China's brands in the shadows
By Benjamin A Shobert
In 2003, Ming Zeng and Peter Williamson, professors at the prestigious Insead
Business School, wrote a Harvard Business Review article on what they called
China's "hidden dragons". As they saw it then, these companies would soon move
from their positions of domestic strength and evolve positions in export
markets not only because they could offer lower prices but, as they wrote,
"China's national champions are using their advantages as domestic leaders to
build global brands. The dedicated exporters are entering foreign markets on
the strength of their economies of scale."
Eight years after this seminal article, many others have written about the
potential for Chinese companies to move up the value chain with branded
products in their export markets; however, skeptics are quick to point out that
even though the American consumer may be surrounded by Chinese made goods, he
still
has little to no brand awareness of China's leading companies.
What explains this disconnect and what, if anything, should be made of China's
ongoing struggle to move up the value chain and build brands in their export
markets?
Two factors provide some much needed context: first, Chinese firms may be quite
successful building brands in their domestic markets or other emerging
economies yet struggle to accomplish the same thing in their export markets,
and second, Chinese companies may first experience brand building success in
lower profile business-to-business (B2B) markets before they find similar
positive outcomes in business-to-consumer (B2C) markets ).
The latter are more costly to participate in initially and make meaningful
progress given the amount of financial capital established brands put to work
protecting their existing market share. Both factors explain, at least in part,
why more Chinese consumer brands have not penetrated the American psyche.
The best examples usually put forward by advocates of Chinese firms for
integrating into their export markets through value-add branding are Haier and
Lenovo. In particular, Haier's marketing deal with the National Basketball
Association (NBA) has been pointed to by many as an indication that Chinese
firms are coming to understand the need to expend additional energy and
investments into building their brands in the North American market.
But, some have pointed out that the Haier-NBA brand should be understood more
as an opportunity for both Haier and the NBA to mutually benefit not in their
respective North American markets but in the critical Chinese market, where
both have good reason to want to see their respective brands gain traction with
the domestic Chinese consumer.
While the relationship between these two is good and healthy, it is perhaps not
the best example of Chinese brands repositioning themselves in their North
American market.
The worst-case example of Chinese firms attempting to move up-stream and build
brands in their export markets may be Li Ning, whose 2007 launch of its North
American operation signaled the company's desire to move up-stream and compete
in the heavy athletic shoe market. The results thus far have been
disappointing.
Criticism of Li Ning's strategy ranges from poor timing to the enormous
financial resources needed to unseat the incumbent US brands from their
positions as market monopolists. Regardless of which best captures Li Ning's
difficulties, the more important question may be why more Chinese firms in
general are not pursuing the same sort of brand-building strategies that Li
Ning has at least had the vision and fortitude to pursue?
Scott Markman, president of Chicago-based The Monogram Group, advises Chinese
companies on how best to build a marketing strategy in North America. According
to Markman, "For a vast majority of Chinese companies, marketing is not even on
their organizational chart."
Because the vast majority of Chinese success stories revolve around
entrepreneurs who aggressively pursued manufacturing and product engineering
skill sets at the expense of others like those in sales, marketing or product
development, they have traditionally not placed much value on more intangible
competencies. As Markman points out, "It is not what they had to understand,
master and execute against in order to succeed."
This points towards what many have suggested is a deeper cultural resistance
against the need for, let alone the insights brought by, strategic marketing
and brand building within Chinese businesses. Whether the current generation of
successful Chinese entrepreneurs will allow their organizations to open up to
the sort of creative energies and forward thinking that characterize their
Western competitors remains a challenge not everyone believes Chinese owners
understand or appreciate.
Joe Baladi, a long time marketing consultant to Asian companies and author of
the recent The Brutal Truth About Asian Branding, believes that beneath
this all is a deeper reluctance by Chinese business owners to, as he puts it,
"come to grips with and address the role of culture itself within
organizations".
