Chinese consumers, brands and the MNC learning curve

Chinese consumers, brands and the MNC learning curve
Market Leader summer 2008

A seasoned China watcher takes a look at China’s progress in terms of the brand issues marketing people need to understand. Tom Doctoroff examines the changing role of multinational companies and contrasts their approach to branding with the local Chinese approach.

 

PRIOR TO THE late 1990s, local brands – three-dimensional entities carrying intangible equity – did not exist. Of course, local trademarks littered (state-owned) supermarkets and corner stalls. But today, they are an increasingly high-powered threat, one that multinational competitors ignore at their peril. They now control more than 50% of the shampoo market, 30% of mobile phones (albeit mostly in secondary and tertiary cities) and are even making inroads in mid-tier automobiles (Cherry, for example). Tactically ruthless, they are a school of piranhas smelling blood in the water and instinctively detecting weakness in the primordial soup that is China’s brand universe. They will chew the flesh off multinational corporation (MNC) players trying to survive off quick, shallow liaisons with (increasingly savvy) consumers.

 

Less than a decade ago, local ‘trademarks’ were laughably inferior, fodder for self-denigrating (yet nationalistic) Chinese patriots. Yet, as we near the end of the 21st century’s first decade, Shenzhen-based TCL is digesting its recent Thompson television acquisition and Lenovo has – in one breathless, bold stroke – purchased IBM’s PC division. No one is snickering now.

 

MNCs target the top, leaving the base exposed

Local names such as Lenovo (computers), Haier (appliances), Wahaha (beverages), Tsing Dao (beer) and Bird (mobile phones) have exploited the blind spot of even the most eagle-eyed multinationals. The cool brands – foreign brands are still hip – are too expensive. Understandably, CEOs from San Francisco to Tokyo are intoxicated by the emergence of a mainland middle class, one fuelled by exponentially rising disposable income. But even a cursory look at the China Statistical Bureau’s crudely manipulated data reveals an unassailable truth: the living standards of the rich, the top 10–15%, the urban elite, call them what you will, have improved at a healthier clip than the circumstances of the bottom 85%.

 

Today, MNCs boast high prices relative to competition. In fast moving consumer goods, categories where achieving scale is a critical precursor to healthy profits, foreign/JV goods are much pricier than local counterparts. Shampoo is 50% more expensive (and this is after both P&G and Unilever slashed prices to compete against down-and-dirty Slek et al.). In skin care, a category dominated by local brands, foreign ones (even ‘upper mass’ Olay) have a 250% premium. International feminine hygiene brands such as P&G’s Whisper or Unicharm’s Sofy are 71% more expensive than the average Chinese SKU. So they have often been relegated to a rarefied, ‘nichified’, aspirational yet unaffordable plane.

 

MNCs, fixated on the pyramid’s tip, have left the ‘base of the temple’ uncovered. (It is here, by the way, that clout with distribution networks and retailers is forged.) Local brands have taken advantage of Westerners’ narrow world-view to target our blind spot. MNCs have across-the-board momentum in some categories (for example, mobile phones and some personal care products). Meanwhile, local players totally dominate the appliance, furniture and apparel industries. (It is significant that the latter group consists of goods consumed out of public view).

 

In China, figures can lie. Reported rises in market share are often flights of fancy. However, distortions are not gross enough to an uncomfortable truth: Chinese brands are not strong yet but are getting stronger and are here to stay. If you are lucky, they will disintegrate into irritating background buzz, targeting the fringes of the consumer universe. If you are not, they will coalesce into juggernauts to smash Western companies to smithereens.

 

Cheap prices

Fortunately, the death knell has not yet rung; there is not a single local brand that consumers actively prefer. We must never confuse equity – perceptions of functional superiority or relevant ‘value benefits’ that translate into long-term loyalty at a higher price – with awareness. The vast majority of Chinese – at all income levels – still favour Western brands. True, local brands are ubiquitous and have achieved universal awareness largely by leveraging two hugely important competitive advantages: control of, insight into, or ability to manipulate prehistoric distribution channels; and massive media investments, which are often state-funded and usually irrationally allocated. Despite this, few hearts are touched.

 

According to BrandZ, Chinese companies have failed miserably at converting ‘presence’ into ‘bonding’. For example, in white goods, both Little Swan dishwashers and Chang Hong televisions boast universal recognition, even in tertiary cities. However, relative to competitors, they are saddled with negative affinity – buyers actually resist purchasing them. Even opaquely European Electrolux, a second-tier international player handicapped by both modest television spending and a cratered retail landscape, is more aspirational than any indigenous brand. The story is similar within the health care category. Despite China’s rapid emergence as a beer-swilling nation (not to mention the widespread availability of local brands such as Tsing Dao and Reeb), American king Budweiser boasts a much richer relationship with consumers.

