The globalisation of Chinese brands.

The globalisation of Chinese brands.

The globalisation of Chinese brands

The Authors

Ying Fan, Brunel University, London, UK

Abstract

Purpose – To examine the state of health of branding in China, focusing on the performance of

major Chinese enterprises in creating brands (as distinct from brand names), sustaining them in the huge domestic market and expand them into global markets

Design/methodology/approach – The study begins with a historical review of the development

of marketing in China, discusses the transition from price competition to branding in the

domestic market, and explains the role of government in the process Thereafter, case histories describe, analyse and discuss the routes to internationalisation followed by taken by six of China's biggest brands

Findings – Modern Chinese companies are large and successful as manufacturers, but uncertain

about the relative merits of branding and global marketing versus continuation as OEMs for established global brands If they do have international ambitions, they seem unsure about strategy, or even about where to look for precedents and advice Many initiatives have met with comparative failure; only one, the Lemovo-IBM merger, seems to offer a blueprint for success, but has been in operation only since 2005 Many lessons remain to be learnt, applied and tested

Research limitations/implications – Six case histories, however well chosen, cannot be

considered a definitive picture of the Chinese approach to international brand marketing The findings are nevertheless highly indicative

Practical implications – International marketing strategists are obliged to have an interest in

China, by virtue of the simple fact of its size and dynamism Several of the companies discussed are the largest of their kind in the world Despite the limitations noted, the actual and potential conclusions to be drawn from the findings reported here are therefore a significant contribution

to the body of applicable knowledge

Originality/value – Whereas many authors have studied Western brands in China, little has been

known about the potential of Chinese brands in the West

Article Type:

Case study

Keyword(s):

Brands; International marketing; Globalization; China

Journal:

Marketing Intelligence & Planning

Volume:

24

Number:

4

Year:

2006

pp:

365-379

Copyright ©

Emerald Group Publishing Limited

ISSN:

0263-4503

Note on currencies

The contraction “RMB” for the Chinese yuan stands for renminbi, translating as “people's

currency” In early March 2006, the conversion rate for the yuan (RMB) was 0.12 to the US dollar (USD), 0.07 to the pound sterling (GBP) and 0.10 to the euro

Historical background

It is now difficult to find a shop in the West that does not sell products with a Made-in-China label China has overtaken Japan within the last decade to become the largest manufacturer and exporter of consumer goods It is believed that China is now the world's number one producer in

172 categories of different consumer and industrial products (Barboza, 2006) In the 1990s, the country's trade growth was three times faster than the global average Between 2000 and 2002 its exports and imports rose by 30 per cent while world trade stagnated (WTO, 2003)

And yet, as “the world's factory” China has yet to create a single brand that is recognised

worldwide This paper discusses the current brand revolution in China, focusing on the unique

challenge faced by major Chinese enterprises: how to sustain their brands in domestic

competition and how to expand in the global market Key issues that affect brand transformation and internationalisation have been identified, using case examples of manufacturers of white goods, television sets, personal computers and microwave ovens The main research input was a variety of web sites, among which www.globrand.com (in Chinese) alone yielded more than 400 relevant articles

Despite its political history in the twentieth century, China has had a long history of commerce and marketing The world's first print advertisement appeared during the Northern Song Dynasty (960-1127), for Liu's Needle Workshop in Jinan City in Shandong Province The first European advertisement, a poster promoting the Bible in Britain, did not appear until 300 years later (Xinhua, 2004) “Made-in-China” was for many centuries a label for high quality and prestige goods, imported exclusively for royals and the rich When China's economy went into a long decline in the nineteenth century, the reputation of Chinese-made products suffered a setback from which it has yet to make a full recovery

Contemporary advertising in China dates from the 1920s, since when it has experienced many ups and downs Examples from the 1920s to 1940s include calendar posters featuring beautiful women, produced in Shanghai, which are now collector's items After the first advertising boom

in the 1930s, the advertising industry suffered restrictions when the People's Republic, founded

in 1949, began to implement a Russian-style centrally planned economy During the Cultural Revolution of 1966-1976, advertising was branded evil and deceptive, and virtually disappeared

