The Gucci Killers

Shanghai Tang has learned from its past mistakes—and now it's gunning to become China's first great luxury brand. Forget about cheap socks and DVD players. This is the next battlefield for global competition.

It's 10 till 10:00 on a dark night in a 1,300-year-old Confucian temple in Shanghai, and if the weather is any indication, Confucius is ticked. October is traditionally a dry month in this part of eastern China. Indeed, yesterday was sunny, and tomorrow is predicted to be glorious. But a steady rain has been falling since late afternoon and shows no signs of letting up. Journalists from three continents, local bigwigs, style-obsessed Chuppies, and even three athletes from China's 2002 World Cup soccer team—certified national heroes—are huddled under umbrellas in the wings, drinking champagne, waiting for a fashion show to begin.

A red lacquered catwalk, slick with puddles, rises three feet above the temple's paving stones and runs the length of the open courtyard. It's a personal-injury lawsuit waiting to happen. But Raphael le Masne de Chermont, CEO of the Chinese luxury lifestyle brand Shanghai Tang, seems unconcerned. Despite the fact that he's about to watch a $49,000 hand-embroidered, chinchilla-lined silk coat that took four months to make (and has already been sold to a Chinese mogul's wife) come sloshing through the rain, he's as charming and chipper as if this were a cozy tent in Bryant Park. If courage is grace under pressure, le Masne de Chermont deserves a fashion-industry medal of honor.

The lights go up, the throbbing beat of "Tainted Love" fills the temple, and a parade of gazellelike Chinese models begins mincing through the mist on high-heeled wedgies. On display is an array of sumptuous clothing: Brocaded parkas with fur-trimmed hoods, silk jackets topstitched in cloud patterns, tweed skirts festooned with crystals in a dragon-scale design, and cardigans embellished with jade are among the 46 outfits to skitter through the rain.

When the final outfit, a full-length shearling coat encrusted with Swarovski crystals, makes it safely back to home plate, the crowd bursts into relieved applause. "Confucius is a very tolerant man," sighs le Masne de Chermont, before leaping to the stage with his creative director, Joanne Ooi, for a triumphal lap.

The glitzy event was a high-stakes gamble for the brand, which has had a rocky history since its launch 11 years ago, including an embarrassing flame-out in New York in 1999. But now the new team, led by le Masne de Chermont and Ooi, believes that Shanghai Tang's moment on the world runway has arrived. If, as global market watchers from Wall Street to Tokyo have claimed, this is the China Century, then Shanghai Tang may just turn out to be that century's banner—China's first global, upscale brand.

China is on the verge of fielding high-end fashion that can compete with anything coming out of Paris, New York, or Milan.

For this exuberant and increasingly entrepreneurial nation, it would be a natural evolution—and a stunning one. As China enters the modern economic market, it has gone from being the low-cost factory for Wal-Mart to the purchaser of big-name brands (think Lenovo's recent acquisition of ThinkPad from IBM). The third stage will be for China to create brands of its own, becoming a center of design and innovation capable of fielding products that can compete in quality, style, and prestige with anything from Paris, Milan, or New York. "The opportunity for Shanghai Tang right now is huge," says David Melancon, North American president of brand strategy firm FutureBrand. "They could be the first big luxury brand out of Asia."

Out of Asia, yes—and in it, too. While the global luxury market is already big—$168 billion a year, according to Bain & Co.—and growing at a rate of 7% per year, "big" doesn't begin to describe the potential market for glitzy goods in China itself. A quarter of a century ago, there were no millionaires in China; by the end of 2004, there were more than 236,000, Bain says. And Patrizio Bertelli, the CEO of another fashion house that's hungrily eying the market—Prada Group—figures that China could overtake the United States as a market for luxury goods by 2020.

In the meantime, the profits China's homegrown brands earn at home will help finance their forays into the rest of the world. Add in the cheap labor close at hand (an edge over many Western luxury labels, which are made in Europe), and the Guccis and Armanis could be facing competition like they've never seen before.

