-three great articles on the seduction of China (why should they be different?) with 'American free-enterprise, capitalist democracy and the right to make as much money as you can and spend it any way you choose -as long as there's no law against it' -from The Economist Magazine June 19, 2004

An unquenchable thirst
Jun 17th 2004 | SHANHOU VILLAGE
Growing tensions over scarce water

IN THE drought-stricken village of Shanhou, straw-hatted farmers are busy spreading grains of wheat on the roads to dry in the hot sun. The harvest is a fraction of what it was a few years ago when water flowed in the Juma River, which traverses the village. Now the wide river bed is an expanse of sand and pebbles. But it is not the drought they blame, as much as an unquenchable thirst for water in Beijing, a few miles upstream.

A few days ago, the capital quietly completed a project on the Juma River to divert the water to one the city's biggest state-owned industries, Yanshan Petrochemical. Only on the rare occasions when the river is high will it flow over the diversion dam and on into Hebei Province, to which Shanhou village belongs. According to reports in the state-owned media, a bitter dispute erupted between Hebei and Beijing after news of the project emerged in September last year.

China abhors open feuding between government bodies. But northern China's increasingly acute water shortage is causing tempers to fray. The demands of intensive farming and burgeoning industrial development, as well as waste and pollution, add to the area's historic problem of low rainfall. Last year China consumed four times as much water for each 10,000 yuan ($1,200) of GDP compared with the world average, the Ministry of Water Resources said this month.

But keeping the capital well supplied is a top political priority. Beijing relies heavily on water from Hebei, which has little choice but to provide generous quantities in spite of its own acute needs. The capital is trying to put a stop to wasteful water use by raising charges and investing more in recycling. Work has also begun on a massive project, due for completion in 2010, to divert water from the Yangtze valley. But Beijing's construction frenzy, influx of migrant workers and the Olympic Games in 2008 will all generate growing demand for water.

In February, the Chinese media reported that Beijing had suspended its diversion project on the Juma River and ceased work on the extraction of underground water nearby (also for the petrochemical firm) in order to ease negotiations with Hebei. But if this was so, the stoppage was brief. Your correspondent this week saw a newly fortified stone dam funnelling all of the water flow into a concrete culvert. Workers said it was destined for Yanshan Petrochemical. They said wells had been sunk as well to supplement the supply with underground water when needed.

A study published by the Hebei Water Resources Survey Bureau about five years ago—when Beijing was considering a similar diversion scheme—said the project then under review would have a “colossal impact” downstream, negatively affecting the livelihoods of 120,000 people in several Hebei counties.

Hebei is hardly blameless. Farmers in Shanhou village say quarries using large amounts of well water have proliferated on the dry river bed in Hebei for the extraction of sand and pebbles to supply the booming construction industry. Much of the Juma River is diverted before it even reaches the capital.

Jiang Wenlai, a water resources expert at the Chinese Academy of Agricultural Science, says the willingness of Hebei to raise its complaints with Beijing is a sign of progress from the days when no one would dare take on the capital. But a Hebei water-resources official clearly recognises to whom he should defer. “Beijing is the capital, so it takes precedence when it comes to politics and overall needs.”

*1 - [WANNABE] "globalization and 'the superiority of the United States of America', in this respect, has everyone in the world a 'wannabe to our value-based worth by ownership' that churns and only further complicates the difficulty of 'sustainable resource use' thruout the world." (-from Gross Demographic Changes Attaching Sustainable Resource Use (or) The Failure of 'Sustainable Resource Use' by 2040-50

Conspicuous consumption in China
Luxury's new empire
Are the Chinese replacing the Japanese as the world's most fanatical shoppers?

THREE ON THE BUND is a vision of the future of Chinese consumerism. The grand, newly refurbished building, first erected on Shanghai's historic waterfront in 1916, houses a top-notch restaurant to satisfy the stomach; an ultra-chic contemporary art gallery to stimulate the mind; and a reassuringly expensive spa (with indoor canals improbably filled with Evian water) to pamper the body. At its heart is a luxury-goods store. Arrestingly lined with metal and hemp, the Armani outlet is the firm's biggest in Asia outside Japan. Georgio Armani himself, say his underlings breathlessly, flew in before the recent opening to check personally every fitting, so besotted is he with China's potential.