It began to reappear in 1978, with the start of economic reform and the “open-door” policy However, even in the dark days of the Cultural Revolution, such brands as Panda radios and Flying Pigeon bicycles remained sought-after products The last decade of the twentieth century witnessed dramatic growth in the advertising business, with average annual growth rates of jus under 40 per cent Total advertising revenue increased more than 28 times to 72.2 billion RMB (US$ 9 billion) between 1990 and 2000, taking China into the top ten largest markets for

advertising services

World-class brands?

Does China have any major brands, as they are understood in western terms? In a recent

interview, the chief executive of the global Ogilvy & Mather advertising agency asserted that are only brand names that “aspire to be brands” not real brands ( Business Week , 2004) Chinese companies “think branding is important, and they want to understand what a brand is But they don't have any experience” The Co-Chairman of Ogilvy & Mather Asia Pacific commented in similar vein that “brands don't exist in Korea” (Sudhaman, 2004) The majority of brands in China today are no more than well-known names, lacking the key attribute of a real brand There

is yet a single Chinese brand that is recognised worldwide “Giants with feet of clay” was the pessimistic assessment from an influential source of the ability of Chinese enterprises to compete

on the world stage ( Economist , 2004) Only 11 Chinese companies rank in the Fortune 500 list

of top global firms by revenue, and only two are in the FT 500, ranked by market value Not one brand figures in Interbrand's top hundred list

Although Chinese brands have made evident and impressive progress in terms of

internationalisation, they still have far to go to compete with their global rivals, and the gaps are even widening in some respects This is demonstrated by the revenue of China's largest

consumer appliance company, Haier, which in 2002 amounted to only about ten per cent of Sony's total electronics sales In that same year, the combined gross electronic-systems sales of the top 30 Chinese OEMs corresponded to only 64 per cent of Hewlett Packard's sales alone (

Twice , 2003) In terms of profitability the gap is even larger China's domestic TV market has been dominated by the so-called Big Four (Changhong, TCL, Konka and Skyworth) for some years, but the combined profits of more than 20 domestic TV manufacturers are less than that Sony's

However, there is also an optimistic side The highly influential British advertising figure, Lord Saatchi, has argued that:

China is always going to be an important element of the global ad business … but we have been struck with the reverse potential: we don't see any reason why Chinese brands cannot have the same impact in the US, as US brands have had in China (Xinhua, 2004)

He further points out that the laws of economics come into play in international brand

development:

There is an economic inevitability to the process In Stage One of a nation's economic

development, a country manufactures products for others; in Stage Two, it manufactures

products to its own specifications; during Stage Three, it manufactures its own specifications for its own brands

In the same way that established and often complacent firms in the West were challenged by the emergence of Japanese electronics and automotive brands in the 1960s and 1970s, and Korean brands in the 1980s and 1990s, the world might expect the same of China It is worth noting that many top Chinese enterprises were barely in existence 20 years ago They have all the potential and opportunities to become global players in the not too far distant future

From advertising to branding

The development of marketing and branding in China since transition to a market economy began in 1978 can be roughly divided into three stages The first, in the 1980s, was the

production stage, the country still reeling from the consequences of the centrally planned

economy, in which virtually everything was in short supply The consumer goods markets were all dominated by international brands and those made in foreign joint ventures The 1990s was the stage of selling and advertising There were major changes in the market, and supply

outstripped demand in many sectors Competition was intensified and price wars became

common Domestic companies established themselves, notably in the television and home appliance sectors, and took market share from international brands Advertising was widely regarded as the most powerful weapon after price Chinese companies confused advertising with branding in a nạve belief that it could create brands, that heavy spending would create big brands, and that sales would automatically follow Corporate identity was also in fashion during