The winds of fashion seem to be blowing in Shanghai Tang's direction, too. By one estimate, in a decade, as many Americans will be visiting China as will travel to Europe. And just as, 20 years ago, Americans brought back a taste for things French and Italian from trips abroad, now they're likely to embrace the next cool thing: Asian chic. "Asian fusion is the top of the style wave," says Michael Silverstein, global practice area leader of the Boston Consulting Group and coauthor of Trading Up: The New American Luxury. "Design is flowing across markets." That puts Shanghai Tang in a fashion sweet spot. Much as Ralph Lauren, a garmento from the Bronx, created a brand translating the look of the landed gentry into fashion and decor that could look at home from Shaker Heights to Pacific Palisades, so too does this company aspire to be the bridge between East and West. (It helps that it's majority-owned by Richemont, a Swiss-based luxury-brands holding company.) "What Shanghai Tang does is translate two cultures," says le Masne de Chermont.

Until now, Shanghai Tang has been proceeding cautiously, focusing first on satisfying the growing Chinese demand for prestigious labels at home, with five stores in Hong Kong and four on the Mainland (plus 10 outposts in places such as Paris, London, and Bangkok). But now it's embarking on an ambitious expansion plan that will see it launching five stores a year in the world's toniest markets. As it emerges on the world stage, though, it must pull off a delicate balancing act: It has to create a look that's both Chinese and international, authentic and sophisticated enough for a global audience. Too much Asian kitsch, and it's dead.

Shanghai Tang's flagship store in Hong Kong's Central District reveals a delicate balancing act: Tang has to create a look that's both culturally authentic and sophisticated.

It's a hazard le Masne de Chermont, 42, knows all too well. Walking through the company's flagship store on Pedder Street in Hong Kong's Central District, he points out the range of merchandise. Sure, there are rows of colorful qi paos, those Suzie Wong dresses so beloved by Hong Kong tourists, and silk-lined velvet "Tang" Mao jackets for men, so decadent they could get you exiled to a rice paddy for a reeducation in proletarian values. But, he says, most of the clothes show their Chinese heritage with far more subtle touches. Men's shirts are made from striped and plaid fabric that would be at home in Brooks Brothers but sport mandarin collars or knotted buttons that hint at their more exotic pedigree.

The women's line features cashmere cable-knit fishermen sweaters lined with Chinese-patterned silk. Other garments wear their parentage more boldly, with luxurious touches such as peony-bedecked brocade, braid twisted into eternity knots, and beaded dragon designs, or with cheeky riffs on Chinese history such as buttons featuring tiny pictures of the late Dowager Empress Cixi.

It's no surprise, says le Masne de Chermont, that the company's principals have been recruited from the carpetbagging global creative class. The brand's founder, British-educated David Tang, is from Hong Kong, that most Western of Chinese cities. Ooi is American; Camilla Hammar, the marketing director, is Swedish. Le Masne de Chermont, who is French, honed his luxury branding skills at Piaget before being deployed by Richemont, whose portfolio also includes Mont Blanc, Chloe, Dunhill, and Cartier, to fix its ailing Shanghai Tang brand.

"We're a melting pot of multicultural people who work on the same vision: a Chinese lifestyle brand that's relevant," he says. As for native Chinese, he says, they're starting to understand branding and sophistication, too. "They are so eager to learn, you cannot imagine."

Learning is a skill much prized in the Richemont organization. "You can make a mistake," Johann Rupert, the company's South African chairman, told le Masne de Chermont, "but you can't make it twice." Shanghai Tang sorely needed that indulgence in 1999, after it had to shutter its glitzy, 12,000-square-foot showplace on Madison Avenue when sales of qi paos and Mao watches couldn't keep pace with Manhattan rents.

