Chinese brands take off in the West
As eastern brands seek to carve out a niche in western markets, Marketing Week asks what companies in the West can learn from China’s rising dragons.
The past few months have seen several Chinese brands launching in the West. Telecoms company Huawei, car brand Great Wall and menswear retailer Bosideng have all expanded their presence in developed markets this year, including the US and UK. These brands have huge financial might behind them - Bosideng has 11,000 stores in China and made more than £130m in profit last year - and the will to take on global competitors. How will western brands respond to this march of the dragon?
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In reality, the picture is far from clear. Huawei’s recent experience in the US, for example, shows that Chinese corporations still face a huge challenge in gaining acceptance in western markets. In October, the telecoms giant was forced to fend off claims by the US House of Representatives’ intelligence committee that it poses a security risk because of links to the Chinese government.
The committee urged US companies to stop doing business with Huawei because of the danger that the company’s devices could be used for spying. China’s commerce minister Chen Deming responded by claiming the committee was still gripped by a “Cold War mentality”.
Last month, Huawei sought to put the episode behind it by launching a multi-million-dollar brand awareness campaign aimed at western consumers. The ‘Ascend to New Heights’ campaign, which includes online competitions and prizes ranging from new phones to holidays, is part of a global brand-building effort targeting consumers in 45 markets. Its success should give an indication of how far Chinese brands have come in winning over Westerners.
“The promotion campaign is testimony to our aggressive push to extend awareness of our brand worldwide,” says Huawei public relations manager Jannie Luong. “As we continue to transform from selling through operators to directly to consumers, we are investing in building a strong brand that is synonymous with putting great technology within reach of consumers.”
So far there are few cases of Chinese brands actually cracking the western market. Instead, China’s home-grown brands have flourished in emerging economies like Latin America and the Middle East where the markets are less saturated and more accepting of new brands.
In the West by contrast, political and cultural considerations mean Chinese brands are often misunderstood or regarded with suspicion, suggests Professor Peter Williamson of Cambridge University’s Judge Business School.
Williamson notes: “In a lot of western markets China still has negative connotations and a kind of ‘cheap and nasty’ reputation. This is a hindrance for Chinese brands before they even start in these markets.”
He points to the challenge of generating brand awareness in a crowded western market and of understanding cultural perceptions of western brands that are up for sale to Chinese companies. “If you put those factors together, you can see how hard it is for the Chinese to build brands rapidly in a western environment.”
It’s perhaps not surprising, then, that Great Wall opted to start small when it became the first Chinese car brand to launch in the UK earlier this year. The group is a huge player in the Chinese automotive industry with revenues of ¥18.3bn (£1.8bn) in the first half of this year, up 30 per cent on the same period last year. However, for its UK launch this spring the company decided to roll-out only one of its models; the Steed pick-up truck (see Q&A).
Ryan Young, marketing manager at Great Wall, explains that this low-key launch was intended to help the brand gain a foothold in the UK. “The pick-up truck market is smaller and more defined than the passenger car market, so that has allowed us to be very targeted in our marketing,” he says. “We’ve been able to focus on leveraging the strength of the manufacturer, because it is the largest pick-up producer in China and has a strong presence around the world.”
As part of this targeted marketing approach, Great Wall has so far avoided using TV advertising in favour of the customer relationship management (CRM) system developed by its UK importer IM Group. “Some of our competitors are locked into a more traditional automotive marketing mix that features TV and large press expenditures,” notes Young.
“We can be a bit more clever and leverage digital, tactical campaigns. We have an in-house CRM solution that allows us to do quite a lot of one-to-one campaigning. That serves to put the customer in control of their relationship with the brand, treating them in a different way to how they’ve been treated traditionally by the automotive sector.”
Young claims that this direct, straight-talking strategy will help to reassure potential customers who might have negative perceptions about a Chinese brand. He says this approach runs throughout Great Wall, including the structure of its sales network of more than 50 UK dealerships.
“We aim to keep things as simple as possible for our dealer network, which means not labouring them with complex margin structures and so on,” explains Young. “We wanted to have a clear communication with dealers; setting up that relationship was paramount in terms of bringing this brand to the UK.”
Meanwhile, western corporations continue to establish hubs in China as a way of accessing both Chinese consumers and Chinese ways of thinking. Professor Williamson says western companies are attracted to the country’s lower operating costs, which has allowed Chinese businesses to steal a march on global competitors.
He defines this benefit as ‘cost innovation’, meaning China’s “skills in improving value-for-money by bringing technology rapidly to mass markets and using low-cost engineering to offer huge variety, rapid product cycles and more customisation at low prices”. This includes having access to a cheaper pool of skilled labour in key growth industries when compared to other economies.
“Western multinationals are acquiring companies in China, forming partnerships in China or using their Chinese subsidiaries in different ways to try and absorb some of the cost of innovation capabilities,” says Williamson. “One example is IBM, which runs all of its emerging market businesses out of Shanghai.”
