Not yet global

There has been much talk about Chinese firms investing in Western companies, and it has been followed by some action. The intent is there, but can these firms use acquisitions to build their brands overseas? More specifically, are they able to compete at a price premium against established brands in those countries, sustained by robust brand equity, price premiums and consumer loyalty?

The answer to these questions is no.

Chinese brands – not long ago derided for non-existent value-add, propagandistic messaging and inconsistent positioning – have become a powerful force domestically. The fly-by-night pharmaceuticals companies that once dominated media spending have been replaced by the likes of Mengniu (2319.HK), China Mobile (CHL.NYSE, 0941.HK) and Wahaha, all of which are here to stay. Furthermore, many firms have gradually increased prices relative to costs and bolstered product innovation.

Still, no Chinese consumer brand is ready go head-to-head against Western counterparts on the latter’s home turf.

Chinese firms are ruthless incrementalists: Their cars are getting better; athletic shoes are becoming more technologically advanced; milk processing standards, despite the melamine debacle, are improving. Many local brands have started forging real consumer equity here and now have stable relationships with international advertising agencies. At one end of the scale, COFCO, China’s largest food manufacturer, has implemented systems and processes to ensure truly integrated communications. At the other, Jason Wood Jeans has significantly upgraded its marketing staff to provide positioning consistency, over time and with product development.

Success in global markets requires price premium, which is rooted in value-added products or services and strong brand equity. Here, Chinese brands are still disadvantaged, in many cases grievously so, and not just by a generic fear of anything "made in China."

Commoditization, not innovation

First, focusing on scale without a commitment to innovation implies commoditization. This isn’t an unreasonable strategy in a market as large and untamed as China – distribution clout and competitive prices linked to economies of scale are huge advantages, particularly in large state-dominated sectors. But state-run firms are traditional in outlook and management structures, and they frown upon entrepreneurial thinking. Smaller companies, usually private enterprises, are more innovative, but they do not have the scale required for international expansion.

So there is a Catch-22 going on. Companies big enough to go global are the most encumbered by commoditized products and services. Companies that grasp advantages inherent in value-added products and services lack the critical mass required of global power brands.

Second, Chinese firms’ management structures are not built to encourage global brand expansion. They are sales-driven and managed by emperor-CEOs who rule in a defensive manner. Often, instructions are promulgated ambiguously, resulting in an undercurrent of anxiety at lower levels, not an all-for-one future focus. Ultimately, this is a question of corporate governance. There is no independent board of directors charged with ensuring long-term shareholder growth. As a result, organizational structures are too centralized, short-term focused and hierarchical.

Like their Chinese counterparts, Korean and Japanese brands are built on scale and have benefited from decades of consistent national economic policy rooted in vertical and horizontal integration. But while Japanese and Korean products are also highly innovative, Chinese firms have yet to plant the seeds of genuine, consumer-driven innovation. Investment in R&D is neither sufficient nor channeled productively. Market research, imperative for uncovering unmet needs, is conducted sparingly.

Please be patient

So, what does the future look like? It will be a decade or more before companies reform their strategies and structures in a manner consistent with global brand management. And it will take half a generation for a new breed of Chinese corporate leader to emerge who see delegation as a strength, not a weakness.

Therefore, Chinese companies will expand foreign presence in one of three ways: further exploiting narrow markets in which "Oriental style" carries cachet; forging production alliances with multinational corporations to provide either components or products that compete at lower price tiers but under non-Chinese brand names; or acquiring international brands and retaining Western management.

The brands that stand a chance in the medium-term will be the ones known as more than simply big Chinese trademarks. China Merchants Bank (600036.SH, 3968.HK) stands out, having developed a range of innovative products and services for the new middle class under a young and dynamic brand image. So too does Anta Sports (2020.HK), which has begun to sign up globally recognized sports stars to promote its products.

Any brand capable of sustaining long-term loyalty with a long-term price premium must provide a consistent "unique brand offer" rooted in either a "brand truth" – something that comes to be associated with the brand over time (e.g. Volvo equals safety) – or a "product truth," something "inside" that delivers a meaningful benefit. No large Chinese brand offers either.

So it will be the medium-sized brands that make the first splash in overseas developed markets, but not until they generate the scale required to manage international marketing and sales operations. And not until they have global positions that are robust enough to be flexibly adapted in different markets with different cultural orientations.