Stuck in the bargain basement

Western media is obsessive about the rise of everything Chinese. The PRC's huge current account surplus, climb up the industrial value-added ladder and productivity gains driven by rapid urbanization have created a global economic force to be reckoned with.

However, for those of us on the ground, we realize that the picture, while steadily improving, is mixed.

Grossly inefficient allocation of resources remains China's most daunting structural barrier to steady, stable growth. The symptoms of unhealthy capital flow are varied: commingling of state and private interests, unwieldy bureaucracy, and a corporate culture that stunts innovation.

But they all spring from the country's number one problem: poor corporate governance – the lack of incentive and oversight geared towards ensuring long-term shareholder gain.

Short-term, opportunistic decision-making is a brand's worst enemy. Some progress is being made but true innovation – value-added products that result in consumer loyalty over time – is rare. Very few brands are capable of charging a sustained price premium versus competitors, leading to overcapacity, downward price pressure and diminished profit margins.

And China has yet to produce a true multinational brand that holds its own in Europe or the US.

The best brands – McDonald's, Coca-Cola, Apple, Starbucks, etc – have reinforced a consistent position over decades. They have discovered the sweet spot, the fount of profit, an Eden where insight and product differentiation seamlessly fuse into consumer desire.

Signs of progress

Some local brands have started to make real progress and no longer compete purely on low price and wide accessibility.

First, sub-brands have been launched to justify charging a higher price. The beer category boasts several robust competitors, differentiated by focused advertising and product differentiation. Brands such Fujian's Sedrin Ice and Tian Di have been effective in staunching the growth of their unfocused multinational competitors.

Second, although rare, product innovation is no longer unheard of. Sheung Yuan infant formula is made with the ingredients of human breast milk while Anta has developed a proprietary shock-absorbent sports shoe, a durability benefit that will appeal to the mass market.

Third, a few companies are leveraging patriotism or faith in Chinese culture to deepen emotional bonds. Li Ning, for example, celebrates a "Chinese style of play" (e.g. qing gong) while Carpenter Tan now has a line of combs and brushes inspired by traditional Chinese craftsmanship.

Fourth, a few fast moving consumer goods brands have executed large-scale promotions – such as Mengniu's Supergirl competition – that generate buzz amongst a carefully-defined consumer segment.

Nevertheless, local brands are generally still considerably weaker than their multinational brethren, the latter boasting higher margins and, increasingly, surprisingly broad scale. A burst of local mobile phone activity has dissipated into background noise, with TCL, Bird, Konka et al boasting no real presence in primary markets.

Even Chinese white goods such as Haier, perhaps the category in which local brands have had the most success, can't compete directly with multinationals.

As we can glean from the above examples, most of the brands that have made real progress are from small companies, usually food, beverage or personal care categories.Why have larger mainland brands – white goods, cars, mobile phones, telecom services, banks – failed to take off?

Ultimately, it's a result of poor corporate governance. There is no board of directors charged with ensuring long-term shareholder growth, resulting in structural deficiencies and chronic short-termism. Typical symptoms are as follows:

Sales department trumps marketing. Sales teams are responsible for profit and loss and they are only focused on short-term gains. A legitimate marketing department is there to balance a sales-now battle cry with a quieter plea for lingering equity. Until the marketing function emerges as an empowered, budget-backed center of gravity, step-by-step investment in brand loyalty will remain a pipedream.

Senior management is not market driven. The large state companies are still heavily influenced by the Communist Party. Having an eye focused on the market and an ear tuned into the party line always results in decision-making schizophrenia.

There is a lack of open communication between senior management and market-savvy new-generation types. China is a very Confucian society where respect for hierarchy is deeply engrained in even the most individualistic-acting younger people. In many firms, the "big boss" exudes a cult-like charisma and his directives are rarely openly challenged.

There's a lack of understanding of how to measure the success and depth of brands. Equity is meticulously constructed over time. Until brand marketing is viewed as a science – and proper respect is paid to the value of focus groups, usage and attitude studies, pre- and post-copy testing – the knowledge required to sustain equity will never be formalized.

In summary, in most industries the rise of local brands is still a superficial phenomenon. There are fundamental operational, structural, and political barriers that preclude energized brand "velocity."

But China's capacity for a Great Leap Forward of the positive kind should never be dismissed.