The Beijing Consensus Isn’t Building Brands

Duxton Hill, Singapore
Enjoying the Chinatown Sunset
1807 hrs.

In describing the results of Millward-Brown‘s BrandZ report of the 100 most valuable global brands in 2012, the Wall Street Journal’s Laurie Burkitt notes a trend that should worry the Beijing bureaucrats who are crafting the nation’s industrial policy. (China’s ‘State-Owned’ Brand Slips in Value – China Real Time Report – WSJ)

While eight of China’s state owned companies maket the list, their collective “brand equity” has fallen by 9% in the past year. By contrast, the three private Chinese companies on the list – online giants Baidu and Tencent and China’s legendary spirits brand Maotai – have watched their collective brand equity rise by 8% in the same period. Even granting that measuring something like brand equity is an inexact science, this does not bode well for China’s national industrial policy.

Stumbling Champions

That policy, which advocates providing implicit government support for large, state-owned enterprises at the expense of small and medium-sized, private, and foreign-invested companies, is ostensibly designed to create national champions while keeping the nation’s most powerful economic entities under state control.

That these massive companies are losing brand cachet despite explicit state assistance suggests one or more of the following:

  • State-owned companies lag private and foreign companies in understanding the value of their brands;
  • State-owned companies do not understand how to build or sustain brands; and/or
  • A brand’s association with government control is seen increasingly as a liability.

There are some industry-specific factors at work here, to be sure. In the case of China Mobile, for example, the brand is gradually losing cachet as the company struggles against increasingly robust competition from China Unicom and China Telecom. China’s leading banks have been the target of derision lately from both consumers and Premier Wen Jiabao for consistently pissing-off their retail customer base.

Yet these are the very companies that the government has protected, offering them preferential policies and practices that have allowed them to prosper. As Burkitt points out, they still rely on China for 95% of their business. Each of these companies has ambitions abroad, and the implicit belief in Beijing is that the way to build global winners

And here is the kicker: in a world where brand and reputation are so essential that even Warren Buffett places their protection higher in importance than profits, how does China expect to turn its coddled domestic champions into global brands when they can’t keep up appearances at home?

Time to Kick ‘Em Out of the Nest

If this were a matter of a few companies or a single industry, no policy change would be necessary. But Milward-Brown has stumbled on an important trend, one which hints at a problem with China’s much-vaunted state capitalism model: picking and protecting national champions creates large companies, but it does not guarantee market success.

China’s state capitalism has come under some pretty heavy attacks of late, following a brief honeymoon with Western intellectuals. The Economist picked at the system’s failings in January; Stefano Casertano of the Brandenberg Institute explained why SOEs become the playthings of policymakers in The European; and MIT economist Huang Yasheng made macroeconomic mincemeat of the strategy in a paper in Asia Policy. Even the World Bank, in its China 2030 report, gently but firmly urged the government to stop running its enterprises.

Most of the criticism has been made from the macro-economic viewpoint: state capitalism is bad for China. What is starting to come out, in Burkitt’s article and two recent books on China’s telecommunications and aerospace sectors, is that state capitalism is bad for the companies themselves. Creating national champions demands tough love early: let them fly or let them fall.