MACROECONOMICS REPORT

LUXURY GOODS INDUSTRY. IS ASEAN AN IDEAL

DESTINATION FOR EUROPEAN FIRMS?

Written By: Group 3

Nezzar Ibrahim
Hong Fu Sheng
Carrenia Cahyadi
Michael Yoe
Anita Pangestan

INTERNATIONAL MASTER OF MANAGEMENT

EXECUTIVE EDUCATION CENTER
UNIVERSITAS PELITA HARAPAN
SEMANGGI
2016
Introduction

Luxury goods are goods that increase in demand as income rises, or in other
words, are goods with high income elasticity of demand. These items can range from
accessories such as bag charms to leather hand bags sold as much as $50,000 to a
professional butler that manages day to day household chores. These items were
traditionally marketed in Europe but with the rise of globalization and consolidation,
these products found their way to Asian and had since allocated their resources in the
East.

Luxury goods can be classified into several categories. Based on the raw
material used, luxury goods can either be soft or hard. Soft luxuries are made of
leather or fabric and are flexible in nature. Leather hand bags or designer apparels are
two good examples. Hard luxuries on the other hand are made of precious stones and
sold exclusively at boutique stores or premium outlets. Diamonds, fancy watches, and
antique potteries are a few examples.

The market for luxury goods is showing a robust annual growth of 10%. North
America and Europe are the highest contributors to the hard luxury goods market
while increasing demand and higher disposable income in Asia Pacific have propelled
the growth. Rapid urbanization coupled with increasing disposable income have
spurred demand in Thailand, Malaysia, Indonesia, and Philippines and filled customer
urge for exclusive products and prestige. Though slowing amidst yuan devaluation
and the crackdown on gift-giving practices, China is still expected to play dominant
roles in Asian luxury goods market and requires different approaches to capture
customer appetite. Singapore has always been the lucrative market in the Asia Pacific
region and will continue to be. It is now players like LVMHs or Herms task to
develop creative products and increase their market presence.

A business model that solves the above riddle lies in defining the concept of
luxury. Luxury brands promote their singularities; their ability to differentiate from
their peers; and create tradition out of those singularities to build an everlasting
demand for their products. Luxury hand bag crafter such as Herms adheres to their
Made in France tradition to distinguish themselves from competitor Prada the same
way Rolls Royce limits its car production and instead shifted resources to customize
their cars and increase their values. By defining a concept that champions unique
traditions that have passed through time, luxury brands have distanced themselves
from contemporary fashion houses, such as Michael Kors, and created virtual value
that the sophisticated seek.

To complement the above model, luxury brands may utilize the following
strategies. Managing design seasonality is one way to underline the everlasting touch
on a brand and consequently their tradition. A solid design approach is not by itself
adequate to sustain business for luxury brands need solid merchandiser that
recognizes customer need and are able to balance it with luxury designs. Too much
reliance on a product to sustain business however steers luxury brands into a fashion
house without that same value that initiates their successes. Luxury brands need both
strong values that withstand challenges and flexible to adapt to dynamic customer
appetite. When firm values are in place, luxury brands can increase its presence
through retail stores and minimize production costs through scalable supply chain.
Clever use of social media, to exemplify Burberry, gives freedom to manage corporate
branding and is a good field to venture. High end luxury items however do not
typically engage with customers to avoid whoring themselves for profit. Finally,
mens market has larger slice of pie than womens for the former presents a blue
ocean opportunity to explore.

1 Economic Background
Together with other member of South East Asia Association, Indonesia gradually
levels up its competition by moving up to 37 th ranking in the Global Competitiveness
Index (World Economic Forum, 2016). Along with this tremendous growth of other
South East Asian countries, Indonesia maintains its stable position by remaining
competitive in the luxury products market, creating a sustainable spot for potential
investors. This is supported by growth in the following economic factors that
Indonesia experienced in the recent years.

