Via HBR, an interesting report on China’s luxury market:

China’s luxury market — and the global phenomenon of “trading up” — are well known. Yet when China’s consumer markets recently experienced short terms blips, several doubters promptly questioned the pace of their long term growth.

Prada offers a recent case-in-point showing that any such “slowdown” in these markets is neither broad nor deep. According to Monday’s Wall Street Journal, Prada announced a 30% year-on-year increase in net income in the third quarter of 2012, with sales in China jumping up by 33% year-on-year in the third quarter. The company also reported a 54% year-on-year increase in sales in Europe, which it attributed largely to tourists. Reportedly some fifty percent of Prada’s sales to people from China occur in the fashion house’s stores outside of that country. The Wall Street Journal says that Prada’s dazzling numbers reflect Chinese consumers’ increasingly refined tastes, making Prada’s high quality leather goods, with high price points and subtle logos, that much more attractive.

We agree — and we can offer some refinements to the Journal’s forecast. At The Boston Consulting Group, we estimate that by the end of the decade, Chinese consumers will spend approximately $41.5 trillion, with annual expenditures increasing from $2 trillion in 2010 to more than $6 trillion in 2020. In our book, The $10 Trillion Prize, we assert that China is poised by 2020 to become the world’s biggest personal luxury market.

Indeed, we calculate that China will have surpassed the United States as the second-largest market by 2015, accounting for $87 billion, or 23 percent, of a $379 billion personal luxury market. And by 2020, it will have assumed the top spot, accounting for $245 billion, or a staggering 40 percent, of a $610 billion personal luxury market.

The growing number of middle-class and affluent city dwellers will drive these phenomenal new levels of “trading up.” “Just 1 percent of consumers are millionaires, and they take 20 percent of our sales,” a senior executive for Chanel, the French high-fashion house, told us. “But the middle classes are the key drivers for the future.”

There are other factors, too. China is witnessing a surge in the number of credit card users as they embrace the “now” impulse more familiar among consumers in the United States and Europe. In 2005, fewer than 50 million credit cards were issued. By 2010, the number had risen to 221 million. By 2020, the major credit card companies are aiming for triple the number of cards — and increased usage, too.

Then, too, an increasingly large proportion of women are prepared to spend big on luxury products. Men have traditionally been the bigger spenders in China, accounting for more than two-thirds of the market. But times are changing. Maserati, the Italian sports car brand owned by Fiat, reports that 30 percent of its buyers in China are women, compared with the 2 to 5 percent typical in the United States and Europe.

As Prada’s current experience reflects, many wealthy Chinese prefer to purchase their luxury products abroad. If they no longer have to travel along the old Silk Road, they nevertheless travel far and wide in their pursuit of the finer things in life: 58 percent of the money Chinese spend on luxury goods and services is spent outside of mainland China. The biggest beneficiaries are the luxury stores on their doorstep in Hong Kong, Macau, and Taiwan. These three centers account for 33 percent of the money Chinese consumers spend on luxury products. Other foreign countries account for 25 percent.

The luxury consumers go in search of European brands, confirming Paris, Milan, and London as the capitals of global chic. In 2009, Rolex, Omega, Longines, and Cartier held nearly 50 percent of the luxury watch market in China, according to our analysis. Among cosmetics brands, Chanel, Dior, Estée Lauder, and Lancôme are the most sought-after by Chinese consumers. The strong leather products brands include Burberry and Dunhill from London, Gucci and Prada from Milan, and Louis Vuitton from Paris — these brands control 60 percent of the market. Besides Burberry and Dunhill, two Italian brands, Armani and Ermenegildo Zegna, and one German brand, Hugo Boss, dominate the apparel market. And the jewelry market is led by Tiffany & Co. (the New York jewelry house), Cartier, and Bulgari.

In our recent interview of Francois Pinault, CEO of PPR, the French luxury producer and retailer, originally called Pinault-Printemps-Redoute, he told us that PPR’s revenues in China would likely triple by 2020. “The Chinese consumer has a profound belief that they deserve luxury products now. They had fifty years with so little, and now, many can afford to buy luxury goods. Their growth in demand is rooted in an expression of individualism in the way you dress. It is a way to differentiate yourself from friends and neighbors. Chinese consumers buy to treat themselves. This China market has evolved faster than any other market in the world.”

We expect this wave of growth to continue across a wide range of consumer luxury goods and services, including apparel, watches, wine, cars, travel, home goods, education, and health care. We would urge you not to be spooked by short term fluctuations in China’s growth rate. Most middle and upper middle class households in China have limited debt, an increasing commitment to education, and soaring aspirations. They are customizing — and improving upon — the so-called American Dream.