TheChek News Flow

China’s cull of EV overcapacity will bring little relief to Europe

Beijing’s tried-and-tested industrial policy has a track record of creating fierce export juggernauts

A senior official in charge of China’s industrial policy recently vowed to get serious about slashing excess capacity in the country’s electric-vehicle industry, seemingly taking to heart a key trade complaint from the EU. 

The bloc last October initiated an anti-subsidy investigation on imported EVs from China. European Commission president Ursula von der Leyen pledged to defend Europe’s auto industry against cheap Chinese exports driven by subsidy-fed overcapacity. But now Beijing is setting about making things right, trade tensions with Brussels will dissipate, surely? Not a chance. 

Overcapacity is a chronic affliction of Chinese industrial policy. Like an adaptable virus, it is difficult to eliminate and requires continuous suppression, which often takes the form of government-orchestrated industry consolidation. The treatment culls the weak. The companies that survive are fitter and meaner and become even more fierce in export markets. 

The Chinese government designated EVs a “strategic emerging industry” in 2009, and began flooding the sector with subsidies, sheltering the infant industry behind a protectionist wall. At the peak, one EV attracted up to $19,000 of consumer purchase subsidies, in addition to tax breaks, cheap land, energy and bank credits for manufacturers. Foreign carmakers and battery producers were mostly excluded by eligibility requirements. 

Government largesse and protectionism created fertile ground for abuse. Myriad companies emerged, churning out low-cost, low-tech vehicles with little appeal to consumers. Many sold their EVs to oversized municipal bus and taxi fleets, which often sat idle.

A bloated industry was the result. In 2014 alone, more than 80,000 companies registered in China to enter the EV sector, more than doubling the previous year’s number of new registrants. The strategic emerging industry appeared to be a textbook cautionary tale of waste, corruption, overcapacity, vicious price wars and low profitability. 

As a veteran practitioner of industrial policy, however, the Chinese government is familiar with this malaise and skilled at treating it. It began raising the bar for issuing production licences and withdrawing subsidies in phases. Vehicles with low driving ranges lost support first. The low-tech producers were either barred from entering the market or forced to exit it. Those who withstood both the price-war attrition and the government-engineered culling became ruthlessly efficient. 

When the government felt confident that its domestic industry was strong enough, it lowered the protectionist wall. In 2018, Beijing allowed Tesla to open a gigafactory in Shanghai making the Model 3 with Panasonic batteries and eligible for the full suite of government support. Even BYD, China’s EV leader, was on its knees: it sold 21 per cent fewer vehicles in 2019 and its earnings dropped by almost half. The company’s founder Wang Chuanfu said then that survival was the only objective. 

But instead, BYD thrived. It doubled down on research and development and produced a new battery called the Blade, which is more compact than earlier versions, charges faster and powers cars over greater distances. The company’s sales more than quadrupled from 2020 to 2022. Tesla adopted the Blade battery last year for its Model Y, produced in Germany. BYD sold more cars than Tesla in the fourth quarter of 2023 — although Tesla still outsold it over the year — and it is now the latter’s turn to brace for “notably lower” sales growth. 

China’s well-rehearsed industrial policy can be staggeringly wasteful but still produce stunning results. This same pattern of fattening up companies with subsidies and protection and then cutting support and introducing market discipline to weed out the weak has already produced domestic and export juggernauts in steel, shipbuilding and solar panels.

China’s EV champions are focusing on the EU market, which is the biggest international prize since the US has effectively kept out Chinese EVs with its own protectionist measures of tariffs and origin requirements for subsidies. 

When it launched its anti-subsidy probe, the European Commission said that China’s share of EVs sold in the EU had risen to 8 per cent, from less than 1 per cent in 2019, and could reach 15 per cent in 2025. BYD is selling five models in eight European countries, including Germany, France, Italy, Spain and the UK, and gunning “to be in the top five” in Europe. Rubbing salt into the wound, Europe’s football federation Uefa has replaced Volkswagen with BYD as its official automotive partner for the Euro 2024 tournament. 

Overcapacity still dogs China’s EV industry. In the first four months of 2023, capacity utilisation of the top 10 sellers hovered below 70 per cent. Price wars have persisted, suppressing profits. Beijing’s pledge to squeeze excess capacity out of the industry was sincere. As with its culling exercises in other sectors, the Chinese government aims to mop up low-end producers to boost the profitability of the industry champions, so they can invest more in R&D and in conquering export markets.

The next round of consolidation in China’s EV industry will not deliver European carmakers a reprieve. It will produce even more formidable rivals.

Oil executives hit out at administration’s move to pause approvals for LNG export terminals

Top oil industry executives have hit out at US President Joe Biden’s decision to pause approvals for new liquefied natural gas export terminals, with Shell’s CEO warning it will “erode confidence” in an industry that has become a pillar of the global energy system.

The European energy major, the biggest shipper of LNG after state-owned Qatar Energy, has bet heavily on demand for the gas, which it expects to continue to grow even if consumption of other fossil fuels starts to decline.

“I don’t think the recent announcement by the administration necessarily impacts, in the short or medium term, the supply of LNG, but I do think it erodes confidence in the longer term,” Wael Sawan said in an interview.

In recent months, Shell has also become embroiled in a dispute with US-based Venture Global LNG, alleging the company is refusing to honour a multibillion-dollar supply contract. Alongside BP, it launched arbitration proceedings against the company in September. Venture Global has denied the allegations.

“You add [the Biden decision] to the behaviour of Venture Global in not honouring the contracts with their foundation buyers,” said Sawan, “All of that I think starts to just raise more questions on the stability and security of LNG from the US.”

Kathy Mikells, chief financial officer of ExxonMobil, also criticised the decision, saying it could damage efforts to wean countries off coal. “It means less US produced natural gas is available to replace coal around the world — that’s clearly a bad thing,” she told the Financial Times.

