Little 1

Tim Little

INTS 4750

Research Paper

The Chinese Luxury Goods Market

As recently as forty years ago, the fashion landscape in China was dominated by a variety
of blue and grey Mao suits. Conspicuous spending of wealth was not only frowned upon but
during the Cultural Revolution could have been a death sentence. With Mao’s death came a new
era in China spearheaded my Deng Xiaoping and his immortal words, “to grow rich is glorious!”
Not only did people no longer have to hide their success, but they were encouraged to strive for
it. Intentional or not, with this new path came an explosion in individualism. People yearned to
break free of the drab clothing and belongings that were so characteristic of communism. Now
people had the opportunity to dress the way they wanted without fear or criticism and flaunt the
wealth that many would soon have with new business opportunities. The luxury brands of the
world were not blind to these historic happenings and their implications for the future. The most
populous country in the world was coming into its own again and was virtually an untapped
market. That market continues to grow today and then like now, there are important questions
that need to be answered in catering to the Chinese market. Those questions include; what does
“luxury” mean to the Chinese people, who is the target consumer, what can historical trends tell
us, what are they buying now, and what does the future hold? I intend to answer these questions
so that one may better understand the Chinese luxury goods market. These are the facts that can
shape the China business strategy of luxury brands and determine their success or failure.

What Does “Luxury” Mean to the Chinese People?

Before we can understand who the consumer of luxury goods in China, we must first
understand how the Chinese define luxury. Central to that understanding is moving far beyond
its literal definition and identifying the deeper cultural perceptions. The Chinese word for luxury
is shēchǐ. Broken down shē translates to extravagant and chǐ translates to extravagant or
wasteful. 1It may not be apparent at first from a Western cultural context, but both words have
rather negative cultural implications. The reason for this is China’s strong Confucian values
which still exist today although arguably in varying degrees. In fact, the social doctrines of
Confucianism, Taoism, and Buddhism have taught that life should have no impetuosity, no
1
Lau, J. "Mandarin- English word dictionary." yellowbridge. 2010.
<http://www.yellowbridge.com/chinese/wordsearch.php?
searchMode=I&characterMode=t&dialect=M&word=17315>.
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arrogance and no showing off.2 These values are still touted today creating challenges for those
who market luxury goods. Luckily for them there are other strong cultural forces at work such as
the concept of face and honor which can actually work in their favor.

Face can best be described as Western terms as honor. By embarrassing someone in

public for example, you cause them to lose face. Like honor, face is something that can be gained
as well as lost. Americans specifically are more familiar with this concept then they may realize.
For decades we have heard the phrase, “Keeping up with the Joneses”. If my neighbor gets a new
car how can I possibly pull my clunker into the driveway everyday and still look him in the face.
He and everyone else would surely look at me as less successful. This is the best approximation
of face in an American context. It is true as well in China, especially with the expansion of
opportunities, that a social contest is taking place. For some it may be buying $200 bottle service
at a bar where for others it may be having the newest Gucci bag. Both are indicative of a desire
to be perceived not necessarily as rich but at least as successful as the company they keep. This
in and of itself may be enough to overcome the obstacle of the aforementioned contrary values.
This is also not to say that there are not those who simply want to show off their wealth, but I
would argue they are currently in the minority. As a consumer segment they will be further
examined in the next section.

The honor aspect is similar but is more rooted in the traditional Confucian values. Filial
piety is extremely important and in general the desire to bring honor on to one’s family. Contrary
to American individualism, children in China are representative of their parents. If the child
becomes successful, he brings great honor to their family and its name. The man driving the
Porsche Cayenne around Guangzhou is not simply making a statement about his own success but
stands as evidence when his parents proudly (but in humble Chinese fashion) proclaim his
accomplishments. In more practical terms it also shows that he has the means to take care of his
aging parents as is expected of him.

Understanding the cultural implications, we can now better understand the motivations
behind the Chinese consumer in how they define and identify luxury goods. This will be
imperative in catering goods to the Chinese market. It should not be too surprising that the views
of the Chinese don’t differ greatly when it comes to what defines luxury. In surveys which have
been conducted, there were six overarching characteristics that come to the surface. They are
excellent quality, very high price, scarcity/uniqueness, aesthetic and emotional content, brand
history and heritage, and the fact that they are inessential/superfluous. Lu, in his book Elite
China, makes the argument that three uniquely Asian characteristics should also be included;
conspicuousness, display, and “dream value”. 3 He goes into great detail describing each

2
Lu, Pierre Xiao. Elite China :Luxury Consumer Behavior in China. Singapore; Hoboken, NJ: John Wiley & Sons Asia,
2008. P26

3
Lu, Pierre Xiao. Elite China :Luxury Consumer Behavior in China. Singapore; Hoboken, NJ: John Wiley & Sons Asia,
2008. P20-1
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characteristic and explaining its relationship within the Chinese context. While such depth is
beyond the scope of this paper, I do think it is important to at least touch on two of the uniquely
Asian characteristics, conspicuous and “dream value”.

