Can Chinese brands be global powers?

At the start of 2013, a transition quietly took place that points to a fundamental shift in the global role of Chinese businesses: China invested more overseas on a monthly basis than it absorbed in foreign direct investment (FDI). After three decades of gobbling up the lion’s share of FDI and using it to create a massive base of manufacturing, China is actively moving to reverse that flow. Spurred by a slowing domestic economy, resource scarcity, and a government that wants to build China-based brands that move from low-end manufacturing into the innovative ranks of the knowledge-economy, more and more Chinese companies – both state-owned and private – are making the jump overseas. But this “great leap outward” is proving a challenge, especially when it comes to corporate and brand communications and the navigation of a more diverse and transparent set of stakeholders compared to the domestic market.

According to the Ministry of Commerce (MOFCOM), China’s total outbound direct investment (ODI) hit $77.2 billion in 2012, a 28.6 percent increase from the previous year. MOFCOM estimates that the number will at least double to $150 billion by 2015. But that still pales in comparison to Japan’s investment in the United States –roughly $290 billion in 2011—but China is making up ground quickly.

While the government sees corporations as primary players in helping build a desired “soft power” around the world, Chinese companies and their CEOs must ask themselves the following question: Is associating a corporate brand with the brand of China going to advance business expansion overseas?  The answer, based on available data, would suggest not. According to a number of annual indices that track the reputation and trust-worthiness of countries, China’s reputation is in the bottom half of the countries surveyed and has actually gotten worse in recent years despite the “soft power” push.

In an economy where state-owned enterprises (SOEs) still dominate many strategic industries such as energy, manufacturing, banking and telecom, and where even privately held companies benefit greatly from the largesse of state-owned banks, creating an independent brand free of state affiliation is difficult.

Brand challenged

The potential downside of a brand being associated with China has clearly been illustrated with the travails of such companies as Huawei Technologies Co., China National Offshore Oil Corp. (CNOOC) , and most recently Henan Shuanghui Investment and Development Co. , all of whom have faced significant opposition to making acquisitions or to expanding sales in the United States. Even traditionally China-friendly countries in Africa and Asia are starting to experience unease amid Chinese efforts to lock in sources of badly needed energy, minerals and agricultural goods—as witnessed by protests at a Chinese-owned mine in Zambia and Myanmar’s recent overtures to other trading partners. While Chinese companies face challenges similar to their predecessors from Japan and South Korea, the country’s nominally communist political system and its growing military power add a layer of complexity and scrutiny that companies from other Asian countries did not have to manage.

In addition, many Chinese companies still do not fully understand the critical importance and complexity of the policy and regulatory environment in developed markets such as the United States. As one Washington, DC-based senior government relations executive for a major Chinese technology brand said: “If we had had better advice five years ago about how to handle the government, we could have saved millions and millions of dollars.”

A rush of “reverse mergers” from 2001 to 2010 by Chinese companies on Western stock exchanges—85 percent in the United States during that period were Chinese— brought considerable backlash. The mergers were also widely seen as bastions of poor corporate governance and accounting fraud. In fact, the US Securities and Exchange Commission even went so far as to issue a general warning in 2011 about investing in Chinese companies listing through reverse mergers. Founded or not, there is a growing perception that Chinese companies lack the necessary governance and transparency to be successful international brands. As Stanford Graduate School of Business professor Charles Lee, told a recent conference, much of the prevailing sentiment, even though his research indicated otherwise, could be summarized as follows: “We don’t trust their pet food and toys, why should we trust their public companies?”

Zhao Qizheng, a senior adviser to the Chinese government, has said Chinese multinationals aren’t yet ready to be truly global companies. “They lack in-depth and comprehensive knowledge about overseas markets, practices and rules, and they are not adept at conducting public diplomacy with the local communities,” he said, according to Xinhua.

Underlying many of these problems are deep Chinese business and cultural traditions that clash with Western traditions. Many Chinese executives stationed in Europe and North America often cite a bias against any self-aggrandizing communications. They prefer to maintain a low profile and therefore a lack of focus on or investment in branding and external engagement. That is perhaps most notable in the president of Huawei, Ren Zhengfei, who refused to talk to foreign media for years (despite mounting claims of cybersecurity concerns) until May 2013. But in markets like the United States and Europe, the prevalence of tight centralized control—another Chinese tradition—and the absence of engagement–with the media, foreign governments, and communities in which they invest–is a recipe for continued trouble in an age of radical transparency. In fact, a 2012 Deloitte survey of mergers and acquisitions (M&A) practitioners found that “differing management cultures” would be the “primary obstacle facing Chinese acquirers when pursuing outbound M&A investments” in Europe, and would rank second only to legislative barriers as the main obstacle in North America. The realization that this has major implications for brand reputation and corporate valuation has not fully been absorbed by Chinese CEOs and their management teams.

