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Dec 16, 2019
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Hong Kong and Singapore set to trade places as Asia's luxury hubs?

Dec 16, 2019

Relief. This was undoubtedly the prevailing feeling when the French luxury triumvirate of LVMH, Kering and Hermès published their latest quarterly results - the same goes for Chanel, though the latter isn’t required to publish them, not being a listed company - and as they assessed the impact of the Hong Kong situation on their financial fortunes.

A mass demonstration in Hong Kong on July 21 - Shutterstock

Even though many financial analysts, since August, had been urging investors to be extremely prudent in dealing with the troublesome situation in the former British colony, it is clear that LVMH, Kering and Hermès have managed to steer a successful course amidst all the turmoil. Indeed, the three luxury groups published results that exceeded expectations, and allowed them to easily bypass the “threat” posed by Hong Kong, thanks to the exceptional resilience of their other markets.

Yet, with regards specifically to Hong Kong, the three months of July, August and September weren’t exactly a vintage quarter, to use a euphemism, for the three luxury giants. In Q3, Kering’s sales in Hong Kong fell by 35%. Contacted by FashionNetwork.com, the luxury group, owner among others of Gucci and Saint Laurent, unsurprisingly stated that “it will not comment on its market environment and on the situation in Hong Kong more specifically.” End of quotes.

As for LVMH, it suffered a more “measured” impact, which hit in particular the selective distribution business of the world’s number one luxury group, owner of duty-free retail operator DFS, whose sales slowed down in the last three months. However, LVMH did record a 25% sales downturn in Hong Kong in the same period.

Finally, Hermès, while more discreet than its illustrious competitors, did admit that its revenue shrunk in the period, without giving any further details. The luxury label’s six Hong Kong stores were forced to close down when the demonstrations reached a peak, as did the label's store inside Hong Kong international airport. Also Richemont, Hugo Boss and Tiffany underlined the impact of the Hong Kong stand-off on their latest financial results.

In this context, investors are starting to look in other directions. The GDP of the world’s third-largest financial centre grew by 3.8% in 2018, but economists at the Nomura group are forecasting for Hong Kong a GDP growth of “only” 2.3% in 2019, a deceleration that is notably attributed to the Chinese economy’s slow-down and to international trade conflicts. A variety of factors which are encouraging operators to set their sights on other financial partners.

Massive capital flight towards Singapore?

According to a communiqué by Goldman Sachs, no less than between $3 billion and $4 billion in deposits have been withdrawn from Hong Kong since August. At the same time, foreign currency deposits at local and international banks in Singapore reached a peak of $9.4 billion. Is it possible that the city state of Singapore could become an alternative to Hong Kong, whose troubled situation has put off more than one investor?

What is the potential for the luxury market in Singapore? - Samir Hamladji

Discernment - or prudence - is required. “It is worth bearing in mind that Hong Kong and Singapore, though they are often portrayed as fierce economic rivals, cater to extremely different markets. Hong Kong is a crucial economic link to China and its region, while Singapore is a key player across Asia, but notably with the exclusion of China,” said Eugene Tan, constitutional law professor at Singapore Management University.

With regards to the luxury market in particular, could the ‘Switzerland of Asia’ benefit from Hong Kong’s troubles and, gradually, reduce the gap separating it from its rival? A stroll around Marina Bay, the district symbolising the city's success, seems to substantiate this claim. Singapore’s most famous bay, surrounded by skyscrapers and sumptuous buildings, against the backdrop of the renowned Marina Bay Sands hotel - home to the world's largest rooftop infinity pool - certainly seems to have the pedigree to become the local luxury linchpin of the future. Thanks also to the 15 million tourists that flocked to the small archipelago last year.

Singapore’s quality of life, its economic competitiveness and the many high-net-worth individuals living there, both residents and non-residents of the city, are further elements to bear in mind. Will all of this be sufficient to foster a fully fledged luxury economy in Singapore, even without tapping the huge resources offered by China?

A possible alternative

All the luxury industry’s heavyweights have set up shop in Marina Bay. The Louis Vuitton flagship literally floats on the Singapore River, and is always brimming with customers. There seems to be little chance a situation similar to the Hong Kong protests, which led to the closing down of many stores, could develop. Strong governance and a rigid enforcement of the laws, combined with a fierce willingness to oppose communitarianism, enable Singapore to give “the right place to everyone.” Even though it would be in the city’s best interests to make some adjustments to its model, to remain relevant in today’s constantly evolving environment.

Luxury stores in a Singaporean shopping mall - Samir Hamladji

However, the road to making Singapore a luxury hub is long, and scattered with pitfalls. “For the leading [luxury] players, the challenge is offering a genuine luxe experience in Singapore, considering the space constraints and the uniformity of products and services in the sector. In my opinion, it is imperative for Singapore to focus on the experiential dimension of the luxury market, rather than on the simple, often hackneyed consumerism associated to it,” said Tan.

Will this be sufficient to upstage Hong Kong? Kering did mention, in the press release announcing its financial results, that part of its Chinese clientèle had “shifted” its expenditure to South Korea, Macao and Singapore, but LVMH and especially Hermès have been cagey on the subject. Nevertheless, if the situation in Hong Kong will continue as it is, everyone stands to lose. Hong Kong was in fact Singapore’s fifth-largest trading partner in 2018, and its fourth investment destination in 2017.

“Considering these well-established links, civic unrest in Hong Kong will eventually have negative repercussions on Singapore and the whole region,” said Tan. “The situation in Hong Kong simply adds to the current international economic uncertainty. This will fuel a fall in investor confidence, in turn affecting investment and business activity in the region,” he added. Only a “strong Hong Kong” could drive Singapore to tap the most of its potential.

“In other words, healthy competition will stimulate Singapore to beat its previous records. Hong Kong’s decline wouldn’t be a bonanza for Singapore,” concluded Tan. The Republic of Singapore, even if this isn’t one of its priorities, could therefore eventually become a key element in the region’s luxury market. But it will only be able to do so by sticking to its history. And without exploiting the shortcomings of its ‘adversary’.

By Samir Hamladj

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