China's latest frontier of luxury spending

After barely a hiccup during the recession, millions of Chinese are spending with an abandon that presents a huge opportunity for Kiwi companies, reports Ben Heather.

A group of young Chinese men pose next to a white Lamborghini as their friends take pictures.

Lamborghinis are still a novelty in Hangzhou, a "commuter city" of more than six million people south of Shanghai, but with the incredible growth of wealth in China, luxury cars will soon barely raise an eyebrow.

Next to the Lamborghini is an Audi convertible. The cars are parked in front of sleek shop fronts selling Prada, Louis Vuitton, and Armani. The street curls around the shores of Hangzhou's West Lake and, apart from a few stalls selling cheap knick-knacks, almost every shop is selling luxury international brands.

In the city centre, high-end retail dominates on the street level interspersed with McDonald's and KFC. Above, plastered on the side of skyscrapers, massive billboards advertise everything from Calvin Klein to Chinese self-help gurus. In one block, two Nike stores sit just 50 metres from one another.

Welcome to the latest frontier of luxury consumerism.

Hangzhou is a wealthy city and a popular domestic tourist spot, but luxury retail is becoming commonplace in China. Many sizeable cities (above tier three) are flaunting the consumer jewels of the West with similar enthusiasm.

Beijing is littered with high-end shopping malls and even Qingdao, a "tier three" port city in the north-east, has luxury shopping on a scale unseen in New Zealand.

The city roads tell a similar story, with Chinese and Japanese car brands outnumbered by Volkswagen and BMWs. Footpaths in shopping areas are packed with stylish young Chinese men and women, with touchscreen cellphones and designer labels prominently displayed (although a misspelled pink "Christjian Doir" polo shirt reveals the origin of some of these clothes).

This display of wealth does not mask the poverty still prevalent in rural areas and smaller cities. In Beijing, the facade of mirrored-skyscrapers occasionally parts to reveal cramped alleys choked with filth and cramped squalid housing.

There appear to be few beggars in Beijing, but even in an uptown shopping district a woman asks me politely for money to feed her child.

Estimates of China's middle class range between 200 million and 80 million, partly because the concept is difficult to define in a country that until 30 years ago treated personal wealth as counter-revolutionary.

But a 2009 wealth report claims there were 364,000 millionaires in China in 2008 with a combined wealth of US$1.7 trillion (NZ$2.5t). Like most countries, China experienced a drop in millionaires because of the global financial crisis, but still overtook Britain in 2008. It now has the world's fourth biggest population of millionaires, behind Germany, Japan, and the United States respectively. The latest figures from China's national bureau of statistics show that in 2009, 621 million people, or 46 per cent of the Chinese population, lived in cities. This compared to just 34 per cent 10 years ago.

It is the cities, particularly the larger ones, where the money resides and fortunes are made.

South Island ex-pat Jade Gray, 35, lives in Beijing and has spent the past 12 years doing business in China, opening two pizza stores, a cafe and a luxury retreat at the Great Wall of China.

He says the number of wealthy Chinese has exploded in the past five years, from entrepreneurs in everything from coal to telecommunications and business people with ties to government spending.

"I don't have any statistics, but I think there would be more Porsches [in China] than anywhere else in the world," he said.

In the new "red capitalism" model, displaying wealth had become culturally acceptable, with luxury goods integrated as potent status symbols in an intensely hierarchical society.

"It's an accepted part of the culture to spend a lot of money and there is a lot of cash in the system."

For New Zealand, with its strong trade relationship with China, the new-found wealth represented a huge opportunity, one many Kiwi businesses failed to grasp, he says.

New Zealand needed to invest more in tailoring itself to fit China and identifying trends. Mr Gray believes a study into what food technology China will need in the future would be good starting point for New Zealand.

"We need to move away from being reactive to being proactive. We are not hungry enough."

For the foreseeable future, agricultural products and technology is New Zealand's biggest opportunity, but almost any company with international ambition should target China.

For New Zealand, the focus should be on the top end of the market and play towards its strengths, like agriculture.

"We are talking lobster and mussels rather than hoki."

Malcolm Cone is the director of Otago University's Asia Institute and says a top tax bracket of 18 cents in the dollar and goods and services tax loopholes has led to rapid expansion of China's wealthy.

"You've got rapid economic growth and that growth has been spread unevenly," he says. "There are a lot of fabulously wealthy people in China."

China is already New Zealand's highest paying market for crayfish and the potential for exporting good New Zealand wines to China is enormous, he says.

Plenty of New Zealand companies are already in China, evident in Statistics New Zealand figures released in March showing China overtaking the United States as our second biggest export market.

Shipments to China rose 37 per cent to $3.76 billion in the year ending February 28, behind only Australia, a rise partly attributable to the 2008 Free Trade Agreement.

Most of this trade is focused on agriculture and forestry, but there was potential to broaden this base into more high-end products and services.

Fisher and Paykel Appliances is the latest New Zealand company to target the luxury market in China, opening its first showroom in an uptown mall in Hangzhou last weekend. It is early days for Fisher and Paykel, but the company has partnered with Chinese appliance giant Haier, which bought a 20 per cent stake in F&P Appliances in May last year.

SPEAKING at the showroom's launch, F&P's international chief operating officer Andrew Paykel says the focus was on the top end, trading on China's growing appetite for international brands.

"At the luxury end of the market Chinese people want international brands. They don't want Chinese-made product and Chinese brands," he says.

But Mr Cone disagrees, believing it will not take long before Chinese companies move into the luxury market, trading on the country's fierce nationalism.

"With all that wealth now, do you think Chinese entrepreneurs are going to let the market slip past and stay in the hands of a few French multinationals?"

One Chinese company in the domestic luxury market is Haier. In New Zealand and elsewhere, the appliance giant focuses on the lower end of the market, but at home it already has a range of somewhat bizarre luxury products.

Haier's Qingdao showroom features a bath with a LCD screen to shows who's knocking on the bathroom door, saving an uncomfortable wet naked journey.

In another room, a mirror remembers your face and adjusts water from the basin tap to your preferred temperature.

Haier is working hard to shed the cheap and shoddy "Made in China" image, which it says remains a barrier when moving into Western markets, such as New Zealand.

It is difficult to assess objectively Haier's commitment to "quality control", but whatever the reality, the idea has taken an almost mythological significance for the company.

According to the official history, in 1985 Haier chief executive Zhang Ruimin gathered his workers on the factory floor and personally smashed 76 defective washing machines with a sledgehammer to protest shoddy manufacturing.

The story is synonymous with China's growing confidence and the sledgehammer is interned in the national museum in Beijing.

Chinese companies like Haier also have the advantage of local consumer recognition that New Zealand companies will have to build from scratch.

New Zealand's ambassador to China Carl Worker says that beyond agricultural production there is very little awareness of New Zealand in China. "There is a knowledge gap there," he says. "Consumer preference in China in relation to overseas products is pretty much a blank sheet of paper."

With multinational luxury brands already pouring huge amounts of money into China, New Zealand needs to get in on the act now.

"This is the time where you can establish yourself and start influencing. It [China] is already big but it's going to become one of the massive markets in the future."

The attention China is drawing is obvious in the huge budgets governments have lavished on their pavilions at the World Expo in Shanghai.

The New Zealand Government has spent about $30 million on its pavilion but it will come down to New Zealand companies to take risks and reap the benefits of China's growing wealth.

Ben Heather visited China courtesy of Haier.

- © Fairfax NZ News