 

Local brands have succeeded in achieving on-the-ground scale. While this coup is impressive, for the most part, they are mere clones of their international counterparts. In many cases, there is functional parity but, like the Tin Man, no heart. They offer nothing more than basic reliability and low, low prices.

 

Few local enterprises keep one set of reliable books; in fact, most keep two or three sets, depending on the audience. Accountants are exotic. However, it is safe to assume, given the mainland’s obsession with fixed capital investment, that profit margins are frighteningly unsustainable. Smart organisations know they must restructure, refocus and reposition or die. As we discuss later, a few are doing just that, and successfully. However, even at this late hour, with China’s financial infrastructure finally embracing real market reform by loosening interest and exchange rates, most marketing managers put up a good front but are feeble equity builders.

 

Change the channel, now!

Local brands, as a whole, are burdened by three communications barriers. Unless they are removed, meaningful affinity will be impossible to achieve. First, local marketers confuse brand awareness with three-dimensional equity. Second, advertising is usually only one step above an annual report, more rooted in corporate credentials than a relevant, single-minded proposition. Finally, most brands’ messages are alarmingly inconsistent and incoherent.

 

Except for P&G, local companies far outspend MNCs in television, print and newspaper advertising. Even after adjusting for the 60%–70% discounts offered by fly-by-night local brokers, it is not unusual for a large local brand to spend $75–$100 million. Chinese marketers, always reassured by gargantuan projections of status, are hooked on screaming their brand name, loudly and frequently, across the airwaves. Commercial breaks are interminable affairs, rendered even more painful by looped TVCs, the same ones playing seven times in one 8–10- minute ‘pod’. To boot, these ‘bulk buys’ usually support creative material of the most dubious persuasive quality.

 

Such media wastage is colossal if one has the temerity to assume advertising should, directly or indirectly, persuade people to buy a product. Awareness is a prerequisite to purchase; however, it is a necessary, but not sufficient, prerequisite. On the contrary, ‘unconverted awareness’ can be, and often is, detrimental to equity.

 

Frequency fixation often leads to a reverse dysfunction – ie chronic media avoidance and a parallel obsession with below-the-line tactical binges. Slek shampoo, for example, struck fear in the hearts of MNC manufacturers after its 1999 launch. The brand utilised extremely aggressive in-store sampling and oceans of point-of-sale material. Although it invested practically nothing in television or print, it quickly achieved a near-miraculous 8% share. Unilever and P&G both feared that a terrifying new ‘model’ had been unleashed, one mysteriously tailored to the ‘uniqueness of the China market’.

 

They were half correct. Indeed, local brands are an increasing menace and, as a cluster, now control over 50% of shampoo market volume. But, due to their failure to forge coherent equity, none has any real staying power. Slek quickly peaked and faded into the background. Its story is not atypical. There are well over 200 shampoo brands sold in the PRC. New ones are born every month. But they soon die, undernourished and unappreciated.

 

Celebrity usage is another common way of quickly establishing awareness (and often nothing else). Endorsements by the rich and famous can be powerful. Over the millennia, Chinese have been conditioned to respect status; they assume that people at the top are there by dint of individual destiny or heavenly mandate. Furthermore, celebrities signal perceptions of reliability, a valuable commodity. However, celebrities should mean something. Usage should be optimised by linking a star’s personality with that of the brand, lest viewers focus on what the star is wearing, not on what they are saying.

 

Unfortunately, celebrity usage is rarely optimised. For example China Unicom, a new and scrappy competitor on the front line is battling China Telecom, the telecommunication industry’s 800-pound gorilla. China Unicom invested $5 million in snaring Yao Ming, the most revered local sportsman of all time, as a spokesperson and then wasted it on pointless and visually egregious advertising. The television commercials, amateurishly shot, depict a child handing a basketball to Yao, who dunks it and grunts, ‘I love basketball. I love China Unicom.’ The print and outdoor material is even worse.

 

Propaganda vs relevance

Since the 1949 revolution, freedom of expression has never existed in the mass media. The authorities meticulously delineate the contours of public discourse. Every sentence, quotation and comma is laid down by edict.

 

The regime – with impressive intellectual agility – mandates what the people hear and what they should think.

