A New Threat
Western multinationals have long approached the Chinese landscape tinged with both fear and titillation. The perceived upside of aggressive investment is simple and has remained the same for a decade -- the promise of dominating the world's largest market of the future. The risks, however, are many and varied, lurking like bandits off the highway. Traditionally, these "threats" have been articulated in operational terms -- cratered distribution (getting better); arbitrary, politically-tethered, and provincially biased courts (getting a bit better but still light years from impartiality); lack of skilled local management (definitely getting better, despite a cultural fear of breaking from the pack); and so on. But, in the face of all these problems, we take heart in local consumers' preference for the reliability, innovativeness, and "coolness" of Western products.
However, just when we hoped we might be able to navigate through the operational shoals of the market, along comes a new terror: The Chinese Brand. Nimble local competitors are appearing in every corner of the competitive battlefield -- mobile phones (Kejian, TCL), appliances (Little Swan, Haier), televisions (Konka, Changhong, TCL again), insurance (Ping An), low-priced autos (Xiali), and an infinite number of hair care products.
A New Opportunity
In the early 90s, Western advertising agencies entered China primarily to service MNC clients. Over the past three or four years, however, we have awoken to the necessity of broadening our appeal to the emerging local players as well. For example, four years ago, JWT did not receive any revenue from domestic clients. Today, perhaps 40 percent of our income is generated by local brands that some in the West may have heard about (e.g., Konka Thomson televisions, China Mobile, Lenovo computers), as well as less "familiar" ones (Fuijian province's Xuejing beer, Inner Mongolia's Yili dairy, and Guangdong's 999 pharmaceuticals). There is a brave new world out there.
Clearly, the impact of WTO-stimulated efficiencies, an export-led economy, and a macroeconomic policy designed to wring overcapacity from an inefficient production base is enormous. Local companies are discovering the benefits of "the brand." Cutting-edge players now know the difference between a mouse and Mickey Mouse. For many, this is no deathbed conversion; more and more are practicing what we preach.
On the most basic level, many local brands boast acceptable "performance" and are not actively resisted. Furthermore, several nimble firms leverage communications rooted in genuine consumer insights. Both Yili milk and Liushan shower gel, for example, tap into consumers' comfort with natural ingredients. Skyworth television has emerged from nowhere with "healthy TV"; although bizarre to Western ears, the concept appeals to the Confucian imperative of "protecting" the family. And Diaopai detergent's "Why use a lot when you can use a little?" positioning elegantly blends hardheaded value with warm-hearted empathy for the plight of the laid-off state-owned enterprise worker. Finally, over the past two years, local companies' new product development has become increasingly aggressive. From Sanyuans' three-in-one breakfast beverage ("nutrition made easy") to Suyixian's MSG-free vegetable bouillon ("worry-free deliciousness") and Haier's "personalized" mini-refrigerator targeted to American college students, Chinese enterprises have discovered that innovation lifts profit margins.
Yes, at long last, local corporations are waking to the call of the market. But, as they say, yi bu yi ge jiao ying, one step at a time (or more literally, "one step, one footprint").
Caution: Slippery When Wet
For every local manufacturer that "gets it," there are fifty that do not. It is important not to confuse brand awareness with brand equity. Brand equity equals affinity. A healthy, vibrant brand carries images and associations that translate into long-term preference and "intangible" assets. According to BrandZ, WPP's proprietary research initiative designed to assesses local and MNC "brand velocity," many domestic trend shapers - e.g., Haier, Lenovo, and Wahaha beverages -- have scale but surprisingly shallow consumer loyalty. This is due to local manufacturers' mercantilist modus operandi, underscored by advertising that is frequently incoherent and laden with basso profundo SOE-style propaganda. The Economist summarizes the jarring coexistence, driven in large part by both political and cultural values, of impressive scale and unimpressive innovation-driven brand depth: "The contradictions of [chip manufacturer] Huawei are mirrored to some degree by all the country's emerging multinationals and ultimately reflects those of China itself. The economy is still in transition between dirigisme and free markets. Its political system can harness enormous resources but, ultimately, undermines its own objectives in a paranoid desire to retain control."
The rise of globally competitive and world class Chinese consumer goods companies is inevitable, but in the distant future. Most savvy Western companies have time to prepare themselves for the emergence of true local brands.
Local companies that hope to remain viable for five, ten or fifty years have no choice but to end the vicious cycle of plummeting prices and surging red ink. They must: (a) build consumer loyalty, (b) forge a sustainable price premium, and (c) reinvest profits in future growth. Any manufacturer who thinks otherwise is doomed. The only way of escaping the market's ruthless jaws is to grasp the difference between "products" (things pumped out of factories) and "brands" ("friends" actively desired and preferred by consumers). The only way to build a brand is to invest in compelling communications that deepen over time.
