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BEIJING — When Louis Vuitton opened a store in the basement of the Palace Hotel here back in 1992, Bernard Arnault had trepidations, encountering a city where mostly bicycles rolled through the dusty streets. Even the faucets in his hotel bathroom worked sporadically at best.

“I remember saying to the teams at Vuitton, ‘Are you sure this is the right time to open up in Beijing, because there doesn’t seem to be an enormous number of clients,'” the chairman of LVMH Moët Hennessy Louis Vuitton recalled with a wry smile.

How quickly things have changed. Today, Beijing’s broad, spotless streets are clogged with cars, water gushes 24/7 from fountains in front of fancy hotels and Vuitton’s boutique in Shanghai’s Plaza 66 complex does more business than the store in Chicago.

“The development over the past 15 years has been spectacular,” Arnault said in an interview last week, just a few hours before Fendi staged a dazzling fashion show atop the Great Wall, the wife of the Chinese prime minister seated at his elbow. “It’s still technically a socialist country, but it operates with a free market economy that is many times more liberal and efficient than a number of European countries.

“If the economy continues at the same rate, 25 years from now China will be the greatest global economic power, which means we will have a potential comparable to the United States today,” he declared. “If things continue at this rhythm, [China] will be the most important country on the economic agenda for a business like ours.”

In a wide-ranging discussion, Arnault shared his views on everything from the prospect of Chinese fashion brands to the country’s growing reputation for innovative architecture.

And he was unequivocal that China would soon leapfrog over the top three global markets for luxury goods — the United States, Japan and Europe — to become number one. Last year, Asia excluding Japan accounted for 17 percent of LVMH’s revenues, which totaled 15.31 billion euros, or $19.23 billion at average exchange rates. Asia’s sales compare to the 26 percent of revenues that comes from the U.S., 13 percent from Japan, 15 percent from France and 22 percent from the rest of Europe.

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“The level of consumption [in China] will increase, the quality of life will improve,” an upbeat, relaxed Arnault said over coffee in a sumptuous suite at the Grand Hyatt Hotel here. “Are we going to have profits continuously over the next 25 years? Are we not going to have ups and downs? That remains to be seen, but currently, China is going very strongly.”

Last week’s Fendi extravaganza, which cost an estimated $10 million, was certainly a major statement from LVMH about the importance of China to the luxury sector and to its future fortunes. That the event coincided with the National Congress of the Communist Party underscored how foreign luxury players have plenty of room to maneuver within the country’s strict, socialist framework.

Indeed, the central messages from Chinese leaders at the congress should be welcome news to Arnault: a vow to make economic development the government’s central task and to create a more prosperous society.

“Private enterprises are more appreciated [in China] than in a certain number of [European] countries,” Arnault said. “When you take a survey on the free market economy in China, and do the same poll in France, public opinion in China is better in terms of the impression of the advantages a free market economy can bring to the population.”

To be sure, LVMH has been a pioneer in China, with Hennessy cognac sold there since the 19th century. Today, LVMH enjoys an estimated market share in excess of 50 percent for cognac, and Arnault said the group’s wines and spirits division is performing “very strongly,” with sales of some liquors growing at a rate of 15 percent annually.

“And now the Chinese are starting to drink more wine and Champagne,” he said. “It’s the same tendency we observed in Japan during the Nineties.”

In terms of fashion, LVMH first began selling accessibly priced products such as lipstick and face cream in China. “Following that, we sold leather goods, and eventually clothing. And now we sell everything,” he said.

Indeed, Fendi operates 10 boutiques in China and Vuitton has 18 in cities such as Xian, Chengdu, Shenzhen, Hangzhou and Shenyang, as well as Beijing and Shanghai. As many as 10 more Vuitton stores are slated to open next year, while Fendi will add five more stores in 2008, including in Nanjing, Dalian and Changchun.

Arnault noted that revenues at boutiques in Beijing and Shanghai are comparable to those in other cities around the world, excepting big capitals like Paris, New York or Rome.

The executive declined to give figures, but asserted LVMH is the market leader in luxury in China and that the company has operated profitably in the country since the mid-Nineties. “While certain American brands have invested a great deal and lost money, we have always strived to be profitable here. For us, it’s a true economic reality,” he said. “We began to see business take off during the early Nineties, and at that precise moment we decided to invest. We were the first; we were the pioneers of development in China, and now all the brands are present and we are developing them actively.”

