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
consignment
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, 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
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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)

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