christie's market entry into china (usyd)

FRONTERE Noémie Consulting Report 15/06/2013

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Executive summary

The following report discusses the entry of the fine art and collectibles auctioneer Christie’s into the

Chinese market. Given the dominant position of China in today’s art market and the strong growth

prospective for auction revenues in the coming years, it concludes that the limited licensing

agreement struck with Forever International Auction Company is insufficient for Christie’s to fully

take advantage of the opportunities present in the market. It explains why a wholly owned

subsidiary is the most suitable entry mode at this stage.

It is also suggested that Christie’s should cultivate partnerships with local arts businesses that will

help build networks in the short term. Different types of non-equity joint ventures are suggested,

such as the co-foundation of institutes of art with universities and regular selling exhibitions on

behalf of local galleries.

In terms of its offering Christie’s should position itself as an adaptive differentiator and focus on

quality and reputation building to compete against local auctioneers. Enough autonomy should be

given to the Chinese salesroom for it to achieve high levels of responsiveness to its local context. The

subsidiary should work in the short term under supervision of Hong Kong but could become the

decision centre for Asia in the long term, once operations are scaled up.

Christie’s entry into China

15 June 2013


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Contents

Executive summary ............................................................................................................................................ 1

Introduction: the art market, the role of auction houses and a brief profile of Christie’s .................................... 3

Role of auction houses.................................................................................................................................... 3

Christie’s ......................................................................................................................................................... 4

1. China’s art market and the local auctions industry ..................................................................................... 5

1.1 Market, resources and country risks .................................................................................................. 5

1.2 Art auctioneers in China: state of the industry ................................................................................... 6

2. Analysis of Christie’s resources and capabilities ......................................................................................... 8

3. Suggested strategy to enter China.............................................................................................................. 8

3.1 Key objectives of Christie’s ................................................................................................................ 8

3.2 Appropriate entry mode and rationale .............................................................................................. 9

3.3 Non-equity joint ventures .................................................................................................................. 9

4. Post-entry strategy: adaptation and differentiation ................................................................................... 9

5. Organisation of the Chinese operations ................................................................................................... 10

5.1 Structure of Christie’s international operations ............................................................................... 10

5.2 Role of Christie’s China .................................................................................................................... 11

5.3 Representation of Christie’s network of salesrooms after the entry into China................................ 11

Conclusion and Recommendation .................................................................................................................... 11

References ....................................................................................................................................................... 12

Appendices ....................................................................................................................................................... 13

Word count: 3,553


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Introduction: the art market, the role of auction houses and a brief profile of Christie’s

The art market is the arena in which works of art are exchanged, either directly or through intermediaries

(dealers, agents). Two reasons are usually summoned to explain a purchase: aesthetics/connoisseurship and

investment. Appendix 1 sums up the structure and actors in the art market.

An important aspect of today’s art market is the levels of international participation. In the 1980s most high-

end art buyers were American or Japanese. Progressively, more and more collectors have emerged in Brazil,

the Middle East, and Russia in search of a social status (Choron 2012). The most important trend today is

the growing status of China. As formulated by a reference arts publication recently “2011 definitively

confirmed Chinese domination of the art market: with a more than 40% share of the global art market and six

out of the world’s top ten best-selling artists, China is now incontrovertibly the world’s leader” (Artprice 2012).

The following figure gives a breakdown of fine art auction sales revenues per country.

Figure 1: Fine Art auction sales revenue, 2011 breakdown by country (data from Artprice 2012)

Role of auction houses

The basic role of auction houses on the art market is similar to that of a stock exchange on the equities market:

they allow buyers and sellers to meet. Auction houses charge a commission on all transactions which ranges

from 2% to 20% according to the value of the piece (Christie’s 2013).

In economic terms, auction houses are institutions which make the art market more efficient by:

- Making it more liquid: they allow direct interaction between buyers and sellers, bypassing

intermediaries (dealers) and reducing transaction times and costs;

China 41%

USA 24%

UK 19%

France 5%

Germany 2%

Switzerland 1%

Italy 1%

Others 7%


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- Reducing information gaps by the means of catalogues and databases, and hiring experts who

recognise fakes and help establish reserve prices;

- Increasing the participation of both buyers and sellers: capturing greater media attention, widening

the asset pool (real estate, wine etc.) and the market by looking for sellers at an international level;

- Facilitating access to finance by advancing against sales and offering financing solutions for purchases.