this period Firms spent millions trying to change their logo and promoting their new image Many companies were initially seduced by the “successful” effects of such campaigns, but were almost always disillusioned eventually For instance, in 1997, one small brewery in Shangdong Province paid five times its turnover for the 30-second slot called the “golden time” immediately after the Central Television's Evening News, which delivered about 700 million viewers

nationwide The brand instantly became a household name and sales tripled But the brewery could neither meet the demand nor guarantee quality Two years later the company was close to bankruptcy (Globrand.com, 2005) Some Chinese companies have tried innovative ways to communicate their brands to the market Kejian, a mobile phone company, is a purely domestic brand that has found a unique way of developing brands through its £2-million sponsorship of the English Premiership football club, Everton It does no business in the UK, but 93 million Chinese watch Premiership matches on television every week (Fan, 2005)

The early twenty-first century has seen the start of a third stage of branding and globalisation In November 2001, China became a full member of the World Trade Organisation Its domestic market is characterised by intensified competition, mass over-capacity and decreasing margins The average life cycle of a Chinese brand is seven and half years, and most seem to be short In

1995, more than 200 brands competed in the household electrical/electronics industry By 2000 only about 20 remained in business An important sign of market maturity has been the social development of consumers, who have become better informed and more sophisticated A recent survey of 600 in four cities by a US consulting company found that they were no longer

concerned only about price; quality, service and choice were the top three criteria in their

purchasing decisions They also developed loyalty to preferred brands ( China Quality News ,

2004) Facing a changing environment, Chinese companies have begun to take branding more seriously, but their understanding of the concept remains vague and superficial In every

advertising campaign and every advertisement, it is the company that is promoted A typical message would speak of the firm's history, its production capability, its technological

competence, its position as a market leader, and the number of prizes it has won What is

promoted is a corporate name, rather than brand value Without product branding, it is very difficult to differentiate competing offerings, and there is no emotional incentive for the

consumer to buy As a result, there is only sales competition, which often leads to vicious price wars

The importance of branding is well captured by the Chairman of Interbrand, “He who owns the brands owns the wealth” (Cass Creative Report, 2004) The world's 100 largest consumer goods and retail companies that rely on overseas production collectively recorded sales of US$ 3,578 billion and profits of US$ 228 billion By contrast, the top 100 OEM manufacturers in the Asia Pacific region supplying those companies achieved sales of only US$ 85 billion and profits of US$ 4 billion ( Business Week , 2003) That represents an extraordinary ratio of 1:50 between the brand owners and the OEMs

Diversification: a blessing or a woe?

Many Chinese companies embarked on diversification in the early 1990s, when the fierce

competition in their original business sectors drove down the margin A classic example is the now very large Haier Company, a thumbnail case history of which is presented later in this

paper It started as small factory making refrigerators and later expanded into washing machines and other household appliances It now manufactures more than 15,000 product items in 96 categories, covering a wide range of white and brown goods, and consumer electronics Since,

1995, it has undertaken wholesale diversification into totally unrelated businesses:

pharmaceuticals, logistics, catering and financial services The company declared diversification and internationalisation to be the two main elements of its long-term growth strategy However, most of the unrelated diversification ventures ended in failure after modest initial success

Haier is not alone in its seemingly careless pursuit of diversification In 2003, the personal computer manufacturer Lenovo (also the subject of a case history) announced an investment of RMB 3 billion in real estate It is now hard to find a Chinese company of reasonable size that is not diversified; these are described as “jituan gongsi” or “group companies” This misapplied strategy does not help to solve the problems of the existing business, and may even indirectly aggravate them by distracting management attention and diverting resources from the core business (Kapferer, 2001) In the marketing arena, it causes confusion amongst consumers about brand positioning and dilutes brand values Many Chinese companies do not understand multiple branding, and use the same corporate name for various diversified products For example, Huoli28 sells a detergent and mineral water under the same brand name, while Yuetu extended its branding from cigarettes to female sanitary protection

