‘Thanks But No Thanks’ to Made in China?

Ambitious Asian firms have long been interested in penetrating the global market and have done so using several methods. In the 1980s, Japanese companies such as Toyota and Honda succeeded in the automobile industry and were well-known for efficient management practices and superior product quality. Other Japanese companies soon followed, making a global name for themselves in the consumer electronics and diversified technology products markets. In the 1990s, companies from the small but formidable Asian “tiger” economies also emerged, with Korean brands such as LG and Samsung succeeding in consumer electronics and Kia and Hyundai making inroads in the automobile industry, and Taiwanese brands such as Acer and Asus making waves in the technology industry. These companies have managed to sustain and grow sales overseas while maintaining their competitive advantages — lower costs, efficient management practices, superior product quality and innovative R&D.

While Chinese companies have exhibited one or more of these qualities, a significant number have failed to overcome the disdain with which many people regard products that are “Made in China.” A few companies, such as Haier, have made significant progress. The Qingdao-based company has become the world’s leading white-goods brand in terms of revenue. Yet, despite encouraging progress on the part of these pioneers, negative consumer perceptions and other challenges, such as domestic and foreign legal barriers, remain. How will globally ambitious Chinese companies tackle these challenges to develop reputable and desirable brands abroad?

Perceptions of a Brand

As global competition intensifies, Chinese companies have had to increase their focus on brand development. Previously, the concept of a brand was equivalent to that of a trademark or logo. The modern idea encompasses much more than simply a design and is inherently more valuable. According to Interbrand, a leading global brand consultancy, brands now must “drive market demand for their products on the one hand, and help their company charge a premium price for better profits on the other.” Jez Frampton, Interbrand’s Global CEO, notes that “brands are playing an increasingly important role in pushing forward the development of Chinese enterprises.” Today, they often represent a promise to the customer, and Chinese firms are realizing that the future success of a company depends on fulfilling customer needs and developing reliable reputations. These two factors are paramount to gaining customer loyalty, driving price premiums and increasing market share. This is especially true for higher-priced goods such as household appliances and consumer electronics.

Interbrand defines a brand as a “mixture of attributes, tangible and intangible, symbolized by a trademark, which if managed properly, creates value and influence.” In essence, a recognizable brand generates considerable value. However, although quantitative analyses can evaluate a brand’s monetary value objectively, its worth is determined ultimately by consumers’ perceptions and loyalty. Companies that successfully develop a recognizable brand at home can promote the brand’s attributes more easily in a new market by using its established reputation. No Chinese brand appears in Interbrand’s 2010 rankings of the 100 most valuable global brands.

Since China is the second-largest economy after the U.S., many foreign companies with developed brands have entered the Chinese market in search of growth opportunities. China continues to grow at an impressive rate, with its gross domestic product increasing 9.5% year-over-year in the second quarter of 2011. A growing Chinese middle class, armed with impressive purchasing power, has emerged, ready and willing to buy brand-name goods at a premium.

In China, surveys show that foreign brands are associated with better quality, innovative design and reliability. A July 2011 survey of Beijing graduate students (ages 21-28) asked respondents about their perceptions of Chinese and non-Chinese brands. One student responded: “In reality, foreign brands seem more reliable;” another responded that foreign brands are “better in quality, though [I] don’t know why.” The presence of foreign brands in the Chinese market has shaped local consumers’ perceptions of which brands are successful and why. The same survey revealed that respondents defined a brand as one that is consumer-focused and reliable; 100% of the respondents considered quality first when evaluating a brand.

As Chinese consumers continue to evolve from cost- to brand-conscious, increasingly they will hold domestic brands to the same standards as foreign ones with regard to quality, design and service. However, Chinese companies have struggled to make headway in these areas from the consumer’s point of view, as “Made in China” is still disfavored by both Chinese and foreign consumers. In the Beijing student survey, the majority of respondents believed that quality, innovation and design were the top three barriers for Chinese companies in developing a strong international presence. Similarly, in a parallel survey conducted in August 2011 among U.S. graduate students (ages 25-32), when asked to compare a Chinese product with a non-Chinese product, 65% of respondents indicated they would be less likely to buy an equivalent Chinese product simply because it was “Made in China.” These results are representative of a broader problematic trend: Products manufactured in China have a stigma attached to them, and several issues must be resolved before Chinese brands can win the affections of a global audience.

Confronting Basic Challenges

To succeed abroad, one of the most important challenges Chinese companies must address is actual and perceived product quality. Globally aspiring Chinese companies have often found that consumers assume their products are of inferior quality compared to those of their competitors. Notorious incidents, such as the 2007 recall of Chinese-manufactured toys coated with lead paint or poisonous toothpaste, have worsened the reputation of “Made in China.” As a result, Chinese companies entering global markets bear the burden of proof when it comes to delivering products that match the quality of their Western and Japanese counterparts.

Chinese companies have tackled this problem in two ways. The first approach is that of acquiring foreign companies, benefiting from their manufacturing and R&D knowledge, and associating with the reputation of an already-established brand. Lenovo chose this approach when it acquired IBM’s PC unit, which made Lenovo a global player overnight and boosted its global market share from almost zero to 9% within six years.

The other approach is to create a corporate culture that stresses quality from within. Haier was committed to quality from the beginning, recognizing that any oversight or flaw could saddle the company with a reputation for poor-quality products. To emphasize this commitment, Haier CEO Zhang Ruimin pulled 76 flawed refrigerators off the production line and ordered the staff to smash them to bits. “I wasn’t going to sell just anything, like my [Chinese] competitors would. It had to be the best.” Haier’s efforts have paid off. In 2009, the company overtook Whirlpool to become the world’s largest white-goods manufacturer in terms of revenue, owning approximately 5% of the world market. Its market share increased to 6.1% percent in 2010, with profits of US$1 billion on revenues of more than US$21 billion.

