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China Rewrites World Fashion Standards

The Silk Road of Luxury

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The Silk Road of Luxury

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China's luxury goods market became the second largest in the world in 2010. Turning the global fashion market on its head, China is making its presence felt by projecting its own "soft standards."

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The Silk Road of Luxury

By Shu-ren Koo
From CommonWealth Magazine (vol. 499 )

Beijing in March. A fashion show of far-reaching significance is being held in the Beijing Hotel, adjacent to the Forbidden City. In the hotel's cavernous ballroom, a large red banner at the end of the runway, emblazoned with the brand name "Sorgere" and its Chinese equivalent in white, quickly catches the eye. Male models work the runway wearing suits that embrace an unmistakably Chinese style.

The show is less remarkable for the clothes themselves, however, than the male fashion brand they represent, which is the first in the world to showcase "Chinese design, made in Italy." The concept stands out as a complete reversal of the pervasive commercial model of the past 30 years in which China has served as the manufacturer of others' designs.

A month later, in mid-April, a group of well-heeled guests visits the Grand Hotel in Taipei to see a jewelry exhibition by renowned Chinese jewelry designer Wallace Chan.

Chan, whose long beard gives him the appearance of a wise old sage rather than an artistic pioneer, will become the first ethnic Chinese designer to show his works at the prestigious Biennale des Antiquaires in Paris in September.

Christian Deydier, president of the Syndicat National des Antiquaires, which organizes the biennale, enthuses that Chan has an international feel and will be an inspiration to European jewelry designers. He was selected because his designs are already being imitated by the most venerable French jewelry brands, Deydier explains.

The honor clearly signals that Chinese aesthetic standards have conquered the discerning French, and it is the latest indication that China is redefining the standards of the global luxury goods market.

In 2010, luxury goods sales in China totaled 80 billion renminbi (US$12.6 billion), making it the world's second largest luxury goods market after Japan, and it is growing at 25 percent a year, bucking the trend of sluggishness generally seen in consumer spending.

According to estimates by global consulting firm McKinsey & Company, China's luxury goods market will surpass Japan's as the world's largest in 2015 with sales of 180 billion renminbi (US$28.35 billion), accounting for a 20-percent share of the global market.

From Ruili to Shenzhen, from lone merchants from Southeast Asia and South Asia to prestigious luxury goods brands, China's huge market has drawn players from around the globe. Standing behind this "soft" Chinese standard is Chinese culture.

Foreign companies try to use Chinese culture to grab the hearts and minds of Chinese consumers, but Chinese companies are hoping to exploit the opportunity to spread the influence of China's "soft power" around the world.

This story of "China's soft standards" begins in the southwestern city of Ruili, on the border with Burma.

Stop No. 1
Ruili – Jade Capital of China

The border town of Ruili marks the Chinese end point of the historic Burma Road, which winds its way across high mountains and river valleys from Kunming, capital of Yunnan Province, to Lashio in neighboring Burma.

Located in a river valley some 700 kilometers southwest of Kunming, Ruili is a very inconspicuous, unspectacular place. At a population of 300,000, Ruili is just a town by Chinese standards, although it covers an area roughly two thirds of the size of Taipei City. Over the past decade this backwater near the Chinese border with Burma (also known as Myanmar) has become one of China's most thriving inland border ports.

Thanks to its convenient location Ruili has emerged as a transfer post linking Southeast Asia and the Indian Ocean, and as the most important transaction center for gem-quality jadeite from Burma for China's southwest and the northern part of the Indochinese Peninsula.

When one enters the town center by car from the Burma Road, the streetscape sends a clear message: Ruili's most important commodity is jadeite, and the jade trade is the mainstay of the local economy.

Be it the town's old district or newly developed areas, shops selling jade are ubiquitous, numbering more than 5,000.

If all the department stores, shopping malls and night markets in Taipei were converted into jade markets, the predominance and density of jade trading would probably equal that of Ruili.

Burma is the world's only source of gem-grade imperial jade (feicui), the most valuable jadeite and highly coveted in Chinese communities. The main mining areas for this precious stone are in northern Burma near the border to Yunnan Province.

Over time the center of the East Asian jadeite market moved from Japan in the post-war period to Taiwan in the 1980s, but entirely shifted to China after the turn of the 21st century.

During the past decade prices for jadeite have skyrocketed in China beyond imagination.

Raw jade exploitation in Burma cannot keep pace with Chinese consumers' enormous demand for Burmese jade. During the past ten years prices for gem-grade jade have risen about 20 percent per year, according to estimates by the Gems & Jewelry Trade Association of China.

