Designed in New York, made in Dongguan

October 24, 2011

By George Chen
The opinions expressed are the author’s own.

It could be the perfect story to show how China Inc and its American partner can work together for a win-win result, but Chinese consumers are having second thoughts on this.

Earlier this year, upscale U.S. handbag and accessory maker Coach said it planned to list in Hong Kong to reflect the growing importance of China’s luxury market. Coach didn’t give a timeframe for the IPO plan, but one thing is fairly certain – before Coach launches its IPO, its local partner in the small city of Dongguan, near Hong Kong, will aim to rise $200 million first.

The company, Sitoy (Dongguan) Leather Products has hired Bank of America-Merrill Lynch for a Hong Kong listing by the end of November. In IPO marketing materials distributed to potential investors, Sitoy described itself as the largest handbag OEM (original equipment manufacturer) in China, although it didn’t name any of its clients.

However, Chinese netizens quickly found out from the company’s website ( that one of Sitoy’s OEM clients is Coach, a  New York-based brand popular among China’s fast-growing middle-class. In China, Coach prices are far lower than those for top-tier brands such as Louis Vuitton and Gucci, although it is still considered a luxury brand among consumers in the world’s No.2 economy.

“Why not buy expensive Caoch bags directly from the Dongguan factory? I believe the cost must be very cheap,” said one Sina Weibo user in response to the news. Foreign brands — not only luxury fashion brands but also consumer electronic makers — have many OEM partners in China, although they are often reluctant to identify them to avoid such unsatisfaction from local customers.

In a company newsletter dated May 31, published on Sitoy’s website, the top headline is about senior executives of Coach visiting the factory and expressing satisfaction with Sitoy’s products for Coach. It’s now seems likely that at least some of Coach’s handbags are designed in New York but manufactured in Dongguan.

Coach was already in trouble after Chinese media pointed out that Coach handbags are much more expensive in China than they are in the United States, sometimes with a difference of hundreds of U.S. dollars. When the news about the OEM factory in Dongguan started circulating on China’s Twitter-like micro-blogging service Sina Weibo, some consumers felt they had been cheated after spending thousands of yuan on a bag that was probably made in Dongguan, a city whose reputation is usually linked with cheap labor costs.

On Sitoy’s website, the company expresses pride in being an example of the small city’s success as the world’s factory for shoes, garments and so on. Sitoy is in a position to list in Hong Kong, largely thanks to cheap labor costs and strong OEM demand from global clients such as Coach. But the case of Sitoy and Coach that is causing such frustration among Chinese consumers also raises the question of how luxury brands can keep selling at high prices while reducing costs.

Other fashion and leather brands including Salvatore Ferragamo and Burberry have said they do not plan to manufacture products in China, although Burberry has chosen other countries such as Turkey to make some low-end products such as T-shirts.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A Coach store in Hong Kong’s Central financial and business district, seen on Dec. 6, 2008. REUTERS/George Chen

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