SPEAKING
FREELY The brand new
China By Benjamin Shobert
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When the next
transition toward globalization occurs, among the
leading indicators will be Chinese companies who
have determined how to build real brand equity in
the export markets in which they participate. The
deeper reason this will be significant is that it
will mark a realization on the part of Chinese
manufacturers who no longer
settle for doing the lion's share of product
design, sourcing and manufacturing, only to allow
an intermediary to mark up a product of their own
conception.
Companies such as Haier,
Hisense, Huawei Technologies, Legend Group,
Sichuan Changhong Electric and Wanxiang Group
represent the leading edge of the Chinese
export-driven success story. And yet each, in
their own way, is uniquely vulnerable to the next
major transition that will mark the Chinese
economy: learning to work within non-domestic
markets on each market's unique terms and in ways
that build the Chinese manufacturer's own brand
equity.
Such requirements historically
have not been necessary, since most Chinese
success stories relied on a somewhat passive mode
of growth. Highly motivated entrepreneurs willing
to embrace the risks of a developing economy,
coupled with large businesses and retailers such
as Wal-Mart who could see how low prices could be
exploited to their own advantage, drove most of
the first phase of China's growth. This in no way
diminishes the significant changes the Chinese
government and people have made to achieve
success; however, because the next stage of change
will be marked by a new type of initiative and a
new emphasis on intangibles not previously seen as
crucial, it cannot be assumed that every Chinese
manufacturer that is successful today will be
successful tomorrow.
Many Chinese original
equipment manufacturers (OEMs) will become
increasingly sensitive to questions of brand
equity as they begin to realize how dramatically
over-capacitized their respective markets are. The
realization that broad product parity exists, and
that any number of their competitors produce
reasonably priced and good-quality products, is
typically the beginning of a profound realignment
of their business toward other intangible
activities - such as product innovation and
brand-equity exercises - that were previously not
essential for their business to be successful.
Chinese companies should also be aware
that they are nearing a very dangerous transition:
dangerous because their business will be
vulnerable to younger firms that more quickly
adapt to the intangibles of marketing their own
product under their own brand in export markets,
and dangerous because many past "partners" will
begin to view a Chinese OEM moving upstream as
dangerous to their own core business.
A
number of good examples of the latter danger are
present in consumer electronics. Several
high-profile Chinese home-appliance and
consumer-electronics manufacturers bring their
product into North America through a captive or
private labeling strategy. This allows the
retailer to sign the Chinese OEM to a strategic
sourcing relationship, but the retailer brands the
product under its own label, not accommodating any
real consumer recognition on the part of the
Chinese company that is doing the manufacturing
and handling the bulk of the product's
responsibility.
In the short term,
everyone is happy: the retailer has locked down a
good-quality supplier under the retailer's brand,
and the manufacturer has locked down a fixed
amount of volume with a respectable customer. But
as the relationship matures, the needs of the
manufacturer begin to change more dramatically
than the needs of the retailer. In some ways, the
needs of the retailer never really change from the
initial emphasis of good quality and low price;
most retailers do not view their private-label
OEMs as providers of product innovation, since
real innovation traditionally is perceived as
coming from larger companies such as Sony and
Toshiba that bear the burden of market leadership.
However, the needs of the manufacturer do
begin to change. Proportionality becomes the enemy
of a long-term private labeling relationship. As
Chinese OEMs grow, they will realize that
proportionally they bear most of the risk in
getting the product into the export market. They
have the bulk of the financial assets at risk in
terms of raw materials, work-in-process, quality
control, packaging, product design, people, plant
and equipment. Their partners, which they
undoubtedly appreciate and wish to continue
working with long-term, have some inventory risk,
and the cost of marketing the products to the
consumer. Most retailers abate even the inventory
risk through sell-through arrangements with the
OEM, which ultimately places the risk of failure
back on to the OEM and not the retailer. The
burden of bearing some of the marketing expense
ultimately pales in comparison with the expenses
borne on the part of Chinese OEMs that drive the
product into the export markets.
Three
major features will characterize the next stage of
Chinese manufacturers that are able to take their
brands international: they will embrace regional
sensibilities, they will be willing to invest the
amounts of money necessary for participating in
brand-building exercises in export markets, and
they will emphasize finding talent native to the
export markets they currently emphasize.
A
very good example of the first feature, adapting
to regional sensibilities, can be seen in what
many rightly see as the predominant example of a
Chinese success story: Haier. Having developed a
logo for the Chinese market, Haier has worked to
expand the number of markets this brand is exposed
to globally. Among the difficulties has been that
one of Haier's predominant marketing icons
features two children wearing brief-like swimsuits
hugging each other. A recent DSN Retailing Today
article commented that the icon "struck US
attendees as vaguely sinister, illustrating, quite
literally, a learning process in its infancy"
(source: DSN Retailing Today, "Manufacturers long
for brand equity", by Laura Heller, August 7).
