The eyes of the business world are fixed on China right now, as the proverbial sleeping giant begins to fulfil its prophecy of taking the world by storm.
China will be the largest economy in the world in the next decade, according to analysts, and western brands are getting in on the act with mixed success: B&Q and Best Buy both opened stores which have since shut, but Tesco and Bosch are thriving. And Procter & Gamble chief executive Bob McDonald wants half of the company’s income to come from emerging markets by 2020.
China has already eclipsed Japan as the second largest economy in the world after the US, and its number of high-earners is rocketing – Morgan Stanley predicts the group will make up a third of the Chinese population by 2020, up from just over 2% in 2005. It also says there will be 350 million middle-class households in the country by the same year.
These astonishing figures may have marketers rubbing their hands with glee – but they should be wary of simply pushing their brands out east without reviewing their brand strategy, according to Catherine Peng, corporate communications director at Bosch China.
In my experience, many international brands do not change the core of their branding, such as visual identity, slogan, brand positioning or personality. There are market specifics that need to be taken into consideration, she says.
Bosch has been trading in China for a century, where it is known as Bo Shi, and recently launched a power tool specifically for the market, following its local for local strategy. It has also increased its revenue from the country by 30% over the past five years and is aiming for double-digit growth in the next five years.
China is not one country. It is so big that if you only take Shanghai, it is as big as a large European country
M&S, Marc Bolland
Nick Thomas, executive director at the China Britain Business Council (CBBC), agrees that careful research into the different Chinese markets is crucial. To be successful in China any company needs to invest a lot of time in understanding the market. Those companies that have a good product and spend a lot of time and energy in developing their market tend to do quite well, he says.
Marks & Spencer announced in November that it is taking this careful approach, focusing first on launching four stores in Shanghai. China is not one country, said chief executive Marc Bolland at the time. It is so big that if you only take Shanghai, it is as big as a large European country. Across China they speak different languages, have different styles, different flavours. Therefore, what we want to do is not look at the whole of China in the coming three years, we want to concentrate on Shanghai and do Shanghai well.
Indeed, a highly punctuated regional fragmentation of culture and demographics is something brands must contend with. The CBBC advises brands entering the market for the first time to roll out in one region initially, as not only does the consumer profile vary by province, so does business infrastructure, from distribution to government registration (see Viewpoint, below).
Besides the centres of Shanghai and Beijing, other regions that account for more than half of the wealth owned by China’s millionaire households in 2009 were east coast regions Guangdong, Zhejiang, Jiangsu and Shandong. While CBBC’s Thomas explains that income disparities are drastic across these regions and more rural ones, the government’s current Five Year Plan promises to expand economic growth into the poorer central and western regions.
Brand awareness is growing among lower income people, as is their consumption of low-cost products. Within the next five years, P&G will have spent $2bn investing in the area, Fortune magazine reported in January. It opened a $70m research and development centre in Beijing this year dedicated to investigating the needs of what it has identified as the $2 a day income consumer.
However, P&G as well as competitor Unilever warned last month that they were raising their prices in China, but Unilever agreed last week to delay the rise, following state pressure.
Jeans label Levi’s launched its cheaper Asia-specific Denizen label in Shanghai last year to tap into a demographic with less cash – the first time it has launched a brand starting with a market outside the US. As executive chairman of The Futures Company J Walker Smith notes in the white paper Future of Global Brands in an Uncertain World: In style and price, these jeans are all about this new global consumer and the local situations that give meaning and power to its global strategy. More importantly, these jeans represent a ground-up approach to building a global (brand) presence.
But marketers considering low-cost brand launches need to assess the market carefully: China Daily reports that budget hotel brand Ibis, part of French group Accor Hotels, has not reached its targets in the country. It launched in China in 2004 and now has 52 hotels, just over half of what it initially planned. Accor declined to comment, but Regal Hotel’s vice-president of development John Girard says the budget hotel market has been well met by local operators. He cites the example of Chinese chain Home Inns, which he says went from five hotels to 750 in a heartbeat. Regal has a stake in the budget market with its Metro brand.
The top three domestic players have a 40% stronghold of the budget hotels market. Conditions in their favour include not only local brand preference but an ability to price lower than their foreign counterparts.
There is potential in the four-star hotel market, however, with the growth of the middle classes. These hotels are a lot more economical to operate for the owner than the five-stars as there is a huge difference between four and five-star hotels in terms of the facilities you need to provide, Girard says. The five-star brands are usually left to the Hyatts and Shangri Las of this world.
Regal also plans to expand its iClub boutique brand, which offers a business environment without the frills of food and drink to meet the needs of the short-stay business traveller. The iClub appeals to a middle-aged bracket for people who don’t want too much fuss, the road warriors who want iPhone and iPad connectivity. It’s low cost and high returns, he explains.
