China is now the world's third largest luxury goods market, but even for companies with mid-level products to sell, the opportunities are enormous, particularly in the climate created by this year's Beijing Olympics.
Three decades of economic restructuring - 2008 marks the 30th anniversary of Deng Xiaoping's Special Economic Zones - have fundamentally altered the PRC's commercial DNA. Pudong, Shanghai's prosperous financial district, is now a mini-Manhattan, with the world's tallest building, the world's highest hotel and one of its largest shopping centres sitting on the east bank of the Huangpu River. There are more than 1,000 television channels in China, as well as hundreds of lifestyle, business and auto magazines. High-end restaurants, elegant or flashy, are everywhere. In the most chic quarters of China's major cities, commercial advertising rates have tripled since 2005. China boasts 320,000 millionaires and 150m individuals who can afford luxury brands.
The cornerstone consumer events of 2007 suggest that, on many planes, progress is unstoppable, albeit gradual. They reinforce the truth that Chinese leaders advocate incremental change, where development must be tui yi bu, jing liang bu ('one step back, two steps forward'). Nonetheless, many multinational and local companies are thriving, riding a wave unleashed by rising consumer incomes in both the lower and middle classes of society. Contrary to perceptions, China's consumer momentum is fueled by domestic demand; in 2007, net export growth accounted for just a quarter of total growth.
In August 2007, prominent billboards were banned in Beijing, dulling the city's commercial horizon. According to state media, the move was intended to minimize the unseemly sale of luxury goods prior to October's 16th Party Congress. Some observers, however, suggested that the real motivation was commercial. With the Olympic Games growing ever nearer, it was high time for the renegotiation of prime outdoor advertising space.
Throughout China, the contrast between Confucian-style wealth redistribution and growing consumption is becoming more and more striking. According to Merrill Lynch, China is now the world's third largest luxury market. The super-luxurious Millionaire Fair trade show will be staged in Shanghai for the third time in 2008. By 2009, it is estimated, seven of the planet's ten largest malls will be located in the PRC. Brands such as BMW, Audi, Zegna, Cartier, Louis Vuitton and Mont Blanc are already iconic and big sellers.
Chinese consumers are not becoming lazy, however, nor are they losing their cultural base. Luxury brands, a sign of self-indulgence in the West, are utilized as 'tools' in China, merely as steps up a regimented ladder of success. Haagen Dazs, Pizza Hut and Starbucks thrive as status projectors to be consumed in public, not as in-home extravagances. Middle-class savings rates in China are still amongst the highest in the world and, even inside wealthy homes, pennies are pinched. The pragmatic frugality of consumers suggests that the Chinese will never be 'like us'. The nation will become modern and international but in a manner consistent with its culture, much as Hong Kong, Taiwan, and Singapore have done.
Multinationals Look to Expansion
The competitive strength of multinational corporations is underscored by the fact that 80 per cent of China's high-tech exports are produced by foreign enterprises. In the realm of fast-moving consumer goods, companies such as Procter & Gamble, Nestlé and Colgate have thrived by a) extending 'premium' brands downwards via lower prices and broadened portfolios and b) leveraging high-end variants to reinforce quality cachet.
Today, MNCs are streamlining their distribution networks to penetrate fourth-, fifth- and sixth-tier Chinese cities. For example:
* Unilever has restructured a fragmented, unwieldy sales force into four accountable regional units. In addition, all merchandising activity has been consolidated with Always, the nation's largest field marketing force.
* InBev, the Belgian brewer, is expanding distribution of its recently acquired, Fujian-based Sedrin beer brand across Eastern China.
* Nokia, through a combination of outreach to villages, a consistent retail presence and promotions timed before local festivals, has dramatically expanded its penetration into rural areas and now dominates the sub-premium market.
* To manage the complexity of national coverage, supermarket retailer Carrefour has married centralized procurement with local supplier networks.
As the countdown to Beijing 2008 begins, multinationals are in an increasingly strong position to win market share from local competitors. Fears about product safety - acute among locals well before the West woke up to China's patchy quality control record - will only buttress the appeal of foreign brands.
The Rise of Midsize Chinese Brands
The world has been looking over its shoulder in anticipation of the rise of Chinese companies such as Lenovo (computers), Haier (electrical appliances), China Mobile, Cherry (autos) and TCL (televisions and mobile phones). However, such companies pose less of a threat than might be expected. They continue to compete on low prices, not on consumer preference or on innovation. They are weighed down by a mixture of political interference, bloated bureaucracies, fragmented decision-making and short-term strategies. Lenovo, for example, has outsourced its global brand building to Bangalore.
On the other hand, medium-scale enterprises with annual revenues of US$150m-US$300m have become forces to be reckoned with. Anta footwear/apparel, Li Lang 'business casual' menswear (a fast-growing segment), Mengniu and Yili (both dairy companies) and Snow and Qingdao beers have taken impressive steps to nationalise distribution, internationalize talent, introduce new product concepts (for example, Yili 'elite' milk, Anta 'breathable' shoes) and air international-standard advertisements (usually produced by foreign advertising agencies).
These middleweight fighters are the brands that many foreigners will have heard of five or ten years from now. Headed by bold leaders with hopes of successful IPOs, they are getting it right in China today, while surveying international expansion tomorrow.
The Automobile Industry
The dramatic growth of the Chinese automotive market is the biggest story in the 21st century motor industry. For the past five years, Chinese consumers have been buying cars as a rite of passage into the hallowed ranks of the middle class. The industry is on track to produce up to 10m passenger vehicles in 2008, and cars of all shapes and sizes clog urban highways, despite the fact that penetration is still below 5 per cent.