Exxon is building a $10bn LNG terminal in Texas, expected online in 2025, but it has already secured the necessary permits

Chevron CFO Pierre Breber said his company’s position was that energy policy should not be a question of politics. “The world needs affordable, reliable, ever-cleaner energy,” he told the FT. 

“US LNG exports are good for this country: it creates jobs, it helps the balance of trade. It’s good for our allies who are looking for sources of energy . . . And it’s good for the environment, because . . . in many instances the LNG is [replacing] coal.”

Chevron does not own LNG infrastructure in the US but has agreements to purchase supply due to come online in the coming years — including at Venture Global’s CP2 terminal, which has not yet been approved. 

The decision to pause approvals for LNG export plants has been widely interpreted as an attempt by the Biden administration to win support in an election year from climate-conscious voters, who argue that the multibillion-dollar plants will lock in reliance on fossil fuels for decades.

Europe, in particular, has become heavily dependent on US LNG to replace piped gas from Russia since its invasion of Ukraine in 2022.

Like other fossil fuels, LNG releases carbon dioxide when it is burnt. In addition, methane, which is the main component of natural gas, is a much more potent greenhouse gas than CO₂ when it leaks into the atmosphere.

However, Shell and other producers, argue LNG has a role to play in the energy transition because, when burnt, it produces half the CO₂ of coal for the same amount of energy and 30 per cent less than oil.

“We are . . . firmly of a view that demand for LNG will continue to grow,” Sawan said. “It plays into both energy security in regions like Europe but also Asia, and critically it plays into [the] energy transition, as countries like China and India use gas to decarbonise and move away from coal.”

Shell plans to invest $4bn a year in LNG projects until 2025 and to increase the volume it sells by 20 to 30 per cent by 2030. Its integrated gas division, which is dominated by LNG, generated half of Shell’s $28.3bn in profits last year.

The company’s focus on the fuel dates from the start of the industry. It shipped the first commercial cargo of LNG, from Algeria to the UK, in 1964 and later that decade was instrumental in developing the Asian LNG market as a partner in Brunei LNG. Before then gas was largely considered an unwanted byproduct of oil production and was usually flared on site.

The LNG industry has been built on “reliability [and] long-term security” Sawan added. “Anything that starts to undermine that . . . is just not good for the global markets.”

Kering will publish its annual results on Thursday that will reveal the extent to which the group is underperforming compared to peers Richemont, LVMH and Zegna Group. The miracle investors had hoped for with Gucci under designer Sabato de Sarno has not happened yet.

Since the former Valentino ready-to-wear designer took over Gucci’s creative leadership in May, there’s not been a huge buzz around the brand. It may take two to three years before it really takes off again – if it ever does, industry experts predict.

The group’s poor performance adds pressure on CEO François-Henri Pinault, 61, to pass on full executive powers to deputy CEO Francesca Bellettini, 53, the former Saint Laurent boss who runs all of the group’s fashion and jewelry brands. Pinault gave her the operational reins as part of a major group reorganization following the abrupt departure of Gucci CEO Marco Bizzarri last summer.

Some investors argue Pinault needs to become non-executive chairman to clarify the lines of command and the group’s corporate governance. Several industry sources say Pinault is planning to leave his post as CEO in the near to medium term to focus on the family investment company Artemis. François-Henri Pinault co-heads Artemis with his 88-year-old father François who founded the company and built Kering, previously a retail group called Pinault Printemps La Redoute (PPR).

Artemis owns the auction house Christie’s, cruise line Ponant, fashion brands Courrèges and Giambattista Valli as well as several French winemakers and magazines including weekly Le Point. In September, Artemis bought a majority stake in Los Angeles-based CAA (Creative Artists Agency) which represents hundreds of famous actors and athletes.

Over the years, Pinault has become less and less involved with the day-to-day management of Kering’s brands. Currently he looks after the group’s eyewear and beauty operations. He’s also in charge of sustainability policies, human resources, communication and audits. You do not see him often visiting boutiques or hear of him breathing down the neck of his CEOs like does his archrival Bernard Arnault, CEO and controlling shareholder of LVMH, industry sources say.

Pinault is known for letting his CEOs get on with their jobs. While he takes pride in the freedom he gives them, this is not without consequences. One of them is that Pinault does not fully control what is going on at his brands. That’s one of the main issues plaguing Kering, sources close to the group say. Somebody needs to be in charge and hold everyone accountable for their performance.

Such lack of control is starting to show in the numbers. Broker HSBC sees Kering’s luxury brands reporting a 5 percent drop in revenue in the three months to Dec. 31. The comparison between Kering and its rivals this week risks being brutal. In the fourth quarter, sales from LVMH’s fashion and leather were up 9 percent, Richemont’s turnover rose 8 percent and Zegna Group saw a 19.6 percent increase.

Kering shares are down 38 percent in the past year and the stock is trading at a discount to its rivals. Kering’s “low PE (price-earnings ratio) of 13.4 times 2024 expected earnings is a 35% discount to soft luxury peers,” HSBC explained. “We believe visibility on an improvement at Gucci and other brands is still limited and we do not see any short-term catalysts.”

Kering’s poor share price performance is making some senior managers think about pursuing other opportunities elsewhere, several industry sources told Miss Tweed. “Frankly, Kering’s two-year option plan is not looking particularly attractive,” one of the sources said. If Kering starts losing executives, that’s not a good sign.

So why is Kering is doing so badly compared to its competitors? One explanation is that Pinault is having a hard time imposing his will on the group’s brands, several industry analysts and sources close to the group say. “Kering’s main problem is the lack of control the shareholder has over all of the group’s brands and particularly Gucci,” another senior source close to the group said. “Management knows and understands what needs to be done but does not do much about it.”