 

The masses, adept at reading between the lines to uncover shards of insight, are in on the game. They know every news item and cartoon has been edited to put the CCP in the most ‘productive’ light. The propaganda is immediately discounted.

 

The largest Chinese enterprises are and will remain state-owned, arms of one government ministry or another. Their leaders have been schooled to treat ‘customers’ as controllable subjects, not persuadable targets. They continue to believe that the buying public gets its kicks by listening to corporate credentials. They remain deaf to messages crafted to meet consumers’ needs. Their advertising, laden with statistics, bar-charted demo sequences and hi-tech mumbo jumbo, emerges from the same department that dreams up the company’s annual report.

 

Change in the wind?

Rome was not built in a day. Or, as the Chinese say, a journey of 10,000 li begins with a single step (for those wondering, a li is about a third of a mile). China’s liberation from the shackles of communistic dogma is, by any historical standard, progressing at breakneck speed.

 

Several industrial sectors – textiles, biotech, information technology, auto components – are clawing their way up the value chain. Even The Economist, a mainstream publication cynical about the China ‘miracle’, grants that the country has ‘progressed from the world’s sweatshop to the world’s tailor’.

 

Despite the fact that few companies have fully implemented the structural reforms required to ensure continued momentum, some local brands have been making good progress. But gains are tentative and scattered, a grudging response to profit squeeze rather than some spiritual conversion to the glory of brands.

 

However, nowadays, many firms are producing better ads. Specifically, they are: using relevant brand logos and taglines, incorporating insights into the core proposition and creating increasingly frequent product innovation.

 

MNC counterattack

Leading foreign companies are not sitting still. They are fighting back, and often winning. Specifically, they have belatedly begun to adopt the following strategies:

 

  • localising product appeal

 

  • grabbing the perceptual high ground while broadening the consumer franchise

 

  • arbitraging on structural shifts taking place within the economy, particularly rising incomes

 

  • leveraging deep pockets and a research and development advantage.

 

The reliability of international brands is, indeed, a selling point but not enough to seal the deal. Localising is essential.

 

Starbucks knows this. From day one, it successfully established itself as a public place in which professional adults go to snack, linger and, most importantly, proclaim their affiliation with the new generation elite. It also knows that Chinese people don’t like to drink coffee (too ‘heaty’) so it introduced tea, broadened the sandwich menu, identified prime site-to-be-seen real estate and expanded average store size. The brand, now on every Beijing and Shanghai corner, has been integrated into the fabric of their daily lives.

 

Most auto companies manufacture no two-door models, offering a wide range of choices between large and extra-large sizes. Image-driven Chinese men must project status with every step – hence Ford’s decision to christen its Lincoln Navigator as ‘The President’, targeted to those who aspire to stride down the corridors of power with confidence and grace. (SUVs will be huge here, both in size and popularity.) Unilever’s Hazeline shampoo (Sunsilk in other markets) localised its range with a black sesame variant, a food believed to make hair blacker and shinier. Other locally relevant ingredients (eg ginseng for weak hair, green tea for oily hair) have also been well received.

 

However, localising ingredients isn’t enough. Since its 1998 launch, Hazeline has shifted positions fast and furiously. It has gone from ‘naturally safe’ to ‘confidence’ to ‘cements boy–girl relationships’, ‘rescues you from social disaster’ and now back to ‘naturally safe’. In addition, media spending has been anaemic, particularly when compared to the P&G Rejoice juggernaut.

 

Leveraging the lab

Global companies are, by and large, bigger investors in research and development than local enterprises. This competitive strength springs from three key factors, only one of which will remain in place as China becomes a more mature economy.

 

First, state-owned enterprises and other Chinese entities have relatively short histories and, therefore, have not aggressively reinvested capital. Second, the growth of per capita income has largely been driven by productivity gains that occur as underemployed ‘rural fringe’ workers are integrated into China’s thriving urban economy. (China’s urbanisation rate has no historical parallel. During and after the American industrial revolution, it took 50 years for the percentage of the people living in cities to double from 20% to 40%. China accomplished the same increase during the past 20 years). Gains do not spring from the technological innovation that occurs in developed economies. Third, China is a Confucian culture. Supremely practical, virtually all knowledge, from scientific to observational, is ‘applied’ to practical (immediate) problems. In such a hard-driving utilitarian environment, the long-term payoffs of primary research will rarely be fully embraced. Japan, a land of nuanced detail, is just the opposite; it is obsessed with style, sometimes even at the expense of substance. Innovation springs from intellectual curiosity, a trait suppressed in cultures where questioning conventional wisdom is verboten.