Over the past two or three years annual price increases reached as high as 30 percent, as speculation in jade became popular among wealthy investors, given the persistently sluggish state of stock markets and the Chinese government's crackdown on property speculation.

Chinese traders buy up about 90 percent of the imperial jade sold by the Burmese government in auctions two or three times a year.

Last year transactions at public auctions earned a total of over 20 billion renminbi. The most expensive piece of raw jade was auctioned off for a winning bid of 300 million renminbi.

Thanks to its geographic proximity to the Burmese jade mines, Ruili has become the first stop for jade on its way into China.

Unofficial estimates hold that up to 60 percent of jade imported into China is channeled through Ruili. In recent years, the local government has also made great efforts to promote Ruili as the "jewelry center of the East."

Playground for Aspiring Millionaires from Abroad

The large market for pricey imperial jade not only attracts traders from Burma and all of China to Ruili. The strike-it-rich jade rush has also infected traders from India, Pakistan and Bangladesh.

Currently, more than half of the town's permanent residents are foreign nationals or hail from other Chinese provinces.

At the jade market run by Taiwanese jade merchant Zhan Maosheng and the adjoining alleys and lanes in the old part of town, traders from Southeast Asia and South Asia peddle their wares. People of different races and different skin colors congregate in this place, creating the impression of a small-scale United Nations gathering.

Chewing betel nut, wearing slippers and shouldering a backpack full of Burmese jade, they roam the streets in search of a good deal. When they come across a prospective buyer, they rush forward to offer their goods, forming a small crowd within seconds.

Peng Jue, the head of the local gems and jewelry trade association and a Burmese national, came to Ruili in 1990 hoping to cash in on the emerging jade rush.

In the twenty years since, Peng has developed an expert eye for high quality jadeite, which enables him to separate the wheat from the chaff. The simple warehouse behind his store holds piles of priceless raw, untreated Burmese jadeite. Some specimens are as big as the palm of your hand, while others are as huge as river boulders.

"This one is worth 300,000 renminbi," notes Peng as he points to a palm-size rock on the table. It's a jadeite variety known as "icy jadeite" because it has a milky white color and the translucency of ice. When illuminated with torch light, the piece emits a dazzling white shine.

"Just a few days ago a group of Hong Kong people bought a piece of jadeite for 10 million renminbi," reveals a smiling Peng, beaming with pride for having struck yet another good deal.

Ruili has much in common with Dihua Street, Taipei's old commercial center for trade in Chinese medicinal herbs, fabrics, incense, and tea. Behind the unassuming shops are very wealthy merchants from around the world like Peng.

In Ruili's Jewelry Street expensive imported sedans of such makes as BMW, Porsche, Mercedes-Benz, and Audi are a common sight. Yunnan's first Rolls-Royce is said to have been bought by a Ruili merchant.

"After coming to Ruili, you don't feel very rich anymore, you only feel that you don't have enough money," notes Zhan's second son Zhan Jieyuan, given the ostentatious display of local wealth.

The Burma Road was once a lifeline for China during World War II. Now many locals have renamed it "Jade Road," the thoroughfare to riches for merchants from countries around the region.

TaiLi Group – A Conglomerate Built on Burmese Jade

Zhan originally ran a fruit wholesale store in Taipei County. But 20 years ago when in his early forties, he went to China with several friends to explore business opportunities there. On their quest, they ventured westward from the coastal areas further into China's hinterland and ended up near the Burmese border in Ruili.

At first Zhan imported pomelos from Taiwan and ran a farm. By now his business empire has greatly expanded and spans virtually all lucrative local industries such as farming, real estate development, construction, retail market management, logistics, tourism, and jadeite trading.

The shopping street where he made his fortune officially carries the name Ruijing Road. But the locals call it "TaiLi Street," a clear indication of the overwhelming influence of the business empire Zhan founded, the TaiLi Group.

Over the past two decades Zhan witnessed Ruili's rise from a desolate border town to a commercial center for jadeite merchants from all over Asia.

"When I first came to Ruili, it took me 36 hours jostling around in a car from Kunming," recalls Zhan with a wry smile.

Back then, Ruili had only one run-down shopping street, which today has evolved into TaiLi Street. It is here that Zhan has established an agricultural products market as a marketing platform for local producers and to sell fruit from his own farm to customers in Kunming.

Following China's economic rise, two-way trade between China and neighboring Burma has been increasing rapidly.