Though the services rendered by auction houses are not enough for the art market to match the stock market

in terms of efficiency and transparency, they allow purchase of arts as an investing technique and thus further

increase participation in the market. According to Edward Dolman, CEO of Christie’s International: ‘people

increasingly see works of art as an asset, new clients are aware they are investing in an alternative asset class’

(CNN 2008).

Christie’s

Christie’s is one of the two major global auctioneers of authenticated fine art and collectibles. Together with

Sotheby’s Christie’s owns over 50% of the market for art auctions around the world. It declared sales of $6.23

billion in 2012, a record high in the history of the art market (Crow 2013). Art buyers are customers for

Christie’s. Given the increasing importance of advance against sales, the acceptance of property on

consignment1, and more reasons given further on, as well as for the sake of simplification, sellers will be

analysed as suppliers: without their works Christie’s cannot serve the previously defined customers.

Christie’s has activities in almost all major art centres (see Figure 2). New York and London are still its main

markets but Hong Kong has become a third stronghold. According to the situation of the art market previously

described, mainland China is of special interest to Christie’s and rival Sotheby’s. However up till now regulation

has restrained their ability to choose appropriate entry modes.

Figure 2: Christie’s international presence as of 2013.

Sotheby is already operating in mainland China (Beijing) in a partnership with Gehua Cultural Development

Group, a SOE. Christie’s has failed to find a partner so far and is not present in the mainland, though it has

1 In specific cases Christie’s will even guarantee to consignors a minimum sale price called ‘auction guarantee’. If the selling price is inferior to the guaranteed price, the company will fund the difference. .


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allowed the Beijing-based Forever International Auction Company to use its trademark (Kun 2012). In 2013 the

Chinese government announced it would grant licenses to international players like Christie’s to enter the

market through wholly owned subsidiaries, which was previously forbidden. This report thus presents a new

entry strategy for Christie’s in mainland China.

1. China’s art market and the local auctions industry

The following paragraph analyses the Chinese environment and the opportunities and challenges it offers to a

company like Christie’s.

1.1 Market, resources and country risks

Growth and size of the market

As said previously China is the biggest market for art auction revenues ($4.79 billion in 2011, growing at a rate

of 15%, Artprice 2012). The size of the auctions market is correlated to the size of the economy and the

increasing number of millionaires and billionaires (Figure 3).

2005 2006 2007 2008 2009 2010 2011

Chinese declared $ millionaires

472,000 509,000 620,000 782,000 825,000 875,000 1,262,000

Figure 3: The increase in Chinese dollar millionaires in the past five years; CAGR of 18% (source Bloomberg 2012)

The prospects of enduring economic growth and the rising number of wealthy Chinese people able to buy fine

art are very attractive for Christie’s which is confronted to a difficult situation in traditional US and European

markets, still recovering from the crisis. According to Xin Dong Cheng, Chairman of the Chinese galleries

association, government restrictions on the real estate sector and uncertainty on the stock exchange also fuel

Chinese investors’ interest in arts (De la Grange 2012).

Access to resources

Given the nature of Christie’s clientele one could wonder though why it is required to hold presence in China

directly (i.e. why geography is an important factor). It is part of the job of agents to travel around the globe

and acquire pieces worth more than a plane trip. Online and phone bids are also increasingly common.

However assuming that China can be served via Hong Kong would show misunderstanding of the

fundamentals of the fine art market which is – overall and in the long term – driven by offer rather than

demand. Demand for masterpieces is ongoing and not always easy to satisfy. Therefore the rationale for

Christie’s internationalisation is not really customers but access to resources, i.e. new works to sell.

A position in mainland China is a key to source new masterpieces to auction. Since Chinese art is on the rise, it

is paramount for Christie’s to build trust with local collectors and encourage them to sell the “treasures hidden

among their private collections” (Kun 2012). This can only be done through local presence. Another critical

resource available in China is skilled personnel. True Chinese art connoisseurs able to recognize fakes and set

reserve prices are an extremely scarce resource (Kun 2012). At the same time, Chinese university programs

dedicated to arts are getting worldwide recognition, for instance China's Central Academy of Fine Arts is

regularly among the best in global rankings. They are therefore key potential partners for Christie’s as sources

of skilled graduates whose wages are lower than in developed countries (De la Grange 2012).


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Ease of doing business

China is a challenging environment for Christie’s to operate in. Significant risk stems from lower standards of

banking and accounting which often do not permit a clear evaluation of a bidder’s financial condition. This has

caused numerous auctions in the Chinese art market to go unpaid (Esman 2012, Sotheby’s 2012).

Consequently the size of the auction market itself can be subject to manipulation and Christie’s might not be

able to provide auction guarantees to art sellers.

