China Law Blog

I'd like to question the premise of the article and suggest that there are some strong Chinese brands. In financial services brands are pretty much everything.

Brands tend to be more important in high value purchases in which quality is not immediately obvious, and I'd suggest that there are simply fewer markets in China in which this is the situation.

I think it is due to the fact that there's no culture of business in China tradition. In general, people don''t value 'money'. It sounds crazy, but it is the Chinese culture to despise any profit oriented mentality. As a result, the business community is comprised of those who just jump on the opportunity to make quick money, but doesn't bother to care for the long term. Most of China's wealthiest persons end up in jail whenever the government needs a public enemy and they all knew it as a fact.

My company does 90% of our manufacturing here in the states. Most of our competitors outsource from China. When I look through their catalogs, I see what appears to be the exact same products with different names. They look nice enough, however they don't hold up (in comparison to us) on a performance basis. One advantage they do have, however, is a lower price. I have to believe that when companies copy each other and do nothing to innovate, all you get is a race to the bottom when it comes to pricing and margins.

Chinese manufacturers are eventually going to have to realize this and change their strategy or they'll find themselves losing out to other countries (like India) who can produce even cheaper.

We'll continue to produce high quality performance products that bring high innovation and value to the American marketplace.

Good post. This was just discussed on BBC business podcast (I think). If I remember correctly, the thrust of the Chinese guy's argument (forgot who he was, CEO of a private equity firm I think) was that the drop-off in China's export economy forces Chinese companies to focus on the domestic market and consequently branding, something previously ignored.

Is it just a matter of motivation?

i think the statemnet is totally wrong.

first, there are brands in China as you quoted. it is just no real global brand, yet.

reason is simple. china is still a developing country. were there good korean brands in 1980s? even in 1990 Goldstar and Hyundai were like Haier of today in the US. it take time to build a global brand, and it takes a lot of expertise and experience. it is just not that easy, especially given that the space is now relatively crowded by western MNCs.

then there are also many secondary factors, e.g. cultural/language hindrance, etc. which all takes time, as China is only first exposed to international commmerce 30 years ago.

i disagree with the "newsweek" assertion. the cut-throat competition actually works in favor of building chinese brand, or for other MNC brand to become more competitive based on innovation in China.

look at the innovations in village phone, the innovation in advertising/creative products (i'm loving it, e.g.), you can see the confluence of world competitors and the scale of the domestic market make companies (chinese or FIE) more competitive than in other markets.

Do you think China has the stigma of historically copying other international — and to a larger extent American — brands as opposed to trying to make their own, that they've fallen into this "hole" where even homegrown brands are seen as copies of foreign products? I just read an article on Shanghaiist about the "Made in China" campaign (http://shanghaiist.com/2009/11/27/made_in_china_ad_campaign_has_its_f.php) and the focus it took on highlighting clothing and other products that are easily counterfeited, as opposed to real "Made in China" brands such as Haier.

Regarding trademarks, I get the impression many Chinese companies do not want to pay the extra cost to ensure high quality products that would develop a valuable trademark. If they can get away with cheaper costs they will, regardless of the later risk to reputation...and apparently regardless of later risk of criminal charges as the tainted milk scandal has shown. This is not unique to China in general, as there are plenty of Ford Pinto type examples in the US. However, perhaps the important factor of non-Chinese big name companies is the willingness to pay for fixing quality and image after a problem exists. Currently, Toyota is taking a hit on reputation after defects in their accelerators that led to deaths, and they are willing to fix it at great cost (though they will still suffer for waiting too long).

Also, how about the role of Chinese consumers? Yes some are willing to pay for famous brand products, especially for the status they provide, however, are Chinese consumers in general willing to pay more for slightly better brand name products?

Another question brought up in the article, is the taste of Chinese and non-Chinese, especially in regards the image of a trademark. As most Chinese have limited opportunity to travel outside of China, I find their tastes in general much less sophisticated than their neighbors in South Korea, Japan and Taiwan. Yes, Chinese have great history of art and culture and such, but there is a difference in style when you see Chinese in Europe versus their more developed neighbors. And it is not a question of money, as these are the Chinese staying in the nicer hotels in Europe. Trademarks have an emotional appeal to them and I think Chinese business are still young in their understanding of international marketing, which is tied to worldliness in general. Sure Chinese can watch fashion shows in Europe any time online, however, that is not the same as living in Europe for a year. Trademarks are not just about costs and quality, there is an emotional appeal that can be vastly different in each region.

