Letter from China: Foreign Affairs

China's mega-population has always lured the world's entrepreneurs--for legal and illegal purposes. The opium trade rested, in part, on sheer numbers. China was so horrified by the drug's deadly impact that it waged war to stop its import. China lost the Opium Wars, ceding Hong Kong to Britain in 1841 as a result. With the return of Hong Kong, China has emerged in its own eyes as a proud, increasingly wealthy Asian power. Take note: By 2015, the economies of the U.S. and China will be approximately equal, hitting $12 trillion, according to forecasts by the RAND Corp. In essence, each nation will account for about one-quarter of the world's trade. And parity is power. At that time, Chinese brands could actively compete with Japanese, Korean and Western exports in the global market. In China, one of the world's largest markets, brands win hearts. Just walk down Shanghai's Nanjing Road. Foreign brands may cost more than domestic products, but they boast an appeal that's irresistible to upscale, urban shoppers. Personal-care products from Procter & Gamble, Unilever and Kimberly-Clarke are part of a modern Chinese lifestyle. Consumers wait on line to buy TV sets from Matsushita and Toshiba. Rolex watches and Motorola cellular telephones define status for the upwardly mobile. Expensive products are bought by the top 3 percent of the population. (Isetan, a Japanese department store, charges $30 for lipstick. A typical salary for a Shanghai worker is $83-95 a month.) Since Deng Xiao Peng initiated reform, expedited by current president Jiang Zemin, China has seen the emergence of a capitalist ethic in a nation run by pragmatic autocrats. Luxury items are sought after by this new breed of entrepreneur. Posh boutiques draw women as elegant as those who stroll through Hong Kong's Pacific Place. Western soft drinks are supplanting Oolong tea. Camera shops sell Fuji and Kodak film and the latest Nikon and Canon models. Shanghai-made Seagulls, once China's most popular camera, are scarce. Clearly, round one of the battle for brand share in China has been won by the West, according to a study conducted by D'Arcy Masius Benton & Bowles. "We are seeing Western brands dominating almost every product category we examine," says Barry Jones, DMB&B's president for North Asia. The survey, conducted in August 1996, polled 1,400 consumers in three key cities--Beijing, Shanghai, Guangzhou--as well as Chengdu, Dalian, Jinan and Kunming. Consumers were asked what brands were leaders in key categories. "It asks, if prices were the same, which brand would you buy? You get a simple measure of who is seen as the best and which brands people associate with. These often become leaders in their markets," says Jones. A majority of Chinese consumers (85 percent) said they'd choose the perceived leader over other brands if all else were equal. Most (67 percent) would pay a premium for the leader, and over half (53 percent) would go out of their way to find it. Perceived leadership correlated with volume leadership, except for high-ticket brands. Shanghai Volkswagen, a joint venture between Germany's Volkswagen and Shanghai Automotive, the most successful overseas-funded enterprise in China, according to the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), outsells Mercedes, and Shanghai Watch outsells Rolex. Except for Tsingtao Beer, no Chinese brand dominates any category studied. In fact, all foreign firms operating in China are joint ventures with a Chinese firm or legal entity. MOFTEC says the top 500 overseas-funded enterprises' profits are up 39 percent from 1995. But many local competitors, saddled with outdated technology and poor brand association, are closing their doors. The study also found that Western brands that are leaders elsewhere are deeply entrenched in China. Coca-Cola, Nike, IBM, Avon, Colgate and Nestlƒ head the list. Product quality, consumer trust and perceived value are traits Chinese consumers look for in leading brands. And advertising plays a crucial role as an information source for new products. Is it any wonder that advertising is China's fastest-growing service-sector industry? Billings grew 52 percent last year to nearly $4 billion and are expected to grow 40 percent this year. By the year 2000, China could be the fourth-largest ad market worldwide, up from 11th in 1996 and 36th in 1990. Round two in the battle for brand sovereignty could see a powerful Chinese comeback. Lieu Minxue, president of the Chinese Trademark Association, says Chinese enterprises should "place greater importance on creating and protecting brand names. This is essential to safeguarding the national industry." As such, China has enlisted Ogilvy & Mather to help create Chinese brands for world markets. "The goal is to compete with international brands," says Shelly Lazarus, O&M's chief executive. According to Lazarus, many Chinese products have achieved parity with Western products in quality and value but lack the brand name and consumer awareness to generate sales. Lazarus has discussed developing Chinese brand names with Lie Tidying, minister in charge of the commission for restructuring the economy, and Wang Guangying, vice chairman of the National People's Congress. Of course, learning new technology and quality control from foreign joint ventures is helping Chinese companies. For example, the Wuxi Little Swan company now produces 1 million washing machines a year that incorporate sensors to measure the size and dirtiness of laundry. The technology is from Matsushita Electric in Japan. This year, about 10 percent of Little Swan's machines will be exported. O&M, which billed $73 million in China last year, views local clients rather than multinationals as the key to future earnings. "Future growth is going to come from local Chinese companies," says Miles Young, O&M's president for Asia/Pacific. "Chinese companies realize they must develop their own brand names to compete with foreign competitors," he says. For Chongqing toothpaste, China's fourth-largest toothpaste maker, O&M developed a position for their Leng Suan Ling brand that stresses functional aspects of the toothpaste. In one ad, a comedian illustrates that dental problems can be solved by using the brand. Believe it. Since airing, sales of Leng Suan Ling have risen 30 percent in six months! "Thanks, in large part, to the government, which wants Chinese companies to develop branding as a competitive tool," says Young. In fairness, Chinese manufacturers have been used to a controlled economy. Manufacturers never considered consumer marketing, product quality or competitive advantage. Because many local companies are closing, the government has a vested interest in halting that trend. Ads are part of the solution, but the real challenge is to develop products that attract consumers. "Western companies in China are oriented to competing with each other rather than with Chinese brands," says Jones. "Down the road, Chinese brands could become the real competitors. In many product fields, we could soon be looking at Chinese brands selling for 30 percent to 40 percent less than comparable Western brands." For ambitious Chinese companies, the winning formula is twofold: utilize modern technology and publicize brands with foreign marketing and advertising savvy.

Brand Marketing

Letter from China: Foreign Affairs

David Kilburn

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David Kilburn