Where Are Chinese Brands Hiding?

Thursday, July 30, 2009 0:47

Last week’s Newsweek article Generic Giants: Why China Can’t Create Brands took a stab at answering the question many have been asking: Whee are China’s brands.

It is one of those debates that has been ongoing throughout the duration of my time here, and is usually partnered with the equally unanswered question. When will Chinese firms begin acquiring foreign firms in mass.

China is famous as the factory to the world, but even its best companies enjoy little if any fame. That paradox has become a vexing problem for China’s leaders. The nation is now too rich to continue growing at a double-digit pace by simply putting more peasants to work in factories, and then underselling its Western, Japanese, and South Korean competition.

The article provides some interesting examples of brands, Huawei and Haier, that have done well globally but have yet to establish a “brand”, while at the same looking through a wider angle:

The simplest explanation for China’s failure to build global brands is cutthroat domestic competition. In most product categories, hundreds or thousands of firms compete for domestic market share, leaving profit margins razor thin. China has 150 firms licensed to make cars and other motorized vehicles, and more than 500 bicycle manufacturers. And because foreign brands have taken much of the market’s high end, most companies are forced to compete on cost, leaving little room for investment in R&D or marketing. China’s weak protection for intellectual-property rights—the patents and ideas that are the solid core of any brand—makes it risky for companies to invest heavily in innovations that could make them famous worldwide but could easily be stolen by rivals at home. Finally, the recent string of product recalls—including poisonous pet food and faulty tires—has left consumers wary of made-in-China goods.

A theory, that when broken down into bit size chunks offers insight… and perhaps room for improvement.

1) Domestic competition
Name an industry, and what you will find is that the market is highly fragmented. That, 150 car firms, 200 solar panel firms, 80,000 logistics firms, are all trying to make their mark on “China”. It is something that I have seen over and over and over again as I have mapped out competitive landscapes in China, and without exception, the most interesting dynamic within these industries is just how fast things change.

Yes, the industries are fragmented, but to say that this inhibits anyone I believe fails to account for the fact that of the 150 of the auto firms, only 10 have a China brand, and than of those 5 are poised to become global brands within the foreseeable future. That, like a pachinco machine, many industries are seeing rapid funneling of firms. Firms that are being forced to compete first at the village level (live or die), city level (live or die), Provincial level (live or die) , regional level (live or die), the national level (live or die) and then at the global level.

Barrier certainly include cutthroat competition and margins, but more importantly it comes down to each firm’s ability to develop markets that are foreign to them, even if they are a single province over. A process that includes being able to market, distribute, and service a market at a level of quality that improves the brand image.. and in a manner that can then be scaled out.

As an example, looking at the logistics industry, there have been several firms that have done this successfully, that moved from local brand, to regional, and are developing their national brand. Kerry logistics (HK based), SF Express (Shanghai based), and others have slowly been creeping across China developing partners, buying up assets, and branding all along the way.

2) Foreign brands owning the luxury market
This is also an issue that many of my clients have faced, and has always provided some of the most interesting conversations as foreign clients have looked to leverage their luxury position and hit the middle market.. realizing that their Chinese competitors were looking to leverage the middle ground to rise up and capture the positions foreign firms hold in China, and abroad.

Again, in the current market, there is no denying that the foreign brands still own much of the luxury and top of the middle markets. Due in large part to their quality of products, marketing campaigns, stronger cash positions, and management prowess, we have see firms like Porsche, GUCCI, and San Pellegrino sweep across China.

The fact that these products exist and own the market is a bit of a head fake as the author assumes that their were (1) Chinese Brands capable of competing at this level (2) that foreign brands capturing the market is sustainable and most importantly (3) that the luxury market is what matters. That, while many foreign firms may see the luxury market as their market, Chinese firms are focused on developing products that provide profits in volumes.That , while the 100 million or so who are able to consistently afford luxurious lifestyles, it is the 400 million or so (and 600 million more to join) that are buying mid level brands that are more interesting to them.

.. and, more importantly, that those billion customers will provide the profits they need to afford to build a luxury brand of their own. Or at the least afford purchasing one of their own.

3) Domestic IP Protection & “Made in China”
Externalizes to the economists and process that many firms are working with to develop brands, I have brought these two together as I see neither as a true barrier to developing a global brand. FAW, Shui On, Huawei, and other national brands have all had their issues with IP theft, but none of those would say that it limited their market potential on the national or global level anymore than the recent release of the Geely GE does the Rolls Royce Phantom.

Many fakes and ripoffs in China are known to be fakes (note: food and pharmaceutical industry are an obvious exception to this), and firms that are ripping of the larger brands are doing so because hey have been incapable of developing their own products, have not developed a sustainable competitive advantage, and will more than likely will fall by the wayside as the national firms marginalize their products through more sophisticated products and marketing.