Marketing textbooks are full of examples of
similar missteps, the classic example being the
Chevrolet Nova economy sedan exported to Mexico,
which did poorly in some part because its name
translated as "no go" in Spanish - hardly an
affirming message to someone looking for reliable
transportation.
But the point is deeper
than simply finding the right marketing icon; the
issue is how multinationals build brand equity in
highly divergent markets. What works in China may
not translate - both literally as well as
esthetically and culturally - into export markets.
While it may be appropriate to find a core
marketing message that companies believe can serve
as a foundation upon which distinctly different
marketing messages for various countries can be
built, the need for native marketing sensibilities
is real.
Companies such as Haier and
Hisense, which must particularly emphasize this as
the next stage of their growth, will pit
themselves directly against established domestic
brands such as Whirlpool, Maytag, RCA and GE,
while also seeing how far retail clients such as
Wal-Mart will allow them to build their own brand
within their stores. Most retailers view the
consumer's brand loyalty as predominantly weighted
toward the retailer, not the manufacturer. Chinese
OEMs that begin to challenge this may find that
their retail partners are not interested in
helping them build their own brand.
Barriers to entry for participating in
Western developed economies are certainly higher
than those in still-developing economies. Costs
for building a brand in the North American market
are fundamentally greater than many Chinese
manufacturers appreciate. In fact, many Chinese
businesses that engage in an initial analysis of
what it would cost to do the same type of
direct-to-consumer marketing as they do in China
are shocked at the disparities in cost between the
two markets.
But this is a strategic error
in that many Chinese manufacturers could develop
intermediate marketing strategies that would move
them closer to their goal of direct-to-consumer
advertising, but would not amount to precisely the
same marketing strategy as their competition may
be emphasizing. Where a domestic
consumer-electronics manufacturer such as RCA
might focus on expensive advertising on national
television, a savvy Chinese manufacturer might
develop a creative and nuanced print-advertising
campaign within targeted print outlets whose
demographic is unique to products the Chinese
company knows it can dominate.
Regardless
of the actual marketing strategy, Chinese firms
that successfully make the transition from a
cost-only export advantage to real multinational
players within their respective markets will be
characterized by a willingness to be realistic
about what they will have to invest to market to
the unique sensibilities of their export
consumers.
Last, Chinese companies that
successfully navigate the next transition will be
those that emphasize hiring competent personnel in
their export markets. This issue has many
challenges to it, perhaps none more difficult than
the cultural differences between business in China
and business in many developed economies. The
practice of many Chinese OEMs to single out
non-performing managers for public accountability
within the company is not likely to be well
received within cultures such as North America,
which would view such actions as demeaning and
belittling.
Many Chinese OEMs will make
this cultural adaptation. Those that do will
realize they were one individual away from large
market share and profitability gains. Many Chinese
manufacturers need only one key marketing, sales
or executive manager from an industry affiliate or
competitor to join their ranks, and they will see
how quickly their business grows and takes on its
own identity in their export market. Before
Chinese companies can recruit these types of
candidates, they will have to show a willingness
to make the previously mentioned changes within
their marketing strategy. Until the underlying
marketing strategy takes on the unique
sensibilities of their export market, it is
unlikely the type of domestic talent they require
will be willing to join their companies.
Pundits are quick to point out the many
problems with Chinese businesses moving up the
value chain, and they are right in highlighting
the numerous risks that may prevent some Chinese
companies from building brand equity in foreign
markets. But many similar naysayers who were
dubious about the economic prospects of Japan saw
an economy that matured and coupled unique
products with savvy marketing to build their own
brands. It is probably true that some Chinese
success stories will not make the next transition
to a global brand, but it would be foolish to
believe there are any inherent structural reasons
preventing the Chinese from making the same
transition the Japanese were able to navigate.
Among the deep-seated cultural fears of
the Chinese people, unfortunately born out
repeatedly in history, is that when foreigners
come into their country they do so under the guise
of helping, only to realize the real intention is
to exploit the Chinese people. Business people in
China should be aware that as their organizations
become increasingly sophisticated, people once
allies and companies previously partners may
become antagonists. Ultimately, this tension will
ease as Chinese brands become better known and
Chinese businesses begin to compete on something
more than price.
Those who roll their eyes
at the thought of innovative Chinese companies
still do not appreciate the deep well of creative
potential from China's history, nor do they wish
to recognize that China's next step forward may
very well leave them behind, when the Chinese
prove they can adapt, innovate and market as
competently as any other truly global business
culture.
Benjamin Shobert is the
managing director of Teleos Inc
(www.teleos-inc.com), a consulting firm dedicated
to helping Asian businesses bring innovative
technologies into the North American market.
(Copyright 2006 Benjamin Shobert. Used
by permission.)
Speaking Freely is
an Asia Times Online feature that allows guest
writers to have their say. Please click hereif you are interested in
contributing.