As discussed earlier, conspicuousness while shunned by traditional Chinese values

became a vehicle by rich the Chinese nouveau riche could make their presence known. While not
common due simply to the lack of wealthy Chinese in the recent past, conspicuousness seems to
be gaining increasing social acceptance especially among the younger generation. My own
experience has shown me that they have no reservations about wearing sequined shirts with the
word ARMANI prominently displayed along with their oversized Gucci sunglasses. The “dream
value” refers to purchasing those items which represent the success they aspire to. To better
conceptualize this we could look to the phrase, “In order to make a million bucks you first have
to look like a million bucks” or more simply, “dress the part”. Here a middle class Chinese
manager may several months’ worth of salary in order to purchase a Rolex watch, not to impress
anyone, but more as a promise to himself of what he will accomplish and who he will become.

Who is the Luxury Goods Consumer in China?

Contrary to what some might believe, luxury goods are nothing new to the Chinese. In
fact the history of luxury goods in China goes back further than that of Europe and much of the
world. Since the beginning of Chinese society, there have been those items which were reserved
for the elite. There was a time in China’s history when the purchase of luxury goods was strictly
regulated based on ones position in society. In theory (although not in practice) during Mao’s
tenure as the Communist leader, all were equal and the rich were in fact vilified. During the
Cultural Revolution many of those who were thought to be even the vaguely wealthy by Chinese
standards were stripped of their property, publicly humiliated, and in some cases killed. Needless
to say, the only ones who could safely be consumers of luxury goods were the top Party
leadership. As we are all aware, the picture in China could not be different now. With over
450,000 millionaires, China has catapulted itself into the position of the world’s second-largest
market for luxury goods.4

In order to successfully capture the Chinese consumer, luxury brands must know who to
target. Ferrari isn’t going to advertise in a fashion which targets the general population. A Ferrari
poster on the subway train will be of little utility considering the chances of someone who can
afford a Ferrari riding the subway are rather minute. This means that their advertising has to be
laser focused, both in audience and content. In order to do this the current demographics of
China must be clearly understood. From the demographic point of view, the overwhelming
majority or over 90% of the affluent urban Chinese are below the age of 40. Some 62% of them
are between 25 and 34 years old, and another 23% are between 35 and 34 years old. In surveys
done to see percentage of disposable income respondents intended on spending on luxury goods,
4
DEGEN, R. J. "Opportunity for Luxury Brands in China." Working Papers (2009).p5
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the largest percentage was claimed by those ages 30-39. Of this group, 17% said they would
spend more than 20,000RMB. The group of 40-49 year olds actually came up with the lowest
percentage in the +20,000RMB category.5 This actually stands to reason since the economic
reigns weren’t loosened until after 1978 and therefore the 30-39 year olds were essentially the
first generation to fully flex their entrepreneurial muscle. The younger generation of 20-29 year
olds, if trends continue, will far surpass the previous generations in terms of wealth and with
their greater propensity of conspicuous consumption, it can be expected that these number will
be very different in a decade.

What Can Historical Trends Tell Us?

It should be noted that as recently as 5 years ago, China was only the third-largest luxury
goods market with 300,000 millionaires. Today there are more than 450,000. Even more
staggering than those figures are the numbers on billionaires. In 2006 China had just 15
billionaires. Today that number has surged to over 18,000!6 The speed in this growth of wealth is
almost incomprehensible. This is just one indication of the growing potential for the luxury
goods market. While there may be advantages to getting in early, one can hardly make the
argument that it is saturated given the current rate of growth.

Factors originating outside China have had a significant impact on the luxury goods
market as well. Take the economic collapse/downturn, whatever negative adjective you use to
describe the event of 2008. In 2007 China was still only the second-largest luxury goods market,
right behind the U.S. By 2009 China had overtake the U.S. and while I won’t present empirical
evidence to support a causal relationship, I think it can be reasonably assumed that it is no
coincidence. China escaped relatively unscathed from the “global” economic crisis, continuing to
see economic growth in excess of 8% for years 2008 and 2009. Compare that to the U.S. who
had a growth rate of approximately 2% and watched it fall even lower in 2009. 7 It would be
foolish for luxury brands not to take notice of these facts and consider the implications. Already
they have seen luxury sales slow in the West and economically speaking, countries like the US
are still not out of the proverbial woods yet. Unemployment continues to grow and not only for
blue collar workers. This can be perceived as a continued loss of potential customers where as in
China the numbers have not stopped growing.

What Are They Buying Now?