David Tang, son of a wealthy Chinese businessman, launched the brand in 1994 in Hong Kong as a custom-tailoring business, marshaling the talents of Shanghainese tailors who had fled Communist China in 1949. In 1996, anticipating a robust market selling Chinese souvenirs to well-heeled tourists attracted by the handover of the city from the British in 1997, he expanded into ready-to-wear. On November 21, 1997, Tang, who had already succeeded in selling the lion's share of the company to Richemont, was ready to colonize New York. At precisely 6:18 p.m.—a time chosen by his feng shui master—he threw open the doors of his palace on a posh stretch of Madison Avenue just across the street from Barneys, welcoming the city's glitterati for a bash that featured roast suckling pig, lion dancers, and Fergie, the Duchess of York. It was such a hot ticket that many partygoers were stuck outside in the rain as the NYPD, citing the city's tough fire codes, turned people away at the door.

The fashion world at the time seemed mystified as to whether Tang was launching a new era of global fashion or peddling Chinese tchotchkes better left to Canal Street. Nineteen months later, it was clear Tang had miscalculated Americans' appetite for expensive Chinese costumery, silver rice bowls, and painted lanterns. "It was not the ideal way to start a business," concedes le Masne de Chermont. "But unlike Europe, America is tolerant of mistakes as long as you learn. And we have learned from this huge mistake. We needed to be more modern."

The lessons of the Madison Avenue meltdown were clear: To compete in the high-end fashion business, you need a continuous array of fresh merchandise to keep customers coming back. You need clothes that are wearable and relevant to modern lives, not costumey designs. And you need to know your market before you make a big real-estate bet—particularly in the most expensive cities in the world.

The company moved to a smaller space farther up Madison, and hunkered down to rethink its strategy. Back in Hong Kong, mired in the Asian financial crisis, things weren't going so well, either. By the time le Masne de Chermont was hired in 2001, revenue was stagnant. Then SARS hit in 2002, effectively shutting down business in Hong Kong for six months.

Meanwhile, rivals were starting to steal some of Shanghai Tang's cultural thunder. One of them was Ooi, who, after various jobs in the Hong Kong fashion industry, had opened her own store across from the Shanghai Tang flagship. China was chic, and international fashion editors were going wild for qi pao dresses. "I thought I'd launch my own ready-to-wear line based on the idea of innovating this iconic symbol," says Ooi, a 5-foot-6 Asian-American whose own fashion taste runs to jeans and T-shirts. "To underscore my point, I even made one qi pao out of African kente cloth and put it in my window. I thought I would eat Shanghai Tang for lunch."

That brash self-confidence is quintessential Ooi. Born in Singapore, the 37-year-old grew up in Cincinnati, the eldest child of two doctors. Her childhood, she says, was a classic tale of Chinese upbringing. "I could do anything I wanted as long as I got good grades," she says. She regularly played hooky, showing up only for exams—and generally acing them. She got kicked out of class for calling her anatomy teacher a fat cow and was suspended for accusing the orchestra conductor of raging mediocrity. "I did really obnoxious things," she says with little apparent remorse.

Still, her grades were good enough to earn her admission to Columbia. After a postgraduate stint at Smith Barney, she earned a law degree from the University of Pennsylvania with the idea of practicing corporate law. That didn't feel right, though. "I realized I didn't want to be the handmaiden to business," she says. "I wanted to be the entrepreneur. I wanted to make the creative ideas." She followed a corporate lawyer boyfriend (whom she later married) to Hong Kong in 1993 and took a job at a garment trading office. She also fell in love with Hong Kong. "It had this crazy kinetic energy of people going nonstop. It appealed to me immediately."

With the same voracious appetite for learning that had fueled her trajectory from the Midwest to the Ivy League, she also embraced her own Chinese heritage. She taught herself Mandarin and began cramming Chinese history and culture. But by October 2001, she was at a crossroads. Her marriage was faltering, and she was looking to make a clean break. "I needed to change my life," she says.