As discussed earlier, all effective (i.e., "international standard") advertising springs from an insight, a firm grasp of consumers' fundamental motivators for behavior and preference. A "brand vision" encapsulates a brand's long-term "identity" - it's the difference between a mouse and Mickey Mouse, or a bit of tobacco rolled in paper and a Marlboro. It is a combination of a unique product attribute and consumer desire and is the key to loyalty. Most Chinese companies are skilled at highlighting the former; all too often, however, they ignore the latter, ending up with communications that are more about what manufacturers sell than what buyers demand.
However, there are structural barriers, most of them rooted in cultural imperatives, which will slow the rise of the Chinese brand. (We will see in the following chapter that the healthiest local brands are found in relatively simple organizations. The large-scale behemoths admired by Conventional Wisdom - e.g., TCL, Haier and Lenovo - are not embraced by consumers. When companies compete in a broad range of categories, profit centers multiply. Interdepartmental struggles fester. The entire corporation becomes less efficient and more political. This, in turn, fosters an environment filled with politics, tight lips, and insecurity. Brands are intangible, unquantifiable abstractions. Healthy equity, the manifestation of confident, unified leadership, does not thrive within a fear-based culture.) These barriers are:
Senior management is not market driven
The large state companies are still heavily influenced by the Communist party; even if the CEO is not a party member (which is rare), the CCP is always fully represented - indeed, dominant - when critical business decisions are made. Having an eye focused on the market and an ear tuned into the party line will always result in decision-making schizophrenia. State enterprises suffer from chronic structurally conflicting goals. Very often, precious little progress has been made in rectifying this situation, for obvious reasons of stability and/or self-interest.
For example, on a micro-economic level, the automobile industry has long been a bastion of local protectionism; every province seems to churn out its own model, often at huge losses. The market simply can't absorb the number of (shoddily produced) vehicles flooding the hinterlands. However, a political fear of "social instability" turns even the most market-savvy manager into an official deaf to the dictates of supply and demand. The net result, of course, is chronic overcapacity, vicious price wars, and underemployment; post-WTO market liberalization threatens to only make matters worse. The television industry is suffering a similar production-led glut.
Poisonous corruption also results from the lure of command-economy "booty" trumping the discipline of free-enterprise incentive. The Party's intention to release all but "strategic" industries from central government control to the purview of the provinces and municipalities has raised the eyebrows of many foreign observers. Will bureaucrats resort to bargain-basement pricing to siphon state assets and line their own pockets? Or will they rely on market principles to fairly value assets and sell companies to buyers with a valid business proposition?
Internal corporate politics also pulls decision-making away from the mandates of a consumer orientation. We have read of one white goods (appliance) manufacturer that, as a result of a struggle between two management adversaries, planted unqualified sales managers in all key marketing positions.
There is a lack of communications between senior management and market-savvy new-generation types
China is a very Confucian society where respect for hierarchy is deeply (and, at times, imperceptibly) engrained in even the most individualistic-looking and -acting younger people. In many organizations, the "big boss" exudes a mysterious, cult-like charisma and his directives are rarely openly challenged. A "behind the curtain" decision-making secrecy only exacerbates the situation. (Again, Chinese are "protective" people who accept authority unconditionally. An old-style or "typical" Chinese boss "leads" by issuing ambiguous instructions and creating adversarial power centers beneath him. Both tactics are designed to stir up fear and nip in the bud the emergence of competitors.)
The companies with the most inaccessible and nontransparent leadership tend to be those in which the hierarchically rigid Communist party still maintains a high degree of operating control. From experience, it appears that the Big Four banks are particularly burdened by layered - even Byzantine - decision-making for two reasons. First, the leadership culture rewards "conservative opacity." Second, these companies have no incentive to operate according to the laws of supply and demand; instead, their primary role is to manage allocation of capital in a manner that ensures maintenance of high-priority state-owned enterprises and social stability.
Advertising agencies frequently bear the brunt of feckless capriciousness. Effective product communications can only emerge from streamlined decision making. At critical junctures - strategy approval, storyboard or layout buy-in, and final creative material release - all key players have to be in the same room at the same time. However, imperial senior management is often loath to participate in "lowly" advertising discussions and often renders broadcast-or-no-broadcast judgment only after hundreds of thousands of Ren Min Bi have been spent on finished copy. Given the subjective nature of creative, top management's aversion to direct discussion with junior marketing lieutenants results in loss of time and quality. Sometimes, yes, the corporate chieftain does participate in communications discussions. But he often holds court with dozens of lackeys sitting beside him, each offering a politically correct, watered-down point of view.
