Can Chinese companies capitalize on the global recession to better establish and develop their brands overseas?
Definitions First. First, it's very important to define terms. Many Chinese companies will likely invest in American companies (or brands) given the massive decline in asset values in the United States and Europe. For example, Geely, one of China's leading car manufacturers, was rumored to have harbored ambitions to acquire Volvo from Ford, though those plans appear to be dead now. But what do we mean when we say "better establish and develop" brands? We are asking whether Chinese corporations have intentions to promote their own brands in foreign markets. And, more specifically, we are asking whether any are in a position to compete at a price premium directly against established brands in those countries, sustained by robust brand equity, price premiums and consumer loyalty, in Europe, America and Japan.
The answer to that question is "no."
Chinese MNCs: The Current State
No Chinese consumer brand is ready go head-to-head against Western counterparts on the latter's home turf, despite Lining's opening a new store in Singapore. This is true in every category, from autos to alcohol and pharmaceuticals to hotels, although some non-consumer brands (e.g., Huawei electrical components) have made significant in-roads and will continue to.
That said, many Chinese brands are making progress in emerging markets such as India, Africa and South America. The TCL logo, for example, is ubiquitous in countries around the globe. China Mobile can be huge in developing nations. However, penetration is largely driven by sales push, underpinned by a very adequate price-value equation, rather than active consumer preference.
Chinese companies, to their credit, are ruthless incrementalists. They know they're not ready to unfurl their flags in the West. But, in China, in category after category, they have crawled their way up the value chain. Their cars are getting better. Athletic shoes are becoming more technologically advanced. Milk processing standards, despite the melamine debacle, are improving. To boot, many local brands have started to forge real consumer equity in China and now have (more or less) stable relationships with international advertising agencies. COFCO, one of China's largest food manufacturer, has implemented systems and processes to ensure truly integrated communications. Anta's China Olympic Committee sponsorship has a three-year roll out plan centered around a core proposition. Even Jasonwood blue jeans has significantly upgraded its marketing staff (plucking the best and brightest from China's L'Oreal operation) to provide positioning consistency, both over time and with product development.
But success in developed international markets is a long way off.
Key Expansion Handicaps
Competition in developed international markets requires are price premium, rooted in both value-added - not parity - products or services and strong brand equity, the latter acquired only gradually over time. And, in these respects, Chinese brands are still disadvantaged, in many cases grievously so, and not just by a generic fear of anything "made in China." As we head to 2010, Chinese companies' scale-driven strategy and management structure the ability for their brands to compete overseas.
Scale vs. Value-Added. First, focus on scale without a commitment to innovation implies commodization, not necessarily an unreasonable domestic strategy in a market as large, geographically dispersed and untamed as China. Distribution clout and competitive prices linked to economies of scale are huge advantages. (What's more, Chinese consumers trust big local brands.) This is particularly true in large state-owned, or state-sponsored, sectors such as appliances, banks, auto and telecommunications. For example, China has recently restructured the telecoms to have "managed competition" as a way of growing 3G services and achieving higher ARPU (average revenue per user). But the decision-making apparatuses of China Unicom, China Telecom and China Mobile are very rigid. They are dominated by the command-and-control centers of landline operations (except in China Mobile's case) which are traditional in outlook and management structures. They also frown upon entrepreneurial thinking and the risk-taking required for innovation.
On the other hand, smaller companies in food and beverage, fashion, shoes, etc. tend to be more innovative. (Compared to Western entities, they are still hobbled by top-down decision making.) But they do not have the scale required for international expansion. So there is a Catch-22 going on. Companies big enough to go global are the most encumbered by commoditized products and services. Companies that grasp advantages inherent in value-added products and services - i.e., the ability to charge a premium - lack the critical mass required of global power brands.
I am not saying this model is fundamentally flawed in China, though it does have its limits. China is a market that, first and foremost, requires scale and top-down command of production and distribution. So centralization works to: a) dominate channels, b) harness efficiencies of the production base, c) force low-cost concessions from suppliers and d) offer a low price to penny-pinched consumers, even middle class ones who have much less disposable income than in the West. However, this is not a model that generates innovation and long-term equity, strengths demanded by American and European consumers. It is also not a model compatible with a global marketing function. Individual country leaders need to be empowered to make investment and advertising decisions that address local circumstances and consumer needs.
