Chinese companies hungry for global brands’ cachet

Monday 21st, March 2016

HONG KONG — Having long played factory to the world, Chinese manufacturers now yearn to prove the worth of their own products on the global stage. But the image of cheap, inferior wares is not easy to shake, driving the companies to go after major global brands in hopes of gaining an instant boost.

Xerago comment: If we travel back in time fifty or sixty years, this is what Japanese industry went through. In the sixties, Japanese cars were considered to be shoddy and badly manufactured. It wasn’t until the OPEC oil shocks of 1973 that the industry got an entry.

The big gas guzzlers produced by Detroit were suddenly beginning to resemble white elephants. Consumers were demanding smaller, more fuel-efficient cars and the Japanese responded smartly and quickly.

A decade earlier, Volkswagen had trumped the advantages of small cars but had not quite found itself a receptive audience. The market simply wasn’t ready. VW found itself a niche, cult audience that appreciated the quirkiness of the Beetle but never quite became a successful mass brand.

The Chinese have a far bigger problem on their hands. For years now, the Chinese have been stamped with the dubious distinction of being a nation that produces counterfeits. The second killer is the perception that they produce cheap wares often without paying sufficient attention to quality of materials or durability.

Unless there is a nation-wide shift to pursuing quality and a change of mind-set, it is going to be very difficult for indigenous Chinese brands to penetrate the quality-conscious Western markets. Buying foreign brands may be a very short-term route to organic growth and market penetration, but they ought to focus on developing research and development capabilities first.

In the latest such step, consumer electronics maker Midea Group said Thursday evening that it has signed a memorandum of understanding on acquiring Toshiba’s white goods business. Toshiba also agreed to sell an Indonesian television and washing-machine production base to Chinese consumer electronics company Skyworth late last year.

Xerago comment: It is good to note that Midea Group has bought out a complementary business. For years now, the Group has had the experience of producing white goods both under its own brand as well as an OEM for other manufacturers. This should stand the group in good stead.

Somewhat more curious is the decision by Xiaomi, China’s largest manufacturer of mobile phones to take an equity stake in the company. We have been getting the feeling that Xiaomi has been spreading itself too thin in recent times. For example, its inexplicable decision to invest in a bicycle maker (http://on.wsj.com/22ypl3i) While its phones are sleek and make no apology about mimicking Apple, it is yet to gain an independent identity as a manufacturer with a distinct design philosophy and differentiated products.

The Sina news portal reported the day before that major Chinese consumer electronics company Haier Electronics Group plans to buy WMF Group, a 160-year-old German maker of upmarket kitchen products. This followed Haier’s announcement in January that it would purchase General Electric’s home appliances division.

An acquisitive mood

The shopping spree was “triggered by the ongoing depreciation of the yuan,” said Louie Shum Chun-ying of Sincere Securities in Hong Kong.

Amid growing expectations that the currency will weaken further, Chinese businesses feel more compelled to acquire overseas businesses while they can get more bang for their buck. And consumer electronics companies are not alone on the hunt. China National Chemical Corp., or ChemChina, plans to acquire Swiss agrochemical giant Syngenta.

Xerago comment: While the news of the yuan’s depreciation may be a recent and urgent reason, Chinese companies have been looking outward for a few years now. There have been a couple of high-profile examples in earlier years. Lenovo acquired IBM’s PC business and Geely, a manufacturer of cheap cars acquired Swedish luxury marque Volvo.

In Chinese acquisitions of Japanese consumer electronics businesses, the stars seem to have aligned because the targets were seeking buyers and the Chinese companies were looking for acquisition opportunities, an analyst at a Hong Kong brokerage said.

Buying credibility

But Chinese companies are not necessarily trying to get their hands on advanced technologies through those purchases.

“Chinese companies’ technological levels are not so different even compared with those of Japanese companies nowadays,” Shum said.

Xerago comment: While this may seem like an overly simplistic assessment, the fact is that the Chinese are yet to produce cutting-edge technological inventions. Dislodging the US or Germany or Japan or more recently South Korea which have built up experience in industries as diverse as high-tech, automotive and aerospace over decades is not going to happen overnight. Which is why the Chinese are eyeing high-tech targets as much as they eye others – the ready access to an intellectual property database together with skill sets of engineers and technologists is simply irresistible.

It also seems unlikely that Western governments will cast a benign eye on Chinese companies snapping up sensitive assets. Consider the troubles that Chinese telecom manufacturer, ZTE has had in recent months as it tried to enter the US. Clearly, Chinese companies are going to have to build a sound business case. Simply flashing wads of money is not going to cut it.

It is their thirst for brand power that has driven Chinese businesses toward big overseas acquisitions.

“The gap between Chinese businesses and major global companies, such as Apple, is still wide when it comes to brand power,” TCL Chairman Li Dongsheng said at the National People’s Congress, the Beijing Business Today newspaper reported online Monday.

Even as Chinese manufacturers have churned out widgets for major global brands, their homegrown brands have been plagued by image problems. Many companies have the wherewithal to purchase reputable foreign brands as a way of instantly adding value. Their appetite will likely remain strong for some time.

Xerago comment: For an economy that was closed off for decades, it comes as no surprise that the Chinese simply had no need to master marketing and branding skills. The domestic economy was growing at a fast clip and Chinese manufacturers could sell whatever they produced.

It is only in the last couple of years when the economy has begun to wobble that Chinese manufacturers have begun to panic. With huge capacities built in on a foundation of sunny optimism and benevolent state support, it is going to be tough to keep the factories running.

They may have mastered production and manufacturing techniques, but the West will not be won unless Chinese companies understand brand marketing and customer service and make it a part of the organisational DNA.

Link to original article: http://asia.nikkei.com/Business/Trends/Chinese-companies-hungry-for-global-brands-cachet

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