchDFA has funded two important initiatives supporting the Dutch creative industry in China; the Dutch Design Workspace in Shanghai, and the Dutch Design Desk in the South of China. The Dutch government will continue to support the sector in the future. At the time of writing plans for the successor of the DutchDFA programme are in development. 16

17 The Dutch Design Workspace (DDWS) is located in Shanghai and simplifies the entrance into the Chinese market for Dutch creative firms significantly. This incubator program is government funded through DutchDFA since 2010 and enables creative companies to access the Chinese market place. Amongst others, it offers an affordable shared workspace, matchmaking, as well as strategic-, marketing-, and legal advice. At the end of 2012 the government funding will come to an end; however the DDWS will continue to exist and offer its services on an independent basis. DDWS has gathered extensive experience over the years and functions as an important steppingstone for Dutch creative firms willing to enter China. Noteworthy as well is that costs for setting up an office in the workspace and fees for services will not increase once DDWS continues as a private company at the end of DDWS recently published the Dutch Design Yearbook It presents top design companies from the Netherlands that have set up a permanent base or have realized a project in China. The publication of the book aims to increase both the recognition of individual companies as well as Dutch design in China as a whole. The Dutch Design Desk South China is part of the China network that is created and supported by DutchDFA. DDD South China supports and connects Dutch firms with Chinese business partners through strategic advice, market research, organization of events and missions. Much like the DDWS Shanghai, DDD South China will continue to offer its services on an independent basis when government funding will come to a halt at the end of Major projects in cities like Shenzhen (Sino-Dutch eco city), Hong Kong (HK Design Year 2012) and Guangzhou (Canton Fair, Guangzhou Design Week) offer many opportunities for Dutch companies. The contact details of DutchDFA, the Dutch Design Desk, the Dutch Design Workspace, and the DutchDFA partners in the Netherlands can be found in appendix 2. 17

18 7. SUBSECTOR SPECIFIC TRENDS 7.1 Architecture One of the most prosperous industries within the creative segment is the architecture industry. In general, steady increase in construction demand in China predicts a continued increase in demand for architecture. However, competition is getting fierce from an international perspective while the Chinese firms are developing and decreasing the quality gap. Large opportunities lay in second and third tier cities and sustainable building, while the biggest challenge is not to lose control in the execution phase of a project. Large opportunities lay in second and third tier cities and sustainable building The following section will discuss general trends in the industry, the competition that is to be expected in China, and will present findings based on interviews with several industry representatives Growing Construction Industry In order to make predictions for the architecture industry in China one needs to look at trends in the construction industry; without construction no demand for architecture. Economic experts agree that construction will be the main force of economic growth on a global scale at least for the coming decade. It is evident that the majority of this growth will take place in emerging urban environments primarily in East Asia; the region will witness dramatic growth due to expanding populations, rapid urbanization and increased economic activity. These three main drivers are particularly high in China and thus the architecture industry is expected to experience a similar rise in demand. Although global construction is expected to grow over the coming decade, the difference in growth between Western Europe and China is enormous. Constrained by public deficits, low population increase and little economic growth, Europe will witness limited growth of the construction, and thus architecture, industry. The typical Western European construction industry will experience little over 10% growth during the coming 10 years while East Asia, including China, will see a triple figure increase in demand of 135%. 18

