China: How China will go global

China's major challenge will be to create its own global brands but Western marketers must beware of writing off the brand builders for wanting to do things their own way.

Eighteen months ago, I had a meeting with the chief executive of a publicly quoted Chinese media and technology company. He had arrived early and, I later discovered, had gone to look around Selfridges to fill in the time. When I asked what he thought of the experience, he responded: "Well, I went into one department and everything had been made in China: it was terrible!"

He could see my surprise at this comment and said: "Most of the things I looked at cost around a dollar to make in China, yet they are being sold for more than 20 times that. We're not getting any of that money - you are!"

At that time this was a interesting nugget to share at dinner parties.

But, by a mixture of serendipity and application, I've found myself involved in this issue ever since.

All of us are aware of the size of China (forget the 1.3 billion population: think of a country with 200 cities of more than one million people); the staggering 9 to 10 per cent compound growth rate and the work ethic.

We know it is sucking in a huge proportion of the world's raw materials to achieve this growth (such as 40 per cent of the world's cement), but it has ensured price deflation for consumer goods in many Western countries.

We all benefit from that.

So, even allowing for the effect on the manufacturing sector (now accounting for around 20 per cent of our employment), this is a trade-off many in the West are learning to accept. However, we shouldn't under-estimate China's interest in moving up the value chain and capturing a significant proportion of the ultimate transaction cost with the consumer.

At present, a very high proportion of Chinese exports are white-label goods, made for Western companies.

Alternatively, they are made by Chinese workers in foreign-owned factories in China (60,000 foreign-owned factories have been opened in the past three years). The only way to capture a lot more of that value is to create or acquire brands - and, since this is a nation in a hurry, global brands.

The interest in this subject in China is now significant. Since 2002, there have been consistently more applications for brand registrations than anywhere else in the world (268,000 in the first half of 2005 alone).

Last year, China's Ministry of Commerce called on Chinese companies to start exporting their own brands - "Each industry needs to have its own famous brand for export." Reflecting this interest, in the past six months, I've spoken at conferences for Chinese government officials and manufacturers about brand-building and run workshops with Chinese business school graduates on the same subject.

The Chinese can ignore things when it suits them, but when they do decide to take action, it is with great speed and decisiveness. (When I was in Beijing last month, China Daily led with the story that their response to avian flu was to vaccinate all their chickens - 14 billion of them. And they will.)

This determination to do something and not to do it in the same way as us, can leave us looking rather silly when we apply our own approach to their situation. A feature on China in Advertising Age in August 2004 saw a top agency executive describe the PC manufacturer Lenovo, patronisingly, as performing well, but "light years away from competing globally". Less than one year later, Lenovo bought IBM's PC division and is now very much a global business - the third-largest.

It is a common trap that Westerners fall into: they assume that things will develop in Asia the same way they have in the West. "These are the stages they will have to go through and these are the problems they will have to overcome at each stage," we lecture.

I saw this in the telecoms and airline industries in India. Their prospects were written off because their "appalling" infrastructure problems would hold the country back for decades. In reality, the use of mobiles and the internet largely enabled India to "jump over" the problem. "Leap-frogging" is what they often call it in Asia, and it's really important for Westerners to bear this possibility in mind before overlaying our experience and culture on them.

So what are the chances of China becoming the owner of a raft of successful global brands in, say, five years? The conventional wisdom says that's far too short a period, because brands have to be carefully nurtured over time. Like most conventional wisdom, it's true, but only to a point - and a lot of money gets made by the exceptions.

We have identified a variety of categories where global businesses can be developed quickly and, in some cases, quickly and economically. For example, Sony Walkman, Apple's iPod and Samsung mobiles went global along the fast and expensive route, blending technology and fashion. But brands such as Starbucks, Zara, Google, eBay, David Beckham, Yahoo! and Who Wants To Be a Millionaire? shot to prominence quickly, but economically.

So there are cases in the West that disprove the point we make when pontificating about the problem China will have before it "catches us up" in branding.

There will be successes we haven't imagined, simply because they do things differently.

One key element we have observed when we have been analysing these sectors is the importance of entrepreneurs and family businesses. This may seem counter-intuitive in this age of globalisation and the obsession with size, but the evidence is that this group is disproportionately important in building (global) businesses quickly.

Why might that be? We often forget in the West that the marketing process, with all its complexity, grew up with mass production. Before then, the owners of businesses went into the streets and spoke to their customers and prospects to find out what they wanted and if they were happy with what they got. The owners responded accordingly - and did it very quickly.

Often the customers knew the owner and if they trusted the owner, they trusted the brand. This applied in Victorian times, when the bosses still spoke directly to customers. It was more straightforward: no committees; no distant shareholders, no corporate social responsibility and no Sarbanes-Oxley. Victorian England had many faults, but was brimming with energy and confidence and was convinced that somehow, there must be a way to solve anything.

