In a market upswing, everyone’s a genius. “Only when the tide goes out,” Warren Buffett warned his fellow investors, “do you discover who’s been swimming naked.” The upswing of the Chinese market over the past three decades has been so perpetual, businesses in China seemed immune from global turbulence. That held true until the tide went out for Apple, which cut its sales forecasts for the first time in 17 years, citing the unforeseen “magnitude” of the economic slowdown in China.

But if the big West Coast tech company is feeling the squeeze, then Europe’s biggest luxury brands — Louis Vuitton, Gucci, Hermès, Burberry — must be bracing themselves for a long winter. This does not come without warning. In October, the French luxury goods conglomerate LVMH saw its share price decline, despite robust sales growth overall, when the Chinese showed the first signs of waning demand for high-end handbags. Collectively, luxury stocks are down by about 11 percent since the start of October, wiping out some $150 billion in combined market value.

When demand wanes, supply must shrink. In an industry shakeout, it’s survival of the fittest. Unfortunately, there are those, like me, who would say that luxury brands are not exactly well known for their operational excellence.

They have corporate headquarters full of brilliant designers who are determined to take on the fashion challenge of changing consumer tastes, only to find the sales organization battling against their brilliance because it makes no sense for the local market. Who’s right? Who knows? But it would be quite a miracle if it all works out for everyone.

This sort of tug of war seems fine for those familiar with the business of haute couture. But it’s the sort of nonsense that Jack Ma from Alibaba doesn’t allow. In 2013, Alibaba bought an 18 percent stake in Weibo, a Chinese microblogging website that is a combination of Facebook, Reddit, and Twitter, with a bit of YouTube and livestreaming thrown into the mix. Alibaba’s online shopping website (Taobao) has since integrated with Weibo, allowing merchants to “hang” dozens if not hundreds of new items on virtual racks. These merchants, who in turn are followed by their fanbase, curate pictures and stories of their lifestyle, aesthetics, and travel, not unlike Kim Kardashian, Jessica Simpson, or Bethenny Frankel. They explain to their fans how to pair a style with the rest of the wardrobe, give makeup tips, and provide in-depth descriptions of the stitching or detailing on apparel. At other times, these celebrities on Weibo talk about their feeling and worries and their personal relationship with “realness”.

A week or two before launching a sale, Weibo celebrities closely gauge interest in new items, such as by posting a shot at dinner wearing a new sweater. Fans discuss these items on display, debating between different styles, colors, and cuts. If a certain color is discussed more than expected, the brand can then produce a larger first batch; if fans ignore something, it may get dropped. Thanks to Alibaba’s automated supply chain infrastructure (Ruhan) and Chinese factories ranging from a single sewing machine in a small room off an alleyway to world-class manufacturing site that handle orders from Burberry and Louis Vuitton, merchants can make clothes in three to seven days, usually in small batches, with low marginal cost and exemplary quality.

That on-demand supply is also met by an AI-powered chatbot, AliMe, that Alibaba launched in 2016. Using a variety of machine-learning techniques from semantic comprehension, context dialogues, knowledge graphs, data mining, and deep learning, the chatbot learns about products within merchant webstores, is well versed in return policies, understands delivery costs and how to change an order or delivery destination, and can find solutions to resolve a customer’s inquiry and then execute them without human intervention. This lack of human action allows AliMe to shoulder more than 95 percent of customer questions on Alibaba’s Singles Day, which generates more than $30 billion in sales within a 24-hour period, surpassing US Black Friday and Cyber Monday sales by a wide margin.

“The future is already here. It’s just not evenly distributed yet,” wrote novelist William Gibson. In this future of retail and branding, European luxury brands have fallen behind, because the new generation of consumers expects well-curated product personas across all social media channels with spontaneous user engagement. Meanwhile, the squeeze of tighter economic conditions requires an agile supply chain that can quickly pivot with emerging consumer preferences. Above all, Alibaba’s operation relies on data analytics and advanced automation, without human meddling in the name of “expert judgment”. This amounts to a radical leap for the fashion industry into a new knowledge frontier.

In my book LEAP: How to Thrive In a World When Everything Can Be Copied, I documented how Steinway & Sons, the best piano maker in the world, relied on timely craftmanship to build pianos that Arthur Rubinstein and Lang Lang desired. However, Steinway saw its sales decline from 6,000 pianos a year in the 1960s to some 2,000 in 2012. The company was forced to auction off many of the historic buildings that had once been part of the Steinway Village in northern Astoria, Queens. The original campus was reduced to one gritty red-brick factory at the end of Steinway Street.

A poignant story, perhaps. But it doesn’t need to be this way. Through five principles — including “leveraging seismic shifts” and “experimenting to gain evidence” — pioneering companies can in fact thrive if they are prepared to rethink the way they do business. Being best at what you do has never been enough. Being best at something different — over and over — is key to flourishing over generations.

The author is professor of Management at IMD Business School in Switzerland. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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