China: Economic Powerhouse—and land of branding opportunities

Financial analysts have said that the U.S. share of global brands is declining proportionately as more competitors come on board. The emerging markets that pose the greatest threat to U.S. brands seem to be China, Korea and India. Why does China, in particular, pose a greater challenge to the West now—and what effects will this have on American and European brands? This question is being pondered by corporate management around the world. What impact will this have on design? What light can current marketing research shed on this developing, complex scenario?

Remember that from 1949 until quite recently, China’s political leadership kept the country isolated from the rest of the world community. China did not participate in a meaningful way in the global economy. Now that the country’s economic reforms, which began in the late 1970’s, have put China on a new path, it has emerged as a force. According to Chinese government statistics, from 1980 to 2003, China’s GDP (Gross Domestic Product) averaged growth of 9.5% per year. China has now become the second largest economy in the world—and it is still maturing.

Business people know that China’s large pool of inexpensive manpower has made it a favorite as a corporate outsourced manufacturing platform. This trend is not going to abate. In fact, it will continue to grow. China has also become attractive to manufacturers due to the high productivity of its workforce and fairly advanced supply-chain infrastructure. Global consumers know that “Made in China” appears on so many categories of consumer products, sometimes it seems that everything is manufactured there!

China has become the focus and target of global corporate providers of products and services with its growing financial clout, emerging middle class and population of 1.3 billion, according to U.N. statistics.

Since China joined the World Trade Organization in 2001, great opportunities have emerged to do business in China, and business with Chinese companies.

There are also great risks, unless Westerners research and understand this unique market. Creative consultancies, especially those who specialize in brand identity, package design, and industrial design have a stake in developments in China, as well. They too, must strive to understand this complex market. Growth potential for products and services is huge here, unlike the developed markets in the West, where incremental growth is small. The challenges: firstly, the development of new Chinese brands and the revitalization of heritage brands marketed within China itself; secondly, the push to position Chinese brands increasingly on a global scale, and lastly, the impetus to position Western brands within China itself.

The development of corporate and brand Identities

In one of its recent reports, Bernstein Investment Research & Management observes that: “Foreign firms may continue to shift production to China and increasingly look to China markets for growth. However, they will not go unchallenged in their pursuit of Chinese customers. China will produce world-class brands and they will challenge incumbents in China, and around the world.” Demographics are rapidly changing in China. Many formerly poor workers are ascending to the middle class. Many are moving from rural settings to urban environments in search of employment opportunities. This is putting some real pressure on heritage Chinese brands to update in order to compete with the inevitable development of new Chinese brands and an influx of Western and other Asian brands, which are steadily finding more favor with Chinese consumers.

European and American franchises see great expansion opportunities within China, as well, and China’s own retail chains will be involved in that race for expansion and their share of consumer dollars.

Foreign brands and franchises are especially appealing to younger Chinese. But older Chinese consumers are fiercely patriotic, and want to buy native brands. Inevitably, with an expanding, emerging “capitalist” economy, Chinese companies will have to learn all about the necessity of establishing corporate and brand identities and develop brand management strategies.

While China is a manufacturing behemoth, the country is not a source of great innovative talent—yet. China’s political leaders recognize that fact and are now focusing on developing native talent in the area of engineering and design in an effort to reposition itself as an innovator rather than an imitator of Western products and services. Chinese officials and Chinese businessmen also recognize that they lack expertise and the critical skill sets of marketing and branding. Chinese companies can either opt to develop this expertise organically, import the intellectual capital from the West to achieve it more quickly, or they might choose to merge with, or acquire, Western companies to gain the necessary expertise. Regardless how they choose to acquire the crucial skill sets of design innovation, branding and marketing, Chinese companies are quick to grasp that these disciplines are absolutely necessary for them to develop if they are to compete successfully on the world stage.

Future success for product companies and service providers alike, depend upon their ability to leverage great design and design innovation, and this fact has not escaped the Chinese.