Within China you can now find virtually any luxury goods from $1,000 Mont Blanc pens
to the $5,000 Hermes bag to put it in. But what are the most well known and presumably most
5
DEGEN, R. J. "Opportunity for Luxury Brands in China." Working Papers (2009).p14
6
DEGEN, R. J. "Opportunity for Luxury Brands in China." Working Papers (2009).p1
7
"United States GDP - real growth rate." September 17, 2009 2009. CIA world Fact Book.
<http://www.indexmundi.com/united_states/gdp_real_growth_rate.html>.
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purchased brands? Luxury business portal the Hurun Report has released the results of its newest
“Best of the Best” survey, which surveyed 383 Mainland Chinese millionaires, each with assets
of at least RMB 10 million (USD1.5 million). Following last year’s list, Giorgio Armani remains
“Best Fashion Label,” the Bentley Continental maintains its crown as “Best Super Luxury Car
for Self-Drive,” and Patek Philippe remains “Best Overall Watch.” 8 Interesting to note in this list
is the position Patek Phillippe when brands such as Rolex have been in the area much longer.
This should stand as a sign to those super premium brands who may think they are too late to the
China game that there is still hope. Even success can bring its own pitfalls in the luxury market.
An article on the survey mentions the drop of Mercedes Benz four spots in the “Overall Top 10
List” and make presumptions that is could be caused by their increased sales and therefore
reduction in exclusivity. While this obviously can’t be proven (without another survey), it does
seem to be a logical argument.
Considering their significant difficulties as of late in the rest of the world market, I think
it is worth making special note of the luxury car market in China. As a whole, the Chinese
market as of the end of 2009, China became the world’s largest car market, overtaking the US.
This is ironic considering two years ago J.D. Power predicted China would pass the U.S. in
2025.9
This is just one example of how even with seemingly optimistic forecasting; many of them have
fallen dramatically short of China’s amazing growth. Perhaps a more relevant example for our
purposes is this; British carmaker Bentley sells more Mulliner 728 limousines, the world’s most
expensive car at US$1.2 million each, in Beijing than in any other city in the world.10

The difference in the presence of luxury vehicles over the past decade is readily apparent
even to an automotive layman such as myself. When I first visited China in 2001 there were
luxury cars and what seemed to me, an overwhelming number of bicycles. When I returned in
2008 the picture was very different. Then living in Dalian, a modest city (by Chinese standards)
of six million, I could not understand how there were so many Audi A6. I would find out later
that Audi had built a plant in China and won the contract to be the official car of the government.
Of course not only government members were driving them. In an effort to appear powerful by
association, many people had gone on to buy Audi A6s as well. Because of the plants that have
been established there, brands like Audi and Volkswagen are hardly considered foreign cars by
the Chinese. The implications for having a plant in China extend far beyond being able to pass
moderate savings on to the consumer. In fact, it quite literally cuts the cost in half. So the next
time you’re in Shanghai and you see someone cruising around in the new Ferrari California

8
UNK. "Cartier, Bentley, Patek Philippe Among Chinese Millionaires’ Favorites On New Hurun
List." JingDaily. January 14, 2010 2010. <http://www.jingdaily.com/en/luxury/cartier-bentley-patek-philippe-
among-chinese-millionaires-favorites-on-new-list/>.
9
Krisher, Tom. "Chinese car market the biggest, first time ever that U.S. market not No. 1." The Associated
Press. November 12, 2009 2009. Autonet.ca. <http://www.autonet.ca/autos/news/2009/12/10/12113506-
ap.html>.
10
Schwartz, Brian, and Vanessa Wong. "Money Talks." Amcham Study on Luxury (2006).
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convertible which boasts a $244,000 base price, it will be all the more impressive knowing that
the driver likely paid close to half million dollars for it. The reason for this is the strict luxury tax
that the Chinese government imposes as well as taxes and fees needed for obtaining license
plates. While perhaps constraining sales from increasing at an even faster pace, it also have the
effect of increasing the exclusivity of having such a vehicle.

Challenges for the Luxury Goods Market

As has been already been shown, there are tremendous opportunities both now and
certainly in the future for the luxury goods market within China. With the fastest GDP growth in
the world as well as its largest population, the long term potential for consumers even for the
most elite brands seems virtually limitless. Despite all the optimistic rhetoric, it should not be
assumed that there are not hazards to be encountered. As discussed earlier, China has significant
luxury taxes of up to 40%. While this may not be a deterrent for someone set on buying a high
end imported car, due simply to lack of options, with smaller goods such as jewelry, handbags,
etc. this is simply not the case. It is not uncommon for Chinese buyers to put off buying those
luxury goods until they go on a vacation or even a quick trip to Hong Kong where everything
will be duty free. This trend is likely to continue as travel restrictions are loosened further. One
could imagine a point at which Chinese consumers regard going to high end shops as little more
than window shopping; an opportunity to test out and decide but not pay outrageous taxes.

