By  on October 3, 2006

China hasn't exactly developed an open-door policy, but entry into its vast consumer market is getting easier.

Already the center of the apparel manufacturing world, China is poised to become a power player at the retail level as the market warms to outside brands and merchants. This spring, Credit Suisse First Boston predicted consumer spending in China would reach $3.7 trillion in 2014, an increase of more than 425 percent over a decade.

"The opportunity is substantial, but in many ways it is still like the wild, wild west, and you have to understand the terrain, you've got to understand the dangers there," said Paul Charron, chairman and chief executive officer of Liz Claiborne Inc.

The chance to tap into the gigantic consumer base of 1.3 billion people has attracted retailers running the gamut from Wal-Mart to Fendi, even if challenges still abound. Annual inspections are required before multinational retailers can open any stores, for example. These inspections are carried out by provincial and municipal governments, which increase the chances of local protectionism. Other difficulties, according to Charron, range from an "inscrutable government" to weak protections of intellectual property rights, laws that are not regularly enforced and a culturally diverse consumer base.

Then there is the sheer vastness of China. Shipping goods across the country, which has an underdeveloped infrastructure and difficult terrain, can prove daunting.

But while Charron, like others, is content to let the opportunity ripen, he isn't sitting still when it comes to the world's largest potential consumer market. Liz Claiborne has deployed Fritz Winans as managing director of Asia development, and purchased Mac & Jac, a better-priced brand that has about 40 stores in China through a joint venture. These moves will help Claiborne, also home to brands such as Juicy Couture and Ellen Tracy, gather intelligence on the market.

"I cannot imagine that we would enter China without a local partner," said Charron. "You can be killed there even if you do those marketing and product things right. You can be killed there if you fail to understand the legal nuances or the governmental regulatory nuances."

Last month, Claiborne's Juicy Couture brand signed an agreement with the Lane Crawford Joyce Group for exclusive distribution rights in China, Taiwan, Hong Kong, Macau, Singapore, Thailand, Malaysia and Indonesia. During the first four years of the contract, 24 Juicy Couture freestanding stores are planned to open, along with 23 in-store shops, with the majority of the presence focused in greater China, including the mainland and Hong Kong, as well as Taiwan.Of the leading 50 retailers in the world, 70 percent have opened outlets in China, according to a KPMG October 2005 report on retailing in China. One of the early movers in the Chinese market is Wal-Mart, which has 63 stores there and plans to continue expanding its presence. Also quick out of the gate was France's Carrefour, which has been established in China for a more than a decade.

Experts point out, however, that Chinese firms might soon prove to be viable competitors, as local retailers are incorporating state-of-the-art retail technologies and hiring people with international experience.

Entering the market with the help of an experienced hand is a strategy that has appealed to retailers of all stripes, including electronics powerhouse Best Buy Co., which gained a foothold in the Chinese market by acquiring a majority interest in the 136-door Chinese chain Jiangsu Five Star Appliance Co. in June.

If the hurdles are high, the reward might prove to eventually be worth the leap for businesses. "The midtier is almost frightening, it's growing so rapidly," said Steve Dixon, who manages Kurt Salmon Associates' China practice.

Dixon said sports brands such as Nike, Adidas and Fila have found success in China, though some consumers have also developed a taste for more luxury products.

"The wealth in China has gotten to the point where people are spending money and flaunt it more than I've seen in a lot of other places," he said. "It's not unusual for people to be driving a Bentley or Mercedes."

That wealth is not the norm, though. China had a per-capita gross domestic product of just $6,800 last year, a fraction of the U.S. per capita GDP of $41,800, according to U.S. government estimates.

But given it's huge population, even if only a small percentage of consumers has the income to afford luxury goods, that is still a large market. As a result, a slew of luxury brands have flocked to the country. Fendi ceo Michael Burke, at a Las Vegas conference earlier this summer, predicted, "China will be much more like America, and it will be much bigger than Japan."

"We have no doubt China will become the largest luxury market in the next 10 years." said Nicola Bulgari, as the jeweler opened its fourth store in the country last month.Valentino, Giorgio Armani, Gucci, Dolce & Gabbana, Louis Vuitton and Burberry are just a few the other fashion and luxury brands that have shops in China. "China is the market of the future, but of course it is challenging," Giovanni Di Salvo, Valentino's Asia Pacific ceo, told WWD last month when the brand launched its women's wear in China. "One cannot expect a return right away, but one must be here. It takes two or three years to see returns. Everybody worldwide is looking at China, and all the brands are coming here. Some are expending very fast, but I'm not sure if the market is ready for them all."

Phat Fashions, a division of Kellwood Co., has a five-year license with a Chinese firm to open 30 freestanding stores under the Baby Phat and Phat Farm names in China, Hong Kong and Taiwan, three of which opened this year.

"China has a tremendous emerging middle class in all of the cities now, and there is a strong awareness of Western culture," said Bernt Ullmann, president of Phat Fashions.

For Baby Phat and Phat Farm, China is an opportunity to get in early and capture a bigger piece of an emerging market.

"As soon as we move outside of the United States, we are not necessarily urban, per se," said Ullmann. "We're the next generation of American fashion."

The expected growth curve in consumer spending combined with recent changes in Chinese regulations for retailers could start a rush of foreign retailers into China. The country agreed to open its market to retailers when it joined the World Trade Organization in 2001.

"It's really just a new right that foreign companies have to operate there," said Erin Ennis, vice president of the U.S.-China Business Council. "Distribution rights really went into effect in the past year, so companies that were poised to get in are opening their stores. Distribution rights actually are a success story of how China is able and does implement its WTO commitments. Obviously, that's not across the board."

China is coming under increasing pressure from the Bush administration, U.S. textile producers and others to meet other WTO obligations, such as the elimination of illegal state subsidies and adequate protections for intellectual property.There's also the subject of currency reform, which doesn't directly impact access to the Chinese market but has been a cause of consternation in U.S.-China relations. Last week, the White House compelled a bill to be pulled from the Senate that included punitive tariffs if China didn't move to reform its currency policy, which critics claim unfairly lowers the price of Chinese exports.

President Bush has preferred to use diplomatic pressure instead of punitive actions to pressure the Chinese to loosen their grips on their currency, the yuan. On Friday, there were signs China is allowing the yuan to float slightly higher, but analysts weren't sure if this was in reaction to the U.S.'s softer line.

U.S. Trade Rep. Susan Schwab, who is on the front lines of the push for business reforms in China, acknowledged the country has made significant strides in opening its markets.

"I was doing M&A work in China for Motorola in the early to mid-Nineties," she said. "There is no comparison between the business that one can do in China [now] as opposed to then, and that's investment, it's exports."

However, retailers are still faced with the myriad of operating issues all foreign companies face in China, from dealing with a government that is not transparent and is apt to adjust laws or practices without much warning to a significant bureaucracy, for instance, when acquiring a license to operate a business.

"The business environment has improved, but it's not to say there aren't continuing problems," said Erik Autor, vice president and international trade counsel for the National Retail Federation. "It takes a lot of ancillary support to run a major retail operation, and any one of those parts of the support network can pose a potential choke point, which makes it difficult to run your store."

With contributions from Vicki Rothrock, Hong Kong, and Lisa Movius, Shanghai

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