Silicon Hutong

China and the World of Business • China Business and the World

Silicon Hutong - China and the World of Business • China Business and the World

Should Li-Ning Be Taking On America Now?

In the Hutong
In Pinewood Derby Mode
1432 hrs.

Li-Ning is popping up on the radar. On Wednesday I got a call from Bo Jin of Campaign magazine in Hong Kong asking me what I thought about the company’s announcement that it would be launching a multi-million dollar ad campaign in the US in May, Then today, catching up on my reading, I read Christopher Shay’s excellent piece in Time magazine about Li-Ning’s foray into the US athletic shoe market.

Let me say at the outset that I have a soft spot for the company: Li Ning gave me a job when I really needed one in the early 1990s, and I was fortunate to spend some time working with him and some of the people who helped form the company. Despite that history–or perhaps because of it–I have to wonder whether now is the right time for Li-Ning to be venturing overseas, and more specifically into the worlds most competitive and challenging sportswear market: United States.

A Long Time Coming

In the company’s defense, this move did not happen on a whim. Li Ning has been thinking about the U.S. market at least since the early 1990s, but the company held back, knowing that a secure market position at home and a positive view of Chinese products abroad would be essential before venturing into the home turf of its strongest rivals. They learned that lesson up close: Li-Ning’s parent company at the time, sports drink maker Jianlibao, made a premature and costly foray into more than a dozen countries overseas, including the US. Not only did Jianlibao fail to take off overseas, the drink maker soon found itself under siege at home from Coca-Cola and Pepsico. Today, though I may look, I cannot find a can or bottle of Jianlibao in any Beijing store.

The company–and it founder–believed then that they would go overseas eventually. But with Nike and Adidas starting to make huge forays into China at the time, the immediate focus was to retrench out of first-tier cities in China and learn to beat the global majors at their own game.

Today, sixteen years later, it is clear Li-Ning has made immense progress toward that goal. The brand is  number 2 in China, behind Nike and ahead of Adidas. The company is public, profitable, and took in over $1 billion in 2009. It has set up a flagship store/design center/listening post in Portland, Oregon, America’s unofficial sportswear capital, enabling it to start tapping into that city’s deep concentration of industry talent. And it has signed an NBA star, Baron Davis, as a spokesman.

So why not blitz America?

Leave aside the fact that Nike alone is twenty times the size of Li-Ning, or that the U.S. is an insanely expensive and competitive market in which to do business. Is this the right time for Li-Ning to be leaping into what is probably the richest and toughest sportswear market in the world? Or is there a better path to global leadership for the Chinese upstart?

I would say no, and here is why.

China is Still not Won

Yes, Li-Ning is now the second largest sportswear company in China. But that position is not unassailable. Nike is still tops, and leads in the more prosperous cities where styles, tastes, and habits more closely match those in developed markets like the U.S. I would argue that until the company can beat Nike in the high-end market in China (which more closely matches the mid-range in the U.S.,) the move abroad is premature.

What is more, foreign brands are delving deeper into Li-Ning’s traditional strongholds in 3rd, 4th, and 5th tier cities. The global majors are finding the going challenging, but they have learned that the formula for success in those cities is different than what it is in Shanghai, and persistent and well-funded, they are adapting. And the big international brands are not the only ones to watch: don’t forget Anta and others are fighting for a chance to steal Li-Ning’s crown at home.

Just when Li-Ning should be using its local advantage to secure the home field against the interlopers, it is turning its attention away.

In America, China Isn’t Cuddly Yet

This is not a particularly opportune time for a Chinese manufacturer to go venturing into the U.S. There is a lot of angst and a certain amount of distaste toward China in the U.S. at the moment. I suppose you could argue that as China rises, there will always be some underlying friction and, after all, the Cold War didn’t kill anyone’s taste for Russian vodka or caviar.

Practically, though, the first four or five high-profile Chinese brands to venture into the West are going to be carrying the burden of America’s China Anxiety with it. The Chinese government hasn’t done much of a job burnishing Brand China lately, and the government does not appear ready to soften its stance merely to ease the marketing challenges of its fledgling global champions. (Nor, for that matter, should it.) What that means, though, is that Li-Ning will need to succeed in spite of China carrying a poor reputation for product quality AND serving as the nation’s bogeyman for its economic challenges.

That’s a lot for a company to carry, and doing so will be expensive. You have to wonder if it might not be wise to wait for a day where the headwinds are not blowing quite as stiffly.

Home Is Where The Growth Is

If Li-Ning goes to battle against the majors in the U.S., they are going to be competing against a host of more familiar brands whose products also extend from the top of the line to the outlet store/bargain basement. The profit share in the US is going to the top-end players. Diving into a market with high sales costs and thin margins is no way to build a war chest to defeat Nike in a global battle.

In China, conversely, more people every day have the ability to buy branded sportswear and footwear, and the market remains the largest in the world. What is more, the tastes of millions of loyal Li-Ning buyers are evolving. They are no longer looking for the basics, but more stylish and higher quality apparel. This is where the company has an opportunity not only to grow in unit sales, but to start using its overseas-built design expertise to grow its unit profits as well. Those profits, long term, will be Li-Ning’s competitive advantage as it takes on Nike and Adidas worldwide.

Other, Easier Fruit is Rotting

There are other markets in the world where the global majors remain weak, others where their products are inappropriate to local tastes and incomes, and even some where Nike and Adidas are only present on the gray market. Li-Ning could use its greater experience selling into developing markets to build deeper footholds into India, South America, Eastern Europe, Turkey, and Russia (and possibly Africa). This would help Li-Ning scale up to a size to be able to match the global giants, and it would fight the big boys on turf that suits its own strengths.

If Li-Ning can establish and retain leadership in China and build market-leading positions in the world’s most populated, high-growth markets, they could then take on Nike, Adidas et al at its leisure in their home markets, supported by immense economies of scale and a global footprint.

Better to Follow Mao

The above approach hearkens back to Mao’s strategy to win the revolution in China. Win the countryside and surround the cities. By dominating the developing markets first, and using those as a power/revenue/scale base from which to take on the more cosmopolitan markets of the world is the strategy that makes the most sense for Li-Ning, along with many of China’s bevy of global brand hopefuls.

So the question is what is compelling Li-Ning to jump into the US before taking the logical intermediary steps that might save it from Jianlibao’s fate? I could figure on several possible reasons. Perhaps analysts feel the “time is right.” Maybe it is all of the buzz about Li-Ning being a presumptive “global Chinese brand.” Perhaps the company wants to capitalize on the still-somewhat-fresh image of Li Ning doing his wire-assisted Peter Pan torch run during the Olympic opening ceremonies 30 months ago.

Or perhaps the company is getting impatient. Maybe they have bought into the idea that the global financial crisis somehow opens the door for them in the US and that they’ll never get a chance like this again. Or maybe it is a much simpler explanation: they signed Baron Davis, so that makes it time to go big time in the US.

Yes, there is something exciting about the prospect of a Chinese brand leaping into the global fray, and the company should be applauded for its guts. But when the applause and the excitement die, I hope they can give us all greater clarity as to why they chose this particular path to globalization.

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