Why Chinese Companies Lack Homegrown Luxury Brand Power

July 25, 2013, 9:56 a.m. ET

Why Chinese Companies Lack Homegrown Luxury Brand Power

WEI GU

Chinese companies build iPads, high-speed trains and world-class telecom gear, but they can’t seem to make their own fancy handbag.

It’s true that global giants from Prada 1913.HK +1.27% to Apple source goods from China, but it is difficult to name a single Chinese brand that is known for its quality products. That’s true not just in luxury, but also in automobiles, smartphones and home appliances.Two Chinese artists encountered trouble when they set up X+Q, a company that produces high-end sculptures—girls with long rabbit ears and angels with Asian faces—sold in the gift shop of the Guggenheim Museum in New York and at Hong Kong department store Lane Crawford.

Xiang Jing and Qu Guangci say they found it difficult to get reliable suppliers. Earlier this year, the artists had to trash almost 200 sculptures and delay shipments for about three months after finding cracks in the material, even though the factory had been buying from the same supplier for many years.

Trying to find quality craftsmanship in China is also a problem, especially when it comes to complex items such as watches and jewelry. When Guillaume Brochard co-founded Chinese jewelry brand Qeelin in 2004, he couldn’t find reliable workshops in China, so he turned to France to produce China-inspired jewelry.

“The smart people in China aren’t interested in a business that takes time to generate high returns,” said Mr. Brochard, chief executive Qeelin, which is now part of French luxury group Kering KER.FR +2.61% . “There are better business opportunities available.”

There is also the question of patience, which some say is key to building a luxury brand. Chinese businesses want to make their brands a success in three years, but it takes 15 to 30 years to build a luxury brand, said Michel Gutsatz, associate dean of Kedge Business School in France who also teaches at China Europe International Business School in Shanghai. Successful companies in this segment are highly profitable, with net profit margins of about 25%, but volumes are typically small and they take years to build up.

Still, Chinese brands do have one key advantage. A McKinsey survey shows that rich Chinese have a real curiosity or preference for things that are more Chinese, according to Yuval Atsmon, a partner in London. “All things being equal, Chinese prefer Chinese brands,” Mr. Atsmon said.

At Western luxury brands, craftsmen may have worked on the same product for decades, but the Chinese labor market hardly has the same job stability. The annual employee turnover rate in China is 19%, well above the 5% rate in Germany, according to consultancy Roland Berger. This translates into loss of know-how and reduced productivity.

“Western societies are stable and things move slowly,” said Mr. Qu of X+Q. “But in China, people are driven by the get-rich-fast mentality.”

Mr. Qu says he isn’t building a company just for the profit. But before he even established the company, he got excited about one day floating it. He can also afford to spend a little more to find more-reliable suppliers: His gross profit margin of 90% is already higher than the likes of Hermès and Prada.

Jiang Qiong Er, who founded high-end lifestyle brand Shang Xia in 2008, said joining with French luxury-goods maker Hermès Group has helped her think for the very long term. Shang Xia’s made-in-China cashmere coat retails for more than $6,000. “Good craftsman can still be found in China, as long as you are willing to pay the price and have the patience,” she said.