Many Chinese companies see diversification as the only route to new growth in revenue when price wars destroy the industry margin This may explain why China is struggling to build home-grown brands ( Economist , 2004) Most domestic businesses are broad rather than deep,

preferring to diversify rather than concentrate on a core business This reflects a perception that there is a very large range of opportunities to make money combined with a lack of individual patience The consistency and quality that builds trust with consumers is not part of the Chinese management style This is paradoxical, in that opportunist diversification is in apparent conflict with traditional Chinese cultural values, which emphasise the long-term outlook and stability (Fan, 2000)

Should Chinese companies hold the earlier view favouring conglomerates for their stability of revenues and earnings, or hold to the contemporary view in developed countries that focused companies build greater shareholder value? The Kotler Marketing Group (which is unconnected with Philip Kotler, beyond overtly espousing his principles) believes the answer is the latter It argues that all multinational companies today are focused companies, sticking to one industry and investing capital in core technologies to achieve and sustain dominance (Kotler Marketing Group, 2002a) However, there are exceptions Many Japanese companies are diversified, and European examples such as Virgin also show that conglomerates can be as successful as a focused firm

The role of government

Realising that the development of brands is essential for the nation's continuous economic growth, the Chinese Government has made constructive efforts to help companies to promote their brands By the end of 2000, brand strategy administration departments had been established all over the country In 2001, China's consumer quality watchdog (the State Administration of

Quality Supervision, Inspection and Quarantine, or AQSIQ), promulgated regulations on the appraisal and management of state-level top brands Under its aegis, the State Commission for Brand Promotion (SCBP) was set-up in 2002, to focus on the role government was to play in pushing forward the national branding strategy Composed of government officials, industrial leaders, technological experts and journalists, it conducts annual product quality appraisals of new national brands, in strict accordance with formal rules and regulations (Xinhua, 2004) Entry

to the appraisal scheme is by voluntary application Successful applicants receive the official designation “China's famous brand” and are entitled to exemption from any further quality inspection for three years Though there are now 547 brands with the title, some famous brands could not sustain their economic performance, even with government support, and failed the test

of market competition Furthermore, almost one in five of the 1,600 “famous and old brands” certified by the government in 1990 are now on the verge of bankruptcy, and only one in ten consistently generates profits (EIU, 2004)

Some Chinese analysts have questioned the legality and effectiveness of such state intervention

in commercial branding (Zhu, 2004) They see it as nothing but another form of covert

protection, leading to abuse by corrupt officials and businessmen Every year, Chinese

companies typically receive many invitations to participate in similar competitions or appraisals that are not organised by SCBP In one event, 34 participating firms all received the top prize, a golden cup, simply because they had paid the high entry fee In other cases, the grade of a prize

or merit certificate was decided entirely by the level of contributions received The appraisal process needs to be open and transparent The criteria for the China's famous brand scheme itself have also been challenged

It is impossible to build brands effectively in a closed environment after Chinese accession to the WTO Truly powerful brands will emerge only from market competition via consumer choice and not at the behest of bureaucrats However, state intervention has some support from the West The President of the Kotler Marketing Group, mentioned earlier, believes that China needs

a state marketing policy, pointing out that the task of a state marketing policy is to change the Chinese mindset from production manufacturing to brand and channel ownership and

management (Kotler Marketing Group, 2002b) He argues that a state marketing policy is the key

to post-WTO Chinese economic growth Important ingredients he identifies include guidance and investment support for brand and channel acquisition, investment in product innovation and global brand design, and encouragement of the discipline of market research

Case histories of routes to internationalisation

The main basis for selection of the six case histories that follow was the market-leader status of the companies in their respective sectors, as well as demonstration of the variety of strategies and approaches adopted by Chinese enterprises, covering a whole spectrum of internationalisation, from OEM exporting to full global production and marketing Their profiles and

internationalisation strategies are summarised in Table I

Galanz

Galanz was established in 1978 as a textile factory and began to manufacture microwave ovens

in 1993 Following rapid growth over the past ten years, it is now the largest manufacturer of that product in the world It dominates the Chinese market with a 67 per cent share, and is the largest OEM exporter in the world, selling more than 10 million units overseas to more than 248

companies in 2004 Out of every 10 microwave ovens sold in the world, at least four were made

by Galanz (www.galanz.com)

