Covering the progress Chinese companies are making as they move into international markets

Marketing Monday: The Prospects for Asian Brands

In the Hutong
Sitting on the heater
0935 hrs.

Benjamin Li starts the year off with a quick look at the prospects for Asian brands in a thought-provoking piece in Media Asia. (Tip of the Silicon hat to Casper Oppenhuis de Jong).

“A major prediction this year has been that the next globally-recognized brands would come out of Asia’s emerging markets, reflecting the shift in global economic power from the West. But over a year since the Western economies crashed, where are these brands?”

Where indeed.

Reading through my comments and those Benjamin gleaned from others in the business, the simple answer is that while Asian (read non-Japanese, non Korean) brands had the motive and opportunity to leap onto the world stage last year, they lacked the ability to do so. Those of us who predicted that 2009 would be the year of the Asian (read “Chinese”) brand overestimated the the ability of those brands to execute, to size up and seize the opportunity in such a short period of time.

Nonetheless, I suspect we will look back on 2009 as the year that China’s brands began to see the potential of being more than just Chinese brands, and a year that something changed in the psyche of an entire generation of future Chinese business leaders. China’s managerial thirty-somethings no longer think about “if” China will have global brands, but about how to get them there.

The results may not show up for a while, but something important has begun.

Brand Reality Check

In the Hutong
A cross between Brad Garrett and John Goodman
1954 hrs.

JWT’s Tom Doctoroff recently wrote an earnest and well-reasoned Viewpoint article in AdAge that described why China would not be producing a bevy of global brands at any time in the near future. (Tip of the Hat to Neil Drewitt for sending this in.) Nicely put and worth a read.

Those who disagree with Tom (and manage to eschew ad hominem attacks) point out that Haier has managed to build a global brand entirely without marketing. While that point would be debatable (if you could buy a Siemens fridge for the same price as a Haier fridge, which would YOU buy, and why?), let’s not go there.

Instead, let us grant for a the sake of argument that Haier is indeed a global Chinese brand. Let’s even grant that Lenovo, Tsingtao Beer, and Li-Ning are global brands.

When you look across China’s landscape of millions of companies, could it not be said that these companies are at best the exceptions to prove the rule? That China has so few international brands in so few industries that what we are witnessing is not a trend but a statistically irrelevant series of accidents?

I do not enjoy running down Chinese companies. I want desperately to be a cheerleader for them, and I know for a fact that Tom Doctoroff wants to as well.  Neither he, nor I, nor a host of other well-intentioned commentators are trying to “keep them down by talking them down.”

But to ignore the fundamental barriers these companies face in their evolution by giving them credit for having evolved further than they have is like encouraging a four year old to learn to read by sending him directly to college. At best, it is misguided. And at worst, it will do irreparable damage.

Kudos to Tom for having the courage to say something that needed to be said, and that if anything will not help his business in the near term. Great brands are built: they do not happen by executive fiat or government edict. And the sooner China’s companies learn the rules of that game, the better off China will be.

Selling Hong Kong

In the Hutong
Lactose Intolerance is my Cross
0832 hrs.

BusinessWeek reprints Gareth Powell’s China Economic Review piece documenting how Shenzhen is about to overtake Hong Kong as the world’s third-busiest cargo port.

On trah what?

Hong Kong began and grew as a trade entrepot, and for many years after 1949 was a busy center for manufacturing as well. Reforming and opening of the mainland have sucked most of the manufacturing upriver and inland, and (as today’s story underscores) Hong Kong’s importance as a center of transshipment declines as its picturesque harbor is pinched by reclamation and development – not to mention rising property values, growing pollution restrictions, and the climbing cost of labor.

In spite of all of this, Hong Kong’s port will continue to prosper for a time. But to rely on the port for growth or economic vitality is growing less practical. Even the city’s major port operators are betting on investments in faraway quays and harbors for their long term prosperity. Clearly, physical logistics is not the basis on which the SAR’s leaders can or should build a vision for the future.

(Nor, for that matter, is some well-intentioned belief that the city is a great place to build online businesses – many of those industries are highly labor, power, and real-estate intensive, and the back rooms of Shenzhen, Hangzhou, Beijing, and Dalian are arguably better suited to become multimedia centers.)

More than Ports and Property

As many readers know, I hardly qualify as a Hong Kong booster: I think many of its people (Chinese and foreign) believe themselves far more expert in mainland affairs than they truly are, and I believe that the city clung to its role as a gateway to China long after that ceased being either true or necessary.

