by Jessy Konvey

I have subscribed to LinkedIn groups about Chinese branding for a while now; like many “China observers”, I have discussed this in detail with many people for a long time. Its a topic that sometimes generates controversy. Since I love controversy (its good for search hits), I’m going to comment on today’s Washington Post article, “Beijing tries to push beyond ‘Made in China’ status to find name-brand innovation“.¹ I found this to be a great article, but not because it is well written. Actually, the article jumps around and fails to make much of a coherent point. But it has lots of great quotes which could be used to talk about cross-cultural business, as well as quotes about how stupid situations.

Last year, China overtook Germany to become the world’s largest exporter, and this year it could surpass Japan as the world’s No. 2 economy. But as China gains international heft, its lack of global brands threatens its dream of becoming a superpower [...]
Much of Apple’s iPhone, for example, is made in China. But if a high-end version costs $750, China is lucky to hold on to $25. For a pair of Nikes, it’s four pennies on the dollar.

I believe the second part of this quote is “mixed-up”. I’m pretty sure its comparing the sales price of the iPhone with the profit which the Chinese side probably brings home. Some may look at that and say, “wow, Chinese companies operate on such low margins! They must be great at controlling costs!” To which I (and most blogs which deal with sourcing in China) would say… yeah… the Chinese companies operate on such low margins, hence will have difficulties controlling quality, or even surviving.

Anyway, this quote shows the power of brands. Apple and Nike get hundreds of dollars profit from their respective products. Chinese manufacturers get pennies. Yet, iPhone and Nike manage to bring quality product to the market.

What Chinese managers often don’t understand that quality starts with the brand. Value starts with the brand. Its not about advertising. Its about thinking of the brand as the “face” of the company, and protecting that face at all costs. Why don’t Chinese managers think this way? I believe because the focus is always on short-term wins… and the easiest short-term win has always been to hire under-paid workers to make products for others. The Chinese industrial policy is usually aimed at creating more technical advantage for Chinese manufacturers, hoping that this will lead to “innovation”, and hence to brand power:

Domestically, it has launched the “indigenous innovation” program to encourage its companies to manufacture high-tech goods by forcing foreign firms to hand over their trade secrets and patents if they want to sell their products there.

Even if we assume that China is successful at bullying foreign brands to transfer key technologies (and I’m 100% sure its mostly unsuccessful), all this is doing is helping Chinese companies become better OEM manufacturers…it does not spur “innovation”. Now that I think about it, I wonder…why don’t people remark on this contradiction? Its so obvious!

Innovation usually comes from being “marketing oriented”. That means it comes from looking around at the market, having a certain amount of communications skills, and common sense. Unlike some Chinese companies:

A move by a private Chinese company to take over a once-dominant U.S. lawn mower company, Murray Outdoor Power Equipment, ended in bankruptcy because, among other mistakes, the Chinese firm didn’t realize that Americans tend to buy mowers mostly in the spring.

Marketing orientation also requires being strategic, learning new habits, and showing a public face that they can take pride in. Marketing orientation requires from good leadership and the characteristic of not seeing failure as a personal catastrophe. And it requires a culture wherein employees can constructively challenge their managers. From the WaPo article, about the new GM of Lenovo, while he was touring the company’s factories:

“I was greeted with rose petals and the red carpet treatment and company songs. In Raleigh, everyone’s armed were crossed. It was like, ‘Who died and left you the boss?’ ” he said. “You had the respect for power in the East and the disdain for authority in the West.”

I also believe that for a company to develop both market orientation and innovation, the alternatives to these characteristics should not be too strong. Which means that companies must make conscious efforts to avoid both OEM-type business, as well as avoid business based on creative promotional opportunities:

Lenovo might not have much of a brand overseas, but its association with a foreign firm has helped it in China. Lenovo’s computers routinely command twice the price in China that they do in the United States. Lenovo offers its top-of-the-line ThinkPad W700 to the Chinese government at $12,500; in the United States, it runs for $2,500.

I just love it when reporters inadvertently display embarrassing facts, which could be construed as showing non-compliant behavior.