Chapter 1 The Long March

"Made in China" lost its novelty long ago.The label has become ubiquitous in much of the world, affix to shoes, toys, apparel and a host of other items produced for global companies. What is a novelty, however, are China-made goods sold under Chinese brand names.Only a handful of Chinese firms so far have the money and the management expertiseto establish international brands; most of the vast remainder are struggling to attain even national recognition. But the pioneering companies testing the waters overseas could be on the threshold of something big.

Some believe that individually,with the help of enterprising local management or eager multinational partners wanting to add new products to their stable , Chinese brands could become a global phenomenon within a decade, marketed on quality and exotic appeal, as well as competitive pricing . Says Viveca Chan, Hong Kong based managing director at Grey China, an advertising agency: "If there's one country in the world that has ample potential for taking brands global, it's China."

In the short term, the strongest promise is in Chinese medicine, herbs and specialty food, as well as goods that play to the romantic foreignness of China — whether in cosmetics, fashion or music. Says Kevin Tan, general manager for China of market-research firm Taylor Nelson Sofres in Shanghai: "There's still a lot of mystique associated with China. If you're taking something like cosmetics, which is image-driven… suddenly you've got a strong player ."Also making a bid to go global are a few trendsetting Chinese beverage and beer brands. Further down the road there is brand-potential for products such as home appliances that can offer quality at a competitive price.

Some of these brands will eventually go abroad via joint ventures or mergers and acquisitions . For their foreign owners, the brands will provide speedier access to China's consumer market and distribution channels , while at the same time serving to complement the owners' premium brands in global markets.

The concept of Chinese brands has been evolving through the 1990s, but is now getting greater attention at home. Although the domestic market is still robust , a handful of state-owned enterprises, or SOEs, including listed Chinese companies , are now looking to establish international brands because they reckon the quality of both their products and their management has improved. Chinese joint ventures think their products can compete on quality with foreign brands anywhere, while enjoying the advantage of being perceived as exotic.

Besides bringing in additional revenue, a global brand also burnishes a company's image in China, stimulating sales among status-conscious domestic consumers. For example, state-owned soft-drinks maker Jianlibao has developed its overseas market in part to "establish a good image", which in turn enhances consumption at home, says Chief Executive Han Weixian.

But building a brand takes time, money and marketing savvy . Some Chinese brands have nudged into the international market on the back of competitive pricing, but have also utilized other strategies. Jianlibao has highlighted its Asian appeal, presenting itself as the preferred rehydrating sports-drink of China's athletes, while Meidi, an air-conditioner maker, is pushing for greater brand recognition . Others like Haier, one of China's leading home-appliance producers, have pointedly steered away from price, competing instead on product quality and an efficient distribution and after-sales service. In another example, the American direct investment firm, Asian Strategic Investment Corp., or Asimco, has positioned its recently acquired Five Star beer as a premium brand.

Of course, global sales don't mean global brands, as Grey China's Chan points out. And it's still early days for Chinese companies. For a start, investment funds for brand promotion are hard to come by, says Chu Liangjin, the Qingdao-based director of the overseas division of China's Tsingtao brewery . "No more than 5% of our total export sales can be reinvested in promoting our brand overseas," explains Chu, adding that Tsingtao is trying to persuade the foreign-currency authorities to change this standard practice for SOEs. With the government's emphasis on preventing the outflow of foreign currency, the chances of the restrictions being lifted are slim.

Although targeted at SOEs － private companies have greater spending freedom － the 5% limit is bound to hamper Chinese brands. Jianlibao, for example, has invested about $10 million to sell its brand in the U.S. market, but Li Jingwei, the company's general manager, knows that's just a drop in the bucket. Sitting in his office at Jianlibao's industrial complex in Sanshui, a 40-minute drive from Guangzhou, Li reckons that to successfully generate brand recognition among Americans, the company needs to spend at least $50 million － 100 million on marketing. He has no doubt that consumers will like Jianhibao's range of sports and soft drinks (which taste remarkably like Coca-Cola's Coke, Sprite and Orange Fanta), but explains that "we need money to invest in promoting ourselves."

Says B. C. Lo, Hong Kong-based vice-president and director of external affairs at Coca-Cola China: "I'm not sure whether they can really penetrate the U.S. market or become an international brand, but certainly they are a strong competitor in China."

Indeed, Jianlibao, which exports to more than 20 countries, will need a great deal more money and years before it can be considered a serious player abroad. Last year the Chinese company sold just 200 000 cases of drinks (there are 24 bottles or cans in a case) in the United States. Although the company has funded a host of promotional events － donating $100 000 for U.S. flood relief in 1997, advertising at Miss America pageants , sponsoring the $20 000 Jianlibao Cup Golf tournament in 1997－its marketing efforts pale in comparison with those of the likes of Coca-Cola.

