The State of China's Brand Landscape in 2009: FAQs

It's dangerous to generalize but the Chinese have always been conservative spenders and messages in China, particularly those targeted to the mass market, have usually focused on "protective" benefits.
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What will be the main challenges in 2009?

To quote Bill Clinton's 1992 campaign, "It's the economy, stupid." China will not be immune to the global slowdown and any government-led efforts to stimulate consumption will take at least a year to kick in. But smart marketers will realize that this is the time to start really investing -- or continuing investment - in sustainable competitive advantage.

How might the current financial crisis effect how advertisers will need to communicate their message in China?

It's always dangerous to generalize but Chinese have always been conservative spenders and messages in China, particularly those targeted to the mass market, have usually focused on "protective" benefits - e.g., ensuring the family's physical and financial safety. I suspect that these "reassurance" messages, particularly after a dairy scandal which calls basic product safety into question, will become more dominant and extend to higher-tier consumers. In this current economic climate, China's middle class wants to know their gains of the past decade will not disappear in the midst of global uncertainty.

Critically, the economic crisis, as mentioned above, will lead to accountability of advertising spend and we will see movement to more one-on-one communication that increases loyalty and per-user profit contribution rather than just reinforce "preference."

What were the major developments in advertising in 2008?

The Olympics were obviously a big deal in terms of sheer scale of activity. Practically no company - official sponsor, ambush-tactician or on-the-side cheerleader - managed to stay completely unengaged from the celebration of the Games and their heralding the emergence of a more confident 21st century China. No one knows how much money was spent, but it was a lot. Liu Xiang's withdrawal (he "quit") from the 110 meter was the Games' low point but at least it got the Chinese talking about unrealistic expectation of role models.

The Sanlu milk scandal -- product sold both on the mainland and abroad was found to contain an ingredient, melamine, causing kidney stones in children - was a huge step backwards. Practically all dairy brands (Yili, Mengniu and Bright) were eventually implicated, shocking local consumers and raising questions about the quality of practically anything produced on the mainland. Consumer reaction, one that state propaganda organs ended up managing fairly effectively, was intense but we don't expect to see huge shift from local to multinational brands. Unfortunately, in many categories, consumers do not have much choice since the latter usually competes at price premiums of up to 300% versus the former. Mainland Chinese, unlikely to stop drinking milk, have nothing to switch to and it is they who, in the end, were the losers.

How did Olympic sponsors fare?

A few did well. Coke, for example, executed a fully integrated, scaled, participatory "refreshing rising" campaign that seamlessly fused the brand's eternal equities with China's emotional investment in the games. A few other MNC brands - Nike, adidas, UPS - had relevant messages that touched hearts. Many companies' efforts, however, were unfocused, inconsistent and delinked from the on-the-ground activation required to generate broad scale and directly plug into mass motivations. Local brands in particular fared poorly. Some, such as Anta, Yili and LiNing, were quite aggressive in harnessing the Games' emotional power, but most threw millions upon millions down the drain with me-too, propagandistic cheerleading.

It was no surprise that the Olympics did not represent a positive inflection point in the development of three-dimensional Chinese brands. That said, more and more local companies recognize the link between intangible assets and share price. Furthermore, they know the only way to escape the downward pull of profit-destroying price competition is through consumer loyalty. So, progress will continue amongst local brands but it will be incremental given the structure impediments within local corporations that lead to short-term thinking.

What are the trends for the upcoming year?

First, media inflation will dramatically decelerate due to a weaker economy and sluggish demand.

Second, consumer spending - particularly in big ticket segments such as houses and autos -- will remain pinched. The government's efforts to stimulate consumer demand will work but not immediately as the underlying causes precluding the emergence of a vibrant consumer economy, even amongst the middle class, are structural. China requires fundamental land reform, a reliable safety net and a modern regulatory environment. Until this occurs, the Chinese will not open wallets and lower savings rates.

Third, gloom and doom aside, the long-term picture remains bright as tens of millions enter the middle class on a yearly basis. This bodes well for service industries such as financial services, travel, education, etc. and offers a huge opportunity for multinational players to establish competitive advantage versus local players who are weak at providing personalized service.

How are advertisers focusing on different consumer segments, e.g. youth?

