Homegrown Luxe.(Special Report)(luxury products)(Cover story)

Byline: Alexandra Seno; With Quindlen Krovatin in Beijing

Asia's elite have fueled the growth of Western high-end brands. Now, they are creating their own.

Ten years ago, the most gracious hosts in China provided dinner-party guests with imported vintage reds, a rare treat as the country began to open up to Western-style extravagance. Today, they still serve $5,000 bottles of Chateau Lafite the way they did back then, often mixed with tomato juice or Sprite (wine isn't yet about enjoyment, but about showing wealth). Increasingly, though, tables are filled with something more palatable to local tastes: premium baijiu, a fiery, traditional Chinese grain-based alcoholic beverage (from brands like Wuliangye, Swellfun or Wen Jun), which outsells all other spirits.

It's a much anticipated shift. For years now, rich Chinese, who today represent 12 percent of the global luxury market, have been snapping up Western brands like Chanel, Armani, Cartier, Rolls-Royce and Louis Vuitton. Goldman Sachs predicts that by 2015, China will be the world's largest luxury market, accounting for 29 percent of sales, some $11.5 billion. It's no wonder that Western brands can't build stores in the country fast enough.

But now, as the Chinese begin to feel more comfortable with their place in the world, they are also willing to pay top renminbi for a small but growing tribe of homegrown brands, including not only premium baijiu labels, but also high-end fashion brands like Ports 1961 and Passerby, or cosmetics like Yue Sai, acquired by L'Oreal in 2004. "There are two elements that are important in luxury: exclusivity and making people dream. History and culture become important at some point," says Denis Morisset, a former CEO for Armani and Ralph Lauren, who now heads the luxury-brand management program at ESSEC, a French business school. "China has both."

Increasingly, it also has top-quality production, crucial to building a luxury industry. While Chinese manufacturing standards have come under fire recently after a raft of safety scandals, many overseas luxury-goods brands are boosting production in the Middle Kingdom -- Armani, Paul Smith, and Coach to name a few. Production standards, particularly in the south, are increasing, and the skills gained will support the homegrown luxury business. Lorraine Justice, head of Hong Kong Polytechnic ...