Another important issue is that Pinault does not appear to be au fait of everything that’s going on at his group. He relies on his first circle of lieutenants and it’s likely they don’t tell him everything. This first circle is made up Jean-François Palus, who was managing director of the group and now runs Gucci. There is also Bellettini and Cédric Charbit, CEO of Balenciaga. One joke Pinault may not be aware of is that some staff call Kering by its old name PPR, which stands for “Pinault, Palus and the Rest,” highlighting the extent to which Pinault, Palus and a few other executives are seen as disconnected from the reality of how some of the group’s brands are faring.

Sources close to the group have been saying for years that Pinault’s lack of control over his CEOs and brands was a problem. Several of them believe he would benefit from appointing external controllers to ensure the consistency of the figures presented by his group’s various brands.

Kering’s managers are remunerated depending on a brand’s sales growth. This creates incentives to inflate that number – at the expense of the brand’s image. Rival groups such as Richemont also use other performance indicators such as return on net assets to calculate executives’ bonuses. Kering’s remuneration policy encourages CEOs to artificially boost growth with outlets – stores that sell items at a discount. That has been an issue plaguing the group’s brands for years. While the market was strong, it could get away with it. In the current downturn, it’s a real problem.

Outlets are great for lifting sales, but they are deadly for brand desirability and the perception of exclusivity. The good news is that under Palus, Gucci has started downsizing its network of outlets, sources close to the brand have said. Investors may want to grill Pinault and Palus on that point.

PALUS TO STAY AT GUCCI

Another question investors may want to ask Kering is about the search for a new CEO for Gucci. Palus is in no hurry to hire a replacement, as Miss Tweed reported. He was named interim CEO following Bizzarri’s exit last summer. He intends to remain in charge for at least two years and retire afterwards. “Palus is part of the old guard,” one source close to Kering said. “You can’t build something new with someone like him who’s been part of the group for more than 30 years. Gucci needs a new drive, a new vision and it’s not going to happen with Palus.”

Kering declined to comment on the matter.

When Palus, 62, moved to Milan in September, he benefited from the flat tax Italy has introduced to encourage high earners to move to the country. That’s another reason why Palus is not in a rush to leave, industry sources say.

Since he’s arrived, he has been working hard on improving the company’s processes. He’s hired a new brand image director and a new head of production. Palus is a great manager and a fantastic troubleshooter, but he has no track record in brand building and storytelling: what Gucci needs to reconquer the hearts and minds of customers.

Its Christmas ad campaigns were sparkling and elegant but lacked originality and audacity, experts say. Sabato has been asked to turn Gucci into a timeless, chic brand, but after the maximalism and zany creativity of his predecessor Alessandro Michele, it looks plain and institutional. It will take time for consumers to adopt the brand’s more subdued aesthetic and for sales to pick up again – if they do, fashion experts predict.

MISSED OPPORTUNITY

Another frustration investors have about Gucci concerns the brand’s missed opportunities in watches, jewelry and beauty. Pinault has publicly complained about the inability of license partner Coty to bring Gucci’s beauty revenues beyond the €1 billion mark. They are currently estimated at around €700 million and Kering gets a small percentage of that amount in royalties. It’s hoping to take Gucci’s beauty business in-house once it has built a strong presence in that field. But that will take a few years.

Rivals Chanel, Louis Vuitton, Dior and Hermès have built much bigger businesses in beauty, watches and jewelry, as Miss Tweed reported in 2021. In watchmaking, these four brands have become respected players with sharp designs and innovative movements. At Hermès, watches represent one its fastest-growing product categories. The brand makes around €800 million in annual sales and looks set to join the watchmakers’ €1 billion club soon, like rival Breitling, industry experts predict.

Gucci could have capitalized on its fashion edge to produce original collections. But that side of the business appears to lack momentum. Gucci’s watch sales are estimated to be around €200 million.

Gucci has launched a new collection of watches for women that features steel bracelets and pastel tinted dials similar to some Rolex models. They are sold on the brand’s website next to models that were launched more than two years ago featuring Michele’s trademark bees.

Then there’s jewelry. Gucci has a tiny jewelry shop at Place Vendôme. Its collection is limited to a few chains and ultra-thin necklaces, matching bracelets and few earrings. Nothing to brag about. Like watches, Gucci has not been actively promoting that business.

Everyone knows that hard luxury is not Kering’s forte. Best not remind the group of its misadventures with watchmakers Ulysse Nardin and Girard-Perregaux, which it sold to management in 2022 after financing losses for many years.

BALENCIAGA

Another mystery at Kering: why is Cédric Charbit still CEO of Balenciaga? Sources close to the group say he has Pinault’s support, but they wonder for how long. Bellettini and Charbit are said to be at loggerheads. Pinault’s father François Pinault has long been in favor of sacking Charbit for what happened, as Miss Tweed first reported last year. In October, Laura du Rusquec, a former Morgan Stanley analyst and Kering veteran, was appointed deputy CEO of Balenciaga. At the time, the group said we should not read anything into this nomination.

Balenciaga’s annual sales are estimated to be around €1.8 billion or 15-20 percent below their peak from two years ago. It has not recovered from the PR fiasco of December 2022. There seems to be fatigue around the provocative creations of Demna Gvasalia. The talented Georgian designer tried to reburnish the brand’s aura with an Haute Couture collection in July and a ready-to-wear one in October featuring some of his best-selling outfits. But the story remains the same, one that has been tarnished by the absence of moral filter that the brand displayed when it put out an advertising campaign a little over a year ago involving toddlers dressed in what looked like BDSM attire. And it handled the debacle disastrously. Balenciaga blamed the photographers and threatened to sue them, a threat it later retracted.

For investors, it was yet another sign that there was a lack of control at Kering, a point already raised by Miss Tweed a year ago. Since that communications mishap, luxury leaders such as Richemont Chairman Johann Rupert and LVMH’s Bernard Arnault have commented publicly on how such a thing would never happen at their group since every ad and move was vetted by several people. Kering said at the time it would hire someone in charge of “brand safety” but it never gave his or her name afterwards.