On top of jadeite, China imports farm products and timber from Burma. The Southeast Asian country, for its part, imports daily necessities, car parts and processed foods from China.

In 2000, the State Council, China's cabinet, authorized the creation of the Jiegao Special Export Processing Zone, as China's sole "inland, customs-free" zone. While the area is located inside national territory, it is exempt from customs duties and customs clearance procedures. The concept is comparable to that of the Offshore Transshipment Center in Kaohsiung Harbor and aims to facilitate cross-border trade.

Growth Rates of 30 Percent despite European Bond Crisis

Zhan was also quick to jump on the bandwagon of the customs-free zone, opening a logistics center at its border port in 2004.

Tang Xiao, a warehouse manager at TaiLi Group company Dong Xie Logistics, remembers that the center's freight yard was still pretty empty before 2007. But now as many as 400 trucks come and go per day.

Despite its soccer field dimensions, the freight yard is packed with fully loaded trucks from Burma day and night so that the current space does not suffice anymore. The vendor stalls in its vicinity are also fully rented out.

The Ruili city government estimates trade at the border port has grown at an annual rate of 30 percent during the past years. Last year trade volume hit 10 billion renminbi. Ruili seems to have escaped the onslaught on global trade from the European debt crisis completely unscathed.

In front of the logistic center's border crossing, trucks from Burma carrying huge 7-meter-long pipeline sections are waiting in line for clearance to cross the border back home.

The pipes are destined for a pipeline that will connect the port of Kyauk Phyu on the Bay of Bengal in western Burma with the China National Petroleum refinery in Anning near Kunming. In the future crude oil will be shipped from the Middle East to Kyauk Phyu and then fed to China via the 2,500-kilometer-long pipeline, which will pass the border in Ruili and end in Kunming, to meet demand in China's Southwest.

Thanks to the oil line, passage through the Strait of Malacca can be avoided, and the shipping route can be cut short by more than 1,000 kilometers. At the same time the oil transports would stay clear of the South China Sea, where the United States has a strong military presence and territorial disputes abound. This is in line with China's national strategy.

"Ruili is a transshipment center linking China, Burma and the Indian Ocean," remarks Zhan in explaining Ruili's strategic importance.

Two years ago, China selected Ruili as one of four border economic zones intended to promote commerce through trade liberalization and development, and is endeavoring to completely develop the transportation infrastructure from Kunming via Ruili to Burma and the Indian Ocean.

The entire Chinese section of the Burma Road will be upgraded into a national expressway. The Kunming-Dali railroad stretch will be extended to Ruili and into Burma, where it will connect to the national railroads, forming the southern corridor for the emerging Trans-Asian Railway Network.

"In Ruili, whether you're aiming to export or import, you have a market of over a billion customers," Zhan exudes, repeatedly emphasizing the good foresight he had in choosing to settle there. "I've waited 20 years, and now my time has finally come."

Stop No. 2
Kunming – Springboard to Southeast Asia

Following the old Burma Road from Ruili about 700 kilometers to the northeast is Kunming, the capital of Yunnan Province.

The city was the most important support base after Chongqing during World War II. American material assistance reached Kunming via the Ledo Road (from northeastern India) and the Burma Road and was collected there before being distributed to where it was needed.

Today, goods are traveling in the reverse direction on those same roads. Kunming's role has changed from a logistics hub for material aid to a bridgehead for China's commercial offensive into the ASEAN countries and the Indian Ocean.

Sitting at an altitude of 2,000 meters, Kunming has a vernal, comfortable climate year round, earning it the moniker "Spring Town." Blue sky and white clouds, ever so rare in China's polluted coastal cities, are standard features in the southwestern city.

In recent years, however, clouds of dust have been far more common in the city's center than fluffy white clouds in the sky, the result of a major new development on the southern outskirts called the Chenggong New Area.

Getting Ready for a Unified ASEAN Market

Arising on this massive construction site are a number of facilities pointing to the area's central role on this new silk road – a new city hall, a commerce and trade center, an economic development zone, a residential area and a logistics hub connected to a Trans-Asian railway and a Kunming-to-Bangkok highway.

The new Kunming Changshui International Airport – considered by locals to be China's third largest airport, behind only those in Beijing and in Pudong, Shanghai – formally begins operations on June 28.

This building frenzy has one goal: to convert Kunming into a bridgehead linking China to ASEAN countries.

But the truth is that Kunming already has close ties binding it to Southeast Asia. Half of the city's external trade is with ASEAN countries, and trade with the region has grown at a 30-percent clip for each of the past two years, far faster than that of the rest of the country.

