* Kao's new luxury Merries line made in Japan, but only for China
* Merries sales hit by China crackdown on cross-border resales
* Kao says eventually wants to shift manufacturing to China
By Ritsuko Ando and Pei Li
TOKYO/BEIJING, Aug 2 (Reuters) - Like many urban Chinese professionals with young children, Shenzhen-based fintech executive Jacob Cao is a fan of Japanese diaper brands including Kao Corp's Merries.
While he knows some Merries are made in China, with little difference in quality compared with higher-priced versions from Japan, he prefers the latter.
"I just get the feeling the Japan-made ones are better, to be honest," said the father of 20-month old twin girls.
The perception that Japanese baby products are superior owes much to Chinese aversion to homegrown goods after a tainted milk formula scandal in 2008. It has served Kao well, propelling it to the No.2 spot in the world's biggest diaper market despite a late entry in 2009.
But Kao's sales have been hit after a clampdown by Beijing last year on "daigou" merchants, who buy goods abroad for resale online in China. More reliant than rivals on daigou sales, its baby diaper sales tumbled 14% in the first half compared to the same period a year earlier, the company said this week.
To preserve and bolster the made-in-Japan cachet, Kao began selling a premium line of "Tender Love" Merries in June, produced in its home market but only for sale in China.
Made of soft, silky fabric, they cost 4.9 yuan per diaper or roughly 200 yuan ($29) for a medium-sized pack of 40, more than double the price of standard Merries and considered too expensive to market in Japan.
"Our strategy in China is to go for the premium market. We don't want to go for volume," said Tomoharu Matsuda, Kao managing executive officer in charge of consumer products.
Promoting made-in-Japan products comes amid emerging competition from Chinese brands in premium diapers and despite Kao's longer-term goal of producing all diapers for the Chinese market in China, which would help it manufacture and distribute more economically.
Baby diapers make up roughly half of Kao's sales in its "human healthcare" division, which in turn accounted for 18% of $14 billion in revenue last year.
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Estimated to be worth some $9 billion in annual sales, China's baby diaper market is five times bigger than Japan's and is expected to show a double-digit compound annual growth rate through 2023, according to research firm Euromonitor.
In the past five years, Kao has doubled its China market share to 10%, mainly at the expense of Procter & Gamble Co , which has seen its share tumble to 19% from 33%. Huggies maker Kimberly-Clark Corp has 8.6% and Japan's Unicharm Corp has taken 7% with its MamyPoko and Moony brands.
P&G, which introduced China to disposable diapers in the 1990s when most babies there were wearing open-crotch pants, has also sought to benefit from the made-in-Japan cachet.
Two years ago it began production in western Japan for its brand "Ichiban" - the Japanese word for "best". Sold mainly in China, they are priced at around 2.0 yuan per diaper.
Unicharm opened a new factory in Japan's southern island of Kyushu this year to bolster production of diapers for the Chinese market.
But it is taking a slightly different tack from Kao. In recent months it began making a premium Moony diaper in China, which are sold for 3.5-4 yuan each, in line with pricing for existing imports from Japan.
"Demand for 'Made in Japan' still exists, but needs are diversifying," said Unicharm spokesman Hitoshi Watanabe. "Consumers are no longer making decisions based solely on where something's made."
Kao's Matsuda agrees that change in consumer sentiment is coming, but the company remains wary of making hasty moves. He noted made-in-Japan Merries diapers, which cost 1.8 yuan each, are still more popular than those made at its Anhui factory which sell for 1.6 yuan each.
"We'll need to carefully consider how the market develops. For now, there are people who still say it has to be made in Japan," he said. ($1 = 107.9300 yen) (Reporting by Ritsuko Ando in Tokyo and Pei Li in Beijing; Additional reporting by Richa Naidu in Chicago; Editing by Edwina Gibbs)