Centralized Corporate Structure. Second, Chinese companies' management structures are not built to encourage global brand expansion. They are sales-driven and managed by emperor-kings who rule in a defensive, even self-protective, manner. Quite often, the instructions are promulgated ambiguously, resulting in an undercurrent of anxiety on lower levels, not an all-for-one future focus. Furthermore, many managers create rival power centers underneath them so competition is "horizontal" rather than "vertical." Ultimately, this is a question of corporate governance. There is no local management team that reports to an independent board of directors charged with ensuring long-term shareholder growth. As a result, organizational structure is too centralized, hierarchical (prohibiting the bottom-up flow of information and new ideas from younger, marketing-driven types) and short-term in planning.
The Japanese and Korean Difference. Like Chinese brands, Korean and Japanese brands - Samsung, Toyota, Sony etc. - are built on scale and have benefited from decades of consistent national economic policy rooted in vertical and horizontal integration. But Japanese and Korean products are also highly innovative, obsessed with details that delight. Unfortunately, Chinese companies, even the largest ones, have not yet planted the seeds of genuine, consumer-driven innovation. R&D investment is neither sufficient nor channeled productively. Market research, imperative for uncovering unmet needs, is conducted sparingly. Corporate culture is extremely hierarchical, thereby minimizing bottom-up innovation. And senior management is much too centralized. These are structural issues, rooted in Chinese cultural imperatives. It will be many years before Chinese business "opens up" enough to drive innovation rather than merely pay lip service to it.
Into The Future
So, what does the future look like? It will be another decade or more before companies reform their strategies and structure in a manner consistent with global brand management. We'll have to wait half a generation until a new breed of Chinese corporate leader emerges from today's middle ranks before "willingness to delegate" is perceived as a strength, not a weakness.
Therefore, Chinese companies will expand foreign presence in one of three ways: a) further exploiting "narrow" markets in which "Chineseness" is an advantage rather than a perceptual weakness (e.g., alternative medicine, niche fashion brands in which "Oriental style" carries cachet), b) forging production alliances with multinational corporations to provide either components or products that compete at lower price tiers but under non-Chinese brand names, c) acquiring international brands and allowing Western management to continue managing them.
The latter is a highly risky strategy. Lenovo, for example, bought IBM's PC division, hoping to kill two birds with one stone by leveraging the PRCs low-cost manufacturing base while increasing penetration of value-added personal PCs (Think Pad) in the West. Unfortunately, this "bifurcated" strategy led to schizophrenic management structures, one for China and the other for international markets, the latter "outsourced" from IBM. When they tried to consolidate the two operations, including an effort to globalize communications, things deteriorated. There were culture clashes. And, more fundamentally, the company was divided between addressing the needs of China versus international markets. As a result, Lenovo's performance during the economic crisis has suffered more than its competitors, with market share of high-end PCs plunging in foreign markets. This has just produced another management upheaval with the original Chinese leaders reasserting control over all operations. To its credit, Lenovo now realizes that success must start in China. There is no short-cut. Tengzhong's planned Hummer acquisition threatens to play as a comedy of errors.
Medium-sized Stars. The brands that stand a chance in the medium-term will be the ones known as more than simply big Chinese trademarks. Again, this requires innovation, a process that has barely begun. China Merchant Bank, not one of the "big four" financial institutions, has developed a range of innovative products and services for the new middle class. And its brand image is "young" and "dynamic." Anta sports shoes has begun to sign globally-recognized sports assets such as tennis star Jalena Yancovic. Some Chinese auto manufacturers (e.g., BFD) are developing new forms of fuel efficiency and long-lasting lithium battery technology.
"Chineseness," even supported with ultra-low price, simply won't cut it. Any brand capable of sustaining long-term loyalty with a long-term price premium must provide a consistent "unique brand offer" rooted in either a "brand truth," an "equity" (e.g., Volvo equals safety) associated with the brand and built up over time or a "product truth," something really special that is "inside" and delivers a meaningful benefit. No large Chinese brand offers either. So it will be the medium-sized brands that make the first splash in overseas developed markets but not until they generate the scale required to manage an international marketing and sales operation. And not until they have a global position, one robust enough to be flexibly adapted in different markets with different cultural orientations.
In conclusion, the time is not ripe for Chinese brands to become true multinationals. There are fundamental cultural, structural and strategic barriers that will preclude sustaining a price-premium versus competitors in developed markets. But, on the home front, progress is being made so, hopefully, decades from now, China will represent itself proudly on the global stage.