Sales department trumps marketing
Very often, sales teams are responsible for profit and loss. The sales force, by its very nature, is focused on short-term gains. A legitimate marketing department's ultimate mandate is balancing a sales-now battle cry versus a quieter plea for lingering equity. Until the marketing function emerges as an empowered and strategic center of gravity (equipped with a real budget), patient and step-by-step investment in brand loyalty will be a pipedream.
This barrier is frequently most daunting in white goods categories. Unlike in most multinational companies, local sales teams are not only responsible for profit and loss but also are structured along very narrow product lines resulting in a proliferation of discrete profit centers. Decentralized sales-based profit and loss (P&L) is both strategically unmanageable and politically "Balkanized," strained by warlordism at even the lowest level of the organization. Electronics and appliance distribution networks are notoriously fractionated; they are the PRC's most vertically integrated. The manufacturer frequently owns retail outlets - either outright or through joint ventures. This configuration reinforces a (short-term) sales approach at the expense of (long-term) brand building. The marketing department operates more as a coordinator or "service center" supporting sales; indeed, it becomes an in-house advertising agency capable only of churning out reams of low-quality, strategically bankrupt promotional material that, at best, push product out the door at fire sale prices.
Guanxi-obsessed sales kings also dominate the automotive landscape. ("Guanxi" are personal relationships that fuel many business transactions in China.) Across dealer networks, red packets stuffed with kick back cash count much more than brand equity. Both long-term consumer loyalty and superior road handling are irrelevant. Western companies without a controlling interest in production and distribution joint ventures don't stand a chance. Mazda's local partner, FAW, commands a 70 percent stake. It's a safe bet that the brand's "Zoom, zoom!" strategy, so successful in Japan and Europe, will be implemented in the PRC only after months (or years) of arduous negotiation. Advertising, if the forces of "localization" prevail, will be handled regionally, greased by a constellation of unaligned bucket shops, each with a small piece of the action.
Relationships with advertising agencies amount to cheap quick fixes
Pitches occur for each and every creative assignment, making it impossible for a multiyear agency-client partnership mentality to take root. A "brand" is the manifestation of a long-term dialogue between manufacturers and consumers. Advertising agencies -- at least the professional ones -- should be chartered with nurturing this relationship; however, very few local entities earmark yearly budgets to sustain an ongoing alliance with communication specialists. Furthermore, agencies are usually paid at extremely low rates, often out of production monies ( the funds set aside for actually making a print or TV ad), not on a long-term fee. The result? Cheap, shoddy communications that, on a per-job basis, maximize short-term gain.
(As a benchmark, international advertising agencies usually charge medium-sized clients -ones that might produce two television and print campaigns per year - around US$300,000-US$350,000. This fee is paid over a one or two year time frame; stability of the relationship is protected by contractual exclusivity. Many local clients resist compensation of more than US$50,000. And multiproject arrangements are the exception rather than the rule.)
On a more nuts and bolts level, there's a lack of understanding of how to measure the success and depth of brands
Equity doesn't appear from thin air; rather, it is "constructed" - meticulously -- over time. The essence of a brand is abstract; indeed, proof of its existence is tantamount to the emotional response it elicits from consumers. However, tracking, analyzing, and projecting the richness of a brand's "magnetic pull" is eminently concrete and requires familiarity of, and respect for, marketing and measurement tools. The blind spots run the gamut from how to conduct relevant research to how to determine what a creative brief should achieve (i.e., concept tests). The difference between monetarily cheap media buying and effective media planning is ignored. The value of focus groups, Usage & Attitude studies, pre- and post-copy testing, as well as other research tools, are scoffed at. Until marketing is viewed as a science, an organ vital to a brand's success, the knowledge required to sustain equity will never be formalized. (Note: for the first time, JWT is sensing a real desire to get a leg up in absorbing basic marketing concepts. But even an infinite stream of "knowledge" will be meaningless unless the aforementioned structural issues are resolutely addressed.)
China: An Olympic Brand?
And then there's Beijing 2008 again, perhaps the most ambitious brand building exercise in history. Beyond generating income from corporate sponsorships, the Middle Kingdom wants to leverage the Olympics as its "debut" as an up and coming superpower. It is seeking the ultimate multinational endorsement: a worldwide stamp of respect. China is prepared to pay a pretty penny for this recognition - hundreds of billions of dollars.