Given the recent rise of the art auction market, taxes and tariffs specific to arts, which are already high, could

also be redefined in a matter that is not favourable to the company.

Regulatory risk

Art auctioneers are submitted to a very wide set of regulations. Therefore the regulatory risk they are facing is

strong. The following table lists the main categories of laws a company like Christie’s has to abide by (based on

Sotheby’s Annual report 2012):

Type of laws Degree of country specificity Risk to Chinese operations

Auction businesses in general Medium High Import and export of works of art Medium High Antitrust Medium Low National cultural property preservation High High Privacy (for buyers and sellers) Low Medium Anti-money laundering Low Medium Copyright and resale royalty Low Medium General sales and marketing High Medium

Political and economic risks

Economic growth, currency rates and the performance of local financial markets have a strong influence on

the art market and therefore on Christie’s activities. Political conditions can also negatively affect the

company, particularly given its potential dependence on the license granted by the Chinese government.

These parameters should be closely monitored by Christie’s.

1.2 Art auctioneers in China: state of the industry

The following analysis follows Porter’s five forces structure.

Competition/rivalry:

Rivalry in the Chinese market is progressively heating up. As explained in the introduction, Christie’s global

competitor Sotheby's has recently (2012) entered the market through a joint venture with state-owned Gehua

Cultural Development Group (Sotheby’s 2013).

Three major Chinese players are also present on the mainland (all of them in Beijing), however they are quite

inexperienced compared to their Anglo-Saxon counterparts. The most reputable is arguably China Guardian,

established in 1993. The biggest is Poly Auctions, a member of the SOE Poly Group founded by the PLA and

ranked third globally (De la Grange 2012). Beijing Hanhai is ranked seventh globally. The reputation and

transparency of transactions in Chinese auction houses is questionable given the close ties to the political

sphere. Poly is thus named the “auction arm of the People’s Liberation Army” by local art lawyers (Esman

2012). These companies nurture international ambitions and have started to set up operations in Hong-Kong.


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Buyer’s bargaining power:

In general art auction houses rely on a rather limited number of clients with whom they tend to maintain good

relationships. The bargaining power of buyers is therefore quite high, in China as everywhere else around the

world. According to Christie's CEO Steven Murphy “new Asian collectors are maturing, so they are increasingly

chasing exceptional pieces rather than going on carefree shopping sprees” (Crow 2012). Therefore auction

houses are pressured to find works of great quality and authenticity.

Suppliers bargaining power:

Given that quality offer in art markets around the world is scarce, suppliers have strong power and Christie’s

has to provide them with special financial services and advances. This is especially true in China given Christie’s

situation as a new-comer with no strong pre-existent networks.

New entrants:

Christie’s and Sotheby’s being the only global auctioneers, there is little risk of foreign entrants once both will

have set foot in China. The risk of new Chinese players emerging is low because of the scarcity of resources

necessary to start such a business (high entry barriers).

Substitutes:

Art transactions can be made through art dealers (intermediaries) and directly between collectors (though in

that case authenticity is not guaranteed and information asymmetry may exist). As local art markets become

more transparent and sophisticated however, auctioneers play an increasing role especially for important

transactions. This should be the case of China therefore the risk of this kind of substitution is low.

Another substitute could be online art auctions which are on the rise (Artprice 2012). However Christie’s has

already invested heavily to develop its own online platform.

Summary of the five forces:

Suppliers, competitors and buyers are the strongest forces in the industry. However Christie’s can still hope for

high levels of profitability given that:

(1) China’s industry is not very dissimilar to other countries;

(2) Globally operating margins are high.

For instance Sotheby’s operating margins in 2010 and 2011 were respectively 35% and 33% (Annual report

2012).

Figure 4: Strength of the five forces in the Chinese arts auction industry.


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2. Analysis of Christie’s resources and capabilities

The following figure details Christie’s major resources and their impact on the company’s capabilities.

Figure 5: Key resources of Christie’s influence the formation of strong organisational capabilities. Time is also a factor to

explain certain capabilities: Christie’s has been operating since the early 1760s.

Among all capabilities, management of suppliers and customers relationships are arguably the biggest factors

in Christie’s successful focus on fine art. They involve resources which are valuable, rare, difficult to imitate

and therefore provides the firm with a major competitive advantage. The art market is highly relational. The

ability of employees to develop and maintain those relationships is crucial and recruitment is a key activity. As

expressed by Poly’s executive director Zhao Xu, "fine art is an extremely scarce resource, and auction talents

even more so" (Kun 2012). Reducing turnover allows Christie’s to retain legal, financial and artistic experts who

are necessary to its success.

