Saro Capozzoli
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21 Luglio Lug 2011 1742 21 luglio 2011

What can Italian companies learn from the Davinci scandal in China?

In the latter days there has been some buzz in the major Italian and Chinese newspapers about the “Davinci case”.

The Chinese retailer of luxury furniture is alleged to have deceived some customers by selling them low-quality Chinese-made furniture in place of expensive imported Italian products.

The peculiarities of this case provide a good basis for a more profound discussion on the current situation of the Chinese furniture market and, in particular, of the challenges and opportunities faced by Italian companies doing business in China.

THE FACT

DaVinci is a Shanghai-based retailer of high-end furniture brands (of which many Italians) currently operating in Singapore, Indonesia, Brunei, Malaysia, Hong Kong, and China.

The company is in the process of being listed in the Shanghai Stock Exchange, with an initial price of about 40 times the net revenues of 2010, leading to an IPO value of at least 400 million Euro. Operating since 1994, the company is the leader in the high-end luxury furniture sector in China.

Davinci has been accused of selling, together with original pieces, other fake products sold under the label of a popular Italian high end brand.
The trickery was made possible by transporting the fake furniture, manufactured in the Guandong province, through the Shanghai's Waigaoqiao Free Trade Zone. Here this could be labeled as “imported” and immediately sent to Davinci’s warehouse in the Qingpu District (Shanghai), ready to be dispatched and sold as a “Made in Italy” product.

The fraud was first made public by a CCTV (national TV network) report, which also showed the defects of the fake products, and was then confirmed by the Shanghai Industrial and Commercial Administrative Bureau. Davinci denies the allegations stating that the fake furniture was intended for a different brand owned by the company and that no Chinese customer received non-original products. The main partners of Davinci, among which some Italian companies, have showed support to the CEO Doris Phua and expressed confidence in a positive solution of the case, in the hope that what represents their main partner and sales channel in China will continue selling their brands with profit.

As for now, Davinci has been prohibited from selling the brand under which the fake products were labeled and, should the allegations be confirmed “they will not only give refunds, but also give cash compensation of the same price of the furniture," as Zhao Jiaoli, secretary general of the commission, said to the press.

CONCLUSIONS FOR ITALIAN COMPANIES

What can Italian companies learn from this story? A first conclusion can be drawn from the observation of the effects that this scandal can have on the whole Italian furniture industry exporting in China.

Some manufacturers from Brianza, the same area of the incriminated brands, are showing concerns that this event can contribute to the creation of a negative image of the Italian furniture in China, leading in turn to a reputational damage for all the operators of the area.

To avoid this from happening again, they are considering putting their efforts together and create a unique entity representing the “Made in Brianza” furniture in China.

Reaching a bigger scale would probably allow them to gain independence from a Chinese retailer as well as from any link between them and the final customer, on which they have little or no control.

The decision of operating in China only through distributors or agents may reduce the financial commitment in the short term, however, it may represent a problem in the longer run in terms of keeping the control of the market. Other problems stem from the possibility of getting involved in fraudes and scandals that could damage the brand image, as happened with the Davinci case.

It is demonstrated that the extent to which companies export is directly proportional to their size. Having Italian companies a smaller size on average than their European peers (10-19 workes), it is advisable for them to increase the scale of their operations by aggregation or concentrating efforts in more promising markets, rather than spread efforts on more fronts.

In fact, only 30% of the Italian enterprises are exporting abroad, compared to more than 65% of the German companies, having an average dimension of more than 249 workes.

A second important feedback of the Davinci case is that the “Made in Italy” is actually seen as a quality benchmark by the Chinese customers, and it receives the legal protection it deserves to keep this valuable image up also in the future.

To conclude, Italian companies have the “national” brand image and the legal protection they need to succeed in China. With a market potential estimated in 40 billion USD per year (2010) and about 5 million families buying brand new homes to be furnished in the same time frame, the Chinese market is an opportunity not to be missed.

A more localized entry-strategy developed under the prerequisite of a bigger scale is an advisable approach, avoinding short cuts to gain the market.

Jesa Chinese Industrial and Economic Studies - all Rights are reserved (by Simone Simoneschi)

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