Another option for the aforementioned window shoppers is to simply buy the items on
line. It is still not entirely common for Chinese to have a credit or debit card but it is becoming
increasingly more so and it can be assumed that the wealthy elite would be more likely to have
one. Such trends have not gone unnoticed by the Chinese government. There is talk of a 10%
reduction in the luxury tariffs. According to the International Finance News, “The Ministry of
Commerce is drafting a motion to lower China’s tariffs imposed on luxury import goods in an
effort to boost sales revenue of the country’s luxury market”11.Such a move would clearly benefit
those retailers which already have a presence in China.
The other challenge for luxury retails which would be evident to anyone who has been to
China is the proliferance of counterfeit goods. The government has made a serious effort to and
has made some headway but there is still much work to be done. I would make the argument that
counterfeit luxury items do not hurt the brands themselves as much as one might think. Those
who buy authentic luxury goods and those who would be willing to buy counterfeits are clearly
two different consumer groups. The Chinese do love a deal, but as discussed earlier, the quality,
price, and very nature of counterfeits go against what the luxury consumer is looking for. If that
logic stands, then the person who buys a counterfeit good had no intention of buying the real
thing anyways and is therefore not creating a loss to the brand by buying the counterfeit good.

11
"China May Lower Luxury Tariffs by 10%: What will it mean for high-end consumption?" JingDaily. Novermber 5,
2009 2009. <http://www.jingdaily.com/en/luxury/china-may-lower-luxury-tariffs-by-10-what-will-it-mean-for-high-
end-consumption/>.
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This example aside, China will be able to entice higher end brands to jump into their market with
improved protection of intellectual property rights.

Another hurdle that the Chinese market needs to overcome is the lack of sophisticated
customer service. If paying premium prices, once expects to be treated like royalty and rightfully
so as it is part of the experience. Although it is improving, customer service is still not a strong
suite in China. Many have linked this to the perception on the part of employees. They are said to
see the position they are in as merely temporary and not as a respectable career choice. This is in
direct contract to their counterparts in the West. The perception of Chinese employees is likely
only exacerbated but the great divide their own income and that of their customers. As such, the
solutions to these customer service issues may be the raising of employee wages and increased
training on customer service expectations for the elite customers. It may pose an upfront
investment but with the long term potential in consumer growth, it is likely to pay off
handsomely.

Conclusion

As we’ve seen, the Chinese market is rife with both opportunity and pitfalls for luxury
brands that are well established in China as well as those eager to break in. While the majority of
Chinese are poor by Western standards, wealth is growing exponentially. That wealth remains
concentrated in the East regionally speaking and urban areas more specifically. This leaves
brands with the dilemma of entering what is quickly becoming a crowded market in affluent tier
1 or 2 cities like Beijing and Dalian, or betting on the future and moving into less affluent but
quickly growing tier 3 and even 4 cities. Of primary importance for the luxury brands is to do
their homework and understand the qualities their customers are looking for. These attitudes may
vary slightly by region and age so they should never assume what works in the south will work
in the north or what is effective at attracting the young will work as well with the old. With the
right preparation and barring any dramatic policy reforms on the part of the government, luxury
brands can expect to watch their sales continue to grow right along with the wealth of the
Chinese people.

Bibliography

DEGEN, R. J. "Opportunity for Luxury Brands in China." Working Papers (2009).

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Garner, Jonathan. The Rise of the Chinese Consumer :Theory and Evidence. Chichester, West
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Krisher, Tom. "Chinese car market the biggest, first time ever that U.S. market not No. 1." The
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<http://www.autonet.ca/autos/news/2009/12/10/12113506-ap.html>.

Lau, J. "Mandarin- English word dictionary." yellowbridge. 2010.

<http://www.yellowbridge.com/chinese/wordsearch.php?
searchMode=I&characterMode=t&dialect=M&word=17315>.

Lu, Pierre Xiao. Elite China :Luxury Consumer Behavior in China. Singapore; Hoboken, NJ:
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Schwartz, Brian, and Vanessa Wong. "Money Talks." Amcham Study on Luxury (2006).

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patek-philippe-among-chinese-millionaires-favorites-on-new-list/>.

"China May Lower Luxury Tariffs by 10%: What will it mean for high-end
consumption?" JingDaily. Novermber 5, 2009 2009. <http://www.jingdaily.com/en/luxury/china-
may-lower-luxury-tariffs-by-10-what-will-it-mean-for-high-end-consumption/>.

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m o n i t o r . c o m>.

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<http://www.indexmundi.com/united_states/gdp_real_growth_rate.html>.

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