The youth, much less willing to passively absorb commercial messages, require a much more integrated media mix. On-line is especially important as it allows a deeper level of both one-on-one participation and emotional engagement with a brand. Whereas Westerners tend to have a relatively "functional" relationship with the internet, Chinese use the web as a means of emotional release, a platform to express the "real me." Digital media, therefore, can play a tremendously powerful role in forging powerful brands that connect with the aspirations of a new generation. This isn't to say that television isn't important; it is, because, on a cost per thousand basis, it's still the cheapest way of reaching a broad audience and forging a clear brand message. But the digital eco-system is becoming a vital channel of connecting with youth.

What are the main growth areas for advertising in China?

First, as mentioned above, the emerging service sector represents a big opportunity for us, as the PRC is just "discovering" the importance of value-added service in increasing price points and profit margins.

Second, customer relationship management, or CRM, which allows marketers to lower acquisition costs and optimize profit-per-customer over time, will be increasingly important as markets narrow down their targets and focus on high-value consumers, particularly in high-involvement categories such as financial services, autos, education and the like.

Third, given the size and scale of China, anything that helps companies "manage chaos" - promotion management, public relations with national media network management - are also areas of huge opportunities for agencies and their partners.

How are advertisers taking advantage of new media such as online marketing?

To date, online media is "constipated." Usage amongst youth in particular is huge and growing but relatively few media dollars are spent in this area. In the U.S., for example, well over 10% of communication expenditure takes place on line. However, in China, the figure is in the mid-single digits, at best. The reasons for this are lack of: a) financial infrastructure that supports on-line purchasing, b) expertise (i.e., talent) required to develop sophisticated on-line marketing programs, c) consolidation of digital production and other behind-the-curtain functions that generate price-value efficiencies and d) reliable measurements in determining spend effectiveness.

What must companies understand before advertising in China?

Chinese consumers are becoming internationalized and modern. But they aren't become Western. The Chinese consumer springs from a fundamentally different world view - a Confucian and/or Doaist world view - that is anti-individualist, in an American and European sense. (That said, egos in China can be huge and hunger for "face" is voracious and growing.) Therefore, brands needs to be brought into alignment with a Chinese mindset. That doesn't mean international marketers must abandon global brand architecture. However, it needs to be adjusted to work in China.

What are foreign brands doing right, and where are they going wrong?

Foreign brands are doing a lot right. In general, it's hard to think of one foreign brand that isn't actively preferred vis-à-vis local competitors due to inherent "cool" and reliability factors. Any time status projection is in question, foreign brands rule the day, particularly in categories - e.g., mobile phones, fashion, automobiles, even shampoo - that are consumed in public. Some international brands - Starbucks, KFC and Haagen Dazs to name a few - have restructured their entire business model to drive public consumption and it has worked. Local brands often dominate in-home categories such as appliances, food and furniture, although, as incomes rise, this is changing slowly. Foreign brands, with the exception of a few skillful marketers such as Procter & Gamble, have been less successful in extending "aspirational" brands downwards, via sub-brands and/or portfolio extension, to generate both profit margin and scale. But here, too, progress is being made.

Are there any success stories which illustrate how to go about conducting a campaign here?

There are many success stories, too numerous to limn. In coastal cities, DeBeers increased diamond penetration from under 10% to over 80% over a ten-year period by establishing engagement rings as a new cultural imperative. Nokia has successfully maintained a 40% market share in the mobile phone market, even in tier four and five cities by leveraging premium phones to build image and cheaper variants to generate scale. P&G has successfully grabbed and held onto the "category benefit" -- i.e., the reason most consumers buy a product in the first place -- affording the company number one share status in most of its categories.

To win in China, the ABCs of successful brand building are the same as they are anywhere in the work: a) tap into an "insight," a fundamental motivator for behavior and preference, b) forge a flexible CONSISTENT "brand vision" that defines that long-term relationship between consumer and product and c) develop communications that invite "participation" in a way that transforms passive exposure into active engagement. All of this, however, needs to be done in a Chinese context and in a manner consistent with Chinese cultural and economic imperatives.

Will Chinese brands go abroad? How should they market themselves?

There are many local brands that boast strong distribution in emerging markets such as Southeast Asia, Africa, the Middle East and Latin America. However, with the exception of Lenovo (which acquired the IBM ThinkPad brand), there is not one local brand equipped to compete at a price premium in the developed markets of America, Europe and Japan. Their brand equity is not robust enough and the structure of their organization is too sales-driven. This will not change for many years and the first brands to break through will be mid-sized, relatively non-bureaucratic entities such as Anta and Lining shoes, rather than lumbering state-owned behemoths.

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