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Chinese rob industry hit by '3Ps' clampdown.

Diageo plc, one of the world's largest producers of alcoholic drinks, recently announced a [pounds sterling]264m fall in profits for 2013/14. The biggest single factor in this fall was the collapse in sales of luxury liquors in China, in particular in Scotch whisky and Baijiu, a local strong liquor which is 40% owned by Diageo. Baijiu sales fell 78% in the year to June 2014.

This is a symptom of the anti-corruption clampdown in the country which is hitting hologram producers, with some reporting a 70% fall in laminating and hot-stamping foil sales.

We have reported the rapid growth of the Chinese hologram industry, which in around two decades has grown to become the largest producer of holographic materials in the world. Reconnaissance's most recent report on the global holography industry (Holo-pack*Holo-print Industry Study and Market Report), estimated the 2011 value of production in the country at US$733m, which after adjusting for purchasing power parity means that China was then producing 35% of the global holographic materials output.

Gift-giving the driver for holo growth

We have also explained in these pages the primary driver for this growth as the culture of gift-giving as a way of producers building relationships with customers, China has the largest consumption of cigarettes in the world, and a culture which (until recently) has encouraged social smoking and drinking. It is the accepted and expected thing to do among friends and business acquaintances to hand out cigarettes and-especially over dinner-to be generous with alcoholic drinks; and it is discourteous to one's host not to accept, and not to empty one's glass when drinking a toast; and then reciprocating the toast, so that during the course of a meal there will be numerous toasts-to the host, to the guests, to the business, comradeship etc.

This is the culture which is at the bottom of the growth in the holography business. Cigarette and drinks producers have launched numerous new products, each more exclusive, more expensive, targeted not at the consumer but at the giver of the gift of this prestige product. And that prestige has to show in the packaging.

The more expensive the gift you are giving-and the more expensive it looks, the more respect you are according your guests (who in business are or you hope will become your customers). And these people are, of course, being similarly wooed by your competitors, who are similarly presenting expensive gifts.

So cigarette and drinks producers have sought ever more ingenious and eye-catching packaging, and their packaging suppliers have turned to holography to meet this demand. Holographic materials are the most eye-catching, they have the brightest colours, the best kinetic effects, the most scope for ingenious use of logos and symbols for luck and success.

The Chinese hologram industry has responded, developing some of the most advanced methods for the production of vast quantities of wide-web holographic materials for packaging, materials which can efficiently and cost-effectively be incorporated into cigarette and liquor packaging.

Which has driven a shift in the industry from predominantly producing anti-counterfeiting authentication labels for branded products to predominantly producing wide-web packaging; a shift from small to large, seeing the industry become the giant of the global industry.


Public spending crackdown

Xi Ping, who in 2011 became head of the Communist Party and therefore the country, recognised that corruption would hold back the country's continuing economic development. He saw the corruption throughout society (such as local officials pocketing 90% of the value of properties purchased to allow building development) which was allowing the rich to get richer, keeping the poor poor, and engendering non-productive resentment and apathy. So in 2013 he launched a crackdown on public spending on overseas trips, on vehicles and on entertainment, now known as the Three Public Spend ings 3Ps-which were estimated to have reached 10% of all State spending.

The last of these-the crackdown on entertainment-is what has hit Diageo's profits and the holography industry. Xi Ping's crackdown is not cosmetic, it is having real impact across the country, where most tobacco and much liquor production is controlled by the state..

We have approached several hologram producers in China to ask what effect this is having on their business. Understandably, perhaps, none would allow us to quote them, but we have heard of packaging material sales being decimated, falling by 70% year-on-year and of authentication product sales being hit in the corporate backlash against holography.

It seems that Chinese business has to learn new ways of doing things. We respect the rationale for Xi Ping's crackdown but hope that it doesn't have unintended consequences for the development of one of China's successful industries.

Caption: Example of prestige packaging in China 1: a luxury gift pack of cigarettes

Caption: Example of prestige packaging in China 2: whisky carton
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Publication:Holography News
Geographic Code:9CHIN
Date:Aug 1, 2014
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