Gucci built its luxury reputation on Italian craftsmanship, but its newest $1,000 sneakers break with its 105-year-old tradition with a new label: Made in China. But instead of citing the cheap labor long associated with Chinese factories, the fashion house said it picked a Chinese manufacturer known for its “technological know-how” and ability to meet the brand’s quality standards.
Gucci told Reuters it will keep making its other products in Italy. But unlike the connotation a “Made in China” sticker carried from days of yore, the move to China is the latest signal of Chinese manufacturing moving into Europe’s most storied industries, like high-end consumer goods and cars.
“I think symbolically, China has arrived,” Ker Gibbs, former president of the American Chamber of Commerce in Shanghai, told Fortune. “It’s no longer a place where only cheap stuff gets manufactured and poor quality this and that.”
The shift is part of what some economists, like Apollo Global Management chief economist Torsten Slok, have dubbed the second China Shock. Cheap clothes, furniture, and electronics made in China poured into Western markets in the first wave in the early 2000s. Now, China is exporting electric vehicles and industrial machinery that compete with Europe’s established manufacturers, while its factories have gained the technical expertise to produce high-end goods for luxury brands like Gucci, whose sales have halved in the last three years and whose parent company Kering cut prices to deal with slow demand.
Howard Yu, a professor of management at Switzerland’s International Institute for Management Development, told Fortune China is following the path of South Korea, Taiwan, and Japan in moving from t-shirts and dupes of name brand items to home appliances and higher-end cars and products “at an unprecedented scale.”
Yu said much of China’s know-how came from Europe. Volkswagen, for example, built cars in China since the 1980s, and “essentially has trained up a generation of suppliers to meet Western standards.”
“The moment Chinese suppliers have enough capabilities, then you want to branch out to develop your own brands for better margins,” Yu said.
That has left European companies in an awkward position as Chinese manufacturers move away from being suppliers to being competitors. But it still remains cheaper to make things in China than in Europe and East Asia. Chinese manufacturing workers earned $629 per month on average last year compared to $1,341 in Taiwan and $2,075 in South Korea, according to a survey by Japan’s trade agency.
Germany’s industrial giants are losing ground
No European country has felt this shift more than Germany, the continent’s biggest economy and the fourth largest in the world. Since 2019, the mix of goods China exports to other countries has started to resemble Germany’s: mostly factory machinery and cars. This overlap grew more for Germany than any other EU country, according to an analysis published by European Central Bank economists earlier this week.
At the same time, China is also buying less from Germany. Last year, German exports to China fell 9.7% and imports from China rose 8.8%, according to Germany’s statistics office, with Germany’s trade deficit with China growing by a third. German car exports to China alone fell by a third last year.
“China has already eaten much of [the] German industry’s lunch and is preparing to start on dinner,” economists Brad Setser and Sander Tordoir wrote in May.
Volkswagen is a case study in how China’s manufacturing capacity has challenged Germany. China once supplied half or more of Volkswagen’s profits, but now the carmaker’s deliveries in China fell 36.6% in the second quarter. Peers Mercedes-Benz, BMW and Porsche posted similar losses. Volkswagen also announced it would cut its model lineup by up to half and cut 100,000 jobs—the biggest restructuring in the company’s 90-year history.
Chinese-owned carmakers are also gaining in Europe, where they outsold Japanese brands for the first time in May, according to the European Automobile Manufacturers’ Association. The EU has tried to protect its automakers with 10% standard car tariffs and then slapped on additional tariffs of up to 35.3% on Chinese-made electric vehicle batteries.
Yu said the shift to electric cars also erased Germany’s biggest advantage: the prestige it earned on the internal combustion engine.
“Now electric vehicles have changed the performance dimension towards battery and software, where China is extremely strong,” Yu said.
An edge only at the top
Yu lives in Switzerland, so when he thinks about what will come next for Europe’s carmakers, he thinks about watches.
In the 1970s, cheap and accurate quartz watches from Japan nearly wiped out the Swiss watch industry. Yu said the brands that survived, such as Omega, retreated to the top of the market and sold mechanical watches as luxury objects. But the industry had to shrink to make it. The number of Swiss watch employees fell from about 90,000 in its 1960s peak to 30,000 employees working in watch businesses by the mid-1980s.
He said the same split could be what’s ahead for Europe as China competes in the areas that were once its home turf. Europe’s moat “is now only sitting at the very top end, whereas the middle market has been all but chipped away,” he said.
That leaves mass-market carmakers like Volkswagen with no easy way out.
“If you are in the mass market, such as Volkswagen, selling 9 million cars a year, you cannot retreat to the top end alone,” he said. “The whole enterprise cannot survive on such a small volume, like Ferrari.”
Instead, European companies are turning to the Chinese manufacturers that once learned from them. Gucci’s Drip sneakers fit that pattern by pairing an Italian brand with Chinese know-how. Volkswagen has started, too. In 2023, it paid $706 million for a nearly 5% stake in Chinese electric carmaker Xpeng and agreed to develop cars with it for China.
