KAREN Shi, a 24-year-old Shanghai native, was surprised recently to find Peh-ChaoLin skin cream on sale at a local supermarket.

Peh-ChaoLin, a local brand that dates back to the 1930s, was very popular in Shanghai in the 1980s but later retreated to less sophisticated inland markets after foreign cosmetic brands began to sweep across China's coastal cities.

Shi said she used to pick some up on occasional business trips to the hinterlands.

"I used it every day as a kid, and it worked very well," said Shi, a consulting analyst. "I don't know why it disappeared so suddenly."

The fortunes of Peh-ChaoLin underscore the marketing war now under way in cosmetics in China, an industry whose revenues surged 400-fold in just two decades.

"The Chinese market has become a main battleground for global players trying to offset declining revenue in European and US markets," said Ge Wenyao, chairman of the state-owned Shanghai Jahwa United Co.

"With the substantial investment by overseas makers, international giants will take an increasing market share and further intensify competition," Ge added.

According to the China General Chamber of Commerce, this nation trails only the US and Japan in terms of global cosmetic sales. Revenue topped 140 billion yuan (US$21 billion) last year.

Industry watchers said China may overtake Japan before long.

Japan's shipments of skin-care and make-up products to China may surge to 119 billion yuan by 2012, exceeding the home market, according to Japan-based Yano Research Institute.

Major international cosmetics makers nurse grandiose plans for China, one of the few cosmetics markets to defy the global economic downturn.

Kanebo Cosmetics Inc, owned by household products giant Kao Corp, increased production at its sole factory in China by 150 percent to 5 million units last year.

The No.2 beauty maker in Japan expects revenue of 600 million yuan this year, after expanding its China portfolio with the skin-care brand Aqua Sprina and make-up line Coffret D'or in September.

L'Oreal, the world's largest cosmetics maker, said its sales in China jumped almost 18 percent to 8.18 billion yuan last year, the ninth year of double-digit growth. That gives the French company an almost 12 percent market share and ranks it alongside Procter & Gamble as the top two cosmetics sellers in China.

"We closed 2009 in a very encouraging way and achieved the biggest gain in market share among all the major players," said Paolo Gasparrini, president of L'Oreal China.

The company, he said, has even bigger ambitions and higher targets for this year.

The assault by multinational firms has put the squeeze on Chinese brands like Peh-ChaoLin. In cities like Shanghai and Beijing, rising incomes and the allure of international chic have relegated many domestic brands to the dowdy category.

To retaliate, Chinese companies have shifted their marketing to smaller inland cities where incomes are lower and global competitors not as rife. Their weapon is lower prices.

Domestic mass-consumer brands such as Bawang, Houdy and Manting have taken large market shares in those areas, said Pei Yunpeng, a Shanxi Securities analyst. That may provide them a solid base to go back on offensive against the foreign invaders.

Southern China-based herbal shampoo maker Bawang International is certainly thinking along those lines. Its aggressive marketing has increased the company's market share to 7.8 percent in 2009 from 0.7 percent in 2005.

It's not only competition that domestic cosmetics makers have to fear from foreign rivals. The specter of takeovers by cash-rich competitors looms large. Popular domestic brands Dabao, Mininurse, Haiermian have already been acquired by Johnson & Johnson, L'Oreal and Henkel, respectively.

Jahwa, the leading domestic brand, is not taking the trend lying down. It is preparing to relaunch the make-up brand Two Girls this year. The brand was popular in the 1930s in Shanghai and the reinvented line will target the high-end of the market now dominated by foreign players.

"The company is apparently turning to high value-added products," said Pei.

Last year Jahwa successfully upgraded its dermatological cosmetic brand Herborist. As part of its marketing strategy, Jahwa opened a Herborist flagship store on the elegant Champs-Elysees in Paris.

"It is a good effort and helps a lot in building the brand at the high-end," said Pei.

Jahwa's revenue last year rose 8 percent from 2008 to 2.7 billion yuan, while net profit surged 26 percent to 226 million yuan.

The battle for market share in the cosmetics industry depends heavily on constantly putting a new face on product lines.

Japan's largest cosmetics firm Shiseido unveiled professional hair-care brands Joico and Shiseido Professional on March 18, marking its first foray into that market in China. Shiseido is only four month away from the launch of a new dermatological line - DQ (Dermal Quotient) - in Chinese pharmacies.

"We are aiming for pharmacies to become our third major sales channel apart from department stores and some 4,500 cosmetics specialty stores," Shiseido President Shinzo Maeda said.

Armed with its new products, Shiseido said it expects double-digit growth in China this year.

L'Oreal also plans to increase its presence in the dermatological channel by launching a new brand soon, to be distributed through high-end spas, Gasparrini disclosed. Currently, L'Oreal has two brands - Vichy and La Roche-Posay, in the pharmacy channel, where they dominate.

That comes after the French firm launched several new products in China last year, including L'Oreal Paris shampoo, the Garnier men's series, American brand Kiehl's and Diesel fragrances.

"L'Oreal will continue to increase investment in China and strive to boost sales and gain market share through innovation, product offerings and support in advertising, promotion and distribution," said Gasparrini.

For many domestic rivals, there's a steep learning curve in building brand image and effective distribution, analysts said.

"Lack of sufficient capital is one big problem, and the lack of experience and knowledge about diversified marketing strategies is another," said Pei.

The prize in the cosmetics wars is the burgeoning population of consumers like Karen Shi, who consider make-up essential and are growing more sophisticated.

"I wouldn't be caught dead going to work without make-up," Shi said. "It's essential to look your best if you want to get ahead. Forever make-up and forever high heels. That's my motto."