Additional resources will need to be acquired once in China. Recognising fakes and selecting the right works

for Christie’s to promote and advertise can be difficult (especially it comes to contemporary art). As explained

in the following paragraph Christie’s should aim at getting stronger expertise in Chinese contemporary art by

hiring local talents. Works should also be sourced locally, and supplier networks established.

3. Suggested strategy to enter China

3.1 Key objectives of Christie’s

Entering mainland China should be an occasion for Christie’s to rebalance its activities according to the new

situation of the art market, which seems very favourable to emerging countries and China in particular.

Therefore market development is a major objective. Access to Chinese networks and resources (works of art

for sale) is also a strong incentive. The third objective should be to learn more about Chinese art pricing,

especially contemporary art, a field in which the locals seem to have an edge (Esman 2012).


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From a broader prospective an auction house, when independent, is an institution in the art market. Due to its

size, resources and reputation Christie’s has the ability to raise the standards of the local industry: make it

more efficient and transparent, less influenced by politics. This will have two consequences: a competitive

advantage over the domestic players which cannot aim for these levels of reputation and transparency and a

drastic increase in participation of buyers and sellers on the Chinese art market which will also impact

Christie’s other auction centres. In other words Christie’s status can enable the company to affect the industry

structure and profitability defined in part 1.2.

3.2 Appropriate entry mode and rationale

To achieve the objectives defined above the current partnership with Forever International Auction

Company is not satisfactory. Christie’s should aim for direct investment in China. The company has only three

solutions if it wants to achieve market penetration and access resources: a wholly owned subsidiary, an

acquisition or a joint venture.

Given that access to resources and trust building with local collectors will strongly influence Christie’s success

in China the best solution would be a partnership with a local auction house willing to share their personal

network. However the Chinese auction market is dominated by Guardian and Poly which are not suitable

partners for a joint venture because of political dependence, reputation and strategic misalignment. The other

Chinese auction houses are too small to be a good fit for Christie’s. For the same reasons, an acquisition

wouldn’t be suitable either.

Therefore the best entry mode is a wholly owned subsidiary. Given Christie’s presence in Hong Kong the

company should be able to navigate the local art networks quickly enough. It will build relationships and trust

through time and the right recruiting policies, and it will have better control of its Chinese activities than in the

case of a joint venture. Independence and reputation (i.e. its ‘institution’ status) will be preserved.

3.3 Non-equity joint ventures

To support the activities of the new wholly owned Chinese salesroom, Christie’s could also engage in various

partnerships and joint ventures with local art businesses (galleries, museums) and universities. These can

include co-foundation of institutes of art and regular selling exhibitions on behalf of galleries: Christie’s would

be in charge of authentication, secured transport and storage of art works while the gallery takes responsibility

for marketing targeted to connoisseurs and active members of the local artistic community.

Christie’s can also extend current partnerships with internationally recognised publications like the Financial

Times to China.

4. Post-entry strategy: adaptation and differentiation

A summary of Christie’s current international strategy is presented in Appendix 2.

According to Porter’s terminology, on the market for art auctions Christie’s is a broad global player and an

adaptive differentiator focusing on quality, reputation and adaptation of services to customers. The company

develops specific financing support and even acts as a private broker in some transactions (Christie’s 2013). In

contrast Chinese art auction houses like Guardian tend to perceive lower commissions on transactions but do

not provide Christie’s tailored services. They could thus be considered cost leaders.


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Given Christie’s core resources, capabilities and cost structure it is obvious that the company should maintain

its differentiated approach in China. Differentiation (political independence, quality and image) will be the key

to build trust relationships with suppliers and customers and compete against the locals.

The extent to which Christie’s will have to adapt its services according to Chinese specific regulations is difficult

to foresee. The Chinese art auctions business and licenses granted to foreign players are new and all rules are

not set yet. However Christie’s is already confronted to contexts where regulatory pressures condition the

delivery of certain services to customers. It has experience in dealing with challenging legislation and having to

refine its services. For instance, draconian laws to protect national patrimony in Europe (Colson 1989) or the

experience in Dubai (Christie’s 2013) have pushed the company to adapt and come up with new consignment

guarantees.

The pieces auctioned will also have certain specificities: the following figure highlights the demand from

Chinese customers that Christie’s will have to adapt to.

Figure 6: Comparison of auction lots sold in Asia and in the rest of the world, 2011 figures (source: Artprice 2012). The share

of drawings (or calligraphy) still differentiates Asia from other regions.

