They serve a fine cup of coffee at Ateliers Louis Vuitton, just outside Paris. The maid who took my order has left and I’m enjoying breakfast in front of a crackling log fire, perched beside a Chinese coffee table where the likes of Sharon Stone and Karl Lagerfeld are more likely to be found, discussing the finishing touches to their latest set of customised trunks.

The grandiose house was built by Monsieur Louis Vuitton, who in 1854 founded the fashion and leatherware brand today beloved of the rich and famous the world over. Next door, dozens of highly trained craftsmen and women are busy in the workshop producing designer handbags and personalised cases. You can buy one for the price of a small car. The place is the very embodiment of luxury.

Or is it? Most French observers would suggest there is a fashion house that goes one better. The House of Hermes was also founded in Paris, but 17 years before Vuitton. Its handbags are even more expensive (they start at about 3,500 euros and go up to the price of a big car) and its garments even more prestigious.

So when LVMH, the world’s luxury market leader, which owns Louis Vuitton, announced out of the blue this autumn that it had taken a 17.1 per cent stake in Hermes, there was uproar. This was no ordinary stock-market operation, but an affront to Gallic tradition and values. How dare Bernard Arnault, the chairman, chief executive and principal shareholder of the conglomerate that symbolises modern France, dare to attack this emblem of la vieille France? He may be excessively rich — indeed, the richest man in the land — but Arnault lacks the lineage that gives Hermes its chic, or if you prefer, its snob value. And in French eyes, this matters.

In a normal business environment, Arnault might have been hailed by Hermes as an ally. After all, his empire extends over more than 60 elitist brands, and almost all have benefited from his expertise. Indeed, Arnault has led the French luxury goods industry on a planetary conquest, chalking up record sales as he has taken bespoke shoes, eau de parfum and customised cases beyond the old bastions of London, Paris, New York and Milan to emerging markets from Beirut to Ulanbaatar.

His success is evident from the activity in the Asnieres workshop. Durkopp Adler sewing machines whirr. Quality control staff check the zips on Damier Ebene bags. Poplar wood from central France is stacked high waiting to be turned into the frames for trunks. A pile of lambskins lie on a table as a craftswoman learns how to cut them for handbags.

Upstairs, half a dozen craftsmen hammer brass nails into cases built to contain eight watches. And an employee is filling a personalised, six-compartment trunk ordered by an ultra-rich family in which to keep its Christmas decorations: the price, thousands of euros.

To the casual observer, it all looks ultra-chic. But to the sixth generation of the Hermes dynasty, which has a 73.4 per cent stake in the fashion house founded by Thierry Hermes, a saddle-maker, it is anything but. They look down their noses at Louis Vuitton and its owner, the upstart son of a factory builder who, even if he is worth 23 billion euros, has no breeding or history.

Moreover, he has been in the luxury business for just two decades, since laying his hands on a sprawling textile group that happened to include Christian Dior fashion. And during that time he has shown scant regard for Gallic tradition in a series of American-style corporate raids on his rivals.

Witness the way he went about acquiring his stake in Hermes. Patrick Thomas, the chief executive, complains that Arnault used “opaque” structures and a system of derivatives allowed in France but banned in most western economies.

He also questions Arnault’s declaration of friendly intentions. Given half a chance, the tycoon would swallow up the luxury leatherware company just as he has swallowed up Berluti, the Italian shoemaker, Chateau d'Yquem, the Bordeaux vineyard and Guerlain, the perfumer, Thomas suggests. For Patrick Albaladejo, the deputy chief executive of Hermes, the prospect is appalling. “We have practically nothing in common with LVMH,” he says. “Here, we seek to get as close to perfection as possible.”

Hermes bags are each made by a single craftsman or woman, unlike Vuitton's mass production line, he argues. They were designed to last for generations, not to be discarded when they go out of fashion. “And none of our decisions are taken just for financial reasons,” he adds, implying that Arnault's are.

In a country as traditional as France, the argument carries substantial weight. Hermes — whose silk scarves are passed from mother to daughter as a family heirloom — is popular because it is widely seen as the quintessence of Frenchness.

