International Business

Chapter 1: What Is International Business?

BusinessWeek Online

Read this article. Then list the international products Chinese consumers are purchasing and possible reasons for their popularity.

In China, To Get Rich Is Glorious

More Chinese are becoming millionaires—and driving a fast-growing market for luxury goods

Wang Zhongjun is loaded and happy to flaunt it. He wears Prada shoes, Versace jackets, and a Piaget watch. He smokes Cohiba cigars from Cuba. He drives a white Mercedes-Benz (DCX) SL600, a silver BMW Z8, and a red Ferrari (FIA) 360. His art collection includes hundreds of sculptures and paintings. Value: $30 million or so. Home sweet home is a 22,000 square-foot mansion north of Beijing with antique British and French furniture, a billiard room with bar, and an indoor pool. When he tires of swimming, Wang can head to his stable (annual upkeep: $500,000) of 60 horses from Ireland, France, and Kentucky. "Entrepreneurs in China today feel much safer than before," says Wang, a 45-year-old movie producer who served in the Chinese army, studied in the U.S., and learned painting before backing internationally acclaimed films such as Kung Fu Hustle. "We are more accepted by the media, government, and society today."

That's for sure. Even though Deng Xiaoping declared that getting rich is glorious nearly three decades ago, just a few years back China's millionaires were running scared. When a Forbes Magazine survey of China's richest appeared in 1999, wags called it the "death list" after a tax crackdown targeted many who made the cut and landed some in jail.

Now China is embracing them. More than 300,000 Chinese have a net worth over $1 million, excluding property, according to Merrill Lynch & Co. (MER). And mainland millionaires control some $530 billion in assets, Boston Consulting Group estimates. "There has been a revolution in attitudes toward wealth," says Rupert Hoogewerf, who authored the 1999 list. He now runs Hurun Report, a Shanghai-based company specializing in information about China's rich, which just released a survey on millionaires' buying habits. "People don't appreciate how much cash there is running around in China today," he says.

"DIZZY" OVER SHOES

Many people might not appreciate it, but luxury retailers sure do. Just five years ago mainland buyers accounted for 1% of global sales of luxury handbags, shoes, jewelry, perfume, and the like. Today the Chinese are the third-biggest high-end buyers on earth, with more than 12% of world sales, Goldman, Sachs & Co. (GS) reckons. Within a decade, China will likely leapfrog Japan and the U.S. to become the top luxury market, predicts Goldman analyst Jacques-Franck Dossin. "China is experiencing huge wealth creation, and there is lots of conspicuous consumption related to that," Dossin says. "People want to show they are successful."

How? By buying custom clothes, diamond-encrusted watches, pricey cars, gourmet meals, and fine wine. Zhao Hui, a chain-smoking 38-year-old restaurateur, real estate developer, and Ferrari owner from Shanghai, says he speaks no English, but he manages to pronounce "shopping" and "Tiffany" (TIF) as he shows off his $50,000 Franck Muller watch. Richard Hung, a 43-year-old manager of a pharmaceutical company, has a closet filled with dozens of Armani, Gucci (GUCG), and Canali suits and more than 100 pairs of Italian shoes. "I get dizzy when I look at shoes," he says. Where to wear those duds? Try Beijing's exclusive Chang An Club, where few blink at the $18,000 initiation fee. "Our members can afford it," says General Manager Antonius van Gevelt, adding that Chang An aims to keep its fees higher than rival gathering spots. The rich "want to join the most expensive club in China," he says.

Luxury marketers are happy to serve up plenty of flash and bling to keep sales rolling. Louis Vuitton, which has a dozen boutiques across the mainland, in November served up 1,500 bottles of Veuve Clicquot and platters of pâté de foie gras at the celebrity-packed launch of a new Beijing store. And fashionistas still marvel at Miuccia Prada's "skirt show" last spring, when she took over seven stories of Shanghai's art deco Peace Hotel.

CADILLAC CAFE

Pricey wheels do pretty well, too. The Rolls-Royce outlet in Beijing is one of the brand's top-selling dealerships. And Bentley Beijing has sold a half-dozen 728 stretch limos—at $1.2 million each, the world's most expensive car—more than any other dealership in the world. For thriftier millionaires without an extra million to drop on transportation, Cadillac, Mercedes, or BMW are eager to help. Shoppers at any of a dozen "Cadillac Experience Centers" in the mainland, for instance, can relax on a black leather sofa and enjoy a glass of Rosemount Cabernet in the "Cadillac Cafe" while browsing through photo-rich brochures that describe the brand's 102-year history. "Our whole showroom supports our brand: It's modern, sophisticated, and not your traditional luxury vehicle," says Stuart J. Pierce, who oversees the Cadillac brand at Shanghai General Motors Co. (GM).

Now the luxury goods marketers are looking far beyond Beijing and Shanghai to find China's millionaires. Cadillac plans to have 40 showrooms in China by the end of 2007, and last year dispatched a 1959 El Dorado convertible on a seven-city "heritage tour" to drum up interest nationwide. At this month's ice festival in the frigid northern city of Harbin, watchmaker Cartier has created a massive ice replica of its flagship Paris store. "Our aim is to have the second- and third-tier cities become a more important part of our business," says Daniel Chang, who oversees Cartier's sales in northern China.

Lately China's new moneyed class has gotten interested in more than fast cars, flashy threads, and extravagant timepieces. Growing numbers of mainlanders are snapping up everything from ancient scrolls and traditional ink paintings to French Impressionists. Christie's International says mainland buyers account for 20% of purchases at its Hong Kong auctions, compared with virtually none five years ago. And while most collectors prefer Chinese art, mainlanders now bid on Renoirs, Monets, and Van Goghs in New York and London, and a Shanghai businessman paid $1 million for a Picasso in a private sale. "There's tremendous potential," says Ken Yeh, deputy chairman of Christie's Asia (see BW Online, 2/6/05, "China's New Eye for Fine Art").

Even as the likes of Cartier, Christie's, and Cadillac try to separate China's millionaires from their wealth, others aim to help them preserve it. Although foreign banks are barred from marketing their offshore services inside China, they are discretely wooing mainland clients via their Hong Kong offices, figuring those who have made money abroad are fair game. And soon, banking regulations in the mainland are to be relaxed. "In the long term, China can surpass Japan as a major market for wealth management," says Kaven Leung, who oversees Citigroup's private banking efforts in China.

Diamond watches. Armani suits. Silver Bentleys. Private banks. Getting rich in today's China is indeed glorious, and spending is even better.

By Dexter Roberts and Frederik Balfour
February 6, 2006

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