Joint ventures can also be a good way into the country for European brands. Volkswagen, Volvo and Mercedes-Benz are working with local competitors to tap into the growing car market.
The Future of Global Brands report affirms the logic of such a strategy, claiming that 44% of privately held businesses in Brazil, Russia, India and China are planning to grow by acquisition in 2011, up from 27% the year before.
The future of global brands may well come down to the determination of well-financed companies in vibrant developing markets to take ownership of established brands and then make them into more authentic local brands through a process of co-creation, says report author Smith.
While statistics from the CBBC show that China is now the world’s largest automotive market, it is very well served by local manufacturers. China produces over a million cars a month, and it seems the government is naturally more likely to support home-grown brands.
Volkswagen will be investing 10.6bn in its Chinese division with the aim of becoming the world’s largest car manufacturer. Despite other obstacles in this market, including traffic congestion influencing government policy and rising fuel prices, figures from the Automotive Industry Development Research Institute of China show the bigger picture to be immense: China only has 40 cars for every 1,000 people, compared with some European countries that have more than 700 per 1,000.
While there is also huge potential in the retail sector, Western stores such as B&Q and Best Buy have found it less straightforward to launch in China. As CBBC’s Thomas points out, B&Q’s Chinese rollout exceeded market demand and it must now scale back. Best Buy has announced it will close its nine branded stores in China to focus on growing the local Five Star brand it acquired. Toy maker Mattel is also to close its five-level Barbie destination store in Shanghai after failing to draw the mother-daughter crowds it anticipated.
Competition from local brands with appetites for expansion is another challenge foreign brands face when entering China. In Millward Brown’s annual BrandZ global brand valuation ranking, seven Chinese brands made the list in 2010; in 2006 just one was present.
LOréal has taken note of the power of local brands and has bought Chinese mass-market skincare brand Mininurse as well as luxury cosmetics firm Yue-Sai. China is the third largest market for the French beauty giant, after France and the US, bringing in more than 1bn last year. The group’s first Chinese research centre was built in Shanghai six years ago, and more than 300 cosmetic and hair products dedicated to the Chinese market have been developed there.
Acquiring Yue-Sai has enabled LOréal to market to a higher-end consumer, and while there are opportunities across demographics, as Regal and Levi’s show, targeting the rich certainly seems a good place to start. In this year’s Forbes magazine billionaires list, China boasted a record 115 billionaires, up from just 64 a year earlier. CBBC statistics demonstrate that China has overtaken the US to become the second largest luxury goods market after Japan, whose presence in this sector has been hit hard by the recent disastrous events.
The likes of Rolex and Louis Vuitton are already in the know when it comes to their wealthy Chinese customers, while fellow designer firm Hermès has launched a brand exclusively for this market focusing on Chinese heritage.
Polaroid Eyewear entered China’s high-end sunglasses market this year via a brand licensing partnership with BMW. While this might not be considered a lucrative move in Europe or the US, Polaroid Eyewear’s EMEA and former Asia marketing director Chris Knight says such a product appeals to the Chinese upper class: In China, if someone has a BMW, they want to show it, he says. People identify strongly with car brands. They will buy the jacket, the headgear, and look for branded items like mouse pads and pens.
But just as China’s economy has taken the world by storm, so too will Chinese brands (see table, below). Mobile phone manufacturer ZTE and PC brand Lenovo are just two Chinese brands that are already gaining traction not only in fellow emerging markets, but in Europe too. They are increasingly recognising that it is not just business strategy that matters, but the power of branding. As Lenovo chief marketing officer David Roman tells Marketing Week: Our business had grown ahead of the brand. But we have now identified growing our brand as one of our strategic priorities. For the growth of our company, we have to become more relevant and be seen as a global consumer brand.
Brand innovation is gaining pace in China. As Bosch China’s corporate communications director Catherine Peng points out: The Chinese market is no longer lagging behind like it was 30 years ago. Numerous Chinese brands are now growing quickly enough to catch up with their western peers in terms of brand building. With their deep understanding of the people and the market, they are becoming more and more competitive to the international brands.
The complex Chinese regulatory system can also prove to be a minefield for brands to navigate as it can often be locally enforced rather than nationally. Thomas stresses that brands must do their homework.
The regulatory system can be difficult to understand but it can also be difficult to understand for Chinese companies, so I don’t think that’s the difference between foreign and Chinese success, he adds. Our experience is that China is still keen to attract high quality foreign investment and Chinese consumers are certainly up for (embracing) foreign brands.
China’s system has long been infamous for corruption and bribery, and Thomas warns companies to take a common sense approach: just don’t do it. He says: Foreign companies certainly need to be aware of it. They may come across situations where they would be tempted to be corrupt, and backhanded requests do happen. It’s not widespread though.
