Emerging Branding Threat From China

Never heard of Haier, Legend, Galanz or Huawei? Don't worry; you will. However, you may wish you hadn't.

    Haier and the others are all Chinese companies who are mounting major branding initiatives in the U.S. and Europe. By building on low labor rates and sophisticated experience outsourcing for other firms, these firms are moving inexorbably from cheap suppliers to international powerhouses that threaten to dethrone your brand. Already, these brands have quietly grabbed market share from bigger and better known companies in Europe and the U.S.

    In 1984, poor quality almost drove Haier out of business. Today, it is a multibillion-dollar conglomerate whose goods are sold in Wal-Mart, Best Buy, Home Depot and other retailers in 160 countries. Starting from ground zero about five years ago, Haier now has almost 50% of the U.S. market in small refrigerators, and capturing large segments of other white goods markets. No wonder Haier was the first Chinese company to be featured in a Harvard Business School case study.

    Other Chinese branding insurgents include Legend, which has about 20% of the world market for motherboards, and a strong Asian PC brand. Galanz turned from making microwaves for other companies to making them under its own brand, and now has 40% of the European market. According to a prominent Wall Street analyst, Huawei "is the biggest reason I know to sell Cisco stock." And there are similar tales in multiple industries, ranging from shipping containers (CIMC) to rear-projection TVs (Changhong Electric) to mobile phones (Keijan).

   The rapid emergence of Chinese brands is interesting for two reasons. Their tactics and techniques provide guideposts for others looking to vault their brands above the competition. And their rapid growth represents a warning shot across the bows of U.S. and European economies. Once Coca-Cola was Asia's primary brand hero; today, it's Haier, and many are actively emulating its formula for success.

    How did Haier do it?

    The pat answer is low wages and government subsidization. These factors have helped, although it's hard to tell since Haier doesn't publish its profitability or accounting methodology. But low wages alone can't explain away its success, especially since Haier now has a $30-million manufacturing facility in Camden, SC, and Haier washing machines in China are more expensive than those from foreign rivals.

    The first key to branding success was a continual quality focus. The story of how CEO Zhang Ruimin, 53, wielded a sledgehammer to smash 76 refrigerators that didn't meet quality specifications is as legendary in Asia as Steve Jobs' garage, and is an omnipresent part of the Haier corporate culture.

    Another key - and one ignored by many companies - was basing product development primarily on customer input instead of market research. By visiting customers, Haier engineers found that housewives frequently used washing machines to clean vegetables as well as clothes. By making a few inexpensive modifications to accommodate both tasks, Haier quickly rose above competitors to become the market leader in rural China.

    Such customer focus also enabled Haier to gain traction in the U.S. market. Students loved Haier's small refrigerators, so Haier initially concentrated on compact refrigerators, a market long ignored by GE and Whirlpool.

    And today?

    Check out your next hotel fridge; there's a 40% chance it's a Haier.

    Although highly unusual for Asian firms, Haier practices "rank-and-yank" management called 10/10. Each year, the top 10% of employees get recognition and bonuses, and the bottom 10% are demoted or booted. The policy has teeth. In 2002, 13 division directors were demoted.

    Finally, it is well on the way toward a Dell-like lean operation where strategic capabilities are outsourced and no product is manufactured unless a customer is lined up. "Things are different today from the traditional economy," notes Zhang. "I can form an alliance with Ericsson for Bluetooth technology. Tomorrow I can work with Motorola. Two days from now I can work with Nokia."

    Haier represents the first wave of upcoming Asian brands about to up the competitive ante. For decades, Asian companies have been content to be OEM outsourcers for U.S. and European firms. But lured by branding's fatter margins and the innovation spurred by international competition, other companies are moving, in the words of one executive, "from sewing wedding dresses for others to wearing our own."

    However, Asian companies face several obstacles to moving up the branding chain. These include limited international distribution channels and service networks, little promotional or advertising expertise, and rudimentary pricing skills. They also lack the design or other innovation that propels many Western brands forward. Quality remains an issue, but increasingly less so. Sign of the times: GM plans to import a new SUV engine from China.

    Such obstacles will be overcome, partly through experience and partly with government help. While the U.S. responds to future threats with tax policies that do little more than enable the rich to upgrade their wine cellars, Malaysia and other countries are establishing funds to help their countries brand abroad. Thailand offers special programs to help local manufacturers meet international standards. And Korea is building the world's most advanced digital infrastructure.

    What can be done?

    On a national level, we need a vision that seeks to make our children richer than we are. Famed Intel CEO Andy Grove notes the dwindling U.S. technological lead. "Where is the U.S. public policy?" he asks, lamenting the lack of a innovation strategy from the current administration. On a corporate level, it means moving back to branding blocking-and-tackling that's critical in an increased competitive environment. When looking at competition from emerging brands, remember that while it's easy to clone an advertising or PR campaign, it's difficult to replicate a profitable customer relationship.