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  • TonyT

    Well, there are companies such as Lenovo and Haer, although I wonder how much of Lenovo’s success comes from its IBM DNA.

    Also, I think there’s a clue in your previous post where you note KFC’s ability to provide reliable food at a reasonable price and stay in business. On the other hand, there’s the issue of quality fade and such from Chinese contract manufacturers…

  • shah8

    It’s all about the Chinese regulations. Until the government forcibly raise consumer standards (particularly the safety stuff), they will continue to see losses to foreign competitors. Chinese consumers are making guesses, sometimes rightfully, that they are benefiting from, say the FDA, when they buy powdered milk. That they are benefiting from the AOC when they buy genuine Bordeaux wines securely.

    As a puerh drinker, even now, virtually all of the proven boutique tea brands are non-mainland. Sanhetang is taiwan. Chenyunhao is Malaysian. To the extent that powerful mainland brands exist, like Dayi or Xiaguan, a powerful impetus for their quality standards had been compliance with European food standards in exporting to French customers. Some of the original “organic” efforts back in the early aughts was in part to cater to foreign audiences conscious about pesticides, far more than native Chinese customers. I suppose you would be more familiar with Tsingdao beer brand history, but I think they largely followed the same track.

    Supposedly premium stuff that caters predominantly to a chinese audience have a nasty tendency to be bad or unsafe, like the recent moutai scandal. What China does not have is something like what you’d read here about Taiwan…

    This is the purest essence of what the middle income trap means. Few social institutions are built and are effective, like tea associations or FDAs or AOCs, and as a result, fewer value added exports are created in that country, and the more difficult it is for domestic companies to compete for their own customers in their home markets. Inport substitution directives that aren’t part and parcel of a broader effort to give domestic companies a breathers *in order to* upgrade product quality and to install regulatory mechanism that prevent competition purely on price and clears out the scammers.

    But then, the Chinese Government won’t even allow proper audits of their major companies–how are people supposed to trust buying stocks on the Shanghai Stock Exchange? How long do you think the government has before they eventually must capitulate on this corporate transparency issue? About as long as it takes for the creation of politically independent oversight bureaucracies that distributes a key ingredient in societies and markets. TRUST

  • Lacompa Cida

    To save face, any Chinese would say anything that has any Chinese content is Chinese, so that they can claim that the whole world is buying Chinese and nothing else. I agree with Chinese people, and encourage them to think that way.

  • http://twitter.com/michaelzakkour michael zakkour

    To answer your reader’s question and to expand greatly on
    Sage’s response I submit the following:

    Chinese consumers are VERY well aware of the difference
    between foreign consumer products/brands and a domestic consumer
    products/brands, they are more sophisticated than ever and they are voting with
    their wallets. In general Chinese
    consumers accept and buy domestic products and brands in the mass-market,
    commodity centered categories. They
    desire foreign products in the health and body care, specialty food and
    beverage, luxury, apparel and lifestyle categories among others. Therefore I
    don’t see this blurring of what is and is not a domestic or foreign product.

    Country of origin (from a manufacturing perspective) is
    only relevant in two ways.

    1. If it is a Chinese brand and the product is
    made in China, Chinese consumers are hyper-aware of this and treat the
    product/brand as such.

    2. A foreign product/brand is not judged by country of assembly. What matters to the onsumer is quality, materials, heritage, brand story, prestige, aspiration and
    face. They know that the product carries quality and performance standards as
    well as prestige standards that are foreign and not Chinese, regardless of
    assembly point. There are some exception
    to this but it is a good general rule.

    Using your Apple example; Chinese consumers know the
    iPhone was conceived, engineered and planned by Apple. They know it is assembled in China, but the
    hardware, software, functionality, brand and performance promises are all
    American. It is a luxury product and
    brand regardless of where it is made.
    It’s an American product, not an American/Chinese combo product.

    Other examples abound in the fashion world. COACH,
    Armani, and a host of other foreign luxury brands make their goods in
    China. Again, this does not mean the
    Chinese consumer sees them as anything other than prestige foreign

    There are plenty of reasons that Chinese products and
    brands cannot compete with their foreign competitors beyond the mass market
    both at home and abroad, some of them

    · Lack of innovation – Li Ning is a prime example.
    They copied Nike’s products, materials, styles and stores, even to the point
    that their logo is nothing more than an upside down Nike “swoosh”. Foreign brands are innovating their next 3
    lines by the time this season’s lines hit the shelves.

    · Lack of understanding and/or Lack of Desire to Build a Brand – At home and abroad it takes a lot of time,
    money, experience and patience to build a solid brand and to build brand
    equity. Having a domestic monopoly or
    tri-opoly (such as China Mobile, China Unicom and China Telecom have) does not
    mean you have built a brand. Again, there are some exceptions but this is
    generally true.