19 Shifting Competitive Landscape This type of growth figures compared to the not so promising prospects in the European and North American markets attracts an enormous amount of international competitors. Over the years the city of Shanghai alone has attracted thousands of international architecture firms who have set up a local office. This strong increase of international architects based in China exists for a large part of medium sized enterprises. At the moment around 30 Dutch firms are active in the Chinese architecture industry. In addition to the high number of small and medium sized international firms, a similar increase is expected in the number of medium sized Chinese firms. Nevertheless, ample opportunities remain in China for Dutch architects due to continued increase in demand. The following section will discuss trends, which are shaping the industry and its competitive landscape. Even relatively unknown foreign architects had a strong advantage over Chinese competition Traditionally Western firms had a strong competitive advantage compared to Chinese firms, merely based on their country of origin. Chinese clients perceived hiring a Western architect as prestigious and therefore even relatively unknown foreign architects had a strong advantage over Chinese competition. This natural advantage is losing most of its strength because of the aforementioned high influx of international competition, especially in first tier cities such as Shanghai and Guangzhou. However the so-called foreigner-benefit still remains valuable in second, third and fourth tier cities. A notation should be made here that the loss of status mentioned accounts for the majority of small and medium sized Western enterprises; a group of globally known and high end design bureaus are still perceived as prestigious in the whole of China and this will remain so in the future. Furthermore Western bureaus tended to be of higher quality and expertise than Chinese, while the Chinese competitive advantage typically was based on price. This relation is shifting towards a more balanced situation as well; two main factors are the reason that Chinese firms are developing in sense of quality and design. First it is noted that an increasing number of Chinese designers are gathering expertise abroad by graduating from internationally known and appreciated universities. Secondly, Chinese companies have started hiring European and other Western architects. Due to low industry prospects and thus little job opportunities in Western markets, Chinese firms are able to import international talent. Hence the quality gap between Chinese and Western firms is being decreased. 19

20 On the other hand the Chinese price advantage is expected to decrease in the coming years due to an increase in wages for Chinese architects. This is in correlation with the general increase of wages in China (as set forth in the national 12th Five Year Plan); a positive development for the competitive position of Dutch architects in China Opportunities and Challenges The evolvement of construction regulations has triggered an important new development. These regulations are becoming increasingly detailed in prescribing safety and energy efficiency standards. In first and second tier cities, as of 2010, close to 100% of new buildings comply with energy efficiency and safety regulations; 99.5% in the design stage and 95.4% in the construction stage. Just five years earlier, in 2005, only 53% complied with regulations in the design phase and 21% in the construction phase. Even more important is the fact that reinforcement of these regulations has dramatically increased. In the past decade Chinese architects did not always take these prescriptions serious, allowing them to offer a much lower price as opposed to (Western) firms who do take regulations into consideration. The improvement of reinforcement causes Chinese firms to account for a new element in the design process. This is a positive trend for Dutch firms, since they are the ones who have much more experience with strict regulations. It will take a rather long time before the Chinese expertise in safety and construction regulations is at the same level as Western firms. Dutch architects active in China agree on the fact that in order to be successful in China, physical presence is crucial Furthermore there is a growing demand for green and sustainable building and thus architectural design with a green focus. Today, green building only represents around 5% of the total market, but the sustainable building industry has experienced annual growth rates of around 50% since Companies with an understanding of this rapidly growing market can position themselves to become future industry leaders. The Chinese government has set the increase of energy efficiency down as top priority in the latest Five Year Plan and this is expected to continue in the future. The Dutch Consulate-General in Shanghai formed the Dutch Sustainable Building Platform in order to help Dutch architects and companies in related industries to take advantage of this growing market and to increase chances of becoming future industry leaders. Included in the Dutch Sustainable Building Platform are: UNStudio, KOW, MVRDV, Tebodin, DHV, Deerns, KEMA, Grontmij, DESSO, Philips, Parthos, Soeters Van Eldonk and Hunter Douglas. 20