The company's policy of internationalisation is OEM first, branding second The Marketing Director of the company has ruminated:

What is a brand? A brand is made of a pot of gold How much gold do we have? We cannot afford to develop a brand in the world market at the moment so we have to do OEM (Fan, 2005)

Galanz's stated goal was to become the world's largest factory, and it has already achieved that goal So what is the next step? The company may lose the opportunity to internationalise forever

if it is content to be an OEM exporter

Changhong

Changhong was founded in 1958 as a factory producing radar for military use It diversified into television in 1993 and is now one of the largest manufacturers in the world, with a product range covering 13 sectors, including television, information technology, air-conditioning and digital components Changhong (//en.changhong.com) sold more than 12 million TV sets in 2003, held

a 16 per cent share of the domestic market, and exported to more than 90 countries Overseas sales are OEM, with only a few exceptions In Australia, Changhong sells all its products under own brand, Celestial In the last four years the company has invested heavily in Indonesia, as the part of an expansion strategy in Southeast Asia It has built production facilities with the capacity for 350,000 TV sets, 150,000 air conditioner units and 300,000 DVD players, and set-up

distribution networks with more than 1,000 dealers across the country The company claims a

“huge” success for the Changhong brand, though no sales or market share data are available Like Galanz, Changhong has taken a cautious approach in overseas expansion, remaining largely

an OEM exporter in the world market At its web site, it is still eagerly seeking new

opportunities in OEM

SVA

SVA (Group) Co Ltd, established in 1995 by the merger of three major television manufacturers

in Shanghai, has transformed itself into a leading electronics company, with four major business units covering broadband value-added services, information-product manufacturing,

photoelectric display devices, and more The company has a technology laboratory in the USA, and production and sales presence in nine countries around the world Within China, SVA is still

a relatively less familiar brand, ranking only ninth among Chinese companies in 2003 Its sales volume of 15 million units is about a tenth of the figure for the market leader, Changhong Total sales turnover reached US$ 4.6 billion in 2003, of which about 43 per cent was overseas Unlike other TV exporters in China, SVA decided to focus on upmarket products such as plasma-screen television sets, TFT-LCD displays and DLP projection units, in order to avoid the intense

competition from other Chinese companies selling on an OEM basis at the low end of the colour television market The company has proved itself by mass-producing quality products at low cost, and made a breakthrough in the highly competitive US market

In marketing strategy, SVA (www.sva.com.cn) has adopted a cautious approach by working first with distributors, to learn more about the local market, rather than selling directly to big retailers

It also sells through internet outlets such as Amazon.com The company used trade-level

promotional activities rather than spending millions to build brand awareness Its pricing strategy sets a level well below those of its Japanese and South Korean competitors but above its low-price competitors (Gao et al. , 2003)

TCL

TCL was founded in 1981 as a small factory making tape cassettes, switched to telephones in

1985, and became the market leader four years later In 1993, it entered the television sector and

is now the world's largest manufacturer, its products including multimedia equipment, mobile phones, personal computers, domestic appliances, lighting and digital hardware The company has achieved a record of 42.7 per cent average annual growth for the last 12 years, becoming one

of China's fastest growing companies

In contrast to Haier's strategy, TCL (www.tcl.com) decided to first test “easy” neighbouring markets, such as India In 1999, it chose Vietnam as the key market for overseas production and expansion The company invested in three production lines, with capacity for 500,000 TV sets and 300,000 DVD players But the easy option in fact proved to be hard work Vietnamese consumers at first believed TCL to be a Hong Kong brand Once its origin was known, brand image became a problem, because most Chinese products exported to Vietnam in previous years were cheap and low quality This negative perception proved to be very hard to overcome in the short term Facing strong competition from two long established rivals, Sony and Samsung, TCL struggled to reach a market share of only10 per cent