    · It “takes a village”- to build a brand. You need a management team that understands the intersection of operations, R&D/innovation, marketing, supply chain, branding and distribution to build a great brand. Putting a new label and logo on the skirts your OEM factory makes and trying to sell them at home or abroad does not a brand make.

    -Professional services – You need an experienced group of people from a
    variety of disciplines to build a brand that can compete with companies who
    have been doing it for 25, 50, 100 years. Chinese companies need to hire he right people internally and accept, pay and trust a variety of 3rd party professional service companies to deploy strategies and tactics. You need advertising, social media, public relations, third party logistics, design, legal, accounting, consulting professionals and the right people to manage them to build a brand. You can’t build a brand on the cheap and with your inexperienced nephew who went to an American college at the helm.

    · The Science – The mega-processes involved in producing products and selling them under a brand are PLAN-MAKE-BUY-STORE-SHIP and SELL. Li Ning ended up with inventory to burn because they did not understand the science behind the six mega-processes of the supply chain.

    There are obviously a lot of other reasons for the
    disparity in success of foreign brands and domestic brands (both in China and
    abroad) but these are a good place to start.

    Will this lead to the government cracking down on brands
    and retailers in China by putting up barriers to entry, quotas and other limts?
    and regulations? Perhaps, but I doubt
    it. China’s continued growth and
    prosperity is dependent on a shift to consumer spending on products and
    services. This is of course dependent on
    reforms to the system that will allow for more spending. Restrictions on foreign brands, products and
    services would stifle consumer spending at the very moment it needs to be

  • pgrath1

    Compare the story of Li Ning’s brand and Nike – and you will understand the story of why Chinese brands “fail.”

    It is perfectly possible that Li Ning could create a competitive and well-known national brand – but NOT in 3+ years. This is the typical Chinese story of trying to make a fast buck, and total lack of patience. Li Ning has few weeks of Olympic fame, and took a highly leveraged $1.4 billion yuan investment, and some copy-cat products into an old and highly competitive industry – and the Chinese patriots are whining Li Ning can’t compete?? Get real. Its lucky the company hasn’t failed earlier

    Phil Knight started Nike in 1969. He worked two jobs while he sold shoes out of his old car. The Nike “swish” logo wasn’t even invented until 1971. Nike steadily rode the NEW trend of jogging and athleticism with overall steady sales growth, although they had many down years as well. It still took at least 10, if not 20 years for Nike to become the premier “urban” athletic shoe brand and develop the intangibles of quality, cachet and fashion acceptance.

    Chinese consumers are no different, and they know they are being insulted by requests to be “loyal” to flash-in-the-pan brands who happen to be Chinese. Chinese marketers can’t grasp that – and Chinese entrepreneurs simply do not have the patience or ethos to not chase immediate riches.

  • Mark

    Chines consumers are absolutely aware of the difference between “foreign” merchandise and “Chinese” merchandise even though both products may be manufactured in China. Chinese people here (China) prefer almost any “foreign” consumer product over a similar (or identical) “Chinese” product if they can afford it. That sentiment isn’t going away time soon.

  • twofish

    There’s this huge overgeneralization thing going on here. Li Ning is
    getting killed so all Chinese consumer brands are doomed. We need to
    get past this, “I read about one thing happening some random place in
    China, and that generalizes to everything.”

    Also Apple has done a
    very good job of setting things up so that iPhone isn’t seen as an
    “American” brand. It’s a “global” brand, there is a difference. There
    are indeed brands which are seen as “American” (Levis or General Motors)
    but Apple and iPhone and for that matter McDonalds and KFC aren’t.

    But even that isn’t clear cut.

    give an example of a weird brand. Kenny Rogers Roasters. It’s a very
    popular brand of roast chicken, and they decorate their stores with
    American flags and country music pictures. The weird thing about it is
    that they closed all of their US stores a decade ago, and it’s now owned
    by a Malaysian company and it’s expanding most heavily in the
    Philiphines and Mainland China. For that matter, one major brand of
    coffee house is Pacific Coast Coffee which looks and feels like
    Starbucks but has never had a single store in North America.


    ***But then, the Chinese Government won’t even allow proper audits of their
    major companies–how are people supposed to trust buying stocks on the
    Shanghai Stock Exchange?***

    Simple, you dual list in both Hong Kong and Shanghai. All of the major Chinese companies are dual listed. Also the Chinese government has done a pretty good job of keeping bad companies out of the Chinese exchanges. The problems are with Chinese companies listing overseas.