Kering has been building internally what it calls a “Brand Book,” a sort of creativity map to set in stone its brands’ DNA and heritage. That may sound like a good initiative, but the group needs to be careful that it does not kill good ideas or alienate designers like Sarah Burton, who left Alexander McQueen in September after more than 20 years. Kering has denied there was any falling out between the group and the designer. It will be interesting to see what the new creative director Seán n McGirr, coming from JW Anderson and previously Dries Van Noten, produces for McQueen at Paris Fashion Week on March 2.

Gucci, McQueen and Balenciaga – that’s a lot of brands on which investors have little visibility. It’s a time of reckoning for Kering.

The pro-reformist’s absence from the running for the Assembly of Experts highlights the hardliners’ grip on power

As Iran’s best-known moderate Hassan Rouhani was being blocked from the powerful body with responsibility to appoint the country’s supreme leader, his hardline successor as president, Ebrahim Raisi, was handed a clear run at the same authority.

The publication late last month of the list of eligible candidates for the elected Assembly of Experts rammed home to Iran’s pro-reform forces that their influence was badly waning, as hardliners consolidated their grip on power. The blocking of a raft of reformist candidates for parliamentary elections and the predicted low turnout for both votes on March 1 has only added to their disillusionment.

The elections come at a critical juncture for Iran, where the 84-year-old Ayatollah Ali Khamenei has held sway as the political and religious authority since 1989. His death over the next eight years would hand the assembly the job of picking a successor, determining the country’s future for decades to come.

The Guardian Council that vets Iran’s electoral candidates gave no reason for preventing Rouhani, president for eight years until 2021, from standing for the 88-member assembly. As he was being disqualified in the Tehran constituency, Raisi was approved as the only candidate in South Khorasan, meaning he would run unopposed in the electoral process.

“When a single vote is enough for Ebrahim Raisi to enter the Assembly of Experts, why should that be called an election?” asked Ahmad Zeidabadi, a reformist activist. It was all part of a hardline plan “to take control of the ruling bodies and transform [themselves] into a hegemonic power with the final say on political matters,” he said.

The question of whether the hardline-run Guardian Council would sideline Rouhani was viewed as a test case for how far the prevailing forces would go to exert their dominance. Rouhani, who signed the landmark 2015 nuclear accord with world powers, is a two-term president with a seat on the Assembly of Experts since 1999.

Former vice-president Eshaq Jahangiri questioned the decision to reject a candidate who six years ago won 24mn electoral votes, while former minister Ali Jannati deemed it a “scandalous move” and an affront to Iran’s constitution.

Raisi has not commented on the fate of his rival, but his deputy for political affairs, Mohammad Hosseini, noted how Rouhani had sought to distance himself from the policies of the Islamic republic since his presidency ended.

Mohammad-Taqi Naqdali, a conservative member of parliament, said the disqualification had been influenced by parliamentary reports submitted to the judiciary highlighting Rouhani’s alleged non-compliance with the law.

Rouhani has been target for hardliners since the nuclear deal with world powers collapsed three years later when then-US president Donald Trump withdrew his country from the agreement.

Hardliners view this as a national embarrassment, all the more so because it was accompanied by swingeing international sanctions that have undermined the economy and made life very difficult for ordinary Iranians.

Raisi loyalists also hold the previous Rouhani government accountable for high inflation, a housing crisis and poor oil sales.

Mahmoud Vaezi, a senior politician close to the former president, said the hardliners had “been putting the blame for all the Iran’s shortcomings on Rouhani’s administration, even while they’ve been in power for more than two years.”

Raisi’s position as the sole candidate in his assembly seat has also drawn scrutiny, leading to speculation that a token challenger will be drafted in. But such suggestions have only added to the sense of pessimism around the elections.

Many reformists already view the process as a lost cause, pointing to the disqualification of a raft of candidates linked to Rouhani’s party. Reformists say that only about 30 moderate and pro-reform figures remain in the race.

Younger Iranians in particular have soured on voting, which contributed to the mass protests that erupted after the death in police custody of 22-year-old Mahsa Amini in 2022. Vaezi cited recent polls to suggest that fewer than a third of voters would cast a ballot, dropping as low as 13 per cent in Tehran.

“If we vote, we’d give a legitimacy that this regime doesn’t deserve,” said Amir-Reza, a private sector employee. “And it will have no impact anyway, because hardliners aren’t giving up. Let’s at least show through a boycott of the election that their policies have no popular support so as to discredit them.”

Ahmad Khatami, a Friday prayer leader who sits on the Assembly of Experts, recently warned that “antirevolutionaries” were seeking to turn March 1 “into a referendum against the establishment,” underlining the tensions around the election.

These forces were “encouraging people not to vote, so they can achieve at the polls what they couldn’t” in the 2022 protests, he added.

The disqualifications have also extended to senior clerical figures from the conservative camp, with two former intelligence ministers barred from running for the elections, domestic media reported.

Vaezi said stopping the rot would require a radical shift from the Guardian Council to open up the vote, while insisting the ballot box was the only option. “Those who argue in favour of not voting won’t win, because that will only help the minority in power to continue to rule.”

Europe's biggest economy has seen a wave of big-name insolvencies over the past few months but local sector analysts say things are not as bad as they look.

Earlier this week, the company controlling some of Germany’s grandest department stores revealed it was insolvent.

The KaDeWe Group, which manages the KaDeWe department store in Berlin, the Alsterhaus in Hamburg and the Oberpollinger in Munich, blamed exceedingly high rents and the financial collapse of one of its two co-owners, Signa Holding of Austria, for its financial woes.

Various suppliers — including Germany’s VKE Cosmetics Association, whose members include the L’Oréal Group, Estée Lauder and LVMH Perfumes and Cosmetics — say KaDeWe has been slow paying some big bills lately. The VKE sent a letter to the store management at what is arguably one of the country’s most prestigious retailers but received no reply, German news agencies reported this week after the insolvency announcement.