There are many product categories that are far from saturated, with hungry Chinese consumers queuing up to purchase, and the growth potential in China far exceeds that of developed markets. For example: Bernstein Investment Research & Management cites that only 43% of homes in China have a refrigerator, so “the potential growth is enormous”.1 Before every household appliance manufacturer in the United States and Europe decides to jump into China, however, they had better research this unique market. So should every creative consultancy collaborating with global corporations. For one thing, while premium quality brands are within the reach of a larger number of more affluent, urban Chinese; 90% of the population still cannot afford them, as they reside in poorer, more rural parts of the country. Even with a growing middle class, statistics from 2002 show that the average urban dweller in China, earned only $1,200 per annum. At the $3,000 income level, a Chinese wage earner is considered to be doing well.2 In Shanghai, the richest city in China per capita, consumers still purchase Chinese brands overwhelmingly over foreign brands, according to Hans Fuchs, managing director of Chinabrand, a German consultancy.

There are also distinctive differences in taste from region to region in China. Not to mention differing consumer attitudes and a variety of language dialects. This particularly affects the way in which products and services are branded and packaged. To many Westerners, China is embodied by Beijing and Shanghai. Mark Kennedy, Landor’s director of marketing and brand consulting in the firm’s Hong Kong office warns: “There is no such thing as a Chinese consumer”, indicating just how diverse the sprawling Chinese population really is. And let’s go back to our refrigerator example: according to Forbes magazine, China’s Haier brand offers 250 models of home appliances, including microwaves and dishwashers. This appliance giant not only sells its products within China, but around the globe, including the United States. Western appliance companies will be competing head to head with this established Chinese brand. And not only within China itself. Haier America founded in 1999, is the U.S. Sales and Marketing division of the international Haier Group. With the help of its international partners, this behemoth Chinese brand will benefit from the marketing, advertising and brand management acumen of the West. These are skills that savvy Chinese businessmen know they need as we’ve already stated, and they will acquire them rapidly by tapping into the knowledge capital of their Western counterparts.

Several brand identity firms have sprung up in China. Interbrand, which operates 40 offices around the world, for example, maintains an office in Shanghai.

The firm has been able to familiarize itself with regional customs, dialects and better understands the nuances of marketing to various demographics within China.

Hong Kong boasts several brand identity firms whose goal is to assist Chinese as well as Western corporate interests to better target and market to Chinese consumers. These same firms can and will consult with Chinese companies who want to brand and position their products and services to an international market, as well. While branding products and services for this expansive market can be risky, these risks can be limited by investing in consumer research and strategy, yielding great rewards. In the next few years, category and market leaders will emerge as a result of the groundwork that is being laid today. For Chinese corporations, the same can be said. In order to compete on a global playing field with the strong brands of the West, Japan and Korea, Chinese businessmen will have to implement great design innovation, branding strategies and best marketing practices. And they will.

Branding challenges within China

As Western corporations, many of whom have failed to establish a customer base in China in the recent past have learned, they must engage in their own research. There is no comprehensive marketing research data available in China and many of the government’s facts and figures are misleading, if not downright inaccurate. There is a dearth of consumer insight data, as well. As a result, original research must be conducted by corporations and creative consultancies alike.

The eagerness to jump into a developing market, should not preclude doing the necessary research before positioning products and services in China.

Otherwise, entry into this diverse, complex market will not be successful. As many companies around the world can already attest to, having tried to market their products in China in the past.

In an article entitled: “Branding with Chinese Characteristics”, author Edwin Colyer 3 notes that Chinese consumers are ‘fiercely price-driven people’. “And if you simply move in with your standard, one-size-fits-all branding then failure is almost inevitable. Experience shows that many Western brands do not cross the cultural divides.” Besides price barriers with Chinese consumers, Mr. Colyer notes that there are many other factors to consider.

The language

In Chinese, a word is represented by a character. When corporations decide to position their brands in China, they must decide which Chinese characters to use, since some of these are pronounced phonetically, and some are visually conceptualized. And the brand name has to mean something to the Chinese. This is a complicated process, and must be developed slowly and carefully. A great example cited by experts of a brand that works well in China, is Coca Cola. The corporation chose to create a phonetic and visual identity after trying in vain to establish “Coca Cola”. The consistent use of the phonetic Mandarin “ke kou ke le” is a phrase that the Chinese understand and respond to. “Permit the mouth to rejoice” means something. Coke has also used the Chinese characters that correspond to this phonetic in all of its branding communications in China.