  • twofish

    For that matter, one has to wonder how “Chinese” Li Ning is. The two major investors are an American private equity firm and fund run by the government of Singapore. The current CEO of “Li Ning” is a Harvard-educated managing director of the American PE firm who has a Korean name, although from the information available he may be Korean, American, Chinese, Peruvian, Martian or any mix of the above.

    Also not everything that happens in China is about China. There are a lot of case study papers on Li Ning’s problems, and it looks to me like the classic mid-market dilemma. The middle is a dangerous place to be because you get hit by low-end cost-sensitive brands and luxury brands. Li Ning is as with most things an interesting business case study, but trying to generalize it to all of Chinese consumer brands is a bit of a stretch.

  • spmiller

    A few thoughts when I read posts like this:

    I kind of think this is becoming a trendy discussion nowadays, in other words that the growth of a sophisticated China middle class will result in huge profits for American companies at the expense of Chinese companies who cannot compete on quality. The fact is that it is still very difficult for most small and medium sized US companies to operate and compete in China as most lack not only the name recognition but the resources – financial and human – to do so. Profits will not come to companies like this for a very long time, if ever. Major international brands like Nike and Adidas might do well against their Chinese counterparts but I think that is about all you can say.

    I would add that as someone who lived in China for 7 years and travels there often still, I think Chinese consumers pay lip service to the idea that Chinese products are not as well made as foreign products. It is their way of expressing dissatisfaction with their own govt and system. In fact if given the choice between a Chinese brand whose name they recognized and an American brand whose name they did not recognize and which cost 25 % more, most Chinese consumers would probably choose the Chinese brand, unless they had studied in the US and had a longstanding Starbucks habit.

    Another problem with these discussions is that they do not differentiate between major intrnational cities like Shanghai and Shenzhen and 2nd tier cities like Hefei or Dalian. China is not a monolith and in fact there is a HUGE divide between 1st, 2nd and 3rd tier cites. Consumer behavior in Shanghai is NOT consumer behavior in China. In fact, local brands with brand recognition do a lot better than anonymous foreign brands in places like Hefei where incomes are lower and consumers not so sophisticated.

    Finally, at some point China will get over the quality hurdle and begin to produce quality goods, if they have not already. Here in Japan, Japanese electronics makers like Sony and Toshiba are quickly losiing market share to Korean and Chinese makers. In fact there was a story in the paper here a few months back which pointed out that 3 Chinese TV brands are now among the worlds most popular, more popular than Sony or Toshiba.

    • Dave Stewart

      ” Consumer behavior in Shanghai is NOT consumer behavior in China.”

      Quite right. According to Wikipedia: “Lenovo Mobile recently ranked third in terms of unit share in China’s mobile handset market.[11] Entering the smartphone market in 2012, Lenovo quickly became the largest vendor of smartphones in the Chinese market.[12]”

      I believe they primarily market to “lower tier” areas, That is, most of China.

      “Finally, at some point China will get over the quality hurdle and begin to produce quality goods, if they have not already.”

      Also true. There is still the perception that Chinese goods must be low quality. Did Li Ning lose due to it being poor quality. or due due to a high barrier to entry against established competition?

      Either way, once Chinese goods are *perceived* as being of equal quality, they’ll gain market share, as you noted.

      No reason for Chinese companies to “give up.” And no reason for the government to take drastic protectionist actions. Though, of course, they always could.

      Remember when Hondas were “Jap junk?”

  • ifadam

    The challenge of Lining in Chinese sports apparel sector is real. but it may be over generalized to say that Chinese local brands are losing to foreign brands. The challenge Lining faced is a sector issue — and do not think Nike / adidas are all the answers to the problems Chinese sports apparel industry companies face today, not only Lining, but also Dongxiang, etc.

    On the other hand, we have good examples of Chinese local consumer companies continuing to do well and outperform MNC companies brands, esp. in food and beverage and household products. This year, in beverage Uni-President is doing well but not Coke and Pepsi, for example

    And the difference is blurring regarding MNC versus Chinese local companies. MNCs come to Chinese consumer market with a brand reputable in other markets, but it is a new brand in China (in many cases, people tend to forget that). The product quality could be good in absolute standard but may not fit best for the Chinese local market. To the contrary, many Chinese consumer companies are really start-ups with 20-30 years history.

    So the competition is between a consumer company with long history of operating in a foreign market (more experience of operating in another market, more financial resource in a sense, and arguably better experienced managers) and a consumer star-up company (highly entrepreneurial founder, limited financial resource, but know the local market much better, make much faster decision)

    I found out that the discussion of MNC vs. local company is highly generalized…

    – a Chinese consumer sector observer…