Not so long ago, I spoke at a China round-table where someone asked me what sort of US businesses Chinese companies are interested in buying. I mentioned how Chinese companies typically buy US companies for one of two reasons: expertise or brand name. Later that night I thought about how Chinese companies should be buying US companies for their brand names, but they really are not doing so in any large numbers.
Newsweek Magazine recently did an interesting article (h/t All Roads) seeking to explain China’s lack of brand names. The article is entitled, “Generic Giants:Why China Can’t Create Brands” and it is subtitled, “China is the world’s factory, but its top firms remain oddly anonymous.” It posits cutthroat domestic competition and lack of IP protection as the cause:
The simplest explanation for China’s failure to build global brands is cutthroat domestic competition. In most product categories, hundreds or thousands of firms compete for domestic market share, leaving profit margins razor thin. China has 150 firms licensed to make cars and other motorized vehicles, and more than 500 bicycle manufacturers. And because foreign brands have taken much of the market’s high end, most companies are forced to compete on cost, leaving little room for investment in R&D or marketing. China’s weak protection for intellectual-property rights—the patents and ideas that are the solid core of any brand—makes it risky for companies to invest heavily in innovations that could make them famous worldwide but could easily be stolen by rivals at home. Finally, the recent string of product recalls—including poisonous pet food and faulty tires—has left consumers wary of made-in-China goods.
First off, China’s intellectual property protection for most companies is just not that bad. Yes it is horrible for companies requiring copyright protection, like software companies that sell their product on CDs and movie companies that sell their product on DVDs and publishing companies whose products are books. It is also horrible for pharmaceutical companies whose products can be easily duplicated, at least in appearance. And yes, China’s patent protections are not nearly as rigorous as those in the United States, for instance. But, China’s trademark protections are actually pretty good and there are a whole slew of foreign consumer and industrial companies making money head over fist in China, while doing a great job of building and protecting their brand name. KFC, Nike, Audi, Shangri-La, and Emerson Electric immediately spring to mind and there are hundreds of others, both big and small. China’s IP protection may explain the lack of international brands in some product categories, but it does not even begin to explain the lack of Chinese brand power across the board.
The same is true of the alleged cutthroat competition. Yes, China has cutthroat competition (what country doesn’t?) and yes price is central to the Chinese consumer. But many foreign and domestic brands are thriving. (Haier and Huiyuan, for example). No, that cannot be the explanation.
My explanation is more elemental. Most Chinese companies just do not value brands as highly as Western companies. At least not yet. For the most part, they do not understand the value in spending massive amounts of money to create positive brand name recognition in places like the United States.
I love telling a story of a matter in which I was called in to represent a US home goods company that was going to be entering into a joint venture with a Chinese company. The US company was based in the Midwest of the United States, where it had a really strong name. It had originally made its own product, but was now buying well over half of its products from a Chinese company, with whom it had a very good relationship. The plan was for the US company to help the Chinese company branch out into manufacturing more product and for the two companies to work together in expanding the products’ footprint in the United States. The Chinese company would be expanding its product line while moving into the US wholesale and retail market and the US company would be getting access to Chinese product that would allow it to expand much more cheaply than if it were to make the product itself or even purchase it from some other Chinese company in a straight outsourcing deal.
The plan was to form a new US company, jointly owned by the Chinese and the American company and to market these home goods. The deal quickly fell apart, however, when the Chinese company insisted it wanted the new products to bear its company brand name. My client’s insistence that using an unpronounceable Chinese name would be disastrous only seemed to cause the Chinese company to trust my client even less. These two companies still do business together, but their plans for worldwide domination have been put on hold. I initially thought their model would be duplicated again and again between US and Chinese companies, but that too has not been the case and I attribute much of that to Chinese companies simply not valuing brand names highly enough.
Not all that long ago, another Chinese company retained us to try to purchase a US trademark out of bankruptcy. The Chinese company made the product for the bankrupt US company and this product had an incredibly strong name within its relatively small niche. The trademark should have been worth more to the Chinese company that to anyone else. Eventually, the trademark went up for auction in bankruptcy and nobody could bid more than the amount it had deposited into escrow or had in cashier’s checks. Our Chinese client kept asking us what we thought the trademark was worth and our answer was that we did not know that particular market and they should either retain an expert appraiser or just give us the absolute maximum amount of money they would be willing to pay for the trademark. They chose the later strategy and we went to the auction to bid. Well, within about a minute, we were out of funds sufficient to keep bidding and three bidders zoomed past us, all bidding at least three times what my client had bid. Even though this trademark should have been worth way more to our client than to anyone else, it valued it at well under the price of three other bidders.
What do you think?
For more on the topic of China branding, check out Aimee Barnes’ very interesting post entitled, “Chinese Brands in America: A Conversation with Scott Markman, President of The Monogram Group.” Also check out “Industrial Designers Tasked With Creating More ‘China Brands,‘” which shows that the Chinese government recognizes China needs to improve on its branding and that it is trying to do something about it.
UPDATE: China Esquire did a post on this, entitled, “Lack of brand innovation in China?“