Brand-building in China

Wharton marketing professor David Reibstein is on a mission. In his role as chairman of the American Marketing Association’s board of directors, he recently signed an agreement with the Chinese government to provide both training and certification for all state-owned enterprises, which represent about 65% of the Chinese economy.

“The Chinese government wants to improve the level and quality of marketing in Chinese companies,” Reibstein says. “The AMA will be supporting that.”

It’s a big job, and not just because of China’s size and population (more than 1.3 billion). “China is really good at one of the four ‘Ps’ of marketing – price – and not very good at the other three – product, place and promotion,” Reibstein notes. The country’s success at keeping costs — and therefore prices — low means that “the development of other dimensions has been thwarted.” Consequently, Chinese companies have not felt the pressure or the need to improve product, place and promotion.

Going back to U.S. history for an example, Reibstein points to the initial success of auto maker Henry Ford, who was able to mass produce huge numbers of cheap black cars. Only when General Motors started making models that were more stylish and offered more choice in design and performance did Ford feel the pressure to become more customer-oriented.

China is now beginning to feel that same competitive pressure in the form of price wars, which in turn heats up the pressure to produce better products. “But in order to come up with a better product,” says Reibstein, “you need a clear understanding of both competition and customer segmentation” – defined by the AMA website as “the process of subdividing a market into distinct subsets of customers that behave in the same way or have similar needs…. Each subset may conceivably be chosen as a market target to be reached with a distinct marketing strategy.” Historically, Reibstein states, “Chinese companies have not done any segmentation, which means there is little understanding of the different needs of customers.” But Reibstein says he has also observed, over the last few years, the growth of new brands and a wider variety of choice in the Chinese marketplace. As one multinational marketing executive recently told him, “China is not just one country. It is more heterogeneous than [one] might think.”

During a recent presentation in Beijing with alumni, faculty and students from CEIBS (China Europe International Business School), Reibstein showed a list of the top 100 global brands by brand value. Coca-Cola was number one, followed by IBM, Microsoft, Google, GE, McDonald’s, Intel, Apple, Disney and HP. No Chinese brand was on the list, although a close contender is computer and electronics manufacturer Lenovo. “Interestingly, they got where they are by buying the brand,” Reibstein says, referring to Lenovo’s $1.75 billion purchase of IBM’s ThinkPad division in 2005. “Lenovo was already manufacturing the product.” Reibstein also cites efforts by Haier, the Chinese consumer electronics and appliance company, to buy Maytag, a well-known competitor, for its brand value – a potential deal that “scared [rival appliance maker] Whirlpool so much that it bought Maytag even though it didn’t need it. What Whirlpool did need was to keep Haier out.”

With top-selling, differentiated brands come high margins, Reibstein told his audience in Beijing. The gross margin for Coca-Cola is 61%; for P&G, 49%, and for Apple, 44%. Yet the gross margin for Hon Hai, the parent company of Foxconn Technology Group, which manufactures the iPhone, is 8%. At some point, companies like Hon Hai and Foxconn “are going to be concerned about whether they are making money on unbranded products,” even with their low-cost manufacturing advantage, Reibstein says. 

He also noted the interplay between price, brand and brand image. Along with low-cost goods, for example, comes the perception of lower quality: “Look at German cars; they are good cars, but we think they are good because [the German car companies] charge a high price,” he says. “If I have a higher price, I have the perception of a good brand. It’s very hard to charge a low price” for a particular item and have consumers see that item as a high-quality brand.  

Reibstein also notes the success that a number of Asian countries have had in creating global brands. Mention Japan, and one thinks of Toyota, Honda, Lexus, Infiniti, Panasonic, Sony, Fuji, Cannon and Oki. Korea has Hyundai, Samsung, LG and Daewoo. Taiwan is known for Acer, Asus and HTC, while Singapore has Singapore Airlines, Tiger Beer and Tiger Balm. 

According to global branding consultancy Interbrand, the top 20 Chinese brands are, in descending order, Chinese Mobile (telecom); followed by China Life, China Construction Bank, ICBC, Bank of China and Ping An (financial services); Tencent (Internet services); Moutai (alcohol); China Merchants Bank, CPIC and Bank of Communications (financial services); Baidu (Internet services); Lenovo (electronics); Wuliangye (alcohol); SPD Bank (financial services); Tsingtao (alcoholic beverages); Anta (sporting goods), and Citics and CMBC (financial services). Number 20 is Alibaba (Internet services).

China did get brand payback from the 2008 Beijing Olympics, which Reibstein says has had a huge impact on the country’s image. “It drew a lot of people who had not been to China and probably thought of the country as a highly military, backward impoverished place. Instead, people [became aware of] how modern the country has become.” For China, it means economic benefits in the form of increased tourism and the potential for more business relationships.

But the country still has a long way to go, he adds, citing a recent survey in which 62% of respondents indicated that current Chinese brands are perceived to be behind other international brands. While Chinese brands are strong on perception of “good value,” they are poor on perception of “safety, trust and ethical … issues,” Reibstein told his audience, adding that concerns over quality, safety and durability are the biggest challenges Chinese brands face. Quality improvement is at the top of the list.  

A Chinese official in charge of promoting China’s overall brand image recently complained to Reibstein that the money the official spent advertising China on CNN had not produced any noticeable results. “When he asked me why, I pointed out that brands are built first by offering consumers a consistent product experience,” says Reibstein. Only secondarily does advertising build the brand.” Once quality is enhanced, then public relations and advertising can “play a big role in awareness building and communicating improvements in quality.”  As long as China “continues to make substandard quality products,” Reibstein adds, “no amount of advertising” will overcome that perception.

Knowledge@Wharton Today