One promising area for Chinese brands in the global marketplace is white goods of low- to mid-technology. By some estimates, Chinese brands have roughly 90% of the domestic market for refrigerators and washing machines, 70%－80% of the market for air-conditioners and 60% for color televisions. "In many areas the quality of products has improved to the point where they are quite marketable," says Philip Day, a vice- president at consulting firm A. T. Kearney in Hong Kong. "What we're now seeing is Chinese companies getting their act together in terms of marketing."

Haier is among the best-known white-goods brands in China. Under the guidance of its dynamic president, Zhang Ruimin, the company has turned from being a loss-maker into an exporter. It claims that more than 60% of the imported washing machines in Japan are made by Haier, and that in the U.S., it holds a 20% market share for 36-litre to 1 80-litre refrigerators. In the first months of last year, Haier-brand refrigerator exports to the U.S. reached $15.6 million, up from $12.6 million for the whole of 1997.

Mario Zhu, an analyst at ABN Amro Securities in Shanghai, says Haier's marketing team has helped build the company's reputation in Europe and now in the U.S. "They have research centers that give them updated information on market demand," she adds. "They do aggressive advertising and they've got good R & D." Haier's Zhang says the company's strengths are high quality and good distribution with good networks for sales and service.

Certainly, Haier doesn't spend much on marketing, compared with the amount earmarked by most international companies. In the U.S., Haier's promotion budget accounts for only a paltry 1% of its American sales. The company has opened a specialty shop on New York's Fifth Avenue14 and in March hired a design company in Los Angeles to determine what American consumers liked best in a refrigerator. Zhang admits Haier hasn't "developed a real brand name yet" among average American consumers, but points out that it's starting to get some recognition among refrigerator makers, distributors and specialty shops.

Another Chinese brand in the U.S. market is Meidi . A collective enterprise that churns out air-conditioners in Guangzhou, Meidi in 1997 achieved $386.5 million in sales, of which $70 million stemmed from exports. In 1998 the company stressed overseas markets, and as a result expects exports for the year to reach $80 million out of total sales of $604 million, according to Peng Qiang, director of the company's overseas division. He believes the "time is mature" to develop the overseas market for Meidi, which competes on both price and brand recognition. "We are attending more overseas exhibitions to further improve brand recognition and have spent more on advertisements, especially in Hong Kong," Peng notes.

Chinese brands under the wings of foreign companies usually have the advantage of plumper marketing budgets and better access to management expertise. But although overseas companies typically buy these brands to gain access to China's consumers and distribution channels, they also can have large plans for their acquisitions. "The multinationals that are buying up Chinese brands are not going to restrict their business to the domestic market," says Day of A. T. Kearney. "Some of these brands aren't necessarily going to be pitched against premium brands abroad immediately, but they might be pitched in other segments of the market. I'd look at China in the long-term as being the source of significant competition for multinational brands globally."

Take the case of Unilever, one of the world's largest consumer-goods companies, with annual sales of about $50 billion. This mammoth Anglo-Dutch group in July bought Laocai, a Chinese pickled -vegetable and soy-sauce brand that it plans to take global within the next five years. Unilever wouldn't specify exactly how much it has earmarked for building recognition of Laocai among consumers.

For its part, Asimco in 1995 bought a controlling stake in Five Star, then an 80- year-old state-owned brewery in Beijing. Jack Perkowski, Asimco's Beijing-based chairman, believes the brand —overhauled , repackaged and resold at a premium — can give Tsingtao a run for its money in overseas markets.

Tsingtao, which has been exporting beer to North America since 1978, has had sales there of about $7 million annually over the past three years. Five Star, on the other hand, could "become one of the smaller imported beers in the U.S.," says a beer-industry analyst at a British brokerage in Hong Kong. One reason is that Asimco has chosen an efficient distributor, Florida-based Northland beverage Corp. In September, the first four containers of Five Star were shipped to the U.S., and if all goes well, Perkowski reckons Asimco will be selling 3 million cases annually in about two to three years. That would help the beer to crack the list of 25 best-selling foreign brands in the U. S. — now topped by Mexico's Corona beer.

New York-based cosmetics maker Coty also has grand ambitions. In 1996, it forged a venture in China with Yue-Sai Kan Cosmetics, launched four years earlier by glamorous China-born American, Yue-Sai Kan, a household name and face in the country of her birth. Technically a wholly owned American company, Yue-Sai Kan Cosmetics is considered one of China's leading brands of color cosmetics. The alliance has propelled Coty almost overnight to the No. 1 spot in China's market, and in October the joint venture opened a $20 million factory in Shanghai, complete with an R & D centre.

"We want to take the Yue-Sai brand and make it the first Chinese international brand," says Jean-Andre Rougeot, Coty's executive vice-president. "China as an economic power will continue to thrive in the next five to ten years. As part of that growth, you're going to see more and more Chinese brands." Rougeot's theory is that Western women with sensitive skin will be attracted by cosmetics that have Asian herbs as key ingredients. Adds Yue-Sai Kan: "We try to incorporate the best Asian concoctions with Western technology. For instance, we have orange blossom and green tea lipsticks."

This blend of East and West may not captivate all consumers, but a lot of smart people are betting it will be enough to help launch Chinese brands into global markets.

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