In November 2003, with much fanfare, BMW opened a joint-venture plant to make its cars in Shenyang, a sprawling industrial city in northeast China. Since then, its sales in China have fallen by more than 10 per cent, despite overall growth in the market of about 15 per cent. Was it a mistake to manufacture in China, when the customers of BMW want a car that is made in Germany? Is the group confusing the luxury and the mass market? Such questions were on the minds of more than 400 executives of luxury goods companies and institutional investors attending the Business of Luxury summit that opened at the former Hall of Sino-Soviet Friendship today. They want to know if the Chinese can rival, or even overtake, the Japanese as consumers of their products. The target market is an estimated 4.5 million Chinese with annual spending power of more than US$30,000 - managers of state and foreign companies, heads of private firms, young professionals on the way up, corrupt officials and Mafia bosses. Luxury goods firms believe their prosperity in the socialist market will be fuelled by unvarnished conspicuous consumption. Chinese customers, they say, buy luxury goods to show their social status and financial success, to impress their friends, family and colleagues, to distinguish themselves from the masses, and to join the global community of owners of expensive things. Last year, Chinese accounted for 12 per cent of global sales of luxury products - 2 per cent bought on the mainland and 10 per cent abroad. That compares with 41 per cent of the total purchased by Japanese consumers, 17 per cent by Americans and 16 per cent by Europeans, according to a research report by Goldman Sachs. The most successful foreign luxury firm is the Swatch Group, which first entered the China market in 1974 with the Rado brand. Its Omega brand is the top seller in the luxury watch segment, with 40 outlets and distributed in 74 cities. Omega expects China to become its largest market worldwide within a few years and has opened at least 14 flagship stores in major cities. In leather goods, the most successful foreign brand is Louis Vuitton, which opened its first China store in Beijing in 1992 and now has 13, including one on two floors in Plaza 66, on Nanjing Road, the centre for luxury goods in Shanghai. Chinese are the third most important customer base for LV, with sales rising 30 per cent a year, most of them outside the mainland. A saleswoman at the LV store in Plaza 66 said that they had a smaller volume of clients than other shops. 'Our customers do not want a big crowd and want personalised service. We have two kinds: regulars, very wealthy, who come here to buy often, do not care about the price and want the most fashionable items. The others are white-collar employees in foreign companies, especially young women. They spend one month's wages on a single bag.' Hong Kong remains the most popular place for Chinese to buy luxury goods, because prices are about 30 per cent cheaper than on the mainland and there is a wider selection. Mainland stores serve then as a place to buy and an advertising window to spread awareness of the brand and help customers decide what they want to buy when they go abroad. The companies do little advertising in the mass media and target their potential buyers through product promotions and invitation events. Amid the boom in luxury goods, the failure of BMW is a puzzle. It has a well-established brand and the good name of German engineering and technology. But last year, its sales in China fell 16 per cent to 15,480 units and, in the first quarter of this year, slid 11 per cent to 3,977. The group dismisses the fall as short term, saying that China will become one of its five biggest markets worldwide within 10 years, but analysts believe that it could have guarded its luxury image better by selling only imported models. Goldman Sachs forecast that demand for luxury goods by Chinese abroad will grow 20 per cent a year until 2008 and then 10 per cent a year until 2015, thanks to rapid growth in the number of Chinese tourists and more countries issuing them tourist visas. The sale of fakes is growing as rapidly as that of the real thing. China is the counterfeit capital of the world. About three kilometres from Plaza 66 is the open-air Xiangyang market, which offers a wealth of brands, including Gucci, Dior, LV and Rolex, for a fraction of the cost of the genuine article. On the corner of one of Shanghai's busiest shopping streets, it attracts thousands of tourists every day, under the watchful eye of police who do nothing. Chris Torrens, a retail specialist at AccessAsia, said the wide availability of fakes had not stopped the luxury goods firms from investing in China. 'Fakes build brand. People will upgrade when they can afford it.' Tess Johnston, a resident of Shanghai and author of several books on the city, said that Chinese liked to buy luxury brands because they were a guarantee of style and good design. 'Most people have had their sense of style destroyed by 40 years of communism. If you buy a top brand, you know you are getting something good.'