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Growing Strong Chinese Brands

Kunal Sinha

Ogilvy & Mather

China Chief Knowledge Officer

kunal.sinha@ogilvy.com

Last year, the unthinkable happened on China’s streets. Homegrown brand BYD surged ahead of well-established international brands Volkswagen and General Motors, to become the largest selling auto brand in China. Backed by a U S$232 million investment from Berkshire Hathaway, the company poured money into R&D. In May 2010, Daimler-Benz announced that it was setting up a research and development center with BYD in Shenzhen, with both partners investing 300 million renminbi apiece. Quite a long distance for a battery maker to travel. Going back a couple of years, former Olympic gymnast Li Ning managed to pull off one of the most stunning ambush marketing coups in recent history. As the wires pulled him skywards and around Beijing’s Olympic stadium to light the torch, official sponsors Adidas – who had forked out US$200 million, could only wring their hands. Li Ning’s eponymous sportswear brand was catapulted on to the global stage, in front of an audience of four billion. On the Monday after, the company’s Hong Kong listed shares leapt by 3.4 percent. Last year, the company opened its showroom in Portland, Oregon – Nike’s backyard, another flagship store in New York City, signed on Shaquille O ’ Neal to endorse the brand; even though overseas sales contribute a mere 1 percent to its revenue. Chief Executive Zhang Zhiyong emphasizes that everything they’re doing is to signal they’re going global. That global presence is vital for its customers back home.

In 1903, two businessmen, one British, one German, invested around US$65,000 to open a brewery in the seaside town of Tsingtao. The Nordic Brewery Co. Ltd (Tsingtao branch) was the first brewery set up with European technology in mainland China, producing 2,000 tonnes of beer every year, and sold in Shanghai, Tianjin, Yantai and Dalian. Over the decades, the company changed hands, from the Japanese, to the Kuomintang, to becoming a state-owned enterprise, until 1992, when in the wake of the Opening Up and Reform era, it became the first fast moving consumer goods company to be listed on the Hong Kong stock exchange. AnheuserBusch took a 27 percent stake in the company. Today, the brand is sold in more than 50 countries, and accounts for half of China’s beer exports. The perfect accompaniment to Chinese takeaway?

It is easy to suggest that the strength of Chinese brands comes from a very large domestic market, one that has only recently begun embracing the idea of brands. For an economy that has grown so large on the strength of low-cost, low-margin, high-volume manufacturing, making the shift to paying a premium for brand value is asking something new from Chinese consumers. This is a market that is yet to be completely conquered: the Chinese drink only 30 liters of beer a year, compared with the Aussies who drink 104 liters, the English who drink 99, and the Americans who drink 81. Only 12 percent of Chinese families own a car. Sports shoe ownership is admittedly much higher, aided by the availability of cheap, unbranded footwear at a little over a dollar. But it is precisely for these reasons that Chinese brands may find opportunity in overseas markets, if they choose them well. These would be markets in the developing world  – such as the BRIC nations, where affordability is a key factor when consumers buy brands. In a study done by Ogilvy and Millward Brown in 2007, Chinese brands were seen as being innovative A ND offering value for money, an unbeatable proposition. In recession-hit markets, notably Western Europe, the value-formoney angle worked very well, as it did among groups of consumers in the U.S. (such as college students) for whom balancing the budget was extremely important. For them, Haier’s tabletop refrigerator, which optimized space, was a big hit. Haier already spends 4 percent of its revenues on research and has created local product development teams in Tokyo and the United States. Even as multinational companies are shifting their design centers to China, they remain reticent about announcing it to their consumers in the belief that this would somehow result in a negative perception. While the MNCs wait for perceptions to change, Chinese brands have the opportunity to highlight their own stories of innovation.

Just as foreign brands realize that they must join hands with China in the area of manufacturing, Chinese brands must also rope in foreign talent or forge international partnerships in areas such as design, to gain an edge. And they are. Feiyue shoes, that simple, white sneaker born in the 1920s, has suddenly become such an icon that fashionistas are ditching their Ferragamos for Feiyues. In 2006, a small band of French sneaker and urban culture enthusiasts chanced upon the cheap Feiyue. They decided that its simplicity was the perfect antidote to the high-tech footwear that the big multinationals were churning out. Working with new materials, revising the form without jettisoning the original vintage charm, they created a range that is now all the rage in Paris, where one style retails for €89, to Sydney, where Bondi beach lifeguards recently wore the shoes at Australia Fashion Week.

Nanjing Auto, which acquired Britain’s iconic auto brands MG and Rover, is now developing its own marques such as Roewe with the help of the engineers who helped create the Japanese car industry in the 1970s and are now retiring. Lenovo’s Pocket Yoga series of concept notebooks was designed by a New Zealand based yoga enthusiast. Other strong Chinese brands are waiting in the wings. Even as Bawang shampoo was buffeted by reports that it contained traces of a carcinogenic substance, the brand could well find opportunity on the streets of London, New York, Vancouver and San Francisco, where traditional Chinese medicine shops are a dime a dozen. I have seen showrooms of Chery (the Chinese automobile manufacturer) in Istanbul, and there’s a large reconditioned car market in Africa, Latin America and Southeast and Central Asia which they and other Chinese automakers could jump into. By next year, JAC Auto expects to sell 35,000 units in Brazil, and Ogilvy is helping launch the brand. That said, I believe that the expectation of China’s corporations to build strong, ‘international brands’ is somewhat misplaced. Countries like Germany and Italy, where domestic demand is small, have no option but to export and find customers elsewhere. But for Chinese companies, which have such a large domestic market, one that they understand well, with government policy stacked in their favor, why would they seek customers elsewhere, especially when the entry barriers keep getting stacked higher?