What is holding Chinese brands back from achieving global stature?

In an incredibly short period of forty years, China has moved from an underdeveloped country to the world’s second largest economy. When economic reforms started in 1978, Chinese GDP stood at $219 billion (about the size of the Dutch economy!). In 2016, GDP exceeded $11 trillion. It is the most massive wealth creation in 40 years the world has ever seen. After Britain in the 19th century and the U.S. in the 20th century, China is now the workshop of the world.

In the last decade or so, Chinese firms have started to shift their emphasis from manufacturing for foreign brands (OEM) to developing its own brands. The importance of developing Chinese brands for global markets is widely recognized by the government, starting with President Xi Jinping. The Chinese government and companies understand that the firm that owns the brand reaps most of the channel profits, not the OEM manufacturer.

To bring this home, I often ask executive audiences: "Who owns a Hon Hai product?" I mostly get blank looks. Yes, most do own one or more – they only know it as Apple. While Hon Hai is a huge Chinese OEM company with sales of around 150 billion dollars and over one million employees, Apple appropriates most of the profits. As you can see, its operating margin is ten times that of Hon Hai Precision Industry.

The value of branding

Accomplishments of Chinese brands thus far

In 2017, China celebrated its first “Chinese Brands Day.” From now on, this national festival will be organized every year on May 10. To support this initiative, the powerful State-owned Assets Supervision and Administration Commission of the State Council (SASAC), the Ministry of Industry and Information Technology, and the China Association for Quality, have established the Brand Association, which advises companies how to build strong brands with global potential.

China has much to celebrate. There are 13 Chinese brands on the authoritative list of BrandZ Top 100 Most Valuable Global Brands 2017. Only the U.S. has more. For comparison, in 2006, there was only one Chinese brand in the BrandZ Top 100.

Most valuable Chinese global brands in 2017

What is missing?

Clearly, as the above table highlights, China has made tremendous progress in building powerful, valuable brands. Yet, closer examination of the results reveals two concerns.

1. Almost all these brands derive an overwhelming portion of their value (two-thirds or more) from the vast Chinese home market. While that makes them strong brands overall, truly global master brands have high customer awareness and appreciation in different parts of the world. Just think about Facebook, McDonald's, or Mercedes Benz. When you think about any product category, few, if any, Chinese brand can be actively recalled, let alone be top of mind.
2. A fair number of these brands derive their strength more from protected market conditions than from the contribution of the brand per se. Just look at the column “Brand Contribution” in the Table above. (Note: Brand contribution is the BrandZ metric that assesses the extent to which brand alone, independent of financial or market factors, drives purchasing volume and enables a brand to command a price premium. Brands that score well on “brand contribution” are viewed positively by consumers.) While Tencent and Baidu have the highest score on brand contribution score, many others score much lower.

Action points to break down barriers to Chinese global brand building

This begs the question why Chinese brands are still relatively weak abroad. What is holding them back? What do Chinese brands need to do to rise to global success and esteem fitting to the size and sophistication of its economy? I identify four action points.

1. Focus on building brand imagery, not price

In my work with Chinese companies, I note that too many brand managers are focused on price. There is a widespread belief that wining on price is absolutely crucial necessary for success. However, strong brands rarely need to win on price (the exception being certain value brands like Ryanair, Aldi, or IKEA – for a discussion of their strengths and weaknesses, see chapter 3 of Global Brand Strategy). Strong brands win because they offer customers superior quality, meaningful differentiation, and emotional benefits. In short, strong brands have (rational) logic and (emotional) magic.

The power of brand magic

The logic is easy to understand for Chinese managers, but not so the magic. Many grew up when China was poor and low price was the name of the game. Only basic functional performance at the lowest possible price mattered. Moreover, these managers typically have studied engineering not marketing. It is challenging for an engineer to really understand brand imagery. I know this from first experience. My brother Paulus holds BSc, MSc, and PhD degrees in mechanical engineering. He is very smart but while he gets the value of investing in hardware, he can’t really grasp the sense and sensibility of investing in emotions - it all sounds pretty fluffy to him. Pumps: yes! (he loves pumps) but imagery???? Chinese engineers are no different.