But I believe in Hong Kong, and feel that if the SAR could understand what it offers – and what it doesn’t – it need not decline to become a lesser light than Shanghai and Singapore, a path it appears to be treading.

Where Hong Kong excels is in services. It remains perhaps the easiest city in all of Asia to get a lot of stuff done in a very little time. Every time I go to Hong Kong I am amazed at how many things I can knock off my list in the space of a morning or a single day. My company is domiciled there. My lawyers, travel agent, and accountant are all there, as are my bank, my tailor, my computer store, and my dive shop. What is more, I can get to every single one of those places in a single day, with time left over for lunch and some random shopping.

It remains the best place in the region to hold meetings, attend conventions, or run training programs. Setting up – and operating – a company there is about as easy as it gets. It is simpler and faster in Hong Kong than Singapore, Beijing, Shanghai, or Tokyo to do my banking, send a parcel (or myself) anywhere on the planet, buy a mobile phone, shop for just about anything, get a suit made, watch a movie, find a wi-fi hotspot, eat a meal, rent an office, buy a CD, or find a Moleskine notebook.

Where else is there a higher density of every business craft or profession? Law firms, accounting firms, advertising agencies, investment banks, venture capitalists, and head hunters abound in such profusion that you could probably get your needs met in any given office tower in Central.

(The Village Grouch and I frequently swap Hong Kong stories, each trying to outdo the other on how fast we got from the gate to the train at the airport, how much we got done in a morning or an afternoon, or comparing notes on our latest “Hong Kong hack.” Yes, I know, it’s a pathetic hobby, but it is mine.)

It’s the Services, Guys

If I were doing a marketing campaign for Hong Kong, I wouldn’t be pushing it as a “city of light” or “Asia’s world city.” Both campaigns are fine for people who have never been to the city and are looking to spend a few days in a conveniently compact Asian metropolis. They will not, however, bring people – and their investment dollars – back.

If I were doing a campaign for Hong Kong, the tagline would be simple:

Hong Kong. At Your Service.

Forget real estate and shipping. If I were Donald Tsang or any of his staff, I would be giving a lot of thought to how to shift the SAR’s industrial policy and external marketing toward highlighting – and growing – Hong Kong’s role as the service entrepot of – if not Asia – certainly of Greater China.

Getting Serious about Service

To make that happen, the SAR government needs to get itself a laser-focus on becoming the place where stuff that is unnecessarily difficult to do elsewhere is utterly simple to do in Hong Kong.

That means a marketing campaign aimed at three separate audiences – tourists, business people, and corporations – that all emphasize how Hong Kong is a critical part of Asia for them because Hong Kong will help them a) get stuff done, and b) make getting stuff done elsewhere in the region simpler.

That means an effort to attract and retain major personal and business service companies from around the world.

That means an education policy that prepares Hong Kong’s children to be leaders in service based industries, including a commitment to restoring Hong Kong’s leadership in English language instruction.

That means a policy focus aimed at encouraging – even subsidizing – companies who are genuine innovators in services. You have a better way to do something for people? This is where you want to be.

The great part of all of this is that Hong Kong is already half way there. Services dominate the economy. Hong Kong’s major brands – Cathay Pacific, HSBC, A.S. Watson, Hutchinson, Shangri-La – are almost all service brands.

The greatest problem is one of positioning: Hong Kong has never articulated these strengths well. That needs to change. Now.

Otherwise the city is doomed to become a sad provincial shadow of itself, a narrow stretch of water surrounded by expensive real estate and the effluent of the Pear River estuary.

Cars? Check. Booth? Check. Hotties? Check! PR and Marketing? Uh-oh…

In the Hutong
Teaching my son about books
1949 hrs.

Reporting from the Detroit International Auto Show, the L.A. Times’ Ken Bensinger gives us a glimpse at the impact Chinese automakers are making at Motown’s home-town trade show.

He quotes a batch of American and Japanese executives who are admittedly concerned about China’s ability to crank out a modestly-priced automobile, and even grants that quality and safety might be at or approaching U.S. standards. Unfortunately, Chinese automakers are still struggling with marketing:

Changfeng Chairman Li Jianxin, who doesn’t speak English, insisted on reading a speech in phonetically rendered English — a painful experience for reporters covering the event. An accompanying news release bore last-minute redactions made with black marker — apparently in an effort to conceal the fact that one Changfeng model relies heavily on Mitsubishi Motors technology. But journalists could easily read the text beneath the black ink. Oops.