1.1 Increase in income and middle income population

Indonesia, the 4th most populated country with its notable economic growth becomes a
very strategic market for investors of luxury goods. With the current President,
Indonesia is optimistic to keep its annual growth to 7 percent (The Economist, 2015).
Additionally, constant increment in GDP per capita is seen in Indonesia for the past
six years and is expected to growth further by the end of 2018 to reach up to USD
6,300 per capita (KMPG Indonesia, 2015). In 2011, per household annual disposable
income is valued at Rp 60.6 million with a steady increase of 5 percent per year
implying an equivalent increase of 4.7 percent in consumer expenditure, reaching Rp
57.7 million per household (Hodgson, 2012). By 2020, the household expenditure will
most likely grow by 39.2 percent in real terms with its increment of 40.5 percent in
disposable income (Hodgson, 2012). With Indonesian tendency to spend around 17
percent of their income into leisure and fashion items (Alicross, 2013), the higher
disposable income implies a higher spending on these leisure and luxury products.
With a relatively low inflation rate of 4.4% coupled with the introduction of higher
minimum wage law, the proportion of lower-upper and upper middle class population
is expected to increase (Find the Data, 2015). By, 2030, more of the population will
join the consumer class in Indonesia than in any other developing country together
with China and India (Doran, 2014). During 2006 to 2011, the number of household
with disposable income of more than $10,000 had doubled to 13.7 million households
and is forecasted to reach 31.1 million by 2020 (Hodgson, 2012). This increasing
proportion of upper and middle class would create a greater market for luxury goods
as their target customer base widen. Moreover, the affordability and growing brand
consciousness among the middle class would also fuel up the luxury goods
consumption. According to Bain, Southeast Asia experience 11% growth in personal
luxury goods market in 2012 2013 which is almost twice as the value of 6%
globally (Doran, 2014).
Figure 1.1 showing the trend of households with income over US$10,000

Source: Euromonitor International from national statisticsNote: Data

for 2012-2020 are forecasts; Household annual disposable income
data are in constant values.
1.2 Improvement in resources and infrastructure to
welcome investment
Constant investments and improvements have been done in order to welcome more
investment into Indonesia. With its comparative advantage of cheap labor with
average manufacturing job base salary of only $253 per month as compared to $403
in China and supportive demographic structure with median age of 29.2 whereby it is
36.7 in China (The Economist, 2015). The new president Jokowi has taken steps to
establish a one-stop shop in order to shortened investment approvals and permit in
January (The Economist, 2015). In the Index of Economic Freedom, Indonesia scores
80.4 in the trade freedom which is higher than China with 72.8 (Index of Economic
Freedom, 2016). The inclusion of Indonesia into several Free trade Area such as
ASEAN and agreement with China also benefit overseas exporters from less trade
barriers.
Indonesia also receives a steady increase in Foreign Direct Investment inflow with 26
percent jump in the last quarter of 2015. The future prospect with steady investment
in infrastructure and other economic factors, Indonesia is likely to undertake China in
terms of FDI in the future.
Figure 1.2 showing the trend of FDI in Indonesia and China

Source: http://www.tradingeconomics.com/indonesia/foreign-direct-investment

The President Jokowi also has boosted the budget for infrastructure by 53 percent
which is the biggest year on year increase in the history (The Economist, 2015). With
the newly build MRT line together with existing and future ports, Indonesia becomes
one of the most strategic hub for investment by luxury brands with lower
transportation and establishment cost.
Cultural Background
Cultural background of a country plays important role on determining consumer
behavior of that country towards specific goods, including luxury goods (Basri and Eng,
2004). But this so called cultural background is too vast to be quantified. Therefore dimension
of national culture need to be established. Below is the dimension of national culture
developed by Professor Geert Hofstede as one of cultural dimension.

(Source: Hofstede et al., 2010)

* Details about the dimensions are available at http://geert-hofstede.com/national-
culture.html