The PRC performance of US car giant General Motors has been impressive for a decade, and the company now sells over 1m vehicles per year in China. Even late starter Ford has opened a second production plant in Nanjing and is on target to produce 200,000 units each year. In fact, Ford CEO Alan Mulally has suggested that the company regards China as a future manufacturing and export centre, not just as a promising consumer market. Design and production partnerships between Chinese and overseas car manufacturers also appear to be increasingly inevitable.
Exporting Chinese-made automobiles to Western markets, a milestone for any Chinese company, remains a long way off. Local auto companies, most of which are arms of local or provincial governments, continue to sell at bargain-basement prices to the lowest market segments. Cherry has delayed exporting its cheap models under Chrysler's Dodge badge until 'some time after the Olympics'. Jiangling Motors' Landwind SUV continues to fail safety tests, and a planned European roll-out has been put on ice.
The Digital Media Scene
Television is still the most widely used and most effective means of advertising. In advance of the Olympics, advertising rates have leapt by 30 per cent. The medium is still monopolistic, with supply outstripping demand, and remains the cheapest way to reach a broad audience. That said, advertising is the most expensive cost involved in doing business in the PRC, a market of continental scale with cost-per-thousand (CPM) rivaling that of Paris or London.
Happily, the digital scene is becoming more interesting by the day. After completing a raft of online and mobile acquisitions, flat-panel ad space vendor Focus Media has labeled itself 'China's leading out-of-home multi-platform lifestyle company'. Internet portals such as Sina.com and Sohu.com have become major multi-billion-dollar players, largely because, on a CPM basis, their banner rates are significantly lower than TV and they directly target youth. Mass-market Chinese sites such as Tudou.com (video sharing) and Taobao.com (online auctions), are pushing foreign brands such as eBay into oblivion. They will also inevitably introduce advertising as part of their monetization strategies.
Finally, to deepen connections with 'new generation' audiences, advertisers themselves have started to complement broadcast media with digital 'engagement' platforms. Ford's 21-day 'Excitement Challenge', for example, achieved more than 3m hits per day. DeBeer's 'What Would You Do For Love?' campaign blurred the boundaries between on- and off-line media.
Unfortunately, the government's ambivalence about new media forms continues to obstruct their potential. Hugely popular, voter-based shows of the American Idol variety have been banned. The press is suggesting that new regulations will keep airwaves 'civilized'. Mobile phone applications - from downloading coupons via Bluetooth to locating restaurants via mapping - could accelerate new forms of active message consumption. The widespread use of mobile phones, even in low-tier markets, is one of China's most unheralded economic advantages. Unfortunately, new media development has been suppressed and bureaucratic battles have stalled the introduction of 3G and HDTV, further handicapping the promise of one-to-one media channels.
Despite the over-use of Olympic symbols in marketing, it is impossible to overstate the importance of the 2008 Beijing Olympic Games to China. The Games represent the culmination of its struggle to shrug off 160 years of colonial degradation and command economy stagnation. The Chinese people, hungry for global face, worry that the international event could backfire on them, with pollution and overall 'civility' ranking as the top concerns. Frustratingly, few companies have so far positioned themselves as true partners in the Games' success, a universally acknowledged step towards brand superpower status.
Due to political sensitivities and a lack of pre-planning, most local companies will fail in their efforts to capitalize on the Olympic frenzy. Advertising often relies on shoddily reproduced Olympic logos and bland propositions. As late as October 2007, Lenovo and Yili dairy, both official sponsors of the Games, were still finalizing their strategies. China Mobile's efforts, while ambitious, will most likely fail to meet expectations. Interestingly, it is the non-sponsors, companies hoping to tap into the spirit of the Olympics rather than the Games themselves, that are being creative. Anta, for example, hopes to tap into repressed mass ambition via its 'We're Coming!' campaign. China Unicom's 'Connecting You to the World' message fuses high technology with universal brotherhood.
Most international companies have found it difficult to articulate the importance of the Games to China. In 2007, neither Nike's nor Adidas' efforts were particularly moving; what appeared felt staged and distant. Visa has jumped on the bandwagon surrounding champion hurdler Liu Xiang, plastering billboards with generic images of travel destinations and airing an 'only official card' TV commercial.
Nevertheless, a few players have scored points. Coca-Cola's shuang qi lai, a Mandarin wordplay that means both 'refreshing' and 'Stand up!' has lots of promise. Both General Electric and UPS have linked their goods and services to operational triumph during the Games themselves. GE has gone one step further by comparing the graceful, environmentally-friendly designs of its high-tech products with the performance of Chinese athletes. Johnson & Johnson's 'Golden Touch, Golden Mom' is a beautiful idea but one that remains under-executed.
In conclusion, the Chinese branding scene is characterized by the following:
* A stable macro-economic environment
* Luxury sales fueled by mainlanders' thirst for professional and social advancement
* An explosion in auto sales, not to mention in local production capacity
* Penetration of lower-tier cities and rural areas by multinational corporations, facilitated by streamlined sales/distribution channels and products that afford both margin and scale
* Resourceful, rising mid-size local brands, but relatively stagnant state-owned behemoths
* A new middle-class service culture (e.g. in banking), albeit one that is not meeting the growing need for personalization
* An increasingly vibrant, though still constrained, digital scene
* A huge buzz around the Beijing Olympics.
Most of these trends represent a gradual evolution rather than a dramatic breakthrough. Chinese culture emphasizes stability and order, which means that there will be no dramatic commercial or political reform. Nonetheless, the marketing and branding opportunities in China are enormous.
Contributed by Tom Doctoroff, CEO of JWT Greater China.