Dan,

Your comment about the bankruptcy auction is extremely interesting. Anecdotally, we have not seen much (if any) participation from Chinese firms in the distressed investing space. One would think that Chinese firms would be interested in acquiring some of the many American companies that are distressed or bankrupt and that have strong brands and a good business plan but are overburdened with debt. Freed of excess debt, these companies should be strong performers.

Perhaps part of the explanation that Chinese firms are not participating in bankruptcy auctions is because Chinese companies do not ascribe the same value to strong brand names that other distressed investors do.

I think one important reason that there haven't been many investments/acquisitions by Chinese private firms in the US is due to the current regime of foreign exchange control and overly cumbersome regulations.

Chinese companies, especially privately owned SMEs without state backing, simply do not have the freedom to do cross border transactions when opportunities arise at the right time.
Capital account foreign exchanges are still strictly controlled by SAFE and out-bound investments of meaningful size have to be approved by MoC and SDPC, which is quite a hurdle for private firms to jump. Just look at Tengzhong’s acquisition of HUMMER brand.

Credit should be given to the Chinese government for the past three decades’ development, but there are still much liberation and deregulation needed, both in domestic industries and for international investments/acquisitions.

Besturn cars??? Yes, China has no clue!

This was a great post and I definitely see it as a jumping off point for some posts I'm working on. There are a few things that I'd say:

1. Chinese companies have focused on using its brands to enter "easier", more receptive markets like Africa and Latin America

2. There is enough money to be made domestically and too much difficulty and new issues in going global

3. China's still young and in the early stages, its like Japan, just feeling around foreign markets in the early 80s, though without a walkman like product yet that will be a game changer.

Just a few points...I think we'll see more Chinese brands trying to enter the US market in the next 10 years, a number of Chinese companies are first trying to enter nearby countries, especially Mexico, and use that as a taking off point into the US.

Great post and much to chew over. Thanks.

If I ask my mother back home about the market prices of the stainless steel, she will not know that for sure, but if I ask her if she knows the glass bricks used to make glass walls, she would probably laugh on my silly easy question. Comparing this with in china, a taxi driver might tell you a detailed history of the stainless steel prices over the past few years, but you will have to spend hours just explaining to him what the glass brick is and still it would be beyond his imaginations to understand it. Most of, if not all the Chinese including the recently-became-wealthy ones, are all living in a virtual reality of the developing world. Many, and again if not all, Chinese came from poor villages, where outdoors are the rice fields, and indoors are empty houses with at most two or three wooden chairs and a Chinese wok are the biggest assets of those households. Moved from there, arrived to the big cities, some went to shopping malls to sell Nike shoes or electrical appliances, some went to work in restaurants, and some found a factory to work in. At night either they sleep in dormitories, or they sleep in rooms which barely see sunlight… Years passed for those people. Those who work at shopping malls are still surrounded by ironing machines, microwaves, heaters, kitchen wares, non of which they ever used before in their lives or at lease saw it in real life use . Those who work in factories and got lucky enough to be promoted to be head of the R&D department will be asked to lead the innovation and better quality campaign. But innovations to satisfy the needs of what? To satisfy their own needs or to satisfy the outer world’s needs which they saw nothing of. The minimal basic needs of any of us in our countries, is the virtual world I am talking about where the Chinese are living in. This is why Chinese makers can copy, but are still far behind our world of innovation. Even for those who are capable of buying quality stuff in China; spending money is just a way to resemble their wealth, like buying imported cars, or buying imported clothes, or eating in expensive restaurants. Yet; their houses feel empty and lack connections to quality or prosperity! They simply don’t buy quality stuff for the sake of using them for just few minutes and then put a way from eyesight to be use again in the future. They buy to show, which is best described by the word “imported”. That’s why I think China will fail to create quality domestic brands or global brands any time in the near future. Long years to come for the vast majority of the Chinese new generations to upgrade their basic needs. Long years for them to start participating and living in this world, rather than just serving it. By then we might start seeing domestic brands, which could be followed by internationally recognized Chinese brands.

