HONG KONG — China has long been seen as the factory to the world, but more and more it’s being looked at as an immense, viable market to be tapped.

International luxury retailers have already rushed in to snap up prime real estate and plant their brand flags in relatively unchartered territory.

For these well-known names, such as Prada or Louis Vuitton, setting up shop might have come a bit more easily with the advantage of a cash supply. However, for small to medium-size brands, the move to China can be fraught with uncertainty.

International brands would probably want to find a local partner to help navigate the market, said Felix Chung, director of manufacturer Global Apparel Group and chairman of the Hong Kong Apparel Society. Hong Kong companies are a natural fit, he said, because they straddle both Western and Chinese cultures, which have widely different mentalities.

One large company that acts as an agent for brands in China is Hong Kong’s Dickson Concepts. It represents Polo Ralph Lauren, Brooks Bros., Michael Kors, ST Dupont and Tod’s, for example.

“Finding your way is difficult,” said Andrew Leung, chairman of Sun Hing Knitting and honorary chairman of the Textile Council of Hong Kong.

He added that different strategies are needed in China, along with expertise and patience to work through a lot of red tape.

Issues for brands wanting to set up business in China range from not knowing what the rules and regulations are to applying for a license as a foreign investor, which can be “a very tedious procedure with the local government,” said Pansy Yau, assistant chief economist for China at Hong Kong’s Trade Development Council. International companies can now be the sole owners and operators of shops in China.

One thing to keep in mind is that China consists of multiple markets from North to South. In first-tier cities — Beijing and Shanghai — good retail property is difficult to come by. It’s largely been snapped up.

That leaves prospective shops looking at expensive premiere sites or the cheaper areas that aren’t as well traveled.

Even if good locations are available, places such as department stores are picky and prefer renting space to more well-known brands, Yau said.

This story first appeared in the March 21, 2006 issue of WWD. Subscribe Today.

For companies that have set up or are setting up, it’s a medium- to long-term investment that might not pay back immediately, Leung warned.

Oddly, such a large country, with 1.3 billion people, has already become a crowded retail market.

“Everyone is going there to look for opportunities,” Leung said.

In addition, local Chinese brands are growing rapidly and are established in good locations, Chung added. These brands could be potential partners for international brands, he said, but there are still trust concerns regarding the protection of intellectual property when dealing with Chinese companies.

Typically, the local brands are mass market and quite cheap, Chung said, leaving a big gap in the middle between them and the luxury products, which few people in China can afford.

This is where the opportunity lies for Western and local Hong Kong brands.

As the mainland consumer becomes indoctrinated on how to spend money on clothes and how to dress, the local brands that pretend to be from Paris or Italy won’t suffice. These educated consumers can tell the difference between fakes and real design, even if the garment is manufactured in China, Chung said.

Retail sales in China have jumped 30 percent for the past few years and it seems that figure will hold steady or grow with an expanding middle class.

An estimated 18 percent of China’s 1.3 billion people are considered middle class. To qualify, you must earn 5,000 yuan a month, or about $602, have assets valued at 300,000 yuan, or $36,145, hold a university degree and be in management or higher professionally.

It is expected that this group will grow by 1 percent per year, which is “very fast,” Yau said.

In addition, this middle income group has a mind-set that is quite different from their parents’ in that they are willing to spend their money, she said.

They also use the Internet and know what’s going on and what’s out there, she added.

Regardless of the possibilities, some brands still are taking a cautious approach and have only recently entered the market.

Diesel executives have said they spent two years developing their Shanghai store, which is 4,000 square feet at Plaza 66. A second, 1,188-square-foot corner space on the first floor of Beijing Capital Times Square was opened in November and the company plans to open five stores this year.

There also are companies that are boosting their presence in China to take advantage of local manufacturing, effectively skirting the quota issue.

Armani Exchange is starting to open more shops for what it’s producing in Hong Kong and China with Global Apparel Group, said Chung, director of the manufacturing company. In addition to Armani Exchange, Chung said about 10 to 15 percent of his clients are expressing interest in China.

Armani Exchange thinks the China market is more mature and it’s the right time, he said, adding, “They can see the buying power, especially from Hong Kong retail.”

For Zara, Hong Kong also was an important gateway. The Spanish retailer opened here in 2004 and targeted prestigious shopping malls such as the IFC in Central. It now has four shops.

Zara recently opened its first China shop in Shanghai in February at the busy intersection of Nanjing West Road and Shanxi North Road. The shop is 21,500 square feet and, much like its Hong Kong shops, packed with people shopping and waiting to try things on.

There is no doubt that high-end, busy locations in Hong Kong help expose brands to the 5.6 million mainland tourists who visited Hong Kong in 2005, about a 30 percent increase over 2004, according to the Hong Kong Tourism Board.

Hong Kong and China do have a one-country, two-systems policy, but the one-country idea doesn’t apply to its borders, which are tightly monitored on both sides.

In July 2003, the Individual Visitor Scheme was implemented to allow those living in coastal areas of China to apply for visitor visas to Hong Kong. The scheme now has been expanded to include 38 cities. While tourists don’t need to be part of a registered tour group, they still need to qualify for a Hong Kong visa.

And these tourists aren’t only window shopping. Overnight mainland visitors spent about $558 per capita in 2004, according to the Tourism Board. Figures for 2005 weren’t yet available.

Part of the draw is cheaper prices in Hong Kong, sometimes as much as 30 percent for the same brand. There’s also more confidence in the authenticity of brands here.

While design becomes more important for consumers, brands also have a vested interest in protecting it, especially when it comes to working in China, well known for its fashion knockoffs.

Protecting intellectual property is a major problem, Yau said, but the Chinese government is becoming more serious about battling the issue. But no matter how much legislation may be written about the matter, implementation will remain difficult in such a vast country.

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