Well, that's China now. And it's a key point of difference that will help it succeed (but also stumble a few times along the way). However, in this world of inter-dependency between companies and countries, there are challenges ahead for Chinese companies.

There are five key issues. First is image. China's very success as the ultimate high-volume, low-cost manufacturer has led to an assumption in the West that quality is low. A change of image for the "Made in China" badge is necessary, as well as its "workshop of the world" tag. Additionally, there is likely to be the occasional outburst in Western countries of anti-Chinese sentiment - the notion that "China is taking our jobs". Boycotting of goods in certain sectors could well happen. An education campaign about the benefits China brings the West might be the solution. For example, few realise that China's imports are now growing faster than its exports.

Second is impatience. Following its staggering economic success, there is an assumption among businessmen there (and the young) that everything can happen very quickly in China. This is wonderful, but only up to a point.

Nurturing brands takes time; it involves trade-offs, sacrifices. However, Chinese companies are quick to diversify to keep building sales. If the diversification is too far, too fast and clashes with existing brand values and what the company stands for, both inside and outside the organisation, then the brand will be damaged.

Third is the apparent lack of innovation. Until recently, Chinese companies spent little on research and development and design, relying heavily on imitating Western brands.

Now the internationally oriented companies are ramping up their R&D spend (TCL, the world's largest TV manufacturer, has increased R&D from 3 per cent to 5 per cent of sales; the TV maker SVA spends 6 per cent; Haier spends 4 per cent and growing).

Imitation can be flattering. But once it becomes intellectual property theft, that's a cause of concern for foreign companies. However, as McKinsey points out, the impending consolidation of the retail trade and China's entry into the World Trade Organisation, which it takes very seriously, will progressively drive out fake goods. China's State Administration of Industry & Commerce started applying fines last year for offending companies. Besides, successful Chinese companies investing heavily in their future are as keen to drive out counterfeit goods as Western companies.

Next is the possibility of an econo-mic wobble. Despite the meteoric economic growth of many Asian countries, historically there have been major setbacks with sudden stock market crashes. This has made the West very cautious in the past about the degree to which they invest.

From the perspective of global brands, I don't see this as an issue.

A huge proportion of China's growth has come from investment in plants within China and competition inside China is intense. (The marketing manager of Nokia in China says: "We take our Chinese competitors very seriously. They are like a wolf pack.")

If, as some predict, there is a danger of manufacturing over-capacity, it will result in more determination to increase exports and this, in turn, will increase their desire to build international brands.

The final point is a shortage of expertise in general management and marketing. This is hardly surprising given the sea change from a communist "command and control" system to a more consumer-led and entrepreneurial economy. Part of this skills gap is being filled by Western-educated Chinese who've returned to China, but there is a shortage of expertise in managing international businesses.

McKinsey has estimated that, given Chinese ambitions, they will need 75,000 leaders in the next ten to 15 years. Today, they have fewer than 5,000 executives who fit the bill. They also need to understand how to build distribution, sales and brands in other countries.

In the short term, we will see more buying of Western brand names. There is no shortage of money to do this, given the Chinese government's encouragement and financial reserves ($700 billion as of last June). Funds are available from state-owned banks and from the Chinese and Hong Kong stock markets and the signs are that they will increasingly tap the London Stock Exchange and Nasdaq.

With the big Western companies' tendency to sell off "non-core" businesses, some Chinese companies have been able to acquire brands rather than build them. Apart from Lenovo's acquisition of IBM's PC business, TCL has acquired the Schneider brand in Germany and the consumer goods side of Thomson in France, which brought with it the Thomson and RCA brands. On the industrial side, this process has been under way for several years.

In addition to acquiring global brands, there are several others that Brand Company, our associates in Hong Kong, believe will be successful abroad. In consumer goods: Haier (appliances); Bird (mobiles); Galanz (microwaves). In financial services: Bank of China; China Life and China Merchants Bank. Plus FAW cars and NCPC pharmaceuticals.

However, I predict that although we will see many more acquisitions in the next five years, there will be a limit to this route, not least because Chinese businesses will have to compete with the cash burning a hole in the pockets of the private equity funds.

So, the shortage of experience will be a significant barrier to China in the short-term. But this bodes well for UK plc and the intellectual capital we have been able to build in this very area, supported by top business schools and our world-leading position in the creative industries. The main beneficiaries will be marketing executives at international companies and the bottom lines of companies in the marketing services sector with an international offering.

A few weeks ago, for the first time, Mandarin was made a compulsory subject at a British school. How very sensible.

- Chris Ingram is the founder of Ingram.

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