2. Take a long-term view on branding

Some marketing mix activities such as promotions are tactical, short-term. However, brands are built over years, even decades, not months. Worse, the positive effects of brand building take time to percolate through the social system. Yes, we all want our brand to go viral and catch on as quickly as Dollar Shave Club, but those are rare. I have often encountered questions about the payback period of advertising and other brand building activities. In fact, Chinese executives are often remarkably short-term oriented. For example, take premium cosmetics brand Shanghai VIVE. The brand concept was deep, blending Chinese and Western culture crystallized in Shanghai and the brand has history. But with a change of guard and its failure to throw off significant cash in the short run, it was practically killed after a few years.

Chinese apparel brand Bosideng is an example of a brand that failed internationally for lack of brand imagery and short-term focus. Bosideng's specialty is down coats. It is a strong brand in China but its attempt to go international, starting with a fantastic store in downtown London near Oxford Street, failed. Why? Two things stood out.

1. Bosideng did not really have a story. What is the brand about? What was its brand proposition? There was no real innovative idea behind the brand. But if Bosideng has difficulty articulating what is different and unique about the brand, well, you can be sure that potential customers are bewildered, and quickly check out.
2. Second, Bosideng was unwilling to invest the millions of dollars that many apparel brands spend on advertising and marketing year after year. A Bosideng executive director acknowledged that in an interview with Bloomberg Businessweek in 2017: “We are not comfortable with making that kind of investment.” Note though that Bosideng was willing to splurge £35 million on a single store! But a store is hardware, tangible, while advertising is not (at least not at first sight). Yet, sustained marketing investments are necessary to build first brand awareness, second, explain to consumers what the brand is about, and third, create brand emotions.

Bosideng's store 28 S. Molton St., Mayfair, London

3. Brand provenance

Many Chinese managers continue to believe that “Made in China” is a major – if not fatal – weakness in their brand proposition. They are right – to some degree. The country-of-origin image of China is a lot less positive than that of Germany, Japan, Switzerland, or the U.S., the four countries that across wide swaths of B2C and B2B industries have the most positive COO image.

But COO image can change. When I was a boy (1960s), “Made in Japan” stood for rubbish. When I started to work (1980s), that applied to “Made in Korea.” How different is their COO image anno 2017! This should give hope to Chinese brands. Indeed, BrandZ reports that consumer perception of Chinese brands is changing worldwide from a presumption of lower quality to an expectation of technological innovation. It measured this change of perception – and the speed with which it is happening – by comparing the 2013 and 2015 results for a survey conducted among consumers in the U.S., U.K., India, South Africa, Russia, and Brazil. See below:

Changing perceptions about ‘Made in China’

The results are encouraging. Quality concerns have declined and trust has increased – albeit one would still like to see higher scores in the future. Importantly, China is regarded positively on technology and innovation by half to two-thirds of respondents. Factors driving this change in perception include the improvement in Chinese product quality over the past decade; the global expansion of several leading Chinese technology brands; and the emergence of a generation of young people (Millennials) who are more positively predisposed toward Chinese brands than their parents or grandparents.

While individual companies can do little to change the "Made in China" perception (unless they are leading in tech, see below), joint action by government bodies and industry associations, such as SASAC,the Ministry of Industry and Information Technology, and the China Association for Quality, and the Brand Association can accelerate the process. One promising tool is nation branding - concerted efforts by trade associations and the government to communicate the achievements of the country to the global market. It has been used successfully by countries like South Korea and Spain, to name but two (click on Spain to see an example).

4. Improve social media engagement

It should not come as a surprise to anybody that social media have become a critical channel to build your brand, especially among the younger generation. But to be successful on social media, the brand has to engage consumers, be open and vulnerable, and give up the (ultimately vain) attempt to control the brand narrative. Standard canned answers on social media hurt rather than help building brand equity. The brand manager is a participant in the multi-flow brand conversation, not the conductor of the top-down information dissemination.

This can be a profoundly unsettling experience for any manager, but it poses special changes for managers of Chinese brands, who are steeped in a hierarchical culture, characterized by top-down communication. Being open, vulnerable, and willing to give up control is especially challenging for state-owned enterprises (SOEs). They are more bureaucratic, formal, and hierarchical in any country, but in China, they account for a disproportionate share of economic activity and of China’s strongest global brands.