Proxy branding

One proven method for overcoming these barriers is buying reputation through brand proxy. Lenovo blazed that trail with its purchase of IBM’s PC business nearly a decade ago, and other companies have followed suit, such as the Dalian Wanda’s acquisition of AMC Theaters in 2012 or Wanxiang’s purchase of struggling battery maker A123 Systems in the United States earlier this year. In Europe, many well-known luxury consumer brands were also subsumed by Chinese investors in the past two years, including Sonia Rykiel and Aquascutum.

According to the Deloitte survey, 28 percent of respondents believe that acquiring reputable brands will be the top reason why Chinese businesses invest in Europe in 2013. In the United States that number was 20 percent, second only to acquiring technology.

But acquiring a brand is not an end unto itself.  For Chinese brands to become true global powers, they must embrace their identity and own their engagement strategy instead of defaulting to government support – whether that is with foreign governments, foreign business customers, or foreign consumers. In addition, they need to start thinking about themselves as part of the fabric of the markets they are entering. Internal communications to overcome cultural differences as they become more organizationally global is also emerging as a major roadblock to success.

The Catch-22 is that engagement and brand reputation are not things that most Chinese companies have ever given much thought. There has always been a bias among Chinese executives against spending money overseas on marketing, branding and public relations, and any money spent has often been driven by personal interest, not business strategy. Even then, money is typically spent only on slapping a brand name on a billboard or a sports team.

Learning loyalty and transparency

The issues that Chinese companies face in developed markets such as Europe and the United States are very different than the realities of the domestic Chinese market. According to brand loyalty expert Henry Winter, consumer loyalty programs in China have not been very successful mainly because “the market has not been, and largely still is not, ready to support investment in customer retention.” The fundamental assumption of investing in a loyalty program, Winter notes, is that “it is cheaper to retain an existing profitable customer than it is to acquire a new one. This is an ‘of course’ statement in Western markets, but it’s not true in China.”

Successful retailers in China have simply pursued a “build it and they will come” approach – opening more stores that are immediately filled with profitable customers. “Although every marketing director in China will say that customer loyalty is important, most of them are too preoccupied with handling business expansion to have resources to design and implement a meaningful loyalty program,” Winter said. This is even more true in regions like Europe and the United States, where Chinese brands struggle when it comes to navigating the more nuanced market dynamics at play.

If Chinese brands want success with Western consumers, they will need to invest in brand reputation and external communications. Similarly, if they want success in industries that touch national security, the sooner they decouple themselves from the government, the sooner they will have the freedom to make a more meaningful attempt to persuade politicians in Washington, DC and other power centers that they are governed by the rules of the market. In this regard, corporate governance (and transparent communications that highlights that governance) will become more important if Chinese companies hope to be successful overseas.

The big questions remains: Without buying into a market through acquisition of a known brand, can China-based multinationals, especially those in the high-value, high-tech sectors that Beijing so covets internationally, be successful in organically building corporate reputation and brand awareness with more loyalty-conscious Western consumers and wary foreign governments? The next few years may provide an answer.

Opportunity to lead

In a world where government inaction on critical issues persists, consumers are increasingly looking to business to drive change. In that context, businesses and their CEOs have permission to lead on critical global issues, but it is striking that there are few if any corporate leaders from China who clearly shine on the international stage. One recent survey found that 94 percent of Americans couldn’t name one Chinese brand. And the only real exception of executive leadership, Jack Ma of ecommerce giant Alibaba, recently stepped down as CEO (he remains executive chairman).

Alibaba’s Ma recently joined the global board of the Nature Conservancy , and launched with other wealthy Chinese executives the China Global Conservation Fund, which announced plans to raise up to $15 million to protect nature worldwide, starting with a reserve in Kenya for an endangered antelope. “China’s economic rise has created an opportunity and a responsibility for the Chinese people to play a leading role in addressing the world’s environmental problems,” Ma said.

Recent research by Weber Shandwick shows that a company’s reputation is directly tied to the reputation of its CEO, and that consumers are more attuned to what executive leaders are doing and saying. Chinese companies and their CEOs have a real opportunity to emerge as the next generation of global leaders. This is especially true because so many of the world’s major challenges will be experienced most tangibly in the developing markets, including China.

[author] William Brent is executive vice president at Weber Shandwick, and co-leads the global public relations firm’s Emergent China group, helping Chinese multinationals expand internationally. He also leads their renewable energy and cleantech practice. He has spent nearly 30 years involved in China, and lived there for 16. [/author]

(Photo by Prayitno via Flickr)

Posted by Christina Nelson