When France sneezes, Europe catches a cold. So said Klemens von Metternich on the occasion of the year of 1848 where revolution rocked Europe. Old Klemens was exaggerating a little – there were a lot of factors behind the 50 democratic revolutions across the Continent. Still, I was reminded of this phrase when reading about the $70b knocked off the market capitalization of four of Europe’s biggest luxury retailers – mooting the prospect of Swiss watchmakers’ China Syndrome. All because of a speech by one man. Not just any man . . .
Arguably the most powerful man in the world: Chinese President Xi Jinping. And he said it with *feeling*.
It’s no secret: the Chinese love their luxury goods. In fact, mainland Chinese spending has been propping up luxury goods makers over the last decade. Forty-five percent of all luxury goods sold in 2021 will be in China. Some 50 percent of all Swiss watchmakers’ products go to the PRC. It’s a trend that’s become even more pronounced coming out of the COVID-19 pandemic.
Think about that for a second. Nearly half of everything made by foreign luxury goods manufacturers go to one country. So when the leader of the only country that matters to Swiss watchmakers and the like says something about their economic policies, investors listen. And what he said was a doozy.
Basically, his remarks amounted to “people shouldn’t make so much money.” Which is a reasonable thing to expect from a politician, even one who isn’t exactly elected in the most traditional sense, a man who’s just a sash away from El Presidente por vida.
But this pronouncement has teeth. Unlike most politicians, Xi can make his reality your reality. Today.
In June, Xi made a fairly innocuous comment around private K12 tutoring (somewhat of a national pastime in China). He remarked, to a bunch of elementary schoolers “We must not have out-of-school tutors doing things in place of teachers,” he said. “Now, the education departments are rectifying this.”
What a nice sentiment! I’m sure those schoolchildren’s parents appreciated that the highest official in the CCP is worried about how much they are paying so their children can get into good schools. Everyone went home happy, the children can say they met the President, and business as usual goes on.
It’s almost impossible for an American or European to understand the swiftness and scale at which the Chinese government kneecapped a $100b market. It basically snapped its fingers and every single education company in China collapsed.
The greater tech industry – which has had its share of governmental problems with data privacy, competition and other, more technical factors – has lost a trillion (and counting) dollars in market capitalization.
The thing is, this isn’t about data privacy, or equality or financial games. This is about power pure and simple. Xi has it, and he is making sure that nobody else does. Why did China just pass an incredibly strict data privacy law? Governments hate competition. Now only the CCP will have access to its citizens’ lives, making everyone more dependent on it.
And the best part is that these are domestic companies that the Chinese government is targeting! If you’re a foreign luxury good manufacturer, as are Swiss watchmakers, why on earth would you think they would be easier on you?
What next? Maybe it’s a 100 percent tariff in the name of “economic equality.” Or maybe it’s a dictat targeting people who spend a lot via a name-and-shame campaign. There’s precedent in the last decade for this. Or maybe it will be something else. Because again, this isn’t about anything but power.
Right now, nobody knows. I guarantee there are a lot of hastily arranged video conferences happening at LVMH. Swiss watchmakers are trying to think of a plan if Xi gives them the same rough treatment as he gave the tutoring companies.
Simply put, there is no other market that matters more to Swiss watchmakers than China. If Xi sneezes, Swiss watchmakers will catch one hell of a cold.