 

In a country where technological leap frogging is often the only route to market penetration, examples of innovation-led gains abound. P&G’s Olay, recently the mainland’s most heavily advertised brand, is a titanic force, powered to number one by full-throttled R&D. Its Olay Total Effects 7X Visible Anti-Aging Vitamin Complex shattered perceptions of what a mass-market cosmetic line can affordably deliver. Unrivalled hi-tech credibility also enables Olay to sell a huge range of lower-rent items (including soap) without debasing its image. In the early 1990s, another P&G brand, the oft-mentioned Rejoice, profited from deep R&D pockets when it introduced two-inone shampoo (cleanser plus conditioner), a format that now dominates the value-conscious, ‘more is better’ mainland.

 

Leading the masses

Until very recently MNC brands were, for the most part, relegated to niche status, targeting only the coastal cities’ crème de la crème. Meanwhile, local players flooded the price-sensitive mass market. A few MNCs are now wising up to the importance of scale – i.e. a broad-based consumer franchise – in establishing a deep foothold in China. As usual, P&G is leading the charge. Its strategy has three pillars: first, dramatically slashing prices, particularly in low-involvement categories with limited product differentiation (eg shampoo and soap); second, heavy media and R&D investment within high value-added categories (eg cosmetics, sanitary napkins); third, ruthless domination of distribution channels. P&G is graceful on the insight front but its real strength remains unleashing massive scale to conquer the hinterland. Smaller players, however, must adopt more elegant means of expanding their consumer base.

 

Reading the tea leaves

Some multinational companies are divining the future. Taiwan’s Kangshifu, for example, knows noodles. More to the point, it knows how instant noodle preferences evolve when income rises and a middle class emerges. Specifically, growing wealth comes hand in hand with increased time pressure, triggering a demand for instant noodles. Kangshifu got in there early, dominated instant noodles when they were only indulgent novelties and, today, owns a massive market. To boot, is also well poised to dominate the next big thing – cup noodles.

 

In facial foam, currently a niche market, Boire is now investing in the same ‘get them when they’re young’ strategy. Based on its experience with rising incomes in North America and Europe, it can map the shift from soap to body gel to facial foam with mathematical precision. Sharp is also an early bird; it currently has a tiny share of the TV market, but it dominates liquid crystal display (LCD) sets, the segment of the future.

 

Eye candy

Finally, MNCs are still better advertisers. They grasp the value of bull’s-eye consumer insights, consistent messages, and the economic efficiency of both robust brand equity and a strategic media plan. Despite the scepticism with which marketing consulting gurus regard the advertising profession, Western companies acknowledge the supreme importance of a well-crafted benefit statement. Furthermore, the best of them are masters at developing visual brand properties.

 

In a market where ‘keep it simple’ carries the same weight as Biblical commandments, the ability to vividly communicate a proposition can be a do-or-die imperative. Rejoice’s comb-drop shot (hands-free, it falls through soft, shiny hair) is perhaps the most effective demo sequence in advertising history. Cadbury’s two-glasses-of-milk shot is integrated in every scrap of communication, from television and in-store displays to packaging. With no copy at all, it reassures mums that chocolate can be delicious and nutritious – well, at least not total junk food.

 

The battle continues

Local brands are still hobbled by key weaknesses including inconsistent messages, failure to distinguish between consumer-relevant copy and corporate propaganda, and confusion between brand awareness and brand equity.

 

That said, Chinese companies have made significant progress. More and more, they weave insight into communication. Furthermore, mainland enterprises are now more skillful at leveraging aspirational taglines and mnemonic devices. And they are taking baby steps on the product innovation front. Multinational competitors have spotted the threat looming on the horizon.

 

They have finally begun to brandish ‘MNC weaponry’, including the ability to localise products, grab the perceptual high-ground via high-end SKUs, dig deep into R&D pockets, arbitrage on future trends and design memorable visual properties. The Middle Kingdom battleground grows ever more interesting.❦

 

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Chinese marketers, always reassured by gargantuan projections of status, are hooked on screaming their brand name, loudly and frequently, across the airwaves.

 

Starbucks modified its strategy for the Chinese market and is now on every street corner or Beijing and Shanghai.

 

Image-driven Chinese men must project status with every step – hence Ford’s decision to christen its Lincoln Navigator as ‘The President’.

 

MNCs are still better advertisers. They grasp the value of bull’s-eye consumer insights, consistent messages, and the economic efficiency of both robust brand equity and a strategic media plan.