With China’s 3Q GDP growth falling the 7.4% year-on-year, the case for the county’s rise up the value chain has never been stronger. As stated in several of our previous articles, China needs to rapidly increase the value of the products that they sell. One way to do this, of course, is to increase the value of the products themselves, through innovation, to be better positioned to compete in the global market. While this mandate has indeed begun to bear fruit, the move up the value chain is hardly this one-dimensional; without brands, China’s companies will remain at a decidedly low rung of the value chain.
This is not to say that Chinese companies are in any way doing poorly abroad, indeed, nearly seventy of China’s companies are members of the Fortune 500, but when you negate market capitalization as a measure of success and replace it with brand equity, fewer than ten of those companies can stack up against their global competitors.
The cause of this problem lies predominantly with Chinese consumers, who, for the majority of the past 30 years, have been relatively uninterested in brands that were not international luxury items such as Mercedes or Louis Vuitton at the high end, and more interested in price and quality at the lower end. This prompted companies to invest heavily in their production in order to drive down costs while improving quality to attract domestic consumers, while investing precious little in their brands.
Also notable are Chinese manufacturers fixed to a strictly OEM model, incredibly adept at making products for others, while less interested in developing their own marketing and sales forces. With sluggish growth and a rising RMB eating at already low profit margins, however, some of these companies are having a rethink, with a modest push by the central government to create their own brands.
But how will a brand make a difference to these stagnating business models? Traditionally, brands have commanded 27% gross margins, in sharp contrast to the 19% delivered to OEM manufacturers, making for a potentially lucrative incentive for any company willing to invest in a marketing team and sales force to build a brand and drive distribution.
While many Chinese brands are making the move toward building their own brands, the opportunity for foreign companies to leverage their own, existing brands to tap a potentially massive market still exists for those companies ready to take a risk and invest in their own marketing and sales efforts within China, while local companies continue to find their feet in unfamiliar territory.