There’s more to the insolvency than that, too, with speculation about a breakdown in the relationship between Signa, which owns 49.9 percent of the company, and Thailand’s Central Group, which holds the other 50.1 percent stake.

But this isn’t the only bad news coming out of Germany’s fashion sector. Over the past few months there has been what the locals have branded an “Insolvenzwelle” or “wave of insolvencies.”

This wave has been headline-making because it has included some of the biggest names in German fashion retailing and production, including Peek and Cloppenburg, Gerry Weber, Reno, Ahlers, Peter Hahn, Madeleine, Hallhuber, Salamander, Klingel and Görtz. Smaller brands that recently declared themselves insolvent included Lala Berlin and bag maker Bree, while other members of the ill-fated Signa family — one of the biggest department store chains in Europe, Galeria Karstadt Kaufhof, and Signa Sports United — also did so.

Insolvencies among apparel sector companies that generate more than 10 million euros annually have tripled since 2022, German management consultancy FalkenSteg noted this month. In 2022, there were just 11 such insolvencies but last year there were 33.

And, FalkenSteg researchers added, “across all [fashion] company sizes, the numbers [of insolvencies] rose sharply for the first time since 2020, to 160 cases.” That’s 57 percent more than in 2022, they said.

All this is happening at the same time as Germany’s economy is slowing and consumer sentiment is increasingly depressed. German national income — gross domestic product — shrank by 0.3 percent in 2023. It was the only European economy not to grow last year, and this year isn’t expected to be much better.

German consumers are also unhappy. “Both economic and income expectations as well as the willingness to buy are showing noticeable declines,” the country’s largest market research company, GfK, concluded at the end of January. German shoppers are worried about inflation, much less willing to spend and want to save more right now, GfK said.

They’re also less willing to spend on fashion, the German Retail Federation reported last summer, and prefer to save or spend on things like holidays.

It sounds bad. But is Germany’s fashion retail sector — the second biggest in Europe after the United Kingdom, worth around 70 billion euros annually — really doomed?

The short answer, as a number experts told WWD, is no.

“Simply put, it’s all a bit of an exaggeration,” said Jochen Strähle, a professor of fashion management at the Texoversum course run by Reutlingen University in southwestern Germany. “The textile and apparel trade has always been subject to change but it’s not going anywhere. What is happening at the moment is something of a turning point for the sector.”

“What we are seeing is the consolidation we have been expecting for several years,” confirmed Achim Berg, an expert for apparel, fashion and luxury with management consultancy McKinsey and Company, who is based in the central Germany city of Frankfurt. “That was something we expected to see when COVID-19 happened but it didn’t because of the subsidies and support the German government provided to retail in general, but also to apparel.”

Taken as a whole, fashion retail in Germany isn’t in trouble, sector observers agree, it’s just changing — and in a way that should probably have happened a while ago.

The country’s Federal Statistical Office recently reported the latest numbers available: Fashion sales actually grew by 9.3 percent in the first half of 2023, compared to the same period in 2022.

Local specialist publication TextilWirtschaft put the insolvencies into further perspective. Out of around an estimated 17,000 companies in Germany that sell or produce clothing, shoes and accessories, 160 insolvencies in 2023 meant that just under 1 percent of the total were in trouble.

Additionally, some of the current wave of insolvencies are not what you would call a genuine bankruptcy, said Leo Faltmann, director of FashionConsult, a business based near the city of Munster in western Germany, which specializes in strategy and restructuring for the apparel industry.

In Germany there are two kinds of insolvencies, Faltmann explained. One sees the court appoint an administrator, who then controls the company’s assets, dispensing of them in order to pay back creditors. The other is “a self-administrated insolvency,” which is similar to an insolvency filed under Chapter 11 of the U.S’ own bankruptcy code. Just as with a Chapter 11 filing, in Germany the troubled company’s management retains control of assets and is able to restructure and renegotiate things like rental contracts, with the objective of returning to some sort of financial equilibrium.

According to TextilWirtschaft’s research, around a third of the redundancies in 2023 were self-administrated insolvencies. “If you look closely at some of the bigger insolvencies, they have chosen self-administrated insolvency,” Faltmann added. “So in some ways, the idea that there is some spectacular wave of insolvencies has been exaggerated.”

Analysts say there are a number of reasons behind the recent insolvencies. Some are beyond the control of local fashion retailers and producers. These include rising energy costs as a result of the war in Ukraine, which has led to mild inflation and a slight recession. This in turn translates to higher costs in everything from raw materials to wages. Rents have also continued to rise, with almost half of German retailers recently telling pollsters they felt particularly disadvantaged by these increases.

Additionally, political and social unrest — war in Ukraine and the Middle East, environmental challenges and dissatisfaction with the current German government — is weighing heavily on German consumer sentiment.

But there are also other reasons for the insolvencies which have more to do with long-running structural weaknesses and unsustainable strategies in the sector.

During the pandemic, the government brought in extra financial support and also suspended rules that said local companies must file for bankruptcy within a certain period after they realize there’s a problem, FashionConsult’s Faltmann told WWD.

“The companies that were not profitable before were, in principle, being supported by the state during the pandemic,” he said. Local insolvency reporting rules returned to normal in May 2021 and state support as part of the government’s Economic Stabilization Fund ended in June 2022. Tightening credit conditions and higher interest rates also made it harder for businesses in dire straits to refinance themselves after state support dried up.

Business models that had been challenged by issues like the rise of online shopping and the decrease in brick-and-mortar footfall, but had not done enough about them, are the ones fighting for survival.

“So we have all these insolvencies piling up,” Faltmann added. “But really it is structural change to the sector that is badly needed.”

