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High Stakes for High-end Goods

Forget about per capita GDP, median income or any other tool economists love to brandish around to show the wealth of a society. Only one thing matters to luxury good vendors: There are enough wealthy people around to make China one of the largest markets for high-end products.


Zheng Biao, general manager of Bentley China, which sells the British-made limousine, was surprised in 2003 when he sold 70 of the cars costing an average of a cool 2 million yuan (US$240,000) each, out of a global production of 200. Now, he takes this for granted.


"Last year, we sold three of the four ultra-luxury, 8.88 million yuan (US$1.07 million) Mulliners to buyers in China, in addition to relatively less exotic models," he remarks.


Despite persistent grumbles about the lack of suitably posh commercial space in major Chinese cities, luxury good vendors from around the world are flocking to Beijing, Shanghai and Guangzhou. Some astute shoppers have noted that there are even more luxury brands in Beijing than in Hong Kong, which has been considered the shopping paradise for many years in this part of the world.


Of course, only a tiny fraction of China's huge population can afford a Gucci bag or Prada shoes. But in China, as in other markets, such products are branded and priced exclusively for people who are willing to buy, well, an 8.88-million-yuan (US$1.07 million) car if they can afford it.


The large number of reports from government agencies, banks, marketing research companies and economic think tanks amply reflect the growing interest by foreign companies in tapping this slice of the Chinese market. Their studies have shown that not only is the number of wealthy people growing rapidly in China, but their willingness to spend on big-ticket items is also on the rise.


A recent survey by the National Bureau of Statistics (NBS) indicates that households with a combined annual income between 200,000 yuan (US$24,096) and 1 million yuan (US$120,000) account for 22 percent of the nation's entire urban population.


A Merrill Lynch/Capgemini report, published in October, 2003, puts the number of mainland millionaires at 236,000. Although the number is small compared to the United States, it is rising at an average annual rate of 12 percent, the report notes.


Morgan Stanley analyst Klarie Kent says in his survey published last November that the actual number of individuals who can afford some luxury spending is about 1 percent of the mainland population, or 13 million people, a number larger than the entire population of some European states. What is more, Kent expects the number of big-spenders in China will swell to more than 100 million in the near future.


That is a conservative estimate compared to the predictions of some other surveys. The China Association of Branding Strategy, a semi-official institution, says that the number of consumers in China's high-end market already exceeds 160 million, and it is expected to grow to 250 million in 2010.


"Clearly, China's luxury goods market is beginning to come of age," says Yue Zheng, an analyst of PricewaterhouseCoopers, one of the "big four" international accounting firms.


Its growth has been given a boost by the progressive reduction of tariffs on imported luxury goods since this year in accordance with China's commitments to the World Trade Organization (WTO).


For example, the 28 percent to 40 percent tariff that was levied on imported watches until the end of the year 2004, has dropped to 12.5 percent now and will be further reduced to 11 percent next year.


Luxury goods vendors are also finding that the demographic of the big-spenders in China is largely to their advantage. Surveys have shown that the vast majority of Chinese consumers of luxury products are aged between 20 and 40. They are considerably younger than those in the US and Europe, aged between their 40s and 70s.


Although younger does not mean richer, Chinese luxury goods buyers are willing to spend a greater proportion of their income on luxury goods than those in the United States and Europe because they are less concerned about savings for their old age, which they see as so far in the future that it does not concern them, says Yue, an accountant.


"The motto of relatively younger Chinese consumers seems to be, 'spend now and worry later'," says Yue. That has a major effect on their spending habits. They prefer to buy the most expensive items they can afford to suit their Yuppie lifestyle, Yue says.


And, of course, luxury good vendors know they are not just selling products. They are selling lifestyles through their careful branding. Come to think of it, many of the branded products are actually made in China at factories that also produce similar items in their millions for the global mass market.


Why would Pan Zhimin, a 24-year-old clerk at a management consultancy firm in Beijing, buy a handbag costing 12,000 yuan (US$1,446), or four times her monthly salary? "It fits the lifestyle of my dream," Pan answers.


But those who buy cars costing more than an average downtown apartment in Beijing are looking for trophies reflecting the lifestyle they are enjoying.


Maybe a Roll Royce does suit that purpose rather nicely.


"Chinese people have no qualms about rewarding themselves for their success. It's natural for them to show off their success," says Colin Kelly, Rolls Royce Asian region director. Rolls Royce was a British luxury car manufacturer that also owned Bentley until they were separately acquired by their respective new German owners.


Rolls Royce sells some 15 percent of its bespoke limousines in Asia, where Chinese mainland has outstripped both Japan and Hong Kong as the company's largest single market, accounting for 25 percent of the total.


"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 in 2003, but it still sold as well as expected," said Kelly.


Out of the 1,000 Phantoms made, 40 were sold in the Chinese mainland.


Kelly says that majority of their Chinese customers are successful business people. Most of them are entrepreneurs who set up their own businesses, he says.


Zhang Ping, a researcher at the Economic Research Institute affiliated to the Chinese Academy of Social Sciences, says that easy money from stock and property speculation has also contributed to the booming sales of luxury goods.


While enjoying the boom time, luxury goods vendors must face the nagging problem of pirating.


Valeria Azario, brand manager of V.S. Ltd of Italy, the owner of the Valentino brand, laments that there are many Valentino shops in China not selling any products made by his company. "What they sell are goods of inferior quality and workmanship to ours," he protests at a press conference.


The rub is that he cannot stop other people from naming their shops and branding their products Valentino, a common Italian name.


"The biggest obstacle for our business expansion in China is the lack of effective trademark protection," Azario says. "The major task for us is to deliver a clear message of our positioning to our customers and differentiate our brand from the many other Valentinos," he says.


China is sparing no efforts to establish effective laws to protect intellectual property rights and to step up the enforcement of such laws.


It is important for the luxury goods vendors to team up with the government and the media in the fight against the counterfeiters, retail industry sources say.


Another common problem facing luxury goods vendors in China is the lack of suitable shop space.


"There are just not enough shopping malls in mainland cities that are considered posh or up-market enough by the luxury brands," says a manager of Christian Dior in Beijing.


And the high-end malls that do exist in Shanghai and Beijing are failing to attract enough consumers. That can be improved by inviting more medium-end tenants to attract more ordinary shoppers. But "such a mix would send the wrong message about our brand," says the Dior manager.


"What we need is a central location, a first-class building with a tasteful design and quality management, a good cluster of luxury brands, a sound flow of traffic with a significant proportion of high-end market customers, and a well-developed mix of entertainment and dining possibilities like restaurants, cafes, bars and even cinemas," she says.


Complaints apart, Dior, as well as many luxury brands, seem most willing to compromise. In November 2003, Dior opened its third megastore in Shanghai comparable in size to the ones in Paris and Tokyo.


Meanwhile, the supply of up-market shopping malls is increasing, thanks partly to increased investment from overseas property developers, keen on cashing in on China's retail boom.


Singapore-based CapitaLand, Southeast Asia's largest property firm, is investing almost US$120 million in the construction and management of shopping malls in China.


As a result, luxurious and well-designed malls are expected to emerge in Shenzhen, the boomtown in South China's Guangdong Province.


"The operating model of real estate developer as the retail property manager is rather new on the Chinese mainland. But it has been proved to be efficient and professional in other developed regions," Lin Mingyan, the chief executive officer of CapitaLand China Holding says.


(China Daily January 27, 2005)


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