With Kunming such a key hub for China's economic ties with Southeast Asia, six of ASEAN's 10 countries have established consulates in the city.

The Kunming-Bangkok highway, which heads southwest from Kunming into northern Laos and on to Bangkok, opened in 2008. In the future, the hub will connect to the Trans-Asian railway network in the Greater Mekong Subregion. 

Uni-President Enterprises – Building its ASEAN Bridgehead

Among those attracted to Kunming's potential is Taiwan's leading food processor, the Uni-President Group. Its food processing factory in the Chenggong New Area began operations in 2010 and has posted annual sales growth of 30 percent since then.

But the local market is only part of the reason Uni-President has invested heavily in the area. Its long-term target is the ASEAN common market, set to become a reality in 2015. A small number of its products are already being exported into northern ASEAN markets via the old Burma Road and the Kunming-Bangkok Highway.

"The Kunming facility was set up based on the concept of moving into the Southeast Asian market," says Wang Chiu-chung, the director of the Uni-President Group's Kunming President Enterprise Food Co.

Similarly, in the six-floor Luoshiwan International Trade Center in the Chenggong New Area, thousands of small shops have been set up along the building's seemingly endless corridors. Business people shuttling between stores pushing their shopping carts can be seen everywhere.

This is the Kunming version of the massive wholesale Yiwu Commodity Market in Zhejiang province. Wholesalers and distributors from around China gather there to sell their goods to merchants from Southeast Asia looking to import Chinese fashion and accessories.

Yin Fengjin from Hunan arrived in Kunming 10 years ago to set up a fashion wholesale business there and now has many customers from Vietnam, Thailand and Laos. "Business is better here than in Hunan," Yin admits.

By her side is a customer busy bundling three hemp bags full of clothes, getting ready to head to Ruili to sell the clothes to Burmese shoppers across the border.

Yet even as Yin's business thrives, opportunity has brought new obstacles. Asked whether her business has gotten better in recent years, Yin shakes her head. "There are more and more vendors coming here, making the competition more intense. It's getting harder and harder to make money."

Stop No. 3
Guangzhou – China's Gem Wholesaling Locus

If Ruili in southwestern Yunnan Province is China's top source of fine jade, then Guangzhou is surely China's jade and gem wholesaling center.
 
Nine out of every ten bracelets of imperial jade in China come from Guangzhou.

Aside from pursuing an increase in production volume, Guangzhou has recently been paying greater heed to raising standards. Taiwanese entrepreneur Runny Su's Guangzhou-based iStone has been in the thick of it, trying its hand at playing the role of promoter.

iStone: Granting 'Branded' Life to Chinese Gemstones

With more than a thousand retail outlets across China, iStone is now in the process of shifting from satisfying young consumers' demand for affordable fashion jewelry brands to providing middle- and high-end fashion accessories for more mature men and women.

In 1997 Su opened China's first branded jewelry store, on Hunan Road in Nanjing.

As iStone general manager Steven Su tells it, those involved in China's gem trade back then had never heard of the word "branding." His father, however, was way ahead of the curve in turning gemstones from a luxury item into something for ordinary people.

Moreover, with massive worker layoffs at the time resulting from ongoing reforms of state-run enterprises, people flocked to join iStone's franchise system and outlets spread across China like wildfire.

Telling the Story of China's Gems

Over the next 10 years, however, what had been largely uncontested market space evolved into a heated battleground.

A cascade of Chinese jewelry brands emerged, and competition became increasingly intense. Add to that the twin headaches of rising wages and the turbulence of the 2008 global financial crisis, and those players who did not or could not take the next step upward could no longer survive.

"Prior to 2008, the money came easy, but those good days are behind us now," Steven Su says.

That was the year Steven Su had just turned 30, and the year he took over as general manager of iStone.

He immediately set to work on market research, calling for a national conference of iStone executives to be convened at the company's headquarters in Guangzhou's Huadu District, where the blueprint for iStone's transformation would be hammered out: The company anointed itself narrator of the story of China's gems.

In 2009, Su took a page from the book of century-old Austrian crystal brand Swarovski's "Crystal Worlds" museum, constructing the "iStone Mineral Park," an underground gemstone museum, in Guangzhou.

Exhibiting a collection of rare and unique stone specimens over an area the size of two football pitches, the objective of the facility is to educate the general public on the history and cultural ramifications of the gemstones on display.

"Although the stones are not particularly eye-catching, they are minerals that have been forged by forces deep within the earth for tens of millions of years," Su says.