The cultural dimensions represent independent preferences for one state of affairs
over another that distinguish countries from each other. Comparison between Indonesia and
China is used to represent the cultural background of ASEAN and non-ASEAN member.
However, the country scores on the dimensions are relative, as different country have
different social, political, economic, and educational factors as well.
Data from Hofstede et al. (2010), conclude that Indonesias culture revolves around
how they judge themselves and how others see them. Indonesians seek to enhance themselves
and impress others through consumption. But on the other side consumers wont follow the
recommendations of others if the choice is distasteful to them. According to Alireza et al.
(2011), Education background is also affecting such behavior. Middle class in Indonesia have
generally higher levels of skills and education and many of them are educated at universities
in the west. The number of brands known by Indonesian student that study abroad compared
with the middle-education group increase significantly while it does not so in China and
Singapore
Bernard & Gilles (1995) explained that globalization also induce the luxury
consumption in Indonesia indirectly through increasing the Indonesian and European student
exchange rate and therefore introducing various brand of luxury. also value luxuries as an
enjoyable experience, and may buy such goods as a distraction from the problems in their
lives.
In contrast to China, despite spending more on luxuries than even the US, the
countrys attitude to this market has been strained in recent years (Alon, 2003). In 2013
luxury advertising on television and radio was banned, which may explain why consumers do
not strongly attach such purchases to social status or personal pleasure. But the thing that was
still very important to Chinese consumers is the quality that luxury brands represent. They are
willing to pay a premium price in return of a good quality luxury goods.
 Trade Regulations on Luxury Goods
Not before until July of 2015, Indonesias government still implemented a
huge amount of taxation on luxury goods being sold in Indonesia. The amount set by
the Indonesian government towards these taxes on luxury goods is considered high
ranging from 10-70% of their original price (UK Trade & Investment, 2014). This
taxation applies to both luxury goods that are entering Indonesia as well as those that
are manufactured locally. These are mostly after-sale taxes that is called PPnBM
(Pajak Pertambahan Nilai dan Pajak Penjualan atas Barang Mewah) or Value Added
Tax on Luxury Goods. The implementation of this regulation for the consumer is
treated very negatively, where it increases the tendency for Indonesian civilians to
purchase these luxury goods abroad where it is cheaper and not contribute to the local
producers, distributors, as well as the government.
In order to increase both consumers spending (locally) and reviving the
declining economic growth, Indonesias government decided to erase most of their
taxes on luxury goods. Part of this is done by decreasing and even removing some of
the taxes applied to luxury goods. Another is by simply removing some categories
from the list of luxury goods. The Indonesian government (Online-Pajak, 2015) has
identified that goods subjected to PPnBM are those that are:
Goods that arent considered essential
Goods that are only consumed by a particular community
Goods that are only consumed by the higher income
Goods consumed to justify their status and social class.

The Indonesian government has abolished some of the luxury goods taxes that
were on the level of 75% to about 10% now, and some others on 0% (policy for goods
such as supercars, properties, and yachts are unchanged). On the other hand, they
increased the taxes for the importer that was usually on the level of 2.5-7.5% to 10%
now (Deloitte, July 2015). This move is surely to increase the consumers spending in
order to elevate the states economic state while still protecting their local producers
from the amount of luxury goods that are spread amongst their market. Through this
move, the government is surely sacrificing its high revenues sourcing form taxes of
luxury goods. Indonesias Finance Minister, Bambang Brodjonegoro (ASEAN
Briefing, 2015) stated, "We want to push up people's purchasing power and spur
industrial growth. We also want to reduce people's tendency to buy goods abroad."
Surely through the more relaxed taxes by the Indonesian government, many
local players importing luxury goods can breath easier while they can invite more
players abroad, especially form Europe to export their products to Indonesia. As long
as Indonesias economy continues to grow, its government will be willing to reduce its
income for the benefit of its producers and consumers.
 On the other hand, Luxury Goods is a specialized product of European. The
European luxury sector exports over 260 billion outside of the EU this corresponds
to 60% of its export output. Given that European exports in total are approximately
1,800 billion per year, the luxury goods exports account for over 10% of all
European exports. Overall, the sector has recorded double digit growth in the last two
years, increasing its employment footprint to 1,000,000 workers directly, and at least a
further 500,000 workers indirectly (ECCIA, n.d.).

Unfortunately, Importers of luxury goods are confronted with policy measures that
seek to regulate mass-market competition which hinders EU importers to optimize
their comparative advantage in luxury good sector. There are several challenges they
might face when enters Indonesia markets, such as; complex bureaucracy, uncertain
and unpredictable legal and regulatory environment, lack of transparency, high
logistics costs, and poor infrastructure (UK Investment, 2014). Negotiating policies
and trade system with government of Indonesia will take important role to create the
trade of luxury goods more efficient. EU needs to persuade Indonesia to have clearer
bureaucracy and organized legal system for luxury good trade activities. It is also
important that the right policies and legislation are in place to foster their continued
growth, especially in protecting the copyright of the products brand (Thewalpole,
2015).

REFERENCES

BOOK

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Basri, M. C. and Eng, Pierre (2004) Business in Indonesia: New Challenges, old
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Hofstede, G., Jan, H., Minkov, M., (2010) Cultures and Organizations: Software of
the Mind. 3rd Edition, McGraw-Hill: New York.

JOURNAL ARTICLE
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Miremadi, A., Fotoohi, H., et. al (2011) The Possible Effects of Need for
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