As with so much in China, the promise is indeed vast. The industry estimates there are now around 10m-13m mainland customers for luxury goods—mostly entrepreneurs and young professionals working for multinational firms. Most live on the country's eastern seaboard in big cities such as Shanghai, Beijing and Dalian.

Many luxury firms see Chinese shoppers as the new Japanese—a potentially huge group of status-conscious, increasingly wealthy people hungry for brands and fanatical about shopping. But the Japanese, long the industry's stalwart shoppers, are increasingly spending their money on cultural and culinary pleasures.

In China, attitudes to luxury have changed dramatically from just a few years ago, when any form of ostentation was frowned upon. Today's Chinese, above all the young, love to flaunt their status. Claire Kent, an analyst at Morgan Stanley, says that, whereas people in the West are buying more discreetly branded luxury goods identifiable only by those “in the know”, the Chinese favour prominent logos that shout, “Look, I'm rich.”

Until recently 90% of all luxury spending in China was by men. But, says Hugues Witvoet of LVMH Investment Asia, more Chinese women are buying brands to assert their independence and to feel good.

Dragon attack

Luxury-goods firms are thus becoming wildly excited about the possibilities—in China and beyond. Armani plans to open 20-30 new stores on the mainland by 2008. Prada will invest $40m in China in the next two years, and almost double the number of stores there this year to 15. Louis Vuitton will open its first full-range shop on the mainland in Shanghai in September, and will have 13 stores by year end.

As the Chinese travel more, they are broadening not only their minds but also the range of luxury goods they come into contact with. Once abroad, their favourite activity seems to be shopping. During last month's Golden Week holiday, around 380,000 mainland tourists visited Hong Kong in just ten days, almost 80% up on 2002. (Last year, SARS kept numbers down.) Mainlanders spend more per person in Hong Kong than any other tourists. From this summer they can travel as individuals to 12 of 15 EU countries (but not Britain, Ireland or Denmark).

“The Chinese go to Paris, stay at two- star hotels, eat cheap Chinese food and spend all their time shopping,” says a luxury-firm executive with glee. Christopher Zanardi-Landi, general manager in China for Louis Vuitton, says that the industry is preparing for “a huge wave” of Chinese shoppers. While they have hitherto catered mainly to Japanese tourists, “luxury stores in Paris are starting to employ Mandarin-speaking assistants,” he says.

But for now, Hong Kong remains the favoured destination for mainlanders. That is why so many luxury stores are opening in Hong Kong. In the past three months, Zegna, Ferragamo, Louis Vuitton, Prada and Dior (among others) have opened in bigger and better-designed spaces. Hong Kong's property developers are delighted.

Making money on the mainland is rather harder. Morgan Stanley's Ms Kent says that luxury firms “are unlikely to see a payback in China for at least five years because of the higher costs of doing business there and limited demand in the short term.” On a weekday afternoon, Plaza 66, the current Mecca for luxury-goods shoppers in Shanghai, is depressingly empty—the most dedicated “shoppers” turn out to be fashion editors loading up for photo shoots. Prices are the reason, says Helen Jiang, chief fashion editor at Biba, struggling with boxes of Fendi strappy sandals: “Who really can afford this stuff?” Higher taxes and duties mean that mainland prices can be 30% more than in Hong Kong. Even stores admit this. Linda Gong, manager at Versace in Plaza 66, says that many “shoppers would rather go to Hong Kong and Europe where the prices are cheaper.”

Still, Prada says that, after ten years, it is profitable in China, and Louis Vuitton says China is now its fourth-biggest market by sales. But Burberry and Zegna, which are spending frugally on numerous no-frills stores or franchises in secondary cities, are probably making the best returns. Zegna says that it is profitable.

A low-cost strategy may not be the best way to build brands in the long run. Alan Chan, who designed much of the interior of Three on the Bund, says that “Plaza 66 has never done well. But that doesn't matter. Shanghai is positioning itself as a theatre to show what can be done in China.” At a party on the eve of Golden Week to open Prada's ninth store in Hong Kong, Riccardo Stilli, the company's finance director, revealed that Rem Koolhaus, who created Prada's $40m famously arty space in Manhattan, will design a new “concept” Prada store in China—probably in Shanghai. Mr Stilli argues that big, high-profile stores with full ranges educate consumers about a brand and feed an appetite for spending overseas. “Returns on single stores are neither here nor there,” he says “What matters is the worldwide impact.”

