The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World (3 page)

Brand managers must cater to the demands and sophistication of the market into which they are selling, and in China of the 1990s, levels of sophistication were pretty low. Few consumers had the money to buy real brands. It was natural that most Chinese companies and executive teams focused on maintaining low operating costs and sales channels to compete on price, when consumers could not afford to care about branding, and when labor and real estate costs were low enough to follow that strategy. Likewise, it is a natural progression that they are now evolving along with rising consumer sophistication to focus on building strong brands.

A second reason why brands did not emerge earlier is the importance of connections during the disruptive shift in the late 1990s toward encouraging private enterprise. Executives used governmental and other business connections to grab quick profits. It did not make sense to spend money and time building a brand when it was so easy to make gobs of fast money through these connections.

Well-connected executives could lobby the government to erect a building, get a lucrative supply contract, or buy assets that the government wanted to divest on the cheap. One son of a government official who became a real estate magnate and head of a large import-export firm told me that in the 1990s, local officials literally gave away land and sweetheart deals to well-connected people, in an effort to bring business and investment dollars to undeveloped areas because everyone was so poor.

In such market conditions, why would smart executives try to establish brands? It takes decades, huge budgets, and patience to build brands that resonate with consumers. Sony and Toyota took decades to gain a true foothold in the imaginations of American consumers as anything but cheap alternatives to American brands like General Electric and General Motors. Even Korean companies like Samsung and LG Electronics still lack the same premium brand positioning as Japanese firms, and are often seen as cheaper versions. Like Taiwanese brands such as phone maker HTC and computer maker Acer, they suffer from a perception of cheapness, even though their products rival the quality of any technology brand in the world.

Western businessmen in China still love to tell each other about the quasi-mystical importance of
guanxi
, which many define as “connections,” when doing business with Chinese. But while good relationships are still important, as they are anywhere in the world, they do not have nearly the importance they once did, and are not nearly as vital as creating sustainable businesses that fit consumer needs and aspirations. Women don’t buy lipstick because the owner of the brand is the son of some government official; they buy it because it makes them feel beautiful and vibrant. Nobody buys a shirt because a government official’s wife owns the company, but because it fits body types and aspirations.

Even in real estate, where connections are often paramount, the government is now making land-leasing processes more transparent due to a renewed government focus on raising tax revenue and sustainable development. Domestic real estate developers like ShiMao Group, Vanke, and SOHO China are grabbing market share because their branding and style attracts Chinese home buyers more than because of connections. Many of the current political leaders’ offspring are looking to Africa and other nations for investment, because it is easier to leverage connections in those markets than back at home, where quick moneymaking schemes are harder to come by.

Branding has become critical for Chinese firms as the combination of product safety scandals and increasing wealth has forced consumers to become sophisticated, skeptical, and less trusting. Well-branded firms that build trust with consumers are the ones grabbing market share and charging premiums for their products and services. Domestic firms like medical device company Mindray, herbal beverage maker Wang Lao Ji, dairy products company Mengniu Dairy, travel services firm CTRIP, and sports apparel firms Li Ning and Anta have emerged in the last decade as serious competitors to Western brands in China and even slowly abroad. These domestic firms understand this brand-oriented shift toward value in consumer demand. Retail sales have been growing 16 to 18 percent a year for the last five years. Mindray’s competitor, General Electric X-Ray, even relocated its business unit to Beijing from Waukesha, Wisconsin, in 2011 because they expect China to be the fastest global growth market for medical devices.

Numerous domestic companies have already established their brands within Chinese consumers’ minds, and are stepping into the global market. It would be shortsighted for Western brands to discount the abilities of domestic Chinese firms and their potential to compete globally, as observers such as Fallows do. To help lobby for its America-based initiatives and contracts, communications technology provider Huawei hired Amerilink Wireless, whose board includes retired U.S. Admiral William Owens, a former vice chairman of the Joint Chiefs of Staff; former U.S. House Majority Leader Richard Gephardt; and former World Bank President James Wolfensohn. Sports apparel maker Li Ning has set up design facilities near Nike’s headquarters in Beaverton, Oregon.

One inevitable trend in the coming decades—now that rising costs and the end of easy money are forcing Chinese companies to become long-term strategic thinkers and look for new revenue models—is that more Chinese companies will go abroad. Western consumers had better get used to seeing Chinese brands, not just the “Made in China” stickers, on the shelves of America’s retailers. Likewise, Western brands will have to start fending off competition from new emerging Chinese brands that will disrupt the world’s markets and the global pecking order, much as Japanese firms did in the 1980s.

The consumer market has risen so fast in China that Chinese brands have focused for the most part on capturing the domestic market. My firm interviewed 500 senior executives with 100 of China’s largest companies across 10 sectors during the financial crisis. Many executives told us they have not made much effort to become global players because the Chinese domestic market is growing so fast and the best opportunities are still at home, explaining in part why Americans have never heard of their brands. They also worry they do not have enough talent at the middle-management level to grow well abroad. They do not want lose long-term viability by making the same mistakes as Western brands when they first went into China, so they often move into markets like Africa, Southeast Asia, or Eastern Europe, where local competition is weak and stakes are not as high if they misstep. A new focus on the Western world is emerging; as companies get more ambitious, they create a professional middle-management layer, and the central government supports the rise of national champions through low-interest loans and tax breaks.

Many companies have started to invest abroad for future growth, too, as Guo Guangchang’s Fosun Group has done. Over 70 percent of executives told us that they would take advantage of the financial crisis to accelerate their international expansion plans into America and Western Europe by capitalizing upon lower evaluations and cash-strapped competitors. They have been hiring leading advertising firms like Ogilvy & Mather and JWT to help shape their long-term positioning.

Branding is not an easy and short-term initiative. Chinese executives know this, so they often buy brands rather than building them. They have seen how long it took Sony, LG, and Samsung to become global players, and they do not want to wait so long. Instead of being second- or third-generation leaders, Chinese powerhouses still tend to be run by their founders, who made their success by conquering the impossible. Others run state-owned enterprises and are driven to make high-profile investments to help get promoted in the Communist Party ranks.

For example, under the stewardship of its founder, Li Shufu, auto manufacturer Geely bought the Swedish Volvo brand. Home appliance giant Haier bought the domestic and and Southeast Asian operations of Japan’s Sanyo. State-owned conglomerate Bright Food, China’s second-largest food company, was rumored to have been in talks with Yoplait and nutritional supplement maker GNC before deals fell through, but it is still on the lookout for such megadeals. After buying Australian firm Manassen, Bright Food Chairman Wang Zongnan announced that he hopes 30 percent of its sales will come from overseas by 2016, and that he is actively looking to acquire more European or Australian companies in the food-distribution and sugar industries.

As I said good-bye to those leading entrepreneurs in the Okura Garden Hotel that night, it became very obvious that the rise of Chinese firms will disrupt world markets in a way most never could have imagined just a decade ago, and that the country was as far from Mao’s vision of China as it could be. The End of Cheap China means that Western executives need to be prepared to fend off increased competition from their aggressive, battle-hardened, well-capitalized counterparts. Western consumers will get used to choosing products at Best Buy or Target with prominent Chinese brand names, or brands owned by Chinese investors, instead of just those bearing hidden “Made in China” stickers.

I was also left with some questions that I wanted to examine more closely. If these entrepreneurs had moved so quickly to build brands, what exactly had caused that change in such a short period of time? What changes in the labor force are forcing Chinese companies to go upstream? Was it due to soaring real estate prices, commodity markets, or something else? Visits to Chinese factories answered my questions.