Insight

Chinese Companies Can't Build Brands? Think Again


How many Chinese brands can you name? Probably fewer than the fingers on your hand. Atlantic Monthly journalist James Fallows believes China's lack of global brands is proof it is not an economic superpower. As he wrote last month, 44% of Americans think that the world's leading economic power is China. "People who think this are crazy," Fallows wrote on his blog. "Name 20 large American corporations that do business worldwide. Without trying, you can probably name 50. Try to name even 10 from China."

Most people can't. In part, that's because Chinese companies traditionally haven't cared much about building brands. Lacking marketing talent and looking for a quick buck, they competed on price rather than spend the time and money on brand-building. After all, it took decades for Japanese and Korean companies like Toyota and Samsung to become global players.

The world has changed, though, and Chinese companies with the potential to become global brands have emerged. For brand managers, it would be a mistake to discount Chinese companies. Take sports-apparel maker Li Ning as an example. It is competing head to head with Nike (NIKE) and Adidas on design and product selection, and opened its first retail store in Portland this month. It has even opened design operations near Nike's headquarters in Beaverton, Ore., and is taking advantage of the downturn to hire American talent.

Herbal tea maker Wang Lao Ji, based in Guangzhou, is another example of a Chinese company that has mastered the art of branding. Although a bottle of its tea costs double the price of Coke (KO) and Pepsi (PEP) in China, Wang Lao Ji is taking market share from them both. It's China's market leader in canned drinks, with about $2.5 billion in sales. The company's marketing campaigns emphasize health and a way of life that resonate with Chinese consumers. Wang Lao Ji's threat is so fierce that it was one of the main reasons Coke tried to buy China Huiyuan, the top Chinese pure-juice brand, in 2008, a deal that Beijing regulators vetoed on anti-trust grounds.

EXPECT AN INVASION

True, few Chinese brands are known by American consumers, but the reason for that isn't that Chinese don't know how to brand; rather, it's that most brand-savvy consumer-focused Chinese firms have elected not to go to the U.S. and Western Europe. That will change. In several hundred interviews my firm (the China Market Research Group) conducted with senior executives of consumer products companies, just over 50% said they expected to enter the U.S. in five years, but only after first targeting their home market, where retail sales are growing 15% a year, and regions like Africa and the Middle East, where local competition is weak. In the next five years, Americans should be prepared to start seeing Chinese brands on the shelves of Wal-Mart (WMT)and not just the Made in China label.

Aside from discounting the increasing threat from Chinese brands, there are two other major mistakes brand managers commonly make in China. They often believe Chinese consumers are the same as those in the West. This might sound like Marketing 101, but many brands simply forget to localize products and marketing campaigns.

British retailer Marks and Spencer is a case study in what not to do. In Britain, M&S successfully sells to middle-class women between 35 and 45 years of age. M&S entered China in Shanghai in January last year, trying to target the same age group, even selling clothes with sizes fit for London's suburbs but way too large for the typical Chinese female. How hard is it to ensure that the clothes you sell actually fit your target customers? M&S's opening was a complete nightmare. Not only did it get the sizes wrong but it also fundamentally misunderstood the aspirations of Chinese consumers. Sir Stuart Rose, M&S's Executive Chairman, told the Financial Times: "Who is looking after the ordinary person in the middle? Not all the 1.2 billion people in China can be aspiring to buy Louis Vuitton."

HIGH-END ASPIRATIONS FOR ALL

Rose is dead wrong: Chinese consumers do all want to wear Louis Vuitton or equivalent high-end brands. Marks and Spencer should have made a better attempt to understand Chinese consumer behavior. China's middle class is very different from America's or Britain's, where changes in socioeconomic status in the same generation are few. And from a consumer standpoint, Hong Kong is worlds apart from the mainland.

Most middle-class mainlanders do not consider themselves middle-class&they view themselves or their children as on the way to true wealth. Everyone knows someone who was farming a decade ago or laboring in a factory but is now a driving a Mercedes. Consumers are looking to dress to impress and to project the image of what they want to become. That is why many women making $600 a month actually are buying Louis Vuitton bags, Omega watches, and Lancôme cosmetics. Or they buy stylish yet good-value clothes at Uniqlo and Zara. They are not buying middle-class, humdrum clothes.

On several recent visits to Marks and Spencer, my firm found most shoppers to be foreigners or Chinese women in their 50s and 60s. M&S should have offered styles and sizes fit for China and projected the aspirations and stylish image that its consumers want.

INNOVATION APLENTY

The third marketing mistake many brand managers make in China is underestimating the innovation taking place there. Chinese companies like automaker BYD and clean technology company LDK Solar (LDK) have improved their product quality and are plowing lots of money into research and development. The Chinese are spending $9 billion a month on R&D in clean tech, according to data compiled by CMRG. (About $30 billion came from the $586 billion stimulus program. The rest came from the Chinese and multinationals like GE Water (GE), as well as private equity firms.) Based on interviews my firm conducted with dozens of venture capitalists, executives, and scientists in the U.S. and Europe, the majority say more innovation is taking place in China in the clean-technology sector than anywhere else.

From telecom equipment manufacturer Huawei to to Nasdaq-listed solar panel maker Solarfun (SOLF), Chinese companies are starting to compete at the top end, too. The all-too-common assertion that Chinese companies cannot brand or innovate is becoming harder to take seriously by the day. They are catching up faster than most people realize, and are certainly more adept at branding at home than many international companies. Western companies would do well to take notice.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Bloomberg BusinessWeek on strategy and marketing in China. Follow him on Twitter at @shaunrein.

Shaun_rein
Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm focused on China. He is the author of "The End of Cheap China: Economic and Cultural Trends that Will Disrupt the World."

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