Few experts question the inevitability of China's emergence as a major economic power. Over recent years, the Mainland has crawled up the value chain in many industries, powered by the combination of sheer scale, cheap labour markets and a Confucian can-do ambition. Its appliances, semi-conductors and electronic products are already world-beaters.
In light of this metamorphosis from low- to high-technology colossus, it's natural to ask whether China's infatuation for foreign brands is waning. Happily, for multinational corporations MNCs), the answer is no.
The allure of foreign brands
It's true, local brands are making inroads. Haier, Legend, TCL and Changhong have achieved market dominance in their respective appliance, computer and television manufacturing sectors. Even in categories where foreign brands are market leaders, their prominence is being challenged. In inland areas, local mobile phone manufacturers such as TCL and Kejian now control 25 percent of volume share. Global megabrands, like Panasonic, Sony, IBM and Digital, have long been relegated to the profitable-yet-niche upper strata of the market.
But, in most cases, local dominance is not function of active preference for Chinese brands; instead, it springs from 'passive advantages' such as price and familiarity. The consumer landscape is still wide open to foreign penetration.
There are three main reasons. First, even the most patriotic consumers don't trust local brands. Still struggling to escape the inefficiency of a heavy-handed, state-owned structure, the entire economy is hobbled by overcapacity – the result of lots of cheap products that don't work well or look good. China is awash with inferior goods – hence the flight international-quality products and services. This trend, fuelled by an increasingly astute and consumer-driven middle class, will only accelerate over the next decade. Blind preference for MNC quality is true even in 'local flavour' categories such as food or medicines.
Second, Chinese 'brands' don't really exist. Chinese commodities do. Even well-known names such as Haier, Legend and Wahaha don't boast brand 'velocity.' They are not able to generate loyalty via an emotional bond with consumers. At best, they are known for presence ('I can find it anywhere'), reliability ('It probably won't break down') and price ('Even if it does, it's cheap'). This lack of brand equity is exacerbated by sales-driven operations airing extremely unsophisticated advertising, much of which treats consumers as information receptors rather than partners in a sophisticated buying process.
Third, foreign brands are cool. The Chinese psyche is driven by a quirky combination of (capitalistic) status seeking and (communistic) 'group think.' Moreover, the utter newness of brands and the cachet they represent make MNC products desirable badges. As a result of these factors, the sustainable price premium can be within reach.
Avoid the usual traps
Sadly, there are still lots of ways to blow it. A successful MNC must:
Avoid too high a price premium. Chinese consumers, given the destruction of the iron rice bowl and consequential need to pay for big-ticket items, especially education and housing, are increasingly price sensitive. Generally, the more a good is publicly displayed, the greater the acceptable price differential. From a can of Pepsi to a Nokia mobile phone, brands that carry 'badge value' boast the strongest perceptions of value-added.
One category that has consistently mismanaged the price gap is shampoos. Shortly after Unilever and Procter & Gamble entered the market, they swallowed value shares of up to 75 percent. Today, according to ACNielsen, they account for only 55 percent of the market and it's no wonder: until recently they boasted a price premium of around 500 percent, a clearly unsustainable figure that was bound to suffer erosion once local brands responded by improving their quality. Today, most shampoos are cutting their prices and, as a result, are struggling to maintain profitability.
Ensure that all product offerings are tailored to local tastes. Every company should conduct enough on-going market research to ensure optimal relevance of their goods. Foods, for example, should be enhanced with locally-compelling ingredients and flavours, and avoid health claims that sound unnatural to Chinese ears.
Build the mother brand
Joint venture or MNC credentials must be self apparent. World leaders are not only accepted but also admired. They signal technological innovation, prestige and durability. So pump up scale, project bigness and exude global power. In doing so, however, avoid country-specific credentials. The slogan 'Number one in the US!' is likely to alienate a fiercely nationalistic target.
Plug into the psychology of Chinese consumers. Some examples:
-a mother's primary role is to 'protect,' not 'transform' her children. 'Kills germs dead' works much better than 'Make your kid the tallest in his class';
-Chinese youth prefer understated hipness, not brash American-style braggadocio. Brains are sexier than brawn;
-romance is an important component, but not the core, of an ideal marriage. When it dies, a partnership can still thrive.
An MNC operation will always lack the operational know-how of Chinese enterprises. Ironically, the foreign company's competitive advantage will spring from a structured approach to market insight, something most state-owned enterprises sorely lack.
Armed with perseverance and a commitment to insightful marketing, Western brands can boast a competitive advantage in China.
Tom Doctoroff is Northeast Asia Director and CEO, Greater China, of J Walter Thompson/Bridge Advertising. He can be contacted at firstname.lastname@example.org.