Baladi, no stranger to China's top-down hierarchy, notes that "The typical
command and control, patriarchal type of management philosophy practiced by
organizations in China either suppress or actively repress employee engagement
and contribution." While this may seem an easily remedied problem, Baladi
recognizes that to change this mentality will be no small task, but because
"this deprives the organization of critical creative energy ... it will need to
change if Chinese competitors are to emerge as powerful global competitors."
Markman believes that some of the cultural resistance should also be understood
as an issue with risk tolerance. As he puts it, "If there were some [Chinese]
success stories across a number of categories, not just these two big companies
[Haier and Lenovo], it would be a proven pathway to higher gross margins and
increased sales and there would be not 10 Chinese brands but 500 trying to
build their name recognition in North America."
A recent market study by The Monogram Group sought to look at one of the other
reasons some have suggested might be preventing Chinese companies from building
brands in North America: the broad perception of Chinese-made goods as being
poor quality. Markman's researchers found that, while Chinese-made goods still
reside in what they call the "low quality - low price quadrant", American
consumers continue to grow more - not less - comfortable with the "Made in
China" brand.
Given the various product recalls and quality issues that have arisen over
Chinese-made products in the last several years, Marksman's research points
towards a growing foundation about Chinese products in general that specific
Chinese firms have the ability to build upon.
One final factor may also be preventing Chinese brands from moving more
aggressively to build name recognition in the North American market, and that
would be their fear that somehow - for reasons entirely outside their ability
to imagine - they encounter the sorts of problems and pushbacks
telecommunications company Huawei has.
While Huawei plays in a section of the North American market that ostensibly
has national security implications, the problems it has faced have led many
Chinese businesses to wonder if they too could become a symbol around which
their North American competitors could rally, creating both political and
practical problems in the very same consumer market where they hope to build a
good reputation.
Equally troubling for Chinese companies is their fear that they do not possess
the know-how by which they could manage an as-yet unforeseen public relations
problem; given Huawei has spent real money trying to build this skill and has
been remarkably unsuccessful doing so, these fears are not baseless.
Two camps have been set up around the issue of whether Chinese brands will ever
be successful building recognition in North America: on one side are cynics who
point towards the previously mentioned problems as evidence China's businesses
are not now, and may never be, ready; on the other hand are the advocates who
believe that not only can Chinese companies rise to meet these challenges, but
when they do they will prove to be a force to be dealt with.
For the latter camp, it is more interesting and important to watch what Chinese
B2B companies are doing to build brand awareness in their export markets versus
what limited and admittedly unsuccessful efforts have been made by Chinese
companies in the B2C space.
China's B2B industrial powerhouses are increasingly coming to grips with the
need to move beyond a pure price play into value-added manufacturing and
marketing. David Wolf, president and CEO of Wolf Group Asia, advises Chinese
firms as they develop marketing and communications strategies. Wolf believes
that the industrial space is much more ready for Chinese companies to begin
building brands.
As he says, "B2B is, for Chinese, a much more comfortable fit, because it
minimizes the gap between cultures." Wolf also believes that seeing China's
industrial companies work up the value chain and thereby paving the way for
Chinese consumer products companies to do the same is precisely what
characterized America's own economic evolution. According to Wolf, "If you look
back at America's own postwar business history, you will find the same
phenomenon occurring. The first American companies to venture abroad
successfully were those that built business-to-business ties first."
It is certainly possible that Chinese companies may never develop the same
brand building competencies that their North American, European or Japanese
competitors have. In part, this might be less cultural resistance or
unwillingness to spend the capital, but instead a strategic decision that while
they know the opportunity in North America is huge, they can much more easily
and more cost effectively develop a strategy for further building their brands
in their own domestic market, and can easily leverage lessons learned in China
into growth opportunities in equally compelling markets in Southeast Asia and
other emerging economies.
Given the stagnant growth and declining consumer spending in developed
economies, it could be that the most interesting markets might be those Chinese
firms are the most dominant in, and equally those where American brands most
struggle to build successful strategies for.
Benjamin A Shobert is the managing director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis for companies looking to enter
emerging economies. He is the author of the upcoming book Blame China
www.CrossTheRubiconBlog.com.
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