Traditional Chinese society

The Chinese think in terms of “we” not “me” as consumers do in the West. This creates a cultural disconnect, particularly with the United States, where rugged individualism is ingrained in our culture. In China, people think of themselves as part of a cultural group, and their issues and concerns are group oriented. A Chinese person’s relationship to family and community are of paramount importance. Western style advertising and promotions that describe individualism go counter to Chinese culture.

Branding perceptions

The Chinese are not easily persuaded about the validity of brands based on traditional advertising. They read, study and talk among themselves. Brand values are better established in China by word of mouth. The Chinese respond favorably to brands that have a strong, recognizable identity and a history. Brand heritage is important in China.

Brand identity and package design

Modifications will have to be made to brands and packaging if they are going to appeal to a large cross-section of Chinese consumers. And consideration will have to be given to adapting packaging to suit the needs and tastes of regional Chinese consumers. Subtle variations may be required. Of crucial importance: brand communications in packaging that clearly delineate premium products from value-priced ones. It has been proposed that the American marketing concept of “good—better—best” branded products might offer an effective marketing segmentation approach for China.

Design will play a much larger role, and a more recognized role, in China, and around the world, in building brand loyalty and brand equity.

Branding China for global positioning

Chinese businessmen, as well as the Chinese government, recognize that their brands have very little recognition outside of their country. As they begin to analyze global markets, it has become clear to them that corporate and brand identity are essential elements, if they are to position themselves to be able to truly compete on a world stage.

How long it will take for Chinese companies to make a real impact around the world depends upon a number of factors. Many investors and business experts think this will happen over the next few years, and that it will unfold in two distinct phases.

In the first phase, Chinese businesses will compete with foreign brands for success in the Chinese marketplace. In the second, the Chinese firms that emerge in a dominant position, will then have acquired the investment and knowledge capital to expand into global markets. They will have also learned how to leverage design and engineering to develop innovative world-class products rather than focusing on more economical, price-conscious products. Not to mention marketing, branding and sales support—all factors that cement brand loyalty on an international stage.
While a few Chinese companies, such as Haier and TCL have structured international partnerships that have yielded great fruit for them, and created world-wide access for their products, very few Chinese firms have followed them into this brave new world. Yet.

Many experts are predicting that China’s emergence as a power in the world economy, will change the face of business; that new category leaders will emerge in many industry sectors as a result of competition from China, and that current category leaders will fail.

As China matures economically, and builds a more sophisticated infrastructure, many opportunities exist for Western companies. The corporations that offer highly sophisticated products or services that the Chinese cannot easily duplicate, have great market potential. The relaxation of long-standing Chinese government policies, thanks to the adoption of World Trade Organization guidelines, make this much more possible. For example, a recent Bernstein Investment Research & Management Study cites GE opportunities in China. GE has openly declared its strategy to exploit current opportunities with its health-care, energy and transportation divisions. These all have great growth potential in China. As a result, the corporate giant generated $3.6 billion dollars in sales in China in 2004, and sees significantly more opportunities. Simply stated, China does not possess the huge research assets nor the sophisticated manufacturing capabilities to develop the jet engines and the MRI machines the country needs. It will take some time before they do acquire the capital and expertise to do so. GE is considering which of its other divisions might have a future with Chinese consumers. Among these are financial services and entertainment vehicles, including television and movie media.

Some of the most exciting challenges and developments in branding lie ahead—and China will be instrumental in the shaping and reshaping of global brands.

Branding in China, branding to China and branding from China spell great opportunities, not without risks but with potentially powerful rewards, to the visionaries and leaders in business and design.

Remember: “Corporations who leverage the power of design and design innovation will own the future”. . . . this applies to both Western and Chinese companies. Future success depends upon it.


___________________________________


1 Bernstein Investment Research & Management: “China: Changing the Way the World Does Business”, article adapted from a presentation at Bernstein’s 2005 Client Conference, which was based on the Bernstein research publication, “China: Is the World Really Prepared?”, released in December, 2004.

2 GeoHive geopolitical data and statistics. www.geohive.com and www.xist.org.

3 “Branding with Chinese Characteristics”, by author Edwin Colyer, www.brandchannel.com