21 Dutch architects active in China agree on the fact that in order to be successful in China, physical presence is crucial for several reasons. First of all, working for a Chinese client from your office in the Netherlands complicates the payment process since it is difficult to export high amounts of RMB into a foreign account. This payment difficulty makes a firm highly unattractive to Chinese clients. Secondly, when a foreign architect establishes a Wholly Foreign Owned Enterprise (WOFE) one is also allowed to make contracts and hire local staff. In addition to these practical matters, setting up a Chinese office seems to be highly valued by the Chinese clients on a psychological level; it makes the client feel you are in China for the long run. Shanghai continues to remain the centre of the architectural design industry in China. The general conception is that even though second and third tier cities will experience highest growth figures when it comes to construction, Shanghai remains the best location for a new entrant in the Chinese market. Networking opportunities are higher in Shanghai and in addition, many headquarters of major companies and project developers active throughout China are based in Shanghai. Firms who open their office in Shanghai could take advantage of the growth in second en third tier cities through the use of the higher networking opportunities in Shanghai. Finally, growth is not limited to second and third tier cities. Even though growth is much higher in such places, Shanghai remains attractive because a second wave is expected in coming years due to renovation and demolition of old buildings. For construction plans and execution of a project cooperation with a Local Design Institute is mandatory Notwithstanding the opportunities, there are some hazards that one should take into account when an architecture firm starts operating in China. In China foreign firms legally are acting as Design Consultants and are not licensed to develop final blueprints or to execute a project. For construction plans and execution of a project cooperation with a so-called Local Design Institute (LDI) is mandatory. Thus the LDI takes over at a certain moment and the architect loses most of its influence on the execution with the risk of losing quality. There exist many examples of a well-designed structure resulting in a building of inferior quality because of loss of control. An advised strategy is to keep advising the LDI during execution phase, but one should expect to do so without receiving payment since the client will not see the value in paying two design firms simultaneously. The firm should take this period of time during execution of voluntarily design consulting into account at the beginning of the project and include it in the budget 21

22 to reduce the risk of losing quality when the project is handed over to the LDI. Additionally, one should be cautious when accepting a Chinese business partner, especially when a request for a project arrives unannounced. There have been several recent examples of Dutch architects who received very promising offers by Chinese firms. These offers came out of the blue and were offered to a selection of companies who had no experience in China whatsoever. Several firms have accepted the offer and started working and making costs; eventually the client was non-existent and was aiming to lure the Dutch firms into paying fake notary fees and diners. 7.2 Fashion China has a long established relationship with the global fashion industry as a low cost fabric producer. After the start of the economic reforms in the 1970s China developed into the world s fashion garment factory. Today, China remains to be a low-cost producer of garments but its position in the international fashion industry landscape is shifting in a similar pattern as its entire economy. China s role in the international fashion industry is moving from a producer to that of major consumer. It is developing into a vast consumption market for the fashion industry ranging from apparel and fast fashion such as G-Star up to high-end luxury brands such as Viktor & Rolf. This section will present motivations for such claims and discuss several trends in the industry as well as challenges and opportunities. China s role in the international fashion industry is moving from a producer to that of major consumer Evolving Chinese Consumerism The fashion industry is an entirely different segment of the creative industry compared to architecture, and subject to different forces. Prime difference is that it is private consumption driven and it is therefore dealing directly with the changing behaviour and spending patterns of the Chinese individual. Therefore, in order to make statements on developments in the Chinese fashion industry it is important to assess the evolving Chinese consumerism. Three main indicators predict continuing increase in private consumption throughout the coming ten years. First of all, the rapid urbanization fuels the growth of the consumer market by widening the affordability and availability of goods. Secondly, the latest Five Year Plan presents assertive mea- 22