However, while China might be on the road to becoming the world’s biggest economy, it is encountering a few speed-bumps along the way. This autumn, the World Bank reduced its growth forecast for China by half a percentage point to 7.7 per cent, citing a fall in exports and reduced internal investment as reasons for the slowdown. This came six months after the Chinese government cut its growth target for the year to its lowest level since 2004.
Growth of more than 7 per cent will still trounce the struggling economies of the West, of course, and few doubt that China is on track to become the world’s largest economy by 2020. But China’s travails this year suggest that its route to global supremacy will not come at a canter. The World Bank notes that “China’s slowdown this year has been significant, and some fear it could still accelerate”.
None of this seems to concern the world’s biggest brands, though, which continue to look east for opportunities and inspiration. Last month, eBay took its biggest step into China when it launched a new shopping website. Working with fashion e-tailer Xiu.com, the new site offers Chinese consumers access to up to 5,000 global brands in apparel, accessories, health and beauty.
PepsiCo, meanwhile, opened a new R&D centre in Shanghai a few weeks ago; its biggest facility outside of North America. The company, which owns Quaker, Tropicana and Pepsi, says the site will “unlock new opportunities for breakthrough innovation” across its portfolio (see Case study).
Williamson argues that the recent slowdown in China has actually helped the country to maintain its low cost advantage by counteracting some of the price pressures that were starting to build in the country. Echoing other commentators, he suggests that the Chinese economy is already on the way back and will continue to boom as a result of its rapidly growing urban population.
“There are another 350 million people in China who are going to move from rural life to an urban, industrial life over the next 30 years and that’s going to provide an enormous increase in the productive employment base,” he says.
EBay’s new venture in China, called eBay Style, is designed to cater for the needs of the rapidly growing urban classes. The company reports that this year it saw a 40 per cent year-on-year increase in goods bought by Chinese consumers navigating eBay.com in English. Steve Milton, director of global communications at eBay, says this is indicative of the demand for foreign brands within China.
In the West, China still has negative connotations, which is a hindrance for brands before they enter these markets
He says: “Fashion is the fastest growing online [sales] category in China and the fastest part of that growth is people trying to buy foreign-branded goods: the likes of Ralph Lauren and Tommy Hilfiger. There’s a strong demand from the growing affluent middle class in China for these brands, which are not available apart from some signature stores in Beijing or Shanghai. If they are available, they’re often too expensive so people are going online to try to buy them.”
Milton suggests that Chinese consumers’ online behaviour, such as their regular use of social networks, is similar to consumers in the West, though he adds that the site’s visual appearance and functionality is tailored to a Chinese audience. “The site is like a Chinese website - it doesn’t look like eBay particularly. It’s what a Chinese consumer would expect, which is for everything to be much brighter and more colourful. That’s what our Chinese partner [Xui.com] is helping us to do. It also supports the logistics, the payment process and the customer service, which is all in Chinese.”
Reducing internal bureaucracy and finding quick routes to market are core concerns for many fast-growing Chinese businesses. Regal Hotels International, for example, which runs seven hotels in China and six in Hong Kong, says both of its markets are developing quickly thanks to booming demand and innovative projects.
“Unlike [the UK], the new hotels in China or Hong Kong are all multipurpose buildings,” says John Girard, vice-president of development for Regal. “It’s a podium of shops, restaurants, apartments, offices and car parks, as well as hotels. Nobody will build standalone hotels anymore - they’re all multifaceted business buildings. There’s no limit to what can be done.”
While this model of rapid expansion has helped the Chinese hotel industry to attract investment from all quarters, the UK hotel market is stagnating because of a lack of demand. Girard reveals that Regal recently looked into the possibility of opening hotels in a number of UK and Irish cities but decided not to because of the limited scope for development.
“Outside of London, the hotels tend to be smaller. In Edinburgh, Glasgow and Dublin a safe-sized hotel seems to be in the 300-350 room range,” he says. “In Hong Kong you can build a hotel of 600-700 rooms in three years and within six years of it being open it will have paid for itself.
“That’s why it’s very difficult to persuade a Hong Kong owner to open a smaller hotel and say to them we might run at 50% [occupancy] in the first year. If you open a hotel in Hong Kong, it’s full from day one.”
Girard puts paid to the notion that China and Hong Kong could end up with an oversupply of hotels similar to that seen in Dubai, claiming that China’s population of 1.4 billion will sustain demand for the foreseeable future. Regal is earmarked to run a further seven hotels in the region.
However, while China has found cost-effective ways to manage projects and deploy products on a mass scale, questions remain about its ability to invent new technologies for itself. George Magnus, a senior economic adviser at UBS and a commentator on China, has suggested that authoritarian structures and the lack of personal freedoms within China are not conducive to a culture of invention, meaning that coming up with new technology is not yet China’s forte.
While Professor Williamson at Judge Business School agrees, he suggests that Chinese companies are overcoming this obstacle by rapidly buying existing technology companies from developed markets. This, he says, is allowing the Chinese to ‘shortcut’ the R&D process and close the technology gap between West and East.