Other thoughts:
Outside of the above, there is one question that was surprisingly unaddressed. do Chinese firms really want to compete on the global stage? Do they want to have global brands at all, and if so… why?

Sure, there is nothing that will sell papers than a decent trade war, or brand competition, but does that make it true? Referencing the author’s own words:

During a Guangdong road trip in April, Wen called the crisis an opportunity for Chinese firms to innovate and expand abroad. Beijing has ordered state banks to make tens of billions of dollars in loans available to firms eyeing the global market.

A statement that leads me to believe that Chinese firms, some who have developed capabilities, are simply not interested or enticed even with money being thrown at them. Which leads me to the next question.

Why aren’t Chinese firms interested in developing global markets?

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6 Responses to “Where Are Chinese Brands Hiding?”

  1. ian channing says:

    July 30th, 2009 at 1:20 am

    I think the question is misplaced. With the single possible exception of South Korea, no developing country has ever produced a truly global brand, comparable with say Philips, Yamaha or Ford. It took Japan, developed by 1950, another two decades to succeed. South Korea was arguably already a developed country when Samsung and LG finally made it. Taiwan, as wealthy as SK, is very close to having truly global brands, but Acer is not quite there and Giant is in too limited a field. In the rest of the nonwestern world, there are no truly global brands. Latin America, wealthier generally than China, has only Embraer, the aircraft maker. It cannot even boast a local brand name in its traditional flagship product of fruit. Africa outside the SA diamond belt has zip. Southeast Asia has, what, Proton? India, oddly enough, is perhaps the nearest to an exception to this dismal rule, with Tata and Ranbaxy etc.
    In other words, it is at least a decade too early to expect China to produce a Samsung. It is not ready to launch global brands and does not need them now anyway.

  2. Rich says:

    July 30th, 2009 at 3:48 am

    Ian.

    Thanks. I had not thought about it in that wide of a context, but glad you did. I myself am not so concerned about abilities, I am more confused by this constant questioning. the trend is to clearly sell into the developing markets first, and I am just not sure that there will be much of an appetite for anything larger for a while.

    R

  3. Paul Denlinger says:

    July 30th, 2009 at 6:22 am

    One reason may be how difficult it is for private Chinese companies to raise funding for expansion. Even today, private Chinese companies have great trouble finding financing for expansion, even though loss-making SOEs have no trouble getting money, much of which is pumped into equities and the RE market.

    If private company CEOs have to save as much of the profits as possible so that they can meet their own capital expenditure needs internally, how much time are they going to devote to thinking about creating global brands.

    For them, that is most likely a bridge too far.

  4. Leslie Forman says:

    July 30th, 2009 at 10:14 pm

    I read this article very carefully with a Chinese intellectual property attorney that I tutor in English. What bothers me most about the article is the journalist’s critical and condescending tone. It seems to me that Huawei knows who their customers are, and they focus on reaching those customers. They sell B2B technical products, which are not necessarily that interesting to mainstream consumers. It seems like the journalist assumes that every CEO would want to be an international superstar like Steve Jobs or Bill Gates. He also implies that connection to the Chinese government automatically implies that it’s a sketchy company with lots to hide. I got the sense that the journalist wasn’t particularly familiar with China’s business environment.

  5. Rich says:

    July 31st, 2009 at 11:09 am

    @ Paul – good points, so I guess my question then is how much is the government putting on the table, and how far is that from what is needed.

    @ Leslie – I think I have just come to remove that bias from articles when I read. What you have pointed out is just so pervasive, and one litmus test I have come to measure an article on is if they quote people in the US vs.China it is a sign that they are based in the US and reaching out to people only in their time zone.

    R

  6. Zach says:

    February 27th, 2010 at 3:12 pm

    The answer is easy; Why spend millions trying to develop a brand and create something new, when its much cheap just to copy and ripoff the competition’s designs and use those.

    Huawei has been accused for dubious research and development practices. In February 2003 Cisco Systems filed motion for preliminary injunction[35] against Huawei Technologies, quoting the defendant to be “engaged in blatant and systematic copying of Cisco’s router technology”. Cisco examined Huawei’s operating system (VRP) and “found telltale signs that is was developed using Cisco’s source code”. To support their case, Cisco also presented additional evidence, including declaration of a former Huawei employee[36] detailing a list of “inappropriate” practices utilized by FutureWei Technologies, a US-based subsidiary of Huawei.

    In July 2004 Cisco, Huawei and 3Com filed a stipulation and order of dismissal with prejudice in the lawsuit filed by Cisco against Huawei in the United States District Court, Eastern District of Texas, Marshall Division, which means that Cisco can’t bring another lawsuit against Huawei asserting the same or substantially similar claims.[37][38][39]

    Huawei Technologies became the focus of a major intellectual property scandal again in 2004, when Huawei’s employee was caught afterhours in the competitors booth at SuperComm tradeshow while “examining circuit boards taken from the vendor’s displayed gear and taking photographs” [40]

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