LVMH is not. With its 2,468 retail outlets worldwide, its celebrity models — Madonna and Scarlett Johansson, to name but two — and its glitzy designers, such as Marc Jacobs, the American artistic director of Louis Vuitton, it is seen as the purveyor of luxury to les nouveaux riches in places like China and India.

Berenice Geoffroy-Schneiter, the art critic, explains it like this: “Hermes is the icon of distinction and a sign of respectability. It is the prerogative of a certain social class.” LVMH, on the other hand, “has espoused modernity and is more bling-bling. We are in a very flashy society, like the end of the Roman Empire, and in a way Hermes is resisting all that. I can understand why they don’t want to hitch up with Vuitton.”

A visit to the two firms’ emporiums in Paris illustrates the differing approaches. Almost every day of the year, there is a queue of tourists from America, Asia and eastern Europe outside Louis Vuitton’s 1,800 square-metre boutique on the Champs Elysee. They wait up to an hour to get in, and while away the time taking photographs of themselves by the shop windows.

Inside the 1,500 square-metre boutique opened by Hermes in a disused Art Deco swimming pool on the Left Bank, there is no such crush. Instead, well-dressed French couples wander through the wooden beehive decor and talk in hushed tones as they pass designer scarves priced at 5,000 euros.

“Hermes, c’est la classe,” says Jacques Vigne, a doctor from Toulouse who has come not to buy anything but to admire Paris’s chicest store. “LVMH is luxury on a mass consumer level,” adds Pascal Fraiche, a gas-industry executive from Paris who has treated himself to a 500-euro Hermes belt.

This, of course, is exactly what Albaladejo would like you to think. But maybe the gulf between LVMH and Hermes is not be as big as he maintains. Hermes has had its own glitzy designers (Jean Paul Gaultier, for example), its own flirtations with modernity (it decorated an EC135 helicopter a couple of years ago) and its own smack of tack (Victoria Beckham is reported to own 100 of its Birkin bags). It also has its own global ambitions. This year, for instance, it launched Shang Xia, its Chinese brand, with a boutique in a mall in Shanghai.

Indeed, some argue that the company’s recent successes — 289 million euros in profits in 2009 and a 25 per cent rise in sales in the first nine months of this year — are because the firm has taken a leaf out of Arnault’s book. He, before anyone else, realised that as Third World economies emerged into wealth, French luxury goods would become a must-have status symbol for the newly rich. He opened LVMH’s first shop in China in 1992 and has spread across Asia, the Middle East, South America and eastern Europe, generating sales of 17.1 billion euros last year, despite the economic downturn.

Albaladejo is, however, indignant at the suggestion that Hermes has simply followed suit. LVMH arrives in emerging economies when “people are just getting rich and want to show off their money,” he said. Hermes arrives later, “when tastes are being refined”.

The figures, however, suggest that Hermes may not be quite so choosy as he claimed. So far this year, it has recorded sales of 298.4 million euros in France, 314.7 million euros in Japan and 448 million euros in the rest of Asia.

Hermes family members insist that their firm is successful because it is independent, and they are determined to keep in that way. At a hastily summoned meeting, they proposed the creation of a holding that would have the right to pre-empt family shares being put on the market in the future and so prevent Arnault from laying his hands on a majority stake. But this suggested an unspoken fear that their heirs, the seventh or eighth generations or beyond, might be tempted to sell out to LVMH. “Arnault can afford to wait,” says a source close to him. “In luxury you have eternity in front of you.”

Whatever the truth, Yves Carcelle, Arnault’s right-hand man and the chairman of the Louis Vuitton brand, sees no sign of an end to the boom, either for Hermes or for his own firm.

“I think the demand for luxury will continue to grow,” he told me over a cup of green tea in an office the size of a typical Parisian flat. “The world is growing richer, people work hard, they have stressful lives, they want to bring themselves emotion and that is what luxury does — it brings you emotion.”

How right he is. Just imagine the feelings of John Nollet, hairdresser to the stars, when he received a custom-made Louis Vuitton trunk for his scissors, hairdryers and dyes. Or those of the Malaysian father who ordered a monogrammed box for his daughter’s PlayStation. Or indeed those of the anonymous billionaire who paid thousands of euros for a case in which to carry his rubber duck from five-star hotel to five-star hotel. It was called Wally.