Who, in your mind, are the typical consumers of luxury products in China?
Are they business people in clothes by French or Italian fashion designers? Do they work in office complexes in CBD (central business district) and are multilingual? Do they exercise daily and spend their leisure time in private business clubs? Do they spend month-long holidays in Europe?
Or are they private entrepreneurs, wearing Pierre Cardin suits with Hermes ties and straps and asking assistants, in Putonghua, for gold Rolex watches? Do they say: "Give me the most expensive one?"
They are all of the above. Consumption of luxury goods is so pervasive in China that the consumers compose a diverse group from youth to the middle-aged, from business executives and white-collar employees to the lowly educated, and from actors and actresses to the nouveau riche.
Huge market
Yang Qingshan, secretary-general of the China Association of Branding Strategy (CABS), a semi-official institute, says one-third of Chinese people spend money on luxury commodities including automobiles, high-end housing, watches, garments, handbags, accessories and cosmetics.
"Of course, many just buy some small articles now and then to demonstrate their highly fashionable and pre-eminent lifestyle," says Yang.
A survey conducted by Yang's association indicates the number of consumers of luxury items in China had swelled to a spectacular 160 million last year.
The size of this group is expected to grow to 250 million by 2010, taking the growth of the gross domestic product (GDP), the booming economy and surging disposable incomes into account.
A Merrill Lynch report indicates the Chinese mainland has at least 236,000 millionaires, about one-10th as many as in the United States. The figure, however, is rising about 12 per cent per year.
Klarie Kent, an analyst with Morgan Stanley, says the actual number of individuals who can afford to buy luxury goods is around 1 per cent of the mainland's population, or around 13 million. That figure could quickly rise to 100 million.
Those are just broad figures. As for the rich people who really want to buy luxury items all the time, the number is, understandably, much smaller.
A recent survey by the National Bureau of Statistics indicates China's urban households earning between 200,000 yuan (US$24,096) and more than 1 million yuan (US$120,000) per year make up 22 per cent of the nation's urban population. Those are the people who have the ability to consume luxury items occasionally.
"The market is about to take off, which will lead to the world's top brands storming into the virgin land," Yue Zheng, an analyst with Pricewater-house Coopers, tells China Business Weekly.
Mushrooming
Companies from LVMH, Fendi, Givenchy, Giorgio Armani and Tod's are rushing in to establish their presences in the Chinese mainland. They are putting down large sums of money to open glossy new shops full of logo-covered handbags, silk ties and diamond-encrusted watches.
"For the next three to four years, the Chinese mainland is an investment," says Diego Della Valle, president and chief executive of Italy-based leather goods maker Tod's.
The firm plans to open as many as 20 stores in the Chinese mainland by 2008.
John Hooks, Giorgio Armani's commercial director, told a luxury goods conference in Hong Kong last December: "We knew it was a long-term gamble."
Hooks said Armani's two high-profile stores in the mainland might make a profit within three years.
So far, about five luxury goods makers the most notable being handbag and clothes maker Louis Vuitton have managed to make money in the Chinese mainland. Louis Vuitton began investing in the mainland more than a decade ago.
LVMH, which owns Louis Vuitton and nearly 50 other luxury brands, ranging from Fendi to Moet Champagne, concedes it could take up to a generation to make significant profits in the region. But the potential, in China, for business profit is growing.
Famous cosmetics brands, such as Dior, Lancome and Shiseido, have already taken hold in China.
Last December, the world's third-largest Dior center opened in East China's Shanghai Municipality. The facility is third only in time sequence. Similar outlets previously opened in Paris and Tokyo.
Prior to its upgrade, the Shanghai Dior center was generating 11 million yuan (US$1.3 million) in annual sales. Management reportedly hopes that figure will exceed 15 million yuan (US$1.8 million).
Compared with the producers of small luxury items, international auto manufacturers have taken pre-emptive measures, as they started cashing in on the mainland's luxury market years ago.
The Chinese mainland has become the largest market in Asia-Pacific for the world's top luxury sedan producer.
Such enthusiasm of the wealthy Chinese people has surprised Zheng Biao, general manager of Bentley China.
Bentley, which produces about 2,000 units annually, sold 40 luxury sedans to China, the world's fastest-growing market, last year. That accounted for about 60 per cent of the firm's sales in the Asia-Pacific region.
"We built only four units of the top model Bentley last year globally. It was priced at 8.88 million yuan (US$1.07 million). Three were snapped up by Chinese billionaires," says Zheng, adding he hopes sales in mainland will rise to 60 this year.
Rolls-Royce, one of the world's super-luxury car producers, sells about 15 per cent of its limousines to Asian customers. The Chinese mainland has overtaken Hong Kong and Japan to become Rolls-Royce's top market where it sells 25 of the vehicles shipped to Asia in the Asia-Pacific.
"We launched the Phantom model, the most expensive car the 100-year-old company has ever produced, during the SARS (severe acute respiratory syndrome) outbreak. But it still sold as expected," says Colin Kelly, Rolls-Royce Asia director.
One thousand Phantoms, the centenary model of Rolls-Royce, have been sold worldwide. Nearly 40 have been bought by Chinese mainland consumers.
Motivations
Yue Zheng, an analyst with Pricewater-house Coopers, says Chinese consumers of luxury goods tend to be aged between their 20s and 40s, unlike the United States and European nations, where the consumers of luxury products are generally in their 40s to 70s.
"The consumers' ideology in China tends to be to enjoy what you can. They prefer to use their money to enjoy life," says Yue.
"However, many have to wrestle with choices from time to time: Which item to buy first."
Faced with the question why she spent 12,000 yuan (US$1,446) on a famous-brand handbag when her average monthly salary was 3,000 yuan (US$361.45), Pan Zhimin, a new, 24-year-old employee of a consulting company, says the answer was simple.
"It was a sign of the lifestyle I desire," she says.
"Chinese people have no qualms about rewarding themselves for their successes. It's natural for them to show off their successes," Kelly tells China Business Weekly.
Kelly says the majority of the firm's clients are successful businessmen, especially private entrepreneurs.
"The nouveau riche long for stamps to demonstrate their achievements. The extra luxurious cars might meet their desire," some media have opined.
Sources close to the super-luxury sedan brand have said the firm's customers also include people with secret backgrounds, who entrust others to buy the vehicles for them.
Kelly declines to comment on those clients. "It is our principle, and promise, to keep secrets for the clients, if they require."
Song Ping, a researcher with the Economic Research Institute, which is affiliated with the Chinese Academy of Social Sciences, tells China Business Weekly public money consumption, derived from corruption, is another stimulus boosting the consumption of luxury goods in China.
"Luxury articles, from high-end apartments and cars to handbags, watches and jewellery, are regarded as sweets to some governmental officials, which are more acceptable than cash," says Song.
Perplexing problems
At the end of last year, one attention-getting case in Beijing was V.S. Ltd, which represented Italian brand Valentino, which condemned the mushrooming growth of Valentino specialty stores in the Chinese capital.
Valeria Azario, brand manager of V.S. Ltd, says those stores have not been granted permission to operate the luxury brand's retailing business, and added the products were counterfeits.
So far, China has more than 200 Valentino brands, but only the Italy-based Valentino belongs to luxury brand.
"The biggest obstacle to expanding our business in China is the lack of effective trademark protection. The major task for us is to deliver a clear message of our positioning and differentiate our brand from other Valentinos," Azario says.
China is trying to establish a complete law system regarding intellectual property rights protection and to strengthen market supervision and inspection.
It is very important that the luxury brands team with government and media to combat counterfeiting and protect their interests, experts suggest.
(China Daily May 16, 2005)