It is evident that an investment in quality allows Chinese companies to reap rewards, as Haier has demonstrated. Other companies have not made as many strides and continue to struggle with product quality as perceived by consumers. For example, the August 2011 survey conducted in the U.S. found that 12% of respondents refused to consider buying any type of Chinese product. Most respondents were unwilling to purchase higher-priced products, such as electronics and household goods, and only 4% were willing to consider buying a Chinese automobile.

Overcoming Legal Obstacles

Although Chinese companies such as Haier and Lenovo have made significant progress in becoming successful global brands, Chinese brands in general face several legal issues in the international market.

Intellectual property (IP) is likely the greatest, or at least most notorious, legal obstacle. Moreover, according to the U.S. International Trade Commission, “foreign businesses have reportedly been pressured to transfer know-how and technology to Chinese firms in order to gain access to the Chinese market.” Chinese manufacturers have chosen to grow businesses by copying foreign IP and selling copycat products at a cheaper price point. However, as China has opened up to the world, this strategy has become less successful. Although these products are still available, the Chinese government has been increasingly vigilant about policing sales of counterfeit goods, a policy that is likely to only strengthen over time. In addition, Chinese manufacturers themselves are becoming more sophisticated and are beginning to acknowledge the importance of having their own IP.

Haier was one of China’s pioneers in this respect, recognizing that to compete abroad successfully, it needed to create its own IP. However, since the company did not have the foundation in place to grow its IP at home, it decided to “purchase” it from Germany. According to Haier’s top lawyer, Su Xiaoxi, ”When we introduced the technologies from the German company, we had to pay it royalties. At the time, most Chinese companies couldn’t imagine paying money for something you could not see, that was invisible. But even then, we had this awareness of the value of intellectual property rights.”Since Haier wanted to target the American market first, this strategy allowed the company to avoid copyright lawsuits over IP patents. While Haier has been successful both abroad and at home, few other Chinese manufacturers have chosen to create their own IP. Thus, these companies will have difficulty exporting their products. For example, the original owners of the IP can use Chinese customs to prevent the export of infringing products under Chinese law.

Second, the poor quality of many Chinese products has led to increased product-liability lawsuits and regulations, which then make it more difficult for Chinese manufacturers to export their products and succeed internationally. Since China has different safety standards for what is produced abroad and at home, local products face the prospect of failing to meet safety standards abroad. The U.S. is monitored by the Consumer Product Safety Commission (CPSC), which regulates imports from China and elsewhere and educates these foreign manufacturers on safety strategies to increase compliance with American standards.

Finally, Chinese manufacturers must address how differences in the Chinese and American legal standards affect their success abroad. American manufacturers file many complaints about Chinese price-fixing schemes to inflate prices for the U.S. market. In addition, Chinese manufacturers face an increasing number of antitrust claims. The more dominant the Chinese firms are at home, the more likely they are to be sued under antitrust laws abroad. This is problematic for many Chinese manufacturers, which aim to dominate the Chinese market first before making the move to go global.

Nevertheless, these legal issues are likely to be temporary setbacks and not permanent obstacles. Chinese companies are becoming more sophisticated, in terms of both IP and meeting the requirements of the American legal system, which will allow them to navigate more easily and enter global markets. Their success will then depend on their ability to grow and manage their brand’s reputation.

A Strategic Brand Identity

“U.S. consumers are very savvy,” notes James Liess, Haier America’s senior manager of corporate communications. “They know what they want, and they know what they want to pay for it. As a company, no matter where you are located, you have to [continually] understand consumer needs and differentiate yourself with better and targeted products.” While a lack of quality and innovation are the primary challenges to global development, Chinese companies also struggle with sustaining and managing their brands.

Today’s successful Chinese brands have tackled the “Made in China” stigma not only by investing significantly in R&D and IP, but also by relying on a foreign relationship or identity. For example, Haier achieved success in the U.S. through the strategic creation of a local subsidiary, Haier America. In the U.S., the company did not emphasize its Chinese origin, but focused instead on creating unique IP and consistently superior quality to compete with other global brands. In addition, Haier’s exclusive partnership with the National Basketball Association (NBA) reflects its commitment to “thinking big” and partnering with established local entities — in this case, an organization perceived as thoroughly American — to validate its reputation outside China.

Thanks to Haier’s partnership with the NBA and its other strategic moves to localize in the U.S., American consumers have not realized that the company is actually Chinese. The perception that it is American has helped it succeed in a market that is generally hostile toward products “Made in China.” As a result, companies like Haier that have global aspirations must find ways to dissolve the harmful effects of their Chinese label, which can otherwise outweigh the product’s quality or innovativeness. Most successful Chinese companies have decided, at least for now, to deemphasize their Chinese origins in favor of promoting themselves as a local or Western brand. Lenovo, for example, still uses IBM’s “ThinkPad” logo to ensure that customers continue to link its products with the IBM brand.

The message for other aspiring Chinese brands is loud and clear: To reign both domestically and abroad, superior quality and unique products are necessary, but not nearly sufficient. Companies should also distinguish themselves as international or Western brands. As more Chinese companies adopt strict quality control standards, their products will become more reliable, and consumers’ perceptions will start to change. At some point, “Made in China” will become a neutral or positive association. For now, it remains a liability — one that leading firms must surmount creatively.

This article was written by Maggie Chao, Elaine Chow, Gil Kerbs and Kate Long, members of the Lauder Class of 2013.

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