Implications for Eyewear as China Pushes the Line of Reform

At the height of the corruption trial of Chinese politician Bo Xilai, the Chinese government has identified the eyewear industry as an area of corruption and anti-pricing investigation efforts, following a spate of similar investigations across industries such as infant milk formula, pharmaceuticals and jewellery. In this article, we take a look at the anti-corruption clampdown in China and its impact on the eyewear business.

Spectacles and Not Automotive at the Centre of Investigation

The Chinese automotive industry was abuzz in August 2013 when a Chinese automotive association claimed that it was collecting data on behalf of the National Development and Reform Commission (NDRC), an anti-monopoly government arm which regulates prices and sets pricing policies in the country. This led to a statement from the head of NDRC, Xu Kunlin, clarifying that it was the spectacle industry which was currently at the centre of its investigations. He added that such investigations would be carried out in industries with high profit margins.

Spectacles are being increasingly portrayed as lifestyle products, used to accentuate one’s personality and status. While a simple pair of spectacles may well serve its daily purpose of correcting one’s eyesight, affluent young Chinese consumers are increasingly seeking branded spectacles. Ray-Ban and Gucci frames and sunglasses are popular in China, with these designer brands enjoying huge margins. International spectacle companies have been the target of media discussion due to the high margins they enjoy.

Contact Lenses Companies Scrutinised

Alcon, the eye care unit of Novartis, was accused of using a third-party research company which conducted false trials on lenses and, in turn, offered Chinese hospital doctors payments in the form of ‘research fees’ to push sales of lens implants. The global player launched its own investigation and issued a stern statement that it would not condone any activities that do not comply with the laws and regulations of the country of operation.

Pharmaceuticals has been one of the industries under investigation. GlaxoSmithKline, Eli Lilly, Sanofi and Johnson & Johnson have all been drawn into legal suits or out of court settlements as China intensifies its efforts to stamp out corruption, fraud and other anti-competitive practices. Of the pharmaceutical companies mentioned, Novartis and Johnson & Johnson are the two involved in eyewear, namely contact lenses specifically. While this does not reflect well on the companies, it is an essential progression to weed out unethical vendors, fine-tune and improve business practices in China.

Implications – Higher Import and Luxury Taxes but Greater Transparency

Anti-monopoly investigations are likely to lead to more pricing controls and stringent enforcements on foreign imports over the longer term. This may in turn artificially increase costs for  companies and bring down margins.

For high to luxury range eyewear products, the industry is likely to experience higher import and luxury taxes, as seen with watches. China currently implements an 11% import tax and a luxury tax of 20% on high-end watches, and this has greatly discouraged domestic purchases. Consequently, Chinese tourists are venturing to Europe and Hong Kong to make their luxury purchases.

That said, it is an opportunity for greater transparency between government and businesses, while promoting free competition in the domestic market. In the infant milk formula price investigation in China this August, six foreign companies, including Mead Johnson, Danone and Abbott, were given huge fines. The companies did not contest the penalties, instead noting that the exercise gave them a clearer understanding of the expectations and transparency of the implementation of pricing policies by the Chinese government.

Implications – Narrowing the Price Gap in Mid-Priced Eyewear

For mid-priced eyewear, a stronger pricing policy will signal a likely narrowing of the price gap between foreign and domestic brands. This, in turn, will favour foreign brands, which tend to be preferred over local brands. Foreign companies which are able to juggle pricing regulations with a strong brand positioning will undoubtedly see growth in market share in a country driven by volume.

With China’s continuous efforts to push the line of reform, the eyewear industry can expect more changes to unfold in the coming months. How the business environment will change is yet to be determined. However, one thing is certain. China is poised to be the next big market which companies cannot afford to miss out on, regardless of the obstacles.