|Professor John Quelch, an expert in global branding and marketing and a senior professor at Harvard University, spent last year at the China Europe International Business School (CEIBS). Together with CEIBS researcher Maria Ibanez Gabilondo, he recently published a report describing the geographic expansion of multinational companies in China. He spoke with us about the different strategies firms employ for rolling out products in second- and third-tier cities.
Q: Have you had any difficulty getting information out of Chinese companies and multinationals?
A: I was pleasantly surprised. We were able to draw so much information from the Chinese language websites of the manufacturers and retailers in which we were interested. In addition, the senior executives of Western multinationals are more self-confident and more forthcoming and open to conversations about what has worked, what is working, what will work in the future. The China market is not only important but proving to be profitable. Usually when profits are non-existent people are less open. In general over the last five to seven years we’ve seen the previous decade’s investments beginning to pay out in terms of profit.
Q: Why did you choose to release this research paper now?
A: It’s timely because there are a large number of Western companies – both manufacturers and retailers – that are looking at the next stage of expansion. What we find is even in the same retail sub-segment, such as luxury brands or mass market products, there are still different rollout strategies being used. Some are focused on deep penetration of a few big cities. Others are spreading their efforts across more cities, with fewer stores on average per city.
Q: You mention a risk that as foreign firms roll out, the door will be closed to foreign investment.
A: There is a risk in taking the lead. But there is a greater risk in being conservative. The cost of market entry increases with delay. The companies that are on the cutting edge of expansion are typically highly experienced in expansion from other emerging economies. For example, McDonald’s and KFC know the economics of investing in new stores ahead of their being profitable. But obtaining prime real estate locations first is critical to long-term success. So while those stores in third- and fourth-tier cities may not be profitable for a couple of years, locking up the prime locations will pay back in the long run.
Q: One of the premises of this rollout is that government policies to increase domestic consumption will work. How effective do you think policy changes can be given Chinese saving culture?
A: The behavior of consumers and citizens usually changes much more slowly than policy-makers would like it to. At the same time, if you give clear direction, particularly through economic incentives, you can focus people’s attention and cause them to change their behavior – or nudge them in that direction. As you know, the stimulus package included some programs that offered discounts in rural areas to promote purchases of durable goods by farmers and their families. Those programs were short-term price incentives, and they were quite effective. I would say also that the level of trust that Chinese citizens have in the wisdom of their government is higher than in Western democracies, and therefore the propensity to take direction from the government is much greater.
Q: You describe some variation in firms’ attitude towards product localization. What are the factors that come into play?
A: The need for localization varies considerably by product category. Among the global luxury brands, there is little reason to adjust the product mix except with respect to sizing – clothing sizes – for China, but the Chinese consumers purchasing global luxury brands are typically seeking to identify with what that brand represents in the West. At the other end of the spectrum, when we look at food products or home cleaning products, they are more likely to require some formula adaptation to take account of differences in local tastes and raw materials. For example, the quality of the water and the hardness or softness of the water in different areas might require the formula for a detergent to be adjusted. There are significant differences in patterns of food consumption in different areas, and it is very important for Western brands to understand what adjustments they need to make. For example, if you were Kellogg’s and wanted to launch corn flakes here, that would be very challenging because the Chinese usually want to eat something warm for breakfast. The educational challenge to persuade Chinese consumers to eat corn flakes with cold milk might be substantial.
Q: Chinese consumers are relatively young and relatively new at all this. Observers fear they are fickle about brand loyalty.
A: First of all, brand loyalty typically takes a significant period of time to become ingrained. It varies by category, but for differentiated products – personal technology like the iPad, for example – it may be quite short. For less-involving products like detergent, you might switch easily on the basis of some price incentive or coupon. You probably aren’t that attached to your detergent. Second, while there is usually a surge in demand for Western brands when they first become available – "the forbidden fruit!" – after a few years there is a tendency to revert to national or regional brands because the quality of those brands has risen. Not out of nationalist duty, but because the locals have closed the gap on the Western brands.
|China Economic Review
European Union Chamber of Commerce in China