That LVMH arrived early certainly provided a competitive edge, Arnault explained.

“It’s an advantage because we became the leaders of the market. In cosmetics, for example, Dior is the most well-known and strongest cosmetic brand. And as we invest strongly year after year, we will try to maintain this advantage,” he said. “The fact that we were first gives us a strong position. It’s the same thing for Vuitton. We are very, very far ahead of number two.”

With a portfolio of brands that includes Givenchy, Pucci, Loewe, Sephora and Marc Jacobs, LVMH can negotiate important positions within retail developments, and even play a role in urban planning. For example, the new Seasons Mall on Beijing’s west side — a vast shopping mecca for workers in the financial district — includes units for Louis Vuitton, Dior Homme, Loewe, Givenchy and Marc by Marc Jacobs.

“You can plan what will become the zone of luxury. We chose the cities, and what will be the equivalent of an Avenue Montaigne [in Paris],” said Arnault.

In China, many developments are mall-based, since few cities have defined or suitable downtown zones. In Beijing, popular destinations for high-end stores include Shin Kong Plaza and the mall inside the China World Trade Center. Many of the more upmarket malls are attached to hotels, such as the Grand Hyatt or the Peninsula.

Arnault asserted LVMH is helping to bring developments of architectural interest to China, just as it has done in Rome with the restoration of a grand palazzo for Fendi, or in Tokyo with its sparkling, high-tech towers for Vuitton and Dior.

“We think we have a know-how which can be very interesting in a country like China. Instead of doing a group of look-alike buildings, we try each time to do something creative that creates a reason for the consumer to visit a luxury store. China is probably the country with the most construction projects of this type,” he said.

To be sure, the city is being spiffed up on a staggering scale in preparation for next year’s Summer Olympics. Not only are there forests of cranes constructing buildings all over the sprawling metropolis, but workers are scrubbing sidewalks by hand during the night, and washing trees to remove dust and pollution.

Although limited spending power still puts luxury goods out of reach of the vast majority of the population, Chinese consumers are swiftly becoming more sophisticated and knowledgeable about international fashion. In addition, even a small percentage of 1.3 billion people is still a large market by Western standards.

“At the beginning of the last decade, the Chinese didn’t have the right to leave China,” Arnault explained. “Now they can travel….It’s a movement that exposes them to brands when they go to Paris, to Rome, to New York. They now go to Russia or to adjacent destinations in Asia; to Macau or to Hong Kong, where the number of Mainland Chinese tourists have replaced the Japanese.”

That said, Arnault estimates it will take one or two generations before China might produce its own brands of international stature. “A luxury brand is not only about creativity and innovative products, but also historical legitimacy,” he said. “In the minds of consumers, [luxury brands] are attached to a past. It’s for that reason that European brands like Fendi, Dior and Vuitton are so much in demand by the Chinese. They equate them with quality, innovation and at the same time, a part of the history of Europe, which speaks to them.”

Besides investing heavily in store networks for LVMH’s various brands, Arnault has made important acquisitions in China. Last May, LVMH took a 55 percent stake in Wen Jun Distillery, a Chinese maker of premium white spirits. And through his personal holding, Groupe Arnault, the business titan made an investment estimated at about $30 million this year in Belle International Holdings Ltd., a giant Chinese shoe retailer. He is also said to own considerable real estate in China and Macau, much of it destined for retail use.

A major aficionado of architecture — he commissioned Frank Gehry to construct a cloud-like building in Paris for a forthcoming Louis Vuitton art foundation — Arnault took time during his Beijing stay to view Herzog & de Meuron’s spellbinding “bird’s nest” stadium being constructed for next summer’s games.

“It’s interesting to see today how architecture is impacting the development of big cities in China, such as Beijing,” he said. “What interests us the most is to participate in luxury centers where one can also have hotels and offices, but with an original architectural impact.”

Asked to name his favorite city in China, Arnault said, “It’s probably Shanghai. I know that’s not very original, but there is also Hangzhou, with a magnificent lake. It’s very pleasant.” During his trip, Arnault also visited Nanjing.

But bringing Karl Lagerfeld and Silvia Venturini Fendi to China, and staging the Fendi event was certainly a lightning bolt about the market’s importance.

“It’s in China and before the [2008] Olympics,” Arnault said. “It’s a big symbol for China. It’s where things are happening today.”

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