Why a Chinese Multinational Brand Is Still Years Away

Viewpoint: JWT's Tom Doctoroff Says Chinese Success in Developed Markets is a Ways Off

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Tom Doctoroff
Tom Doctoroff
Can Chinese companies capitalize on the global recession to better establish and develop their brands overseas?

Many Chinese companies will likely invest in American companies (or brands) given the massive decline in asset values in the United States and Europe. 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 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."

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.

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.

Many local brands have started to forge real consumer equity in China and now have (more or less) stable relationships with international advertising agencies.

But success in developed international markets is a long way off. Competition there 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 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. 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.

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.

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. Their organizational structure is too centralized, hierarchical and locked into short-term planning.

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 a decade or more before companies reform their strategies and structure in a manner consistent with global brand management.

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

  1. Exploit "narrow" markets in which "Chineseness" is an advantage, such as alternative medicine and niche fashion brands in which "Oriental style" carries cachet.
  2. Forge production alliances with multinational corporations to provide components or products that compete at lower prices but under non-Chinese brands.
  3. 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. 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 are reasserting control over all operations. Lenovo now realizes that success must start in China.

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 stars.

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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