However, when talking about Chinese minds, Innovation to them means complexity rather than simplicity. Has anyone ever watched the Chinese version of the American idle where mature singers are competing with each other? Voting for the winner is the most complicated voting procedures humanity has ever created since the creation of life on this earth…and that’s what I call Chinese innovation. Period!

Good post, thanks for sharing your experience. But while I agree with your opinion, I don't see that it is fundamentally opposed to the Newsweek article.

You are saying that: "My explanation is more elemental..Most Chinese companies just do not value brands as highly as Western companies. At least not yet...

But the question now would be: why is this happening? And that is what the newsweek article tries to answer.

In my opinion, it has to do with the fast growth of the Chinese economy. When markets develop so fast, companies are too scared to stop for a second and build quality/brand, they fear that if they stop running someone else will take over and then it will be too late. The economy is in the stage of quantity rather than quality, like the times of the Ford T in the US.

Of course, this is only one of the factors in play, there is more and this, including the important role of the giant state-owned companies in many industries, where private initiative is stifled.

I like the fact that discussions here are moderated but how posts like Had's could pass the basic intelligence test and appear just baffles me. It contributes little but just shows how little he understands the issues here and how off base his 'knowledge' and 'insight' of China are. Where is censorship when you need it?

Marx never mentioned commercial brands as a priority, nor did Lenin, so for the generation of mid and upper management levels you are talking about here, i.e., decision makers in Chinese firms, branding is still an alien concept. And the concept of intellectual property didn't exist in China til recently, and even now it's not really recognized by the majority of the population. The younger generation have kind of figured it out, but still have a mix of ideological thought that partly describes branding as evil capitalism. There are Chinese brands, but most are still hangovers from the earlier state led economy, like maotai, zhonghua, haier, etc. Lenovo has made a go of it to create a global brand- but the exception proves the rule - that Chinese firms have still little imagination when it comes to global capitalism, they are still thinking in terms of global revolutionary rhetoric, they have a distinct lack of post-colonialist thinking- give them time and I'm sure they'll come round.

This is an excellent post, however, I am not certain that I agree with the central premise that brands are not valued in China. Having worked here for a number of years I have seen time and time again Chinese companies attempt to climb aboard a valuable brand. In terms of international dominance, I believe that one of the more significant issues is Western perceptions of Chinese products and services (and in fact China generally). As some other commenters have indicated, there are some very strong domestic brands, Liaoning and Peak on the sporting goods side just as an example. In terms of the example you cite, I agree that many Chinese companies do not fully invest in intangibles. However, the same can be said of some American companies. I have worked for many clients who do not register their trademarks in China because they don't see the value. Admittedly, this has a lot to do with their perception on China's protection of IP.

Also the story of the Chinese company in the bankruptcy auction is hardly an example of a company that is insensitive to the value of branding. It seems to me that they were quite sensitive to branding, it's just that they didn't have the information needed to put together a bid.

Which suggests that they may not have done a bad thing by losing the bidding war. To keep a brand fresh and valuable requires a huge amount of time, effort, and money by the company that owns the brand. Doing this in a foreign market may end up being more risk and cost than it's worth.

Something that makes China very different from Western companies is to Western companies, China is "just another country." Western companies have been introducing brands to new markets for decades, and China is just one more country to be added.

For a lot of Chinese companies, they are just started with their first international venture, so all of this is new. One other thing (and you can see this with Haier), in a lot of situations, their first cross-border branding is not going to be in the developed world because that's just a full frontal assault that is going to get them nowhere. It's more likely they they are doing to focus in the Latin America and the Middle East were they can fight with established global brands where there isn't a home field advantage.