Why Chinese brands will overcome the barriers to achieving global stature

Will Chinese brands be able to overcome these barriers to achieve global reputation and acclaim? I often hear a healthy degree of skepticism that this will happen any time soon. Having been in China many times, I am keenly aware that it is not going to be easy, and that many will fail - but that is normal in competitive conditions. I am convinced though that a large number of Chinese brands will be able to achieve global stature. Why? At least two reasons stand out, in my mind.

1. March of history

First, there is the march of history. Until the late 1700s, China was renowned for its wonderful products, from silk to lacquer cabinets and Ming porcelain. Those were all products that sold on magic as much as on logic. There is no reason why China cannot accomplish what other nations accomplished in terms of brand building in the last century. In fact, there is no historical precedent for a country that reached economic greatness without also developing its own strong, global brands in the process. The U.K. did it, Germany, U.S., France, Italy, Switzerland, the Netherlands, and most recently Japan and South Korea.

2. Current brand building activities

Even when you don’t believe in the march of history (but remember what Churchill said, “Those who fail to learn from history are doomed to repeat it”), there are plenty of examples of Chinese brands that are already making inroads. Huawei is an obvious example. Through heavy investments in R&D and marketing, it has been able to become a major branded force in smartphones (and telecom equipment gear). It entered the BrandZ Top 100 Most Valuable Brands in 2015, and in 2017, had already moved up to #49. Its latest phone, the Mate 10 Pro is stunning in design and features. It includes a full-screen OLED display and artificial-intelligence capabilities like image recognition -at a price that is only slightly below (around 10-20%) the iPhoneX.

Huawei Mate 10 Pro

This is what techradar wrote: "Not only is the Huawei Mate 10 Pro the most impressive device we’ve seen from Huawei to date, it’s also one of the most impressive flagships currently on the market, undercutting the competition while offering more in some key areas." Its strengths according to techraar include excellent design, great camera (20 mega-pixel dual camera versus 12 mega-pixel for the iPhone X), and class-leading battery. While Huawei still faces significant challenges, it is getting there.

Other examples

Huawei is perhaps the best known example of a successful Chinese brand. But it is not alone. Tencent and Alibaba have also made great strides. JD.com, Lenovo, ZTE, Midea, Xiaomi, and Haier are other examples. Brand building in these tech categories are especially important as the Japanese and Korean experience has shown that they really help to move the overall COO image needle.The weakest spot is automotive. Despite all its efforts, China has not been able to develop a strong car brand because of the complexities of the internal combustion engine. The Chinese government has decided to ‘resolve’ this by going all out for electric vehicles. This is their one chance to leapfrog Western giants.

Creative and cutting-edge brand building is not restricted to technology industries. According to Skytrax, customer satisfaction with Hainan Airlines and China Southern is higher than that of Delta, United or American Airlines (although anybody that flies with any of these U.S. carriers might observe that this is not a high bar). Tsingtao beer has its own unioque story, as a hybrid of Germany and China. Pearl River Piano is the largest piano manufacturer by unit in the world. While it is strongest in affordable pianos, it also carries an range of concert pianos.

What about apparel? Leading the charge of Chinese brands in luxury cashmere is Sand River. It is an up and coming luxury cashmere brand with a genuine brand story around cutting-edge designers with their own life story such as Junko Koshino and Francesca Mitterand (daughter-in-law of the late French president Mitterrand), responsible sourcing, and natural resources branding? The company was founded and is led by Juliet (Xiuling) Guo.

The Brand: Juliet’s dream

Be true to the product,

Be good to the vast country,

Be full of respect for the herdsmen.

When Juliet and I visited upscale retailers in the U.S., they marveled at the daring of the designs and the superior fabric quality. When I talked about this company in my EMBA class, one of the students told his wife, who checked it out and was so enthusiastic that she bought an expensive ($300) scarf right away. Lucky for their finances, she did not buy the beautiful reversible coat of $2,422. This is as far away from shoddy-workmanship China as the East is from the West.

Conclusion

These examples are just the tip of the iceberg. Chinese companies are ever more aware of the barriers to global brand building and working hard to overcome them. The government is also on board. Be prepared for Chinese brands taking their place next to established Western brands by 2025.

Author: Jan-Benedict Steenkamp, Chairman of Marketing, C. Knox Massey Distinguished Professor of Marketing, & Executive Director AiMark at UNC Kenan-Flagler Business School, and author of Global Brand Strategy: World-wise Marketing in the Age of Branding.