A powerful mix of benign patriotism, angry nationalism, and the ruthless quest to extend the legitimacy of the Chinese Communist party has intoxicated both the nation and the political establishment. Furthermore, a quest for hard, cold cash - and lots of it - has ignited Olympic dreams. The nation's Olympic marketing objective is to position China as a blockbuster product, a New Horizon travel destination and investment magnet. On top of this, hundreds of local enterprises will "borrow Olympic equity" to upgrade perceptions of their own products via Olympic-themed events, sponsorships, and PR.
There's nothing wrong with either objective. Politicians have always used the Games to bolster the appeal of a host city or country. By trumpeting sparkling Olympic infrastructure and the worldliness of its citizens, both Tokyo (1964) and Seoul (1988) "launched" themselves as modern commercial and cultural centers. What's more, for the past several decades marketers from McDonald's to Visa to Samsung have been ruthlessly aggressive in marrying product promotion and Olympic ideals.
Can China leverage the 2008 Games to enhance international perceptions of the country and its goods? Will the Olympics be harnessed to transform perceptions of the PRC from a producer of low/mid-priced commodities to a nation that practices international standards of product development? We certainly hope so. But, in reality, the jury is out. The real question to ask: Is there enough time for "bureaucratic China" to fade away so that "dynamic China" can step boldly onto the world stage?
The Cultural Revolution-style propaganda blitz that has characterized coverage of the Tibetan crackdown is not an encouraging signal.
The outside perception of the PRC is, at best, murky. In the eyes of many, China is a land of gray concrete buildings, expressionless faces, backward facilities, dirt-cheap laboring hordes, and dusty tourist attractions. Beijing 2008's marketing arm, working in conjunction with the Ministry of Tourism, should use the Olympics to reposition the country as full of visual delights, bursting with humanity, modern yet historic, and multidimensional. It needs to develop a multiyear plan that seamlessly integrates the tactical and commercial opportunities presented by the Olympics with the broader objective of elevating the image of China around the world. In short, China needs a "brand vision" and a "big creative idea" that can be woven into all globally targeted communication. Unfortunately, politically motivated, short-term-oriented cadres, divorced from the realities of how the rest of the world perceives the motherland, clog the Olympic machine. Likewise, to my knowledge, there is no corner of the tourism sector dedicated to projecting a cohesive, animated image to the world's traveling set.
What will visitors experience when they arrive in Beijing? Will attendants be warm or will they be robotic in a heartless, Pudong Airport kind of way? Will the city be festooned with creative decoration or can we look forward to thousands of already ubiquitous, cheap, white plastic pots containing one of four plant types? Will the opening ceremony be a rousing release of national passion or an Orwellian propaganda spectacular? Will the awe-inspiring zip, zing and pizzazz of the Chinese people be overshadowed by an insecure government apparatus paranoid about lost face? Will an instinctively self-protective China open its doors to the unfamiliar, or stage a well-rehearsed Beijing opera sure to leave most of us cold? Time will tell.
On a microeconomic level, the vast majority of enterprises are still not equipped to translate Olympic goodwill into momentum in the supermarket. As discussed above, very few state owned enterprises (SOEs) or listed companies are structured to build brands. Lenovo, China's ambitious computer manufacturer, IBM raider, and "Top Olympic Sponsor", is having an awkward time figuring out what do with both billion-dollar investments. (They are still "brainstorming" or consulting their marketing masters in New York.) In early 2005, observers were still wondering who, exactly, was in charge of managing the money pit. (Rumors are rife that Lenovo, not a SOE but a leader of a "strategic" industry watched over by the central government, was strong-armed by the CCP into achieving global-sponsor status.) Developing communications that (a) integrate product and Beijing 2008 in a manner relevant to consumers and (b) are approved by the highest level of Oz-like corporate bureaucracies is, to put it mildly, challenging. So even if, on a national level, the Olympics are a success, it may not boost consumer perceptions, inside or outside the PRC, of Chinese goods.
Ultimately, the root of the problem with both the Beijing 2008 Olympics and corporate management is the same. Politics trump commerce. When the party is involved in all aspects of business, Olympic or otherwise, one eye will always be on the market and the other firmly fixed on individual, self-protective interests. Rational and efficient allocation of resources - what is needed to build brands - becomes exponentially more difficult. China is already changing. But its evolution will be gradual. Many doubt the years between now and 2008 are enough to "wow" the world.
In summary, in most industries, especially those not yet affected by the WTO, the rise of local brands is still a relatively superficial phenomenon. There are fundamental operational, structural, and political barriers that preclude energized brand "velocity."