Luxury in China:Where Is It headed?

China tops the world in luxury spending, but is there room for the country’s budding homegrown brands? By Zhou Xiaoyan

After having lived in France for four years,Jiang Jianlong developed a propensity for luxury goods.

“My favorite brands include Lanvin, Prada,Dolce&Gabbana and Armani,” said Jiang, a 31-yearold private equity analyst in Beijing. “I buy luxury products for two reasons. First, they are of better quality and have classic designs. Second, what the brands represent makes it easier for me to mingle with my business partners, who bear a similar mindset toward luxury,” Jiang said.

Jiang purchases high-end clothes, watches and scarves. But the thirst for luxury in China extends to bigger toys like premium cars, yachts and private jets. With its newfound and growing wealth, an appetite for all things luxurious is the rage in the country.

A big market

Chinese shoppers have outstripped their U.S.counterparts as the world’s top spenders on luxury goods, according to the Luxury Goods China Market Study by Bain & Co., a leading global business consulting fi rm. About 25 percent of luxury purchases globally are now made by Chinese shoppers, versus the 20 percent by U.S. shoppers, according to Bain.

Chinese shoppers have become a core segment of the luxury market. A weaker Euro and better prices have pushed them to make 60 percent of their total luxury purchases abroad, according to Bain’s latest data. While luxury sales in the Greater China region cooled to 6 percent in 2012,top brands continue to outperform. The Greater China region has bypassed Japan as the sector’s second market, only behind the United States, said the company. Among Chinese shoppers, Louis Vuitton, Chanel and Gucci are the most sought out,according to the Bain survey of over 4,600 consumers.

“The Chinese consumer has increasingly become a global consumer for luxury brands,” said Bruno Lannes, a Bain partner in the Greater China region. “Changes in what Chinese shoppers want are now a central issue for the global luxury sector’s largest brands.”

China has a soaring luxury market at home.Even in 2009, when the financial crisis rattled the world, the sales volume of luxury products in the country saw a 16-percent year-on-year growth,said Xiong Xunlin, Deputy Secretary General of the China Chamber of International Commerce. “Sales volume of luxury products in China is expected to reach $27 billion by 2015, accounting for 20 percent of the global sales and becoming the world’s largest luxury market.”

The tremendous spending by the Chinese people globally is backed by a growing middle class and an expanding number of rich and wealthy.China had over 1.4 million multimillionaires by the end of 2012. Luxury consumption accounted for 35 percent of their private spending, according to a report released by Fortune Character magazine based in Shanghai.

“China has a rising number of rich people with strong consumption ability and desire. That’s why the country’s luxury market outperformed others amid a sluggish global economy, and why globally renowned luxury brands cashed in on the market,”said Zhou Ting, head of the research institution.

Max Magni, head of McKinsey & Co. consumer practice in the Greater China region, said that the growing middle class will be a pillar of future luxury consumption in the nation.

“A growing middle class in the country, with an annual disposable household income of between 50,000 yuan ($8,110) to 250,000 yuan ($40,550),will become the new buyers of luxury products. In the coming three years, over 40 billion yuan ($6.49 billion) will be spent on luxury consumption from those Chinese,” said Magni.

What do they buy?

Private jets are favored by China’s super rich.Back in 2011, famous Chinese comedian Zhao Benshan made headlines when he purchased a private jet worth 200 million yuan ($32.44 mil-lion). The Chinese mainland led the Asia-Pac ifi c region in possessing 187 business aircraft in 2012, up 103 percent from a decade ago, according to market researcher JetNet.

Rich Chinese also desire the sea. The market value of China’s yacht sector totaled 1.75 billion yuan ($283.9 million) in 2012. Italy and Britain are major exporters to China’s yacht market, according to Fortune Character’s China Yacht Report.

Premium cars are in high demand, too. Already the largest car market overall since 2009, China ranks second to the United States as the premium auto market. According to a report by McKinsey,1.25 million units of cars worth over 200,000 yuan($32,440) had been sold in China by the end of 2012. The premium auto market is likely to surpass that of the United States as early as 2016.

In 2012, Bentley sold 8,510 vehicles worldwide.Among the total, 2,253 were sold in China, the brand’s second largest market. A total of 73,347 units of Jaguar Land Rover were sold in China, surging 73 percent year on year, making China its top market.

Mark Bishop, Group Director of Jebsen & Co.(China) Ltd., one of the biggest dealers of Porsche in China, told Beijing Review that he is absolutely confident in China’s luxury car market despite a cooling of the economy last year.

As a luxury brand proudly labeled “Made in Germany,” Porsche entered the Chinese mainland market in 2001 to enormous success. A total of 31,205 Porsche cars were sold on the Chinese mainland, and in Hong Kong and Macao, surging 28.2 percent year on year in 2012.

“People buy luxury products because they are a sign of wealth and success. It’s not all about how you made the car. It’s about what it represents and what the badge on the front of the car means. We have invested tremendously in China and will continue to do that. I see nothing today that worries me in China,” said Bishop.

Room for local brands?

With such massive luxury market potential, can Chinese companies build up successful brands and snare a piece of the sector dominated by foreign players?

Some of them are heading in that direction.In November 2011, Chery Automobile, a Chinese auto company, announced a joint venture with Jaguar Land Rover to develop better-functioning engines. In 2010, Geely, a Chinese auto maker based in east China’s Zhejiang Province, bought 100-percent share in Sweden-based Volvo.

“It’s a good, brave and strong move for Geely,”Bishop told Beijing Review, adding that he believed in the future of Chinese homegrown luxury brands.“It’s unlikely that they will let go of this huge market,” he said. “It’s only a matter of time. Everything in China is a matter of time. They will get there.”

However, many are less optimistic.

Chinese luxury brands are far from winning the hearts and minds of those at home and abroad. A survey conducted by the Luxury Research Center with the Beijing-based University of International Business and Economics showed that about 68 percent of respondents think there is no possibility for China to have successful luxury brands. The research center conducted the survey with over 2,000 Chinese consumers who frequently purchase luxury goods.

Jiang, the Beijing-based private equity analyst,agreed.” Chinese people don’t recognize Chinamade products. The country has to turn around its image of ‘Made in China’ as a source of low-quality cheap goods,” adding that the system is not in place to truly cultivate and exploit young talented designers.

“Building up a luxury brand needs time,” he said. ■