23 sures to boost private consumption. Concerns about social security have made the traditional Chinese consumer to develop high saving habits. The government is aiming to change this behaviour. For example, retirement pensions are increased by 40% in urban areas, within five years. This development will improve the sense of security of Chinese individual consumers and therefore stimulate overall private consumption. The aforementioned factors are stimulating private consumption in China. However, the most important trend remains simply that the Chinese individual consumer is getting richer fast: the per capita disposable income of urban consumers will experience a 50% increase before 2020 from about USD 4,000 (EUR 3,196) to USD 8,000 (EUR 6,393). The diagram in figure 2 displays the composition of China s urban consumer population in 2011 and the expected composition in Four consumer segments have been identified, ranging from poor (annual household income of less than USD 6,000 (EUR 4,795)) up until affluent (annual household income of more than USD 34,000 (EUR 27,170). As can be seen in the figure below, there is an impressive number of consumers moving from the value segment of urban consumers into the mainstream segment. The absolute increased number of mainstream segment consumers will be even higher considering the increase from 650 million today to 850 million urban citizens in This development is of high importance for the fashion industry due to the fact that once consumers cross the line from being value consumer to mainstream consumer; it is proven that one of the first categories they upgrade their spending on is fashion Affluent Mainstream Value Poor Figure 1: Urban Households by Annual Income Fashion Industry Growth The fact that the share of mainstream urban consumers is growing from just 6% to 51% in the coming decade will be of great influence to many industries. However, fashion will be affected significantly more than others. The 23

24 domestic fashion industry in China has almost tripled in market size since 2000, reaching almost RMB 400 billion in Based on the high amount of households crossing the line between value and mainstream income households, it is safe to say that this segment of the industry is likely to see another decade of at least 300% growth. This development is most relevant for so-called fast fashion companies such as ZARA, C&A, WE and H&M. The domestic fashion industry has almost tripled in market size since Opportunities and Challenges Companies such as ZARA, H&M and C&A have opened shops in first tier cities in recent years to test the water. Cities such as Shanghai and Beijing currently are the major core markets for medium priced fashion labels. However, in the coming decade the largest growth in demand for middle segment fast fashion is expected to be in second, third and even lower tier cities. Low tier cities will represent 60% of growth in the market due to the fact that the majority of households moving into the mainstream consumer segment reside in these cities. Currently, in order to reach 80% of the mainstream consumers, a company needs retail shops in 460 cities. But to reach 80% of the mainstream consumers in 2015 retail representation should be in over 560 cities. This shows that the growth benefit for fashion companies is spread out over a larger number of cities. So in order to become an industry leader and to maximize the benefit from the growth presence in a high number of lower tier cities is needed but significant investments are necessary. Therefore, for smaller firms who do not have the funds to such investments it is still more viable to enter through a first tier city such as Shanghai. Additionally, a major development regarding retail channelling is that online shopping for fashion will experience an unusually strong growth in the coming years. The overall number of online shoppers in the coming decade is expected to increase from roughly 145 million to about 329 million in Fashion represents over 50% of online purchases, and thus the dramatic increase of online shopping will coincide with a strong increase of the online fashion market. This offers a great opportunity to enter the Chinese market through an online channel, which allows for low entrance costs and thus a great opportunity for smaller companies. Essential to note is that online shoppers typically reside in higher tier cities. To reach consumers in lower tier cities companies are still advised to establish an offline retail shop. The Chinese mainstream consumer tends to save up money to purchase 24

25 luxury items occasionally to upgrade their wardrobe, especially in first tier cities. Considering the size and growth rate of the mainstream segment, it is an important consumer segment for luxury brands as well. The high-end luxury market in China belongs to the largest in the world. As can be seen in figure 1, the consumer segment able to afford luxury products is expected to triple in size in the coming years. Because the Chinese luxury consumer is very brand conscious it is hard to compete with these established players. However, a noteworthy development is that amongst others, Hermès established a newly created luxury brand, tailored for the Chinese market. The success of Hermès newly developed Chinese luxury brand Shang Xia shows it is not impossible to succeed in the luxury segment without relying on an internationally known brand name. The notation should be made here that in order to successfully implement a localized luxury brand extensive funds and knowledge of the Chinese luxury consumer is needed. 7.3 Design Design is a broad field that includes a variety of segments. This report will focus on visual identity/graphic design. At present only very few Dutch firms are active in the fields of graphic design and brand identity. In developed economies it is proven that an increase in the service industry typically triggers a higher demand for design services such as the development of visual identity. The service industry in China now accounts for 43% of the economy, in comparison with almost 90% in the United States. Economists agree that the service sector in China is highly underdeveloped. However, as external demand for manufactured goods slowed down due to public deficits and rising production costs China is destined to become a more service oriented economy. The national government realizes this and stated the realistic goal to raise the share of the service sector in the economy to 49% in The natural force of the shifting economic focus in combination with the government goal of stimulating the service sector will increase demand for design. At the moment there are few Chinese firms who fully recognize the value of graphic design and visual identity, and most of them are very short term focused. This makes it hard for international firms to benefit from the increase of local brands. However, opportunities lay in the internationalization of Chinese brands and the increasing number of international brands aiming to enter the Chinese market. 25

