Doing Business : A Rags and Riches Tale in Hong Kong : Diane Freis left Los Angeles for Asia and made a lucrative mark for herself in the fashion business.

It’s a rags-to-riches story. To be more exact, a rags-to-riches-in-rags story.

Despite Hong Kong’s well-deserved reputation for business ruthlessness--as a place where cheap labor and quick imitation usually triumph over innovation and outsiders have a hard time learning the ropes--Diane Freis of Los Angeles has carved a special and lucrative niche as one of the world’s top fashion designers.

“I’ve always been inspired by living here,” Freis said in a recent interview. “I know I can get magnificent things done in Hong Kong. If I lived elsewhere, there’d be all kinds of obstacles.”

Freis grew up in Los Angeles and graduated in 1972 with a fine arts degree from UCLA. After graduation, she set up a cottage industry in Los Angeles designing and making sequined jackets for a boutique.

She first came to Hong Kong in search of new fabrics, hitting upon what she described as a “silk chiffon” concept using the brightly printed polyester fabrics then available in the British colony.

Like any other tourist, she took her fabric to a retail tailor to have it sewn into clothes. The finished products were shipped back and sold to boutique customers.

In February, 1975, Freis settled in Hong Kong and began designing in earnest. The rainbow colors remained her trademark. In 1977, a local boutique owner asked her to do a collection, and by 1978 she had her own retail store in Hong Kong.

“I didn’t have any capital. I was just taking a chance. I was young and didn’t have anything to lose,” she recalled.

Now, Freis has seven shops in the United States as well as 450 boutiques in department stores such as Bullocks, I Magnin and Nordstrom. She exports to Australia and the British market as well, and her privately held company now has annual sales of $35 million.

Freis attributes her success to finding a niche in the market and exploiting it to the hilt, saying she is “aiming at European sophistication, with a sense of style and a sense of value.”

It doesn’t hurt that many of her garments are designed in a flowing, loose-fitting style that tends to flatter women who are large or don’t have model-perfect figures. The dresses customarily sell for $400 to $1,000.

“These are not fitted, sculpted garments,” she said. “I strive to create a fashion look that is loose and comfortable.” She knows of what she speaks: At the time of the interview she was nine months pregnant with her third child.

Freis’ operation has come a long way from the $5-per-dress, back street tailors she frequented in 1975. She opened her first factory in 1983 and now has more than 40,000 square feet in a run-down section of Kowloon--the heart of Hong Kong’s rag trade.

Because of the perils facing a foreigner farming out manufacturing work to strangers in Hong Kong, Freis (her name rhymes with fleece) entered into a partnership agreement in 1986 with one of her early production employees, Henry Kao. He set up his own company, DF Manufacturing, in the same building as Freis’ company and now turns out Freis clothing exclusively.

“We’re paying the girls about $80 Hong Kong (about $10 U.S.) a piece” to sew garments, Kao explained. “Labor costs are going up all the time.” He predicted that the mass production of clothes for which Hong Kong is renowned will soon come to an end because of rising costs, leaving only high-ticket operations such as Freis’ company, which makes only 10 copies of each garment.

“We just couldn’t produce these kinds of clothes in the United States because of the labor costs,” Freis added on a recent tour of her manufacturing facility. “Not just costs--the quality of the work is very high.”

In addition to her design studio and her business offices (run by her husband, Richard), Freis now designs and prints her own fabrics, as well as importing designs from Europe.

Freis said she has come to love living in Hong Kong, despite the crowding and the unruly people. The city is relatively crime-free compared to Los Angeles and the lifestyle can be sumptuous compared to America.

She said she was not particularly concerned about the prospects of change in 1997, when Hong Kong reverts to Chinese rule. But she has given a thought or two to opening a subsidiary operation in India, just in case.

“I’m doing something different and it’s very exciting,” she said. “If everybody was making the same kind of clothes we would all be making uniforms, not designers.”