Culture and creativity are absolutely essential, Su emphasizes, for any business that hopes to move forward.

Stop No. 4
Shenzhen – Jewelry Branding Operations Center

Shenzhen, the first "special economic zone" created in the early days of China's economic liberalization, is a major manufacturing center for computers, communications products and consumer electronics.

Yet Shenzhen is at the same time China's center of jewelry and gemstone branding operations and precious metals processing, accounting for 70 percent of the country's jewelry and gemstone output value.

These industries are centered along Shuibei 1st and Shuibei 2nd Roads in Luohu District, on the outskirts of Shenzhen, an area that has come to be known as the Shuibei Jewelry District.

Of every ten shops clustered along the streets, no fewer than eight are jewelry stores, with most of the rest engaged in businesses associated with the jewelry industry. Nearly every commercial building is occupied by jewelry companies, with even the lower floors of residential buildings given over to jewelry company office space.
 
Pedestrians carrying cases on the street may be toting tens of millions of renminbi in precious metals or gemstones.

China's gemstone and precious metals business has now entered a "Warring States Period" among the rising titans of the business, and it continues to expand at a prodigious pace. With sales value growing around 30 percent annually, it is widely viewed as a sunrise industry.

The Gems and Jewelry Trade Association of China reckoned the value of the domestic market for 2010 at 240 billion renminbi and expects that to reach 300 billion renminbi by 2020, thereby surpassing the United States to become the world's largest jewelry and gemstone market.

But most of those sales are consummated by myriad small- and medium-sized enterprises, with the industry leaders accounting for less than 10 percent. Brand recognition and brand influence are low, and the industry remains focused largely on contract processing work for international brands.

Aggressively Establishing Independent Brands

But over the past several years, the industry of Shenzhen has been aggressively establishing independent brands in its effort to move into the higher end.

"Chinese companies have already been through the survival stage. Now they're ready to start developing," says Liu Fa Zhi, chairman of China Gold Gift, a wholesaler of gold gift items that is a subsidiary of Shenzhen Gold Dragon Group.

A fashion maven who often travels to Italy to buy clothes, Liu appeared for an interview looking stylish, sporting a sharply tailored black Dolce & Gabbana suit paired with black-framed glasses.

Liu believes that traditional, family-operated jewelry businesses need to take the next developmental step by injecting elements of culture and creativity.

"If China wants to talk branding, it needs to come up with a cultural narrative, and to give China's ancient culture a modern context," he says. "Because buying a brand is buying into cultural and spiritual value, not material value."

Getting a Voice in Global Gold Markets

While in Taipei for a ceremony to join the two halves of the famed Yuan Dynasty landscape painting Dwelling in the Fuchun Mountains by Huang Gongwang, which had been separated for decades due to cross-strait animosity, Liu's mind seized upon the notion of combining gold with Huang's seminal classic to give China a voice in international gold markets.

Through contacts in Taiwan, Liu aggressively sought to acquire the rights to reproduce the image from the National Palace Museum in Taipei.

As it was their first experience negotiating reproduction rights with a China-based business, the museum was extraordinarily cautious, meticulously poring over the history of the Gold Dragon Group going back generations, including its record protecting intellectual property rights.

"It was only through working with the National Palace Museum in Taipei that I became aware of the sheer number of details involved in the cultural and creative industries," exclaims Liu.

As it was the museum's first time authorizing a Chinese business to make reproductions of an artwork, the standard model and procedures had to be drawn from scratch, so it was particularly grueling, explains Heather C.H. Ho, managing director of the Museum Shop & Restaurant at the National Palace Museum.

Artisans contracted by the Gold Dragon Group subsequently spent 10 months reproducing the famed scroll painting in pure gold to its original dimensions, which at seven meters in length ultimately tipped the scales at 100 kg. Liu is hopeful these sorts of "cultural and creative products" will drive China's jewelry industry to the next level.

"Currently, Chinese consumers are still relatively more concerned with the value of the materials in their jewelry, and aren't terribly concerned with brand or design," Liu says, pointing out a major bottleneck facing the industry. "So a lot of companies aren't willing to expend too many resources on branding and design."

Behind the disdain for branding and design lies a general disregard for intellectual property rights, wherein lies the even greater challenge for the "dissemination" of China's "soft standards."

"Without respect for intellectual property rights, there is no future for Chinese cultural and creative industry," says National Palace Museum Department of Creativity and Marketing director Su Wen-Syan.

Translated from the Chinese by Luke Sabatier, Susanne Ganz, Brian Kennedy

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