5. Organisation of the Chinese operations

5.1 Structure of Christie’s international operations

Christie’s has a decentralised structure that allows local and regional management to make decisions

concerning the nature of the pieces accepted (particularly the exclusion of fakes) and the actions to be taken

to form local networks of suppliers. New-York is the decision centre for the Americas, London for Europe and

Hong Kong for Asia. This structure is designed to be responsive to regional trends and the evolution of

legislation.

If Christie’s opens salesrooms in the major art centres in China (Beijing and Shanghai) those would work in

close collaboration and be supervised by Hong Kong in the short term. However, given that China is the leader

in the Asian art market decision marking could be progressively transferred from Hong Kong to the mainland.


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New internal challenges and tensions could arise from the development of the Chinese operations, which are

likely to overtake the American and British ones. This would be an unprecedented situation for the 250-year-

old company. Hong Kong alone is considered a third stronghold by Christie’s and Sotheby’s, but with $200

million sales in 2012 (Crow 2013) Christie’s Hong Kong was still far from dethroning the western centres.

5.2 Role of Christie’s China

It is important for Christie’s to establish global price databases and share knowledge between salesrooms.

Christie’s should thus be globally integrated as well as responsive to local context and Chinese trends (state of

the local art market, regulations etc.).

Following the framework of Jarillo and Martinez (1990), Christie’s China should be an active subsidiary with

some autonomy but strong links with sister subsidiaries. It could become a Centre of Excellences in the field of

Chinese art which is popular around the world – even in New York and London – and share specific insights in

prices and authentication of specific pieces with other subsidiaries.

As said previously Christie’s China could work with Christie’s Hong Kong due to their position inside the Asian

region however the Hong Kong market is different from the mainland market in many respects. Collectors in

Hong Kong are considered more ‘westernized’ in their tastes and dealings and less oriented towards Chinese

antiques (Esman 2012).

5.3 Representation of Christie’s network of salesrooms after the entry into China

Figure 7: Flows of knowledge and personnel between Christie’s different subsidiaries in the short and long term.

Conclusion and Recommendation

Christie’s is advised to seize the opportunity offered by the Chinese government and acquire a license to enter

the Chinese market through a wholly owned subsidiary. Mainland China is attractive to Christie’s because of

the size of the market and – more importantly – the presence of local resources and arts suppliers. The

company will have to face political and regulatory challenges however, and compete against local firms that

enjoy political support. Those risks should be monitored closely.

Christie’s should partner local arts businesses to build its buyers and suppliers networks in the short term and

use firm-specific resources to develop a competitive edge against local auctioneers. The Chinese subsidiary

should be provided with enough autonomy so it can adapt services to the specific needs of its Chinese

customers. Given the strong growth prospective of the market mainland China could host in the long term

Christie’s decision centre for Asia.


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References

B C L R h E N h J

Mai 2013 <http://www.bloomberg.com/news/2012-05-31/asian-millionaires-counter-lost-riches-in-

europe-north-america.html>

Choron-B x C F L é x hé Transcontinentales, 30

August, viewed 20 Mai 2013 <http://transcontinentales.revues.org/1312>

Ch www.christies.com>

CNN 8 Th : I h ? 4 h : y

video/news/2008/04/04/news.harlow.art.market.cnnmoney>

Colson, P. 1989, A story of Christie’s, London: Sampson Low, 1990

C K C N : P x P Wall Street Journal, 17 January

D G P y Ch à ' hé ' Le Figaro, 16 August 2012,

<www.lefigaro.fr/arts-expositions/2012/08/16/03015-20120816ARTFIG00405-poly-la-chine-a-l-

assaut-du-marche-de-l-art.php>

Esman Ch ' $ B F -- Wh I F Y Forbes, 13 August 2012

Hambrick, D. and Fredrickson, J. 2001, Are you sure you have a strategy? Academy of Management

Executive, no. 15, vol. 4, pp. 48-59

Jarillo, J. and Martinez, J. 99 Different Roles for Subsidiaries: The Case of Multinational Corporations in

Spain , Strategic Management Journal, no. 11, vol. 7, pp. 501–512.

Kun, Z. 2012 I h China Daily, 15 November 2012

S h y 2012, Annual Report 2011, viewed 20 Mai 2013 <http://investor.shareholder.com/ >

S h y 2013, Annual Report 2012, viewed 20 Mai 2013

<http://investor.shareholder.com/bid/annuals.cfm>


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Appendices

Appendix 1: Structure of the art market and role of auction firms

Appendix 2: A summary of Christie’s existing strategy through the diamond framework (Hambrick 2001)

christie's market entry into china (usyd)

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