He continues:

But perhaps the most entertaining offerings were three electric vehicles made by the Li Shi Guang Ming Automobile Design Co. They looked like oversize bath toys, painted bright yellow and bearing nameplates such as “The Book of Songs,” “A Piece of Cloud” and the amphibious “Detroit Fish.” Two of the models could go on sale in China this year, the company says. Depending on the type of battery, the cost is $5,200 to $9,200.

The money quote came from the man who has just contracted to import 600,000 Chinese vehicles and sell them in the U.S.

“Chinese manufacturers are good at production,” Chamco’s [William] Pollack said. “But their expertise is clearly not in marketing.”

When, oh when, will large Chinese enterprises learn to value marketing?

The Real Implications of the Landwind SUV Safety Issue

In the Hutong
1951 Hours

The German Auto Club ADAC, on behalf of the European New Car Assessment Program, completed crash-tests on the Jiangling Landwind SUV and gave it the worst score ever achieved by an automobile in the program – a zero. China’s first high-profile SUV export has the distinction of being the first to achieve the score. You’ll hear a lot about that over the next few days, mostly auto observers talking about how China is not ready to go global. (For those of us who are aware that China’s annual highway deaths per registered vehicle exceeds that of the U.S. by over 2000%, such a conclusion would be no surprise.)

But the real implications are far different. It gives us a glimpse at some realities that China has been unwilling to face in its own globalization (sorry – “internationalization”) effort.

First, China is going to have to reconsider its “not invented here” approach to international standards, because there are some it is going to have to be prepared to accept. Auto safety standards, food safety standards, radiation standards, and the like are not negotiable.

Second, China’s industry is going to need help understanding those standards, keeping up with them as they change, and remaining competitive while doing so. Maybe the Chinese government can help, but I doubt they can be quick or nimble enough. This is going to be a powerful, compelling opportunity for some consultants someplace, because Chinese manufacturers are going to have to get up to speed fast, or they’ll have to settle for whatever third-world markets the Koreans and Japanese can’t serve.

Third, this is also going to bring about closer collaboration with global standards-setting bodies. Apart from information sharing, done well, such collaboration can become a point of competitive advantage. Foxconn, a computer and consumer electronics ODM in the Pearl River Delta, actually has an FCC lab set up in its factory in China that is capable of certifying products BEFORE they leave the factory. Look for more of that to happen in other industries, including the auto business.

Fourth, this is going to have broader implications for safety standards in China. For many big-ticket, relatively low-volume products (like cars), it is difficult to get economies of scale when you are building products to two sets of standards. Far easier, in such cases, to produce for a single set of standards, thus adopting the international one as the one you work by.

All of these are going to be good things, and in the long run will both redound to the benefit of Chinese industry, and place a higher value on collaboration with global partners.

For those who snicker at the expense of the Landwind, though, remember that some of the most substantial advances in SUV safety standards in the U.S. and Europe have come since the disastrous Suzuki Samurai crash tests in 1988. Improvements in rollover standards, roof safety, front-end safety, and side-safety have been continuous, and the standards have continued to rise. In essence, the Landwind may not be the total POS that the tests indicate – it may just be a car that is a decade or less out of date.

And that would be no surprise – most of Chinas businesses are still a bit behind in one way or another.

Watch this space.

A Dragon Not Ready to Fly

The Day Care Center, Silicon Hutong Plaza
Beijing

As the early sales results for the Christmas season begin to come in from the U.S., it’s pretty clear that consumer electronics (led by the iPod) was the category driving increases in sales. Eric Taub at The New York Times notes that consumers are shifting to digital products and flat panel TVs in droves.

In a year where most of the world’s consumer electronics manufacturers are high-fiving themselves for record-breaking results, China’s largest television manufacturer, Changhong, is declaring a huge first-time loss.

The details are ugly and not fully known. What the NYT will say is:

• Changhong says it’s rep owes Changhong US$468 million, an allegation rep Apex Digital president David Ji denied last year, saying they only took merchandise on consignment from Changhong and only took commissions, never owning title to the goods. Hmm.

• Changhong apparently appointed a single representative in the U.S., that only Changhong CEO Niu Runfeng was allowed to deal with. Hmmmm.

• Ji has allegedly been detained by Chinese police is Sichuan as part of an investigation.