For example, Germany has far too much inner-city shopping real estate, Faltmann said. Although the number of consumers going to brick-and-mortar stores plummeted during COVID-19 lockdowns, customer footfall in inner cities had been falling long before that, statistics show.

There were already a lot of empty storefronts in Germany’s smaller towns and cities. The pandemic saw even more of them and the trend becomes a vicious circle because, as observers say, the more of a concrete wasteland inner cities become, the fewer people want to go there.

The Signa Group’s many financial problems don’t help either. The Austrian real estate firm was responsible for the Galeria Karstadt Kaufhof chain of around 90 department stores — the chain has declared insolvency three times since 2020, received state bailouts of more than 700 million euros and previously had more than 170 stores. Anybody who’s ever visited smaller German towns and cities knows these are often a focal point in central shopping districts. Now they’re at risk. Some already stand empty.

So while the pandemic may have accelerated the trend for fewer shoppers in town, it didn’t create it.

After all, the share of online apparel sales in Germany has been growing for years and German online giant Zalando has benefited from this. Around 40 percent of all sales of fashion and accessories are now made online in Germany.

Asked whether Germany’s apparel sector has perhaps fallen behind other European nations or is more conservative in some way, Reutlingen University’s Strähle doesn’t think so. “Germany is the largest clothing market on the European continent, with some tough barriers to entry, which makes local producers and retailers more cautious about questioning their business models,” he suggested. “If you want to try something different, it’s a big deal and a lot of money. So people are less likely to experiment.”

McKinsey’s Berg also pointed to how the sector as a whole has developed over the past 10 to 15 years. “If you look at the top line development of the industry over that period, it’s all flat at best, with 1 to 2 percent growth or decline most of the time,” he told WWD. “So the industry as such is not growing. This means if you want to be successful in this market and you want to grow, you need to grow at the expense of somebody else.”

In particular there is pressure on mid-price apparel, Berg noted, with categories like premium and affordable luxury eating into that market from the top, then value and discount clothing pushing into it from the bottom. Many of the big-name German insolvencies are from the midmarket category.

In other words, Berg argued, the German market is very competitive. “And I think the reality we have now is not coming by surprise. Apparently some players have not taken care of their homework when it was due.”

At the same time, this will open up opportunities in Germany, Berg argued. “There are always pockets of growth,” he concluded. “If you look at the last five years, you see how sports was one of those pockets, casualization was another, so were sneakers. So there is always something in fashion. And if you have that consolidation in German apparel, and there are some not very competitive formats and players that are exiting, that also creates opportunities for other players to gain market share or compete in that segment.”

For weeks, both sides have been wrangling over trademark infringement, false advertising, an implication of an alliance that did not exist and claims of counterfeit goods.

After weeks of testimony, the court battle between Chanel and What Goes Around Comes Around is nearing the end, with the jury expected to start deliberating Monday.

Chanel filed a lawsuit against the New York-based resale company in March 2018, alleging that there appeared to be an affiliation between the two fashion resources that did not exist and that Chanel had authenticated the pre-owned items sold at WGACA. The years-long dispute finally went to trial in a New York federal court last month with both sides disputing trademark infringement, false advertising, an implication of an alliance that did not exist, claims of counterfeit goods and other issues.

Unexpectedly, the defense made its closing argument Friday afternoon before the plaintiff did. Yale Galanter of Galanter Law in Miami reiterated his opening remarks, stating, “This is a case about David and Goliath,” and suggested that the $17 billion luxury brand with “thousands” of stores didn’t like that WGACA, a three-store operation, was growing and wanted to make a statement by going after the reseller. He also claimed that Chanel contacted Dillard’s, Gap, Banana Republic and Van Maur (all of which had fragrance and beauty deals with Chanel) “and told them to stop doing business with WGACA.”

Galanter said WGACA had shared its sales numbers, order numbers and stock keeping unit numbers with Chanel during the legal proceedings and that that had led to Chanel discovering some of its own discrepancies in relation to some of its serial numbers. The attorney suggested that “not a single person who would walk into this courthouse” would be confused about any association between the two companies, and how Chanel customers are “sophisticated.” He also referenced a transcript from a key witness, Joyce Green, managing director of Chanel France. When asked if she had come in contact with any information from a customer or retailer being confused since November 2020, Green had replied, “Nothing like that, no.”

The testimony of another central witness for Chanel, Chanel’s executive operations director Joseph Bravo, who traveled to New York for three court appearances, was also dissected by both sides. In his final appearance, Bravo recanted his prior testimony that had falsely claimed that a zipper on a Chanel handbag imprinted with the zipper manufacturer’s name Lampo was not genuine.

Bravo also suggested that the bag’s shape was irregular, and that the zipper slider, font size of a Chanel logo, the color of the bag and the stitching were not right. Galanter reminded the jury how Bravo had declined to measure the bag (with a wooden ruler), preferring to do so by eye.

Conversely, during Chanel’s closing argument, Dylan Price, a partner at Sheppard Mullin Richter & Hampton, alleged repeatedly that WGACA had sold counterfeit bags. He also told the jury that the issue at hand is the “likelihood of confusion.”

Price showed a transcript excerpt from a former WGACA employee who had testified about “Frankenstein” bags, a term used to refer to items with some authentic elements and some replaced features. He also mentioned how WGACA sold Chanel items that had been repaired, refurbished and repainted — and how if asked by a consumer, Chanel would not authenticate an item. Price suggested that such refurbishing is a common practice in Japan, where WGACA sources more than 80 percent of its handbags (based on WGACA chief executive officer Seth Weisser’s testimony).

Chanel’s policy of not authenticating goods was challenged by Galanter, who spoke of the gaining strength of the resale market. Galanter raised the point of where non-Chanel customers are to go for repairs, if they can’t go to Chanel. He also called into question Chanel’s policy of never offering discounts or sales of any kind and asked where all of its excess inventory goes.