While China’s mammoth economy is not something brands should ignore, it isn’t for everyone, Thomas concedes, as there are a myriad of considerations to be mindful of. But, perhaps more importantly, his main argument for brand expansion in China is that if brands don’t get there soon, their competitors will beat them to it. And playing catch-up isn’t a marketer’s ideal game plan.
Nick Thomas, executive director at the China Britain Business Council
We have about 1,000 members, which range from very small companies to large corporates like M&S and HSBC. A lot of them have offices in China already and have been doing business here for years, while others are just starting.
The leading sectors we see coming through are education, creative industries and financial and professional services. There are also a lot of business-to-business companies; for example, there are a lot of UK companies that produce niche engineering products that do quite well in China.
We help companies find business partners and distributors and help get them access to potential customers and the Chinese government. Government in China is a daily fact of life; it’s not an absolute rule but you have to interface with the government at some point to do business effectively.
We have offices in 11 cities here, so a lot of the work we do is outside the better known first tier cities like Beijing and Shanghai. That is where we are seeing a lot more UK companies showing an interest.
Retailers here tell us thinking very locally is essential when rolling out a presence because consumers in one region behave differently to those from another because it’s a huge country. It’s true when they say it shouldn’t be thought of as one country but many. There are big differences in terms of climate, cuisine, and incomes in the east can be double or triple what they are in some of the poorer inland areas.
Companies should look at several regions when they are first exploring the market and settle on one. It’s difficult to find good distributors that can cover the whole country. Working with one distributor, say in east China, and making that work might often be a better way than covering everywhere at once.
Some sectors are more challenging than others because they are quite restricted. In insurance, for example, you can’t have 100% ownership in China, so that generally means you have to go through a long process of identifying a partner. It can be very governmentally controlled, so you can end up sitting there for some years hoping for the best.
Retail is certainly very competitive. The local competition may be very intense and they have certain advantages over a retailer like Tesco in that they have very good government connections and good access to particular sites, and probably don’t have to do the same due diligence as a public company might have to for certain projects.
But Tesco is still expanding here and doing quite well. B&Q, however, went through a major retrenchment a couple of years ago.
It basically over-expanded and was hit by a housing downturn in some parts of the country that led to a lack of demand for home furnishings.
Catherine Peng, corporate communications director, Bosch China
Marketing Week (MW): What are the specific features of Bosch products in China?
Catherine Peng (CP): One of Bosch’s development strategies is local for local. For example, in March 2011, Bosch launched a tailor-made power tool for the Chinese market called the T-series. We have responded to the heavy construction needs in this country as well as Chinese tradesmen’s dream of having a Bosch power tool. The main features of the T-series were designed after researching the Chinese user’s working environment and purchasing. The retail price of the T-series is made more affordable for Chinese users than traditional Bosch products in other markets.
MW: How does Bosch tailor its brand communications for the Chinese audience?
CP: Bosch has been in China for 102 years, hence it is not a stranger to the Chinese. The communication strategy is both to highlight the heritage as a German brand standing for technological advancement and innovation; and to take into consideration local market needs in terms of communication. For instance, Bosch’s Chinese name is Bo Shi, which is a phonetic translation from Bosch but it also means big, worldwide, which is well accepted by consumers who are seeking a high-quality, world-famous brand.
We also believe that a strong corporate social responsibility strategy will help enhance Bosch’s reputation in China. At the end of 2009, Bosch initiated a programme to support 100 vocational schools in China with technical training over a five-year period. Bosch also donated 11 million Chinese Yuan (£1.05m) to help rebuild two schools which were devastated in the 2008 Sichuan earthquake.
MW: What kinds of things can brands learn?
CP: There are market specifics that need to be taken into consideration. For instance, to a Chinese, a rainbow appearing at the end of a TV commercial will be highly welcomed; while to a German, this looks strange. And the use of the number eight in China means wealthy and lucky while in Europe it would be just a number.
China: A snapshot
- China is the second largest economy in the world in nominal US dollar terms.
- China is about the same geographical size as the US, with a population of 1.3 billion people. In 2008, there were 122 cities in China with over 1 million people each.
- It is the second largest luxury goods market in the world after Japan.
- It overtook the US to become the world’s largest car market in 2009.
- It has over 833 million mobile phone users and 420 million internet users.
- UK exports to China were up 44% year-on-year at £4.5bn last year.
- In 2009, there were 85,000 Chinese students in the UK.
The 5 most valuable Chinese brands
1 China Mobile. Value: $56.1bn. World’s largest mobile service provider. More than 500m subscribers.
2 ICBC – Industrial & Commercial Bank of China. Value: $38.1bn . Largest bank in the world, 16,200 branches.
3 Bank of China. Value: $22.3bn. Most international and diverse bank in China
4 China Construction Bank. Value: $21.7bn. Founded 1954 and managed funds of 150 construction projects
5 China Life Insurance. Value: $18.3bn. Strategy to change from government entity to global consumer brand
Source: Millward Brown BrandZ