There is a lot going on here. Changhong apparently would not invest in building TV sets with digital receivers in them as required in the U.S. of all television manufacturers. That automatically restricted the number of sets it could sell. Then they were hit by the new anti-dumping actions of the U.S. government, and Changhong sets probably got a lot less competitive with the big-box and discount retailers that were Apex/Changhong’s largest customers.

This is a huge fall from grace for Changhong and Apex, which together supplied the U.S. with 90% of the televisions made in China that were sold in North America. The companies won a Best of Show award at CES last year for a game product. Now the partnership is clearly in doubt.

Clearly, the anti-dumping ruling hurt, since the companies were bringing TVs in so cheap that it was pretty clear that they were being sold at less than cost. But to what end? Japanese companies have long sacrificed profits to build market share, but it seems that Changhong has tried, but failed, to take a page from that book.

As all of this unravels, a several lessons for aspiring Chinese multinationals are becoming apparent:

• Long term success for Chinese technology and electronics manufacturers in global markets will be directly tied to their corporate governance.

• Consistent investment in technology will be essential for all industries to compete in global markets. When people are buying flat screen TVs, trying to hawk big cathode-ray-tube based boxes makes you irrelevant, not inexpensive.

• Cheap products and dumping may build market share, but they don’t build mind share. Marketing, the construction of a brand, and the ability to understand and anticipate market directions in the major consuming markets worldwide will all be fundamentals, not extras. Look at BenQ.

The problem is, near-sighted approaches to globalization a la Changhong are the rule, not the exception in China. As the world’s begins to expect China to conform to global standards of corporate governance and business practices, running things “the old-fashioned way” will become untenable.

Wharton’s Take on the IBM-Lenovo Deal: Out of Touch

In the Hutong, Hiding from the Snow

I like Wharton’s Knowledge website. There are some extremely smart people at Penn’s B-school and they usually have something brilliant and insightful to say about most things.

Which is probably why their article about the Lenovo deal, The IBM/Lenovo Deal: Victory for China was such a disappointment. Some concerns:

1. Wharton Does Not Understand Public Relations: Marshall Meyer (IMHO one of the giants in organizational theory) who is touted as having “studied Chinese companies and travelled extensively in China,” says “Public relations is a big component of Chinese Management and a lot of people will see [the IBM/Lenovo deal] as a victory for China.” Now, either the esteemed Dr. Meyer doesn’t know the difference between “face” and “public relations,” or he doesn’t know much about Chinese companies and the way they are run. Or both.

As someone with just a little bit of experience with Chinese companies and public relations will tell you, Chinese companies care about face. Full stop. But public relations? Most Chinese companies think P.R. stands for “press release” or “Payoff the Reporter.” Chinese companies and their executives are notoriously unsophisticated when it comes to any form of corporate communications, and that’s a distinction I’m genuinely shocked Dr. Meyer missed. As an organizational theorist, he should know that despite a widely accepted practice to the contrary elsewhere in the world, Chinese companies still insist on placing public relations beneath marketing and 23 levels removed from the C-suite.

2. Wharton Thinks Lenovo is the Only Chinese Company on the World Stage: This pains me, because I really respect the work Dr. Michael Useem has done on leadership. But when he says “It is untrodden ground for a Chinese company to make a sudden, big move to operate on the world stage,” I can’t let that pass. Other Chinese companies going boldly down that direction who have preceded Lenovo:
a. Haier opening a factory to build refrigerators in South Carolina.
b. Huawei and 3Com creating a joint venture to sell each other’s gear around the world
c. China Netcom’s purchase of Asian Global Crossing
d. The TCL/Thompson merger that brought the RCA brand to China
Not to mention the recent move by China Minmetals to purchase a major Canadian mining company. C’mon, Dr. Useem. If I were in your class and made such a blatantly inaccurate statement in a paper, you’d nail me for it, and rightfully so.

3. Wharton Thinks Guanxi is Worth Hundreds of Millions of Dollars to IBM: Dr. Useem is not finished with himself, as he goes on to note that “‘government relationships are key in China. IBM sees this as an alliance. Maybe the price wasn’t as good as it could have been’ but IBM gets a definite payoff in the form of ‘better relationships.'”

