Gucci's $1,000 'Made in China' Sneakers Signal a New China Shock

Gucci is selling $1,000 sneakers that break with its 105-year Italian tradition, and the label inside reads Made in China. The fashion house did not cite cheap labor as the reason. It told Reuters it picked a Chinese manufacturer known for its "technological know-how" and ability to meet the brand's quality standards. Gucci will keep making its other products in Italy.

The move marks a broader shift: Chinese manufacturing has entered Europe's most storied industries, from high-end consumer goods to 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."

Economists including Torsten Slok, chief economist at Apollo Global Management, have dubbed this the second China Shock. The first wave, in the early 2000s, saw cheap Chinese clothes, furniture and electronics pour into Western markets. The current wave is different. China is exporting electric vehicles and industrial machinery that compete directly with Europe's established manufacturers, and its factories have gained the technical expertise to produce high-end goods for brands like Gucci — whose sales have halved in the last three years and whose parent company, Kering, has cut prices to cope with slow demand.

Howard Yu, a professor of management at Switzerland's International Institute for Management Development, said China is following the path of South Korea, Taiwan and Japan in moving from t-shirts and dupes to home appliances and higher-end cars — but "at an unprecedented scale."

Much of that know-how came from Europe itself, Yu said. Volkswagen has built cars in China since the 1980s and "essentially has trained up a generation of suppliers to meet Western standards." Now the students have become competitors. "The moment Chinese suppliers have enough capabilities, then you want to branch out to develop your own brands for better margins," Yu said.

The economics still favor China. Chinese manufacturing workers earned an average of $629 per month last year, compared with $1,341 in Taiwan and $2,075 in South Korea, according to a survey by Japan's trade agency.

Germany is losing the most

No European country feels the shift more than Germany, the continent's biggest economy and the world's fourth largest. Since 2019, the mix of goods China exports has increasingly resembled Germany's own: mostly factory machinery and cars. An analysis published by European Central Bank economists found this overlap grew more for Germany than for any other EU country.

China is also buying less from Germany. Last year, German exports to China fell 9.7% while imports from China rose 8.8%, according to Germany's statistics office, and Germany's trade deficit with China grew by a third. German car exports to China alone fell by a third.

"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 the case study. China once supplied half or more of the carmaker's profits, but its deliveries in China fell 36.6% in the second quarter. Mercedes-Benz, BMW and Porsche posted similar losses. Volkswagen has announced it will cut its model lineup by up to half and eliminate 100,000 jobs — the biggest restructuring in the company's 90-year history.

Chinese-owned carmakers are also advancing on European soil. They outsold Japanese brands in Europe for the first time in May, according to the European Automobile Manufacturers' Association. The EU has responded with its standard 10% car tariffs plus additional tariffs of up to 35.3% on Chinese-made electric vehicle batteries.

The transition to electric cars has erased Germany's biggest advantage, Yu said: the prestige earned on the internal combustion engine. "Now electric vehicles have changed the performance dimension towards battery and software, where China is extremely strong," he said.

An edge only at the top

Yu, who lives in Switzerland, draws the parallel to watches. In the 1970s, cheap and accurate Japanese quartz timepieces nearly wiped out the Swiss watch industry. The brands that survived, such as Omega, retreated to the top of the market and sold mechanical watches as luxury objects. The price was contraction: Swiss watch employment fell from about 90,000 at its 1960s peak to 30,000 by the mid-1980s.

Europe faces the same split as China competes on what was once its home turf, Yu said. Europe's moat "is now only sitting at the very top end, whereas the middle market has been all but chipped away."

That leaves mass-market carmakers without an escape route. "If you are in the mass market, such as Volkswagen, selling 9 million cars a year, you cannot retreat to the top end alone," Yu 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 pair an Italian brand with Chinese production. Volkswagen went further: in 2023 it paid $706 million for a nearly 5% stake in Chinese electric carmaker Xpeng and agreed to develop cars with it for the Chinese market. The teacher-student relationship has formally inverted — and Europe's next decade of industrial strategy will depend on how it adapts to that reversal.