Another matter that was hashed over involved WGACA’s use of Chanel display material and its purchase of 779 such items including plastic trays and tissue boxes. Chanel’s attorney Price referred to prior testimony by Chanel employees, which emphasized that those items are “props” and are never given away or sold, and that that constituted infringement. WGACA provided an invoice listing those items from the Hong Kong vendor that they had been purchased from, and suggested that those items may have been passed along by Chanel or store employees.

Price informed the jury that it will be seeking $4 million in statutory damages for willful trademark infringement. “The only way they are going to stop doing this is to send a message to them to stop.” He also disputed that the case was “a David and Goliath” situation, claiming that WGACA had grown from $30 million to $150 million in sales.

An attorney for Chanel spoke repeatedly about WGACA’s “willful” use of the Chanel trademark in print advertising, email blasts, social media posts — showing multiple examples of how old Chanel ads and runway shots were used by WGACA in its posts, as well as prints ads with “Chanel” being the prominent name — even larger than What Goes Around Comes Around — as well as examples of how the resale company has featured Chanel’s interlocking “Cs.”

In addition to alleging false advertising and a false association between the two companies, the Chanel attorney claimed that WGACA had sold counterfeit handbags that carried serial numbers that had been voided, after more than 30,000 were stolen from the Corti Renato factory in Milan. Chanel’s team has argued that the fact its internal Orli system, which is used to track the production, quality control and distribution of its handbags, only referenced that the serial numbers had been voided indicates that any merchandise with those numbers signals a counterfeit item. The Chanel attorney also alleged that the retailer had sold three of those bags, after Chanel had provided the serial numbers that had been stolen.

Throughout the trial, including during Friday’s closing argument and WGACA cofounder Weisser’s lengthy testimony in the days prior, the defense has said the case is not about serial numbers and is about handbags. Weisser said Thursday, “Chanel is in the serial numbers business. We’re in the product and handbag business.”

Whatever business either company specializes in, WGACA did comply with a pre-trial Chanel request made in a 2015 cease-and-desist letter to add a disclaimer to its landing page.

The trial is being watched closely by many executives in the fashion, licensing and resale industries, given the potential precedent it could set in relation to future litigation. Trademark infringement is just one of the sometimes nebulous topics that have been debated at length. What defines “counterfeit” and “vintage” were wrangled over. Justice Louis Stanton, who is presiding over the trial, referenced Thursday how in another case involving a luxury fashion brand, even the company’s in-house expert could not say for certain whether an item was genuine. He advised the jury, “There are extremes in everything. There is a possibility of extremes in all of these situations.”

Before dismissing the jury, Stanton suggested that they may have the case by noon on Monday and advised them not to discuss anything about the trial with anyone over the weekend.

Whatever the outcome, there have already been rumblings of an appeal by Chanel and Weisser, who has been in the courtroom every day. On Wednesday, Chanel’s in-house lead counsel Robin Gruber told WWD, “Chanel believes that we have put on a strong case. If the court’s decision is one we don’t agree with, we will bring it to an appeal.”

Rocket revolution threatens to undo decades of European unity on space

Starting gun has been fired on competition to determine the continent’s leading rocket-maker

French President Emmanuel Macron was in combative mood when he addressed aerospace executives and innovators in Toulouse. 

“We have fought for months saying European sovereignty is European unity. Unfortunately, some of our partners have decided to become competitors,” he told the December gathering in France’s aerospace capital. “So take note, we’re going to push very hard to be the best.”

With those words, Macron launched the race to find Europe’s future rocket-maker of choice, capable of propelling the biggest and most sensitive missions into space. As the sector finally opens up to competition, there are signs that 50 years of European collaboration on accessing space may be fragmenting.

“Everyone has lost sight of the final objective, which is a European programme,” warned Pierre Lionnet, director of research at trade body Eurospace.

For decades, France’s ArianeGroup and its predecessor companies have been the prime contractors for jointly funded development of Europe’s Ariane family of heavy launchers. Until 2017, Ariane dominated the global market for commercial launches into geostationary orbit — 36,000km above Earth.

However, delays in delivering Ariane 6, problems with the smaller Vega-C produced by Italy’s Avio and the breakdown of collaboration on Russia’s Soyuz medium-lift rocket have left Europe without its own launch capability. Instead the bloc has had to turn to Elon Musk’s SpaceX, even for sensitive missions.

Josef Aschbacher, director-general of the European Space Agency, has described the lack of launch capability as a “crisis” for Europe’s sovereign access to space.

Aschbacher has long argued for a model on the lines of US space agency Nasa, under which Europe would not procure rocket systems but instead buy flight services from European commercial launch companies.  

Last November his wish was granted. ESA member states decided to launch a competition for the next generation of rockets, initially for an intermediate launcher and then for a successor to Ariane 6. ArianeGroup, owned by France’s Airbus and Safran, will no longer be the guaranteed prime contractor.   

The demand for competition came from Germany, home to some of Europe’s most promising rocket start-ups. It was the price France had to pay for German backing on a €1bn European support package for Ariane 6. Without the subsidy, the expendable Ariane 6 would struggle to compete with SpaceX’s reusable Falcon 9.

“Ariane 6 should have been able to compete on the commercial market without any subsidy,” said Toni Tolker-Nielsen, ESA’s acting director of space transportation. “It did not deliver and now member states want us to change the system.”

As the deal on competition was struck, Italy’s Avio withdrew its small Vega launcher from Arianespace, the subsidiary of ArianeGroup that markets and manages all of Europe’s launches.

Avio objected to ArianeGroup’s plan to target Vega’s market with MaiaSpace, its small rocket start-up.

“How can we have a sales and marketing organisation that is building a competing product?” said Avio’s chief executive Giulio Ranzo. “If Ariane is going to be a competitor, you don’t want it to have information on your rocket.”