Louis, I can't agree with you. Other than Had's exaggerated conclusions, the majority of his comment's content has been directly experienced by me, as well. After you get out of your nice, cozy apartments in Shanghai, Shenzhen, and Beijing, you will see a China that is still living in a forming vision of itself. Beijing is using foreign products now that citizens in smaller cities have never heard about. People here, in Shenyang, only know brands that are SOE holdovers, or foreign brands that have become known across China as "The best". They are not concerned with any other brands or products, and only want the best so that they can show it off to other Chinese. They don't buy it for the price, quality, color, function, etc. They buy it only for the name, and then show it off. People here buy cars that cost millions of yuan, and don't even know what headlights are. People used to walk into my R/C helicopter store, ask what the most expensive one was, and buy 3. We told them that we could teach them to fly it, and they asked, "Why in the world would I want to fly it?" I'm having a house decorated right now, and while carpenters might know what wood trim is, it takes hours to explain it to the family. God forbid you want a toilet that isn't white, or wood paneling on your walls that isn't just basic flooring tacked up. People use what they've known all their lives, and instantly claim that anything else doesn't exist, or isn't possible, without even waiting for you to show them the picture of it. There is a huge gap between what Dan is seeing at the business level with investment in brands, and what basic Chinese think about brands. CEOs, in my experience, have been educated overseas, and have a much broader knowledge of the value of a brand, and are trying to make it work in China. The people here, however, aren't interested. If you buy a car, it doesn't matter which one you buy, unless it's the best one. If you buy a washing machine, same thing. To be honest, I have recently heard Chinese say that "X isn't a good brand, we should buy this other Y brand instead", but it's not often. They usually just open up the box, and see if it can do what they want it to do. The name doesn't matter.

Final point: I know I posted from the perspective of a consumer, but it shows the culture that China's current business leaders have come from.

Hi Louis,

1st: I am not a writer. 2nd: I am not an economist, 3rd: I am not a politician. 4th: English is not my native language … This thread does not say you have to be one of the above to post a comment. To me, instead of writing in a “fancy style” the same old stuff about cultural differences or restrictions from the governments and the old story of HUMMER which can be all observed from the moon without a telescope – [also posted again here by you], I thought I could contribute with my own observations that came over the years through direct contacts with Chinese. Anyhow, what I wrote before was just my humble opinion which I think was 100% true. And to be back to the original discussion, it is the 95% or more of the Chinese population who can strengthen a brand, but unfortunately, at this stage, for those the 95%, to pay extra 0.0001 dollar for quality is the last thing in mind, add to that, anything which is meant to be of a better quality, the price curve rises exponentially; a typical Chinese way of targeting people who can pay, which adds another challenge for quality to spread in China.

Had,

The problem I had with your comment is 'what's the point this long babbling is trying to make?' Of the 1.3 billion people in China, at least one billion are still extremly poor, of course they're hyper sensitive to price. Tell us something we don't know. Your so-called experiences adds nothing but eye sore for the issue at discussion here. Same thing with LongTian's babbling too. Just saying.

This is a really interesting reflection. While I don't have enough of a background in Chinese business to say whether or not I think it's accurate or true, it's certainly fascinating to think about.

I think an important issue to add to the mix is that the U.S. often goes too far in its intellectual property protections, which is a problem China doesn't seem to have. The cost of this can be huge...within the software industry, battles over patents can be costly. Some U.S. firms, such as the Sco Group, seemed to base their whole business model on litigation over intellectual property rights--buy and sell rights, to the point where you are in a position to sue for something. In the process, no actual products are produced...the result is a lot of money getting shuffled around, which is included in GDP, without anything of value actually being created for anyone.

Also, the tight intellectual property rules in the U.S. can also stifle R&D. If you're a small company and there's a product you're considering developing that has a significant risk of attracting litigation over a patent someone else owns, a patent that you might not even know about, you might just decide to not go down that route.

I do think there's also a hidden (or not-so-hidden) cost to the way Americans value brand so highly. Many brands wax and wane in quality, and people tend to stick with the impression that they once had. Instead of critically evaluating quality, we look to brand name reputation, which is often just an artifact of past years. Does this mean that Chinese value quality more? Not necessarily, as all the nasty product contaminations seem to prove. But...at least they do seem to think more critically about price...something Americans have failed to do for a long, long time now...

It's simple. Hack into a western company, steal their secrets and brand innovation becomes a secondary issue. It's much cheaper hacking than doing R&D. Chinese aren't stupid which is why intellectual property rights only matter in China if you anger the officials by intruding into their territory.