A Long Road to Rome

A Chinese Multinational Brand Is Still Years Away, Says JWT's Tom Doctoroff

By Published on .


SHANGHAI (AdAgeChina.com) -- Can Chinese companies capitalize on the global recession to better establish and develop their brands overseas?
Tom Doctoroff
Tom Doctoroff
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 Automobile, 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 Europe, America and Japan.

The answer to that question is "no."

The current state of Chinese multinationals
No Chinese consumer brand is ready go head-to-head against Western counterparts on the latter's home turf, despite the recent opening of Li Ning's new store in Singapore. This is true in every category, from autos to alcohol and pharmaceuticals to hotels, although some non-consumer marketers such as Huawei Technologies, a telecom equipment company, have made significant inroads and will continue to.

That said, many Chinese brands are making progress in emerging markets such as India, Africa and South America. The logo of TCL Corp, a Chinese electronics manufacturer, for example, is ubiquitous around the globe. China Mobile can be huge in developing nations. However, penetration is largely driven by its sales push, and 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. Their athletic shoes are becoming more technologically advanced. Their milk processing standards, despite the melamine debacle, are improving.

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 manufacturers, has implemented systems and processes to ensure truly integrated communications.

The sportswear company Anta has centered its sponsorship deal with China's Olympic Committee around a three-year core proposition. Even Jasonwood blue jeans has significantly upgraded its marketing staff (plucking the best and brightest from L'Oreal's China operation) to provide positioning consistency.

Key expansion handicaps
But success in developed international markets is a long way off. Competition in developed international markets requires a price premium rooted in both value-added -- not parity -- products or services and strong brand equity, the latter acquired only gradually over time. Chinese brands are still disadvantaged, and not just by a generic fear of anything "made in China." Chinese companies' scale-driven strategy and management structure limit their brands' ability to compete overseas.

Chinese companies' focus on scale without a commitment to innovation implies commoditization, not an unreasonable domestic strategy in a market as large, geographically dispersed and untamed as China.

"Success in developed international markets is a long way off"
Distribution clout and competitive prices linked to economies of scale are huge advantages. 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" to grow 3G services and achieve revenue per user. But decision making at China Unicom, China Telecom and China Mobile is 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.

Smaller companies in food and beverage, fashion, shoes, etc. tend to be more innovative, but lack the scale required for international expansion.

So there is a Catch-22. 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, like 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 requires scale and topdown 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.

However, this is not a model that generates the innovation and long-term equity demanded by American and European consumers, and it's not compatible with a global marketing function. Individual country leaders need to be empowered to make local investment and advertising decisions.

Centralized corporate structure
Chinese companies' management structures don't 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.

Furthermore, many managers create rival power centers underneath them so competition is "horizontal" rather than "vertical." There is no local management team that reports to an independent board of directors charged with ensuring long-term shareholder growth. As a result, their organizational structure is too centralized, hierarchical and locked into short-term planning.

"Chinese companies, even the largest ones, have not yet planted the seeds of genuine, consumer-driven innovation"
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 is conducted sparingly. It will be many years before Chinese business "opens up" enough to drive innovation rather than merely pay lip service to it.

So, what does the future look like? It will be a decade or more before companies reform their strategies and structure in a manner consistent with global brand management, and "willingness to delegate" is perceived as a strength, not a weakness.

Therefore, Chinese companies will expand their foreign presence in one of three ways:

They will further exploit "narrow" markets in which "Chineseness" is an advantage, such as alternative medicine and niche fashion brands in which "Oriental style" carries cachet.

They will forge production alliances with multinational corporations to provide either components or products that compete at lower price tiers but under non-Chinese brand names.

They will continue to acquire international brands and allow Western management to continue managing them.

The last strategy is highly risky. Lenovo, for example, bought IBM's PC division, hoping to leverage China's 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 another for international markets, the latter "out-sourced" 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. Now the original Chinese leaders reasserting control over all operations. Lenovo now realizes that success must start in China. There is no short-cut.

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. China Merchant Bank 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 Jelena Jankovic. And some Chinese auto manufacturers such as BYD Auto are developing new forms of fuel efficiency and long-lasting lithium battery technology.

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.

Tom Doctoroff is JWT's CEO, China and area director, North Asia based in Shanghai. He has lived in China since the end of 1997.


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