Officials from the ESA — which is independent of the EU but acts as its procurement agency, and includes non-EU countries such as the UK and Switzerland — said the aim was not to replace incumbents such as ArianeGroup or Avio, but to spur them to be more efficient.

“We wanted to give them an electroshock. We have done that. We have completely changed the paradigm of access to space,” said Tolker-Nielsen.

But individual ESA member states, like many countries, all want their own slice of the expanding space economy, forecast by Morgan Stanley to be worth $1tn by 2040. Launch capability is key: Europe has close to 20 start-ups developing micro-launchers and most have plans for larger rockets.

“We have to avoid this becoming a competition between nations,” said Tolker-Nielsen. “It is not going to be easy.”

Competition means ESA will also have to review the principle of georeturn, in which member states are allocated contracts proportional to their investment in a rocket programme. Critics say this results in a non-competitive supply chain, favouring the biggest rather then the most efficient investors. 

But abolishing the system was risky, said Lionnet. “With georeturn, programme managers know what their budget is and who the suppliers are,” he said. It would also be difficult for governments, which “would not know if they had to invest €20mn or €100mn”, he added.

However, Aschbacher hopes freeing launch providers to choose their own suppliers while delivering fair returns to member states will both lower mission costs and stimulate Europe’s commercial space sector.

Nasa contracts not only fuelled the rise of Elon Musk’s SpaceX, but its reusable rockets dramatically lowered launch costs, creating a vibrant US space industry.

“We looked into the US model and the lessons learned,” ESA’s director-general told the FT. “We will give industry the freedom to do it the best possible way from their point of view”.

Not everyone is convinced, however. Lori Garver, a former deputy administrator at Nasa, said the space agency’s strategic turn could be difficult to replicate. “We had a unique situation with the richest person in the world, where our strategy was aligned with what he wanted to do anyway,” she said. 

European rockets will have to compete not just with SpaceX’s Falcon 9, but with its giant Starship, which is expected to lift payloads of up to 150 tonnes into orbit when it finally becomes operational.

Most importantly, Europe could struggle to guarantee enough recurring demand to help bring down costs. The requirements of its projects, such as the Galileo navigation service, the planned IRIS² broadband constellation or scientific missions, are tiny in comparison with the US. “We don’t have a large volume of demand for launcher systems as the Americans do,” said Lionnet.

Space consultancy Euroconsult estimates European governments’ annual spending on space in 2022 — either through national programmes or ESA — was less than a third that of the US.

To succeed, member states would have to agree to pool their institutional launch needs to feed these European competitors, even if others might be cheaper. ESA tried to do this for years but had “not succeeded”, said Tolker-Nielsen.

Europe’s rocket start-ups welcome the competition, but some insist firmer signals are needed to convince investors. “ESA needs to act like real anchor clients,” said Ezequiel Sánchez, executive president at Spanish rocket company PLD Space, arguing that ESA should pursue a “full launch contract for missions”.

But pooling demand may be pointless if national interests prevail.

“Instead of trying to find a common solution which is best for everyone . . . some see this as an opportunity to build more on their own side,” said Eurospace’s Lionnet. “But there is no good national solution for European sovereignty in launch. Interdependency must be the rule.”

Veolia urges cutting red tape on permits to speed up renewable projects

French waste and water group is rolling out €250mn plan to install solar panels on closed landfills

The chief executive of French waste and water group Veolia has urged European governments to do more to cut red tape on permits to speed up renewable energy projects.

Estelle Brachlianoff made the plea as Veolia aims to produce 300 megawatts of electricity from solar panels mounted across its closed landfills in France, enough to power a town of 130,000 people, in its first large-scale attempt to reconvert the sites.

One of the obstacles to a rapid rollout of solar farms in France and elsewhere across Europe is finding land to install the panels.

Using the landfill sites Veolia already owns or operates is one solution, but a series of permits are still needed, from fauna and flora controls to construction authorisations.

Veolia’s solar plan for 40 different projects will cost about €250mn and is part of a €4bn investment the company is making to expand its energy activities as it doubles spending in the sector between now and 2030.

It also aims to bring financial partners — from local investors to banks — into the solar projects.

The speed at which permitting authorisations are granted means that Veolia’s solar panels could take four years to get connected to the power grid, which Brachlianoff said was too slow.

It was also penalising Europe at a time when clean energy subsidies through Joe Biden’s Inflation Reduction Act were helping US businesses, she added.

“Everyone is trying to do renewable energy as quickly as possible and we’re not asking for subsidies here,” Brachlianoff said in an interview.

“We’re not talking about sensitive sites in the middle of a city. So for me, this is a perfect example of how we might be able to figure things out so that we can move faster. As things stand today, you have to ask for different authorisations one after the other.”

Veolia, which traces its origins back to the 19th century as a water service company, makes roughly a quarter of its annual revenues from energy on sales that reached nearly €43bn in 2022. It is yet to publish results for the whole of last year.

Energy was Veolia’s fastest-growing division in the first half of 2023, a year after it completed its near €13bn acquisition of many of the activities of longtime French rival Suez following a bitter takeover battle. 

The group’s energy activities are largely aimed at using existing resources such as capturing excess heat from industrial processes or burning non-recyclable waste. 

Its focus on the sector is partly aimed at providing efficiency measures in buildings to save energy, which more and more companies are doing.

This fits with Brachlianoff’s plan to grow a market in utilising unused local energy reserves, including bioenergy and power produced from waste, which she said could provide up to 400 gigawatts of power in Europe as the region tries to become energy independent.

“That’s huge. It’s the equivalent to the energy demand of the whole of Italy. It’s a third of all European fossil fuel imports,” she said. 

“When public authorities ask us what we need to go faster (on energy), they expect us to say money. The answer is not money . . . it’s the rhythm, the authorisations, the delays,” she added. 

The group will use the electricity from the projects for its own plants and operations as well as offering it to other companies and local authorities. It already operates a standalone solar farm on a restored landfill site in Essex in Britain.