But big investments could prove wildly misjudged. Andy Xie, an economist at Morgan Stanley, thinks that an investment bubble in assets such as property “has exaggerated China's income growth”, creating a hot but unstable market for luxury goods that could quickly collapse.

Meanwhile the industry faces a more immediate crisis—piracy. While Mr Armani calls counterfeiting “flattering”, privately the industry is worried—though not, it seems, enough to stop it exploring the potential of China's workers, as well as its shoppers. Despite concern that being made in China could cheapen their brand appeal, firms such as Coach, Paul Smith and Armani have already shifted some manufacturing to the mainland.

But piracy certainly threatens the exclusivity of luxury brands. Most newly wealthy Chinese still want the real thing, but as a rule the Chinese are far more price-conscious than the Japanese. And younger consumers are happy to mix cheap fakes with genuine products, and may even prefer pirated versions. Those cities determined to police piracy—notably Shanghai—cannot control it. Steven Liew, head of anti-counterfeiting at LVMH Fashion Group in China, is still shocked at the extent of the problem. “People turn up in our stores with a fake Louis Vuitton bag and ask what the difference is. It's outrageous.” But clearly not outrageous enough to stop the luxury industry rushing in.

China's car industry
The rich hit the road
Jun 17th 2004 | BEIJING
Luxury cars are driving fast into China
Can I trade in the trike?

ONCE it was assumed that when Chinese consumers could finally afford to buy cars, they would want basic, inexpensive models. But China, like every market in the world, has a wealthy minority that wants to drive something more racy or luxurious, especially from a famous marque. Although luxury cars account for only about 2-3% of car sales in China, that still adds up to a possible 120,000 vehicles to be sold in the country this year. And, as in the rest of China's car industry, this is causing competition to hot up.

At this month's Beijing motor show, Toyota's luxury division, Lexus, announced that it will open 14 Chinese dealerships in the coming year. Ford is to start selling cars from two of its upmarket brands, Aston Martin and Jaguar. Even Italy's Ferrari is coming. Cars from General Motors' luxury division, Cadillac, arrive in Chinese showrooms later this year—imported at first, but eventually made in China. Germany's BMW has already begun producing a version of its 5-Series in Shenyang, and Mercedes-Benz is preparing Chinese-made versions of some of its models. “By 2010, China could represent 15-20% of our total volume,” says Mark LaNeve, Cadillac's general manager.

This is a huge change from barely a decade ago when there were few private cars of any kind on Chinese roads. Now, in Beijing alone, some 1,000 cars a week are being added to the city's vehicle fleet.

So far this decade, demand for cars in China has grown at double and even triple-digit annual rates. This year, the pace has slowed a bit, and sales have actually declined in April and May as Chinese authorities have struggled to cool a red-hot economy. And yet, even with these declines, sales were up 21% in first five months of this year over the same period last year. With 5m vehicles likely to be sold this year, China is now a bigger national market by volume than Germany. China could soar past Japan by 2007, making it second only to car-crazy America.

So, as well as their luxury-vehicle projects, carmakers have been announcing production increases in China across most of their ranges. GM plans to double its production capacity in China, at a cost of $3 billion, and Volkswagen is investing €5.3 billion ($6.4 billion) in its facilities. New investment in China's car industry announced in the past year or so exceeds $13 billion, according to research by Automotive Resources Asia (ARA), a consultancy.

“We're going to see overkill, just like we have in other industries,” says ARA's founder Michael Dunne. He points to China's over-optimistic television manufacturers, who now have four times more capacity than they need.

There is, however, a potential safety valve. A new Honda plant will be devoted specifically to exports. Volkswagen hints that it will begin exporting from China as well, and others could follow. Chinese factories have long been seen as too inefficient to export—and perhaps the coming exports will bring in only enough revenues to cover marginal production costs, not total costs. Successful exporting will require the Chinese assembly plants to keep their quality levels high—something consumers abroad have come to expect of their cars, luxury or not.