Local brands are cheaper, and improving

Researcher Darryl Andrew

By Published on .

Multinationals trying to get a piece of the action in China should keep their eyes on a big red flag--the growing power of mainland companies. Local brands representing distinctively Chinese categories, such as herbal tea, are gaining considerable momentum among consumers, even with products selling at a noticeable premium over global powerhouse brands.

Just five years ago, global marketers often dismissed local rivals as branding wannabes that only achieved market place presence because of extraordinarily low prices.

Some local companies worked off a combination of incredible efficiencies with wafer thin margins, such as Lifan Hongda motorbike manufacturer. Others achieved profit margin by taking short cuts that meant compromising product quality, such as the milk powder fiasco in 2004. Dozens of infants died of malnutrition after they were fed fake milk formula made by local companies.

Today, the situation is different. Kat, a local herbal tea brand, is one case in point. In convenience stores, a 330ml can of Kat retails for RMB 4.50 (59 cents), while the can of Pepsi next to it sells for RMB 2.50 (33 cents).

A growing affinity for local brands is even taking place in Shanghai, China's most cosmopolitan and international city. In a recent Synovate study of the most admired brands in China, two of the top-ten in that city were local.

Moutai, the leading manufacturer of potent Chinese rice wine that has steadily raised its price over the last five years, and the online portal Baidu.com, known as the Google of China, achieved 3rd and 8th place, respectively. That result isn’t bad considering they shared the top-ten status with icons such as Nokia, Nike, Adidas, Sony and Volkswagen.

This is a harbinger of the future, and it's a scary scenario for foreign companies. More and more local companies are becoming savvy about marketing, giving them a combination of unequivocal manufacturing efficiencies as well as a greater share of consumers' hearts.

A lot of the latter can be attributed to national pride. Ultimately, it can be traced back to a growth in awareness amongst the wider public of China emerging as a global player.

Remember the space race between the Soviets and the U.S., and how the public rallied behind these achievements in the 1960s? The space race back then even influenced design treatments of American cars. Now China has put its flag in orbit as well, with two successful manned space excursions.

Hot on the heels of that feat was the failure of China National Offshore Oil Corp.'s bid to buy American-based Unocal, the ninth largest oil company in the world, because of opposition from Washington lawmakers. Today, there is ongoing coverage of foreign powers pressuring China to revalue the yuan.

From the halls of commerce, we rove to the theater of arts. There has been considerable international recognition of Chinese artists, such as the 2000 Chinese epic, "Crouching Tiger, Sleeping Dragon,” and pianist Lang Lang are but a couple of cultural phenomenon that have helped raise pride in the contemporary cultural scene. China's art market is booming thanks to pioneering artists like Wang Guangyi and the country is spawning a young generation of up-and-coming fashion designers.

The sports arena is another front where China is winning battles with the constant media attention given to Yao Ming and track star Liu Xiang, a world record holder in the 110 meter hurdles, a full year before the 2008 Olympic Games in Beijing.

And at the product level? If China is now exporting more cars than it is importing, we are well poised for further shifts in favor of products made by local companies. Another recent Synovate study shows the U.S. public rates Chinese manufactured products as being of higher quality and better value than those made in South Korea. Perhaps it won't be long before Chery, one of China's largest car companies, and electronics manufacturer TCL out-brand Hyundai and Samsung at home.

Local branding will get stronger. M&A activity will steadily rise. There are just too many forces at play to suggest otherwise. I would be hastening my search for local brands or manufacturers to acquire or form a joint venture, if I were with a multinational with, or pick the right foreign partner if I were a local manufacturer.

Just look at China's $3 billion investment in the American private-equity firm Blackstone Group two months ago. That deal represented a coup in both directions. As for another high profile potential overseas acquisition target for a Chinese company to raid, why not go for Wal-Mart? Isn't it wise to control your main distribution channel?

Darryl Andrew is the Shanghai-based managing director of Synovate, an Aegis-owned market research company based in Hong Kong.

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