26 Opportunities and Challenges There are some differences a Dutch design firm should take into account when contemplating to enter the Chinese market. First of all, there is a significant difference in mentality when it comes to the importance attached to graphic design and visual identity. There are a selected number of international brands such as Huawei and Lenovo who realize the importance of graphic design and visual identity. The number of international Chinese brands will increase in the coming years, but most brands that will develop are likely to operate in the domestic market. It will take a long time before the industry has matured and the importance of visual identity for a company is widely recognized. New brands are unlikely to hire a Western design company The service industry in China finds itself in rapid development; this will cause the emergence of a high number of new Chinese brands. The demand for corporate design and branding will increase. However for a non-chinese firm to take advantage of the increase in Chinese service brands will be challenging. Major reason is that these firms do not recognize the value of a long-term brand identity and have much lower expectations than Western firms. For this reason these new brands are unlikely to hire a Western design company as they prefer to hire a Chinese firm. These firms might be of lower quality but are perfectly capable of meeting their needs, and for a much lower price. Furthermore a local firm obviously has the benefit of a complete understanding of the Chinese culture, which is very important in communication through design. For these reasons it will be more difficult for an international firm to benefit from the growth in demand for design by Chinese domestic companies. As described, the cultural differences and differences in mentality make it very difficult to succeed in the domestic market. However, this cross-cultural challenge could also become an opportunity for Dutch firms. As more and more Chinese companies look to operate internationally, the opportunities for Western designers will increase. This cross-cultural opportunity also works the other way around. As China is shifting from a production-based market towards a consumption driven economy it will become a major market for essentially all international brands. All of these brands need to adjust their visual identity and campaign to the local culture, which causes a 26

27 demand for design firms who have an understanding of adapting a brand to the local Chinese needs. Obviously to benefit from these opportunities a multi-cultural staff is crucial. 27

28 8. APPENDICES 8.1 Creative Clusters SHANGHAI Highstreet Loft The Highstreet Loft is home to numerous outlets devoted to fashion, including cosmetics, luxury accessories, public relations, media and clothing. It is also a major venue for hundreds of creative and fashionable events at the Shanghai International Fashion Culture Festival, Shanghai Fashion Week, the Shanghai Tourism Festival, and designer art shows and fashion shows. Address: 508 Jiashan Road, Xuhui District 2577 Creative Garden 2577 Creative Garden is focused on new media, specializing in advertising design, exhibition planning, artistic creation and other design and consulting services. Address: 2577 Longhua Road, Xuhui District Shanghai Fashion Hub This complex moves away from high-end fashion labels and explores the characteristics of local fashion brands. Many of the companies in the hub have good reputations and are influential in the fashion industry in China. The hub also supports the development of the urban fashion industry by providing training for those in fashion design, image design, animation and game design. Address: 1718 Tianshan Road, Changning District M50 The M50 complex was one of the earliest creative clusters in Shanghai. M50 concentrates on contemporary art, galleries, advertising, film and TV, fashion design and industrial design. It houses creative agencies from 20 countries and regions. It also houses the most influential contemporary art gallery in China, the ShanghART Gallery, and China s top design agency, Mooma Design. Address: 50 Moganshan Road, Putuo District 28