As anyone on the ground here understands clearly, IBM doesn’t need to forego hundreds of millions of dollars (or tens of millions, or even a few million) in order to enhance its standing with the Chinese government. A recent study my firm conducted for an entirely different I.T. client made clear that IBM’s government relations were outstanding, that no doors were closed to it, and that this had all been accomplished simply by operating in China as a good corporate citizen. If IBM knowingly left any money on the table in the name of “better relationships,” I think shareholders are entitled to an explanation of why they paid for something they already had.

There is a bigger issue here, and it concerns me deeply. Dr. Useem, and many other highly respected academics, seem to be laboring under the mistaken impression that government relationships, or guanxi in the local vernacular, are critical to the success of a business. Don’t get me wrong, building and maintaining good contacts with the government is important in China. But it is far, far less important than it was a decade ago, and it is certainly no determinant of success. The two generational changes in leadership that have taken place in China over the past 15 years have had a major effect on the way governments and foreign enterprises work together. Bureaucrats, regulators, and ministers are much more comfortable evaluating and working with business executives, and there are sufficient regulatory and procedural measures in place to ensure this takes place systematically enough of the time that you don’t need Hu Jintao’s help to get a business license.

Even if IBM didn’t have the kind of relationships that it has built over the years, it would not need to spend millions to build those relations. I’ve helped much smaller companies do very well for a lot less, and the cost is dropping all the time because the process is getting so much more straightforward.

3. Wharton Doesn’t Understand the Value of Brand: Professor Christian Terwiesch, a professor of operations management, can’t understand why Lenovo paid so much for “the number three company in the PC market.” Apparently Dr. Terwiesch is having a hard time comprehending that perhaps Lenovo (whose brand name, let’s face it, sounds more like a French economy car than a computer) saw some very real value in the IBM and Thinkpad brands. Certainly BusinessWeek and Interbrand recognize that the IBM brand alone is probably worth something on the order of $53 billion. For the privilege of using that brand for 5 years, Lenovo pays about $350 million a year. Some would call that a bargain, but only if they understood the value of a great brand to a company that lacks one.

There are other mistakes, mainly small ones (spelling the name of the infamous techno-gadfly Fang Xingdong as Fang Zingdong, etc), but what really jumps out is how much better the insights and analysis are when they come from Gartner and the Chinese, and how unplugged Wharton comes across when it comes to both China and Technology.

If I were a trustee or an alumnus at Wharton, I’d be very worried. This is a clear sign that Wharton is in deep danger of losing whatever relevance it has outside of the Boston-Washington corridor.

China’s Tech Firms and Africa

The Silicon Hutong Desk, Starbucks @ China World Tower 2, Beijing

A great article in the Economist on 25 November (“A New Scramble: Booming Chinese interest in Africa is not just about oil”) concisely documents the strategic raw materials relationship that China is building with Africa. Shades of 1964 indeed, but instead of Simbas and Stalinists, this time China is dealing with any odious dictator or pariah with oil or mineral reserves that the country needs. Zambia and Gabon are about to join a rogue’s list that includes Zimbabwe, Angola, and Sudan as countries that China is courting mostly because nobody else wants to do business there.

It’s a fantastic opportunity for China, created in no small part by NGOs and activist shareholders who won’t let global companies break bread, much less do business, with these nations.

Huawei, never concerned by such niceties as consumer perceptions, shareholder activism, or ethical corporate behavior, has staked claims in markets like Sudan and Zimbabwe where Lucent and Nortel hesitate to tread. They are the largest and most visible, but they won’t be the last.

In fact, Africa is an opportunity for many of China’s tech firms, at least on the surface. ZTE and Bird can sell low-cost mobile handsets. Lenovo can sell low-cost computers. AVIC can sell low-cost airliners. Etcetera ad nauseam.

There will be two key issues for tech firms venturing into Africa. First is getting paid: these countries are rated poor credit risks for a very good reason. PRC tech firms that venture into Africa should think about doing so on COD terms. Period. Normally I would suggest getting guarantees from the PRC government, but I’m not sure the PRC government would pay that much quicker.

The second issue is appropriateness. Even though China is a developing country and has vast regions of very poor people, the circumstances in Africa make China look like Northwest Europe. Products that are developed and priced specifically for the market are essential. One indicator of how radical products need to be modified for Africa comes from the Economist’s quarterly technology review (“Human Powered Health Care”, Economist, December 2, 2004). Anyone for PCs powered by hand-cranked generators? China will find the kind of challenges in Africa that rival those American adn European firms encounter in the PRC. Good luck, boys.