Enter le Masne de Chermont, who met Ooi through a headhunter friend. They quickly realized they shared a passion for an authentic Chinese luxury brand, but one that recognized the primary imperative of the fashion industry: constant innovation. Le Masne de Chermont asked Ooi to walk around the flagship store and write up her thoughts. Her observations were unsparing: "It's an overpriced Chinese emporium that has no credibility with local Chinese people, let alone with fashion people. Its very narrow market is high-end tourists. It's a once-in-a-lifetime destination shopping experience, a kind of fashion Disneyland. Plus, it's unwearable and eccentric." Le Masne de Chermont made her an offer.

Ooi joined the company as marketing and creative director, and the two immediately set to work reimagining what Shanghai Tang might be. It had to be modern and relevant. It couldn't be kitschy. It had to be luxurious, since prestige is even more important in the Asian market than creativity. They decided to focus on women's ready-to-wear, since that was likely to be the highest-profile part of the line. For a year, they launched collections that overcorrected the problem. The clothes were fashion forward but still out of touch with the market—rigid little suits that could have come from a Paris designer's atelier. "The brand had no depth, no sincerity, no differentiation," Ooi now concedes.

For each collection, Ooi chooses and researches a China-related theme. "I decided it was really imperative to create cultural roots for every single product," she says.

Then she hit on an idea: Each collection would reflect a China-related theme. "I decided it was really, really imperative to create cultural roots for every single product," she says. The fall/winter 2003 collection, inspired by the traditional costumes of a Chinese minority group called the Miao, came first. It sold better than the previous two collections. A strategy was born.

Ooi now roams China, visiting antique markets, art galleries, museums, and historic sites, making notes, sketches, and lists. "If I lost my notebook, I would be lobotomized," she says. She reads voraciously in Chinese history and stays in tune with Chinese pop culture. Then, twice a year, she defines a theme for the next season's collection and emails a brief on the concept to 16 designers and consultants scattered around the world. It will specify the collection's intellectual underpinnings and suggest various elements that should be incorporated into the season's designs. The theme of the fall/winter 2005 collection, for example, was Beijng's Forbidden City, the former imperial seat. Design motifs included elements such as symbols from the emperors' robes—the sun, the moon, the five-clawed dragon, the color yellow—and embellishments fit for an imperial court—brocade, jade, lapis, and fur.

While the garments are luxurious, Ooi also has a strict standard for their wearability. "Every item should transport the wearer mentally to someplace exotic in terms of time and region," says the Buckeye girl, dressed in well-worn denim for breakfast at Hong Kong's posh Mandarin Oriental hotel. "But it's also important that every piece we make is able to be worn with a pair of jeans. If it can't be, we're not succeeding. That's the nature of modern dressing."

Once the brief has been distributed, Ooi runs the creative process like a circus ringmaster, gathering sketches from designers in Paris, London, New York, and China, and sending them out across the network. "I allow the designers to pollinate themselves," she says. Ooi's job is to distill, disseminate, and then unify. "The trick is to make it look like it all came from the same person," she says. Given multiple time zones, nationalities, and egos, it's a 24-7 job, keeping her on the phone and email long after she has tucked her 6-year-old son, Sam, into bed.

The theme for the spring/summer 2006 collection: contemporary Chinese art. Ooi commissioned well-known Chinese artists to create designs and, in turn, asked students at China's most prestigious art academy to create artworks based on fabrics from the collection. She's currently gathering ideas for a collection based on Shanghai in the 1930s, the period when the city was known variously as either the Pearl of the Orient—or the Whore of the East.

Early signs are that the strategy is working. While the privately held Richemont is cagey about divulging numbers, le Masne de Chermont says that the Madison Avenue's store's revenue is up 50% in 2005. Overall, Tang grew 40% last year, mostly in Asia, home to 70% of its stores. And it's profitable, though not quite yet in the United States.

But while le Masne de Chermont has plans to roll out additional U.S. shops, he's not as obsessed as his predecessor was with making it in America. The red-hot future of his business, he points out, is in Asia. "Can you imagine 1 billion Chinese getting into capitalism?" he says with undisguised glee. "It's unstoppable!"

Linda Tischler (ltischler@fastcompany.com) is a Fast Company senior writer.

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