The last two years have seen a total change of direction in its international strategy Instead of the expensive and time-consuming effort required to promote the TCL brand overseas, the company decided to buy-in international brands through acquisition and strategic alliances In

2003, it purchased two companies with headquarters in Germany and the USA A year later, it set-up a joint venture TTE Corporation with French multinational Thompson, which was

destined to be the world's largest TV manufacturer, with capacity of 40 million units It also signed an agreement with Alcatel to form a joint venture manufacturing mobile phones TCL now has a portfolio of six brands: TCL and Lehua in China, Schneider and Thompson in Europe, and RCA and Govedio in the USA In the short term, it could continue to benefit from using these brands in different geographical markets without large investment But this strategy is only transitional, because it does not make economic sense to maintain multiple brands in the long term, and that could cause difficulty in brand positioning and confusion among the consumers A recent example is Matsushita After using the dual brands Panasonic and National for more than

40 years the company decided to discontinue National Similarly, TCL will have to undertake brand reduction in future, and decide if and when to promote the TCL brand in the world market

Lenovo

Established in 1988, Lenovo is the largest information technology enterprise in China, engaged primarily in the sale and manufacturing of personal computers, mobile telephone handsets, computer servers and printers, in China It has been the market leader for seven consecutive years, commanding a 27 per cent share of the domestic PC market in 2003 It is also the market leader in the Asia Pacific region (excluding Japan), with a market share of 12.6 per cent in 2003

The company was forced to change its English brand name from Legend to Lenovo

(www.lenovo.com) in 2003, because the former had been registered in various sectors in many countries, making it difficult to promote the brand overseas The new name, combining the Le of Legend with the universally recognised Latin prefix signifying newness, is intended to build an innovative image for the group worldwide

Lenovo made a first attempt in internationalisation in 2001, opening of seven overseas offices Three years later, overseas sales accounted for less than 3 per cent of total revenue, whilst share

of the domestic market slipped from more than 30 per cent to 27 In early 2004, the company announced its decision to concentrate on the domestic business, disguising a retreat from the international markets In a surprise move later in the same year, it bought IBM's personal

computer division for US$1.75 billion in cash, stock and assumed liabilities, after an approach from IBM three years earlier that had been rejected IBM took an 18.9 per cent ownership stake

in the new company; 26 per cent is held by the Chinese government Lenovo acquired rights to the IBM brand for five years It is relocating its world headquarters from Beijing to Armonk, N.Y., and will be responsible mainly for production, with experienced IBM management

retaining responsibility for design, sales and service Thus, Lenovo acquires a world-class brand name, whilst IBM is free to concentrate on its high-end computer business

It might well have beyond the wildest dreams of many, even a few years ago, that such a potent icon of capitalism could metaphorically change from blue to red almost overnight, but the new Lenovo has become a symbol of the modern East-West collaboration The combined company has an 8.6 per cent share of the PC market, in third place behind Dell at 16.8 per cent and

Hewlett-Packard at 15 This massive transformation in Lenovo's internationalisation was

described by the company's chairman as “a turtle on the back of a rabbit” Some Chinese

commentators believe that this acquisition has accelerated Lenovo at least ten years along the road of internationalisation At the same time, IBM in partnership with Lenovo gains direct access to China's lucrative corporate market, which was forecast to double from US$ 24 billion

in 2003 to US$ 47.9 billion in 2008, and eventually to overtake Europe to become the world's second largest IT market after the USA ( Business Week , 2004)

Lenovo now faces daunting tasks of integration, and culture clashes both outside and within It is also confronted by a particular branding dilemma: should it invest in promotion of the IBM brand or its own? The new company will inevitably lose some of IBM's corporate customers, but the real challenge will come after five years, when it can no longer use the IBM brand The crucial question is whether or not Lenovo will have grown into a credible global brand by then While it may be too early to attempt an answer yet, it is certain that Lenovo cannot win the race riding on the back of a rabbit; it must become an equally agile and swift animal itself