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BIZCHINA> BizViews
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National brands instead of winning models
By Teng Binsheng (chinadaily.com.cn)
Updated: 2009-04-01 16:54
In the light of similar cases, the reason is quite simple. One of the most striking failed cases is that of the Carlyle Group attempted acquisition of China Xugong Machinery. Although shareholder investments declined from 85 percent to 50 percent down to 45 percent following the signing of a purchasing agreement in October 2005, the approval of the supervising body had still not been obtained. In July 2008 the agreement automatically expired. Cleverly, this stalling mechanism meant that the government never had to officially adjudicate one way or another, postponing not only the decision but also a potential public relations crisis. If the supervising body had agreed to the purchase, it would have faced a nation-wide nationalistic outburst; if it had declined the purchase officially, it would have damaged China's investment environment enormously. It appears that the selling of State-owned property is likely to create such a storm that no-one dares to call a winner either way. Huiyuan is not a State-owned company and juice is only arguably a core Chinese industry. But economic nationalism is a strong undercurrent in China, making little distinction between companies of different characteristics. There are people who point out that companies such as Huiyuan and Mengniu are foreign-invested and listed on the foreign stock markets therefore not counting as entirely Chinese enterprises. But these differences matter little when national brands are at stake. In our globalized world, national brands evade precise definition, but more or less refer to brands born and bred in the Chinese marketplace, among Chinese consumers. It matters less that many are boosted by capital from overseas. Although the number of significant Chinese brands is few, their influence is not inconsiderable, for example Maxam toothpaste, Power 28, Nanfu Batteries, Mininurse, Robust, Dabao, Delixi, and Supor. These purchasable items are consumer products, where types proliferate but when it comes to acquisitions by multinational corporations, the intent is strategic. Entering the Chinese market through Chinese brands is useful to foreign investors – through acquiring brands multinationals gain plentiful resources in the marketplace which naturally promote sales. Secondly, domestic products dominate the low and middle-tier market segments, complimenting a high end foreign brand coming in at the top where no competition from domestic products exists, reducing the likelihood of Chinese threats and challenges. In the cases of Mininurse, Robust and Supor, the space for them to develop as brands is limited (unless they begin attempt to export abroad), but the brands continue to exist, and no foreign capital interests are involved. Overseas firms acquire domestic brands to benefit their overall brand portfolio, thus forming an important part of transnational strategy. Multinationals coming to China seek to diversify their market entry by promoting multiple products under multiple brand names with the overall corporation forming the umbrella. Gillette for example sells Duracell batteries and Coca-Cola sells Minute Maid Juice. Flexible use of multiple brands enables companies to target diverse market needs, providing consumers with a range of average-priced batteries or mid-priced juices. After years of competition with local Chinese competitors, multinationals are moving more aggressively to acquire local brands but this strategy entails risks, such as the type of dispute we witnessed between Danone and Robust. Danone pursued the acquisition of Chinese brands so aggressively that it bought nearly half of China's drinks market, including Yili, Robust, Aquarius, and a 20 percent stake in Huiyuan, in addition to joint ventures with Bright Dairy and Wahaha. Danone's acquisition strategy produced a lot of enemies in China who retrenched and decided to fight eye-for-eye, tooth for tooth for every strip of land. But despite the costs, Danone realized that global and local brands can complement each other. National brands don't really go away, they just have their owners replaced, similar to when a Chinese mainland company goes IPO in Hong Kong or overseas. Unlike developed markets, the Chinese market is a fast-paced warlord zone of Chinese history. Hundreds of brands compete in many different forms for the same market-segment, and a few have rapidly built themselves into leading industry players. Taobao, Mengniu, Shanda, Focus Media and LDK Solar are among the best examples of companies that have created popular and dynamic brands in a warlord zone. China is still in the brand-creation phase rather than the brand-management phase. Successful entrepreneur Shi Yuzhu, who created the nutritional supplement naobaijin, followed by Giant Interactive and then Huangjin Wine (almost everything he touched turned to gold), proved that the Chinese marketplace is still in a formative period. Most Chinese brands focus on low-cost brand segments. The dynamic state of the China market leads some to exuberant talk about positional warfare. However, the right strategy should not ignore guerrilla warfare. Given the right opportunity and the right price, companies should be flexible enough to make a move, but not necessarily fight until the bitter end.
The fact that Chinese companies continue to create new brands that thrive and become targets for multinationals is actually a sign of economic health and innovation. This type of value exchange beats trading a Boeing plane for 800 million shirts. China has a saying, "third-class companies sell products, second-class companies sell technology, and first-class ones sell standards" For Chinese companies that cannot establish and export standards or technologies right now, selling brands might at least help them to move up in the pecking order. When Chinese companies one day accumulate enough experience in building brands and can obtain adequate investment, they will not only withstand acquisitions by overseas firms, but may overcome their overseas competitors first in China and then even in global markets. Despite rapid progress by Chinese firms in some industries, such a prospect is still far off. I am not advocating the sale of national brands without consideration of national interests. Rather, I am against blanket criticism of acquisitions. Entrepreneurs will not be willing to sell a good company cheaply, so we do not need to worry that one day all Chinese national brands will be sold on the block. The series of disputes between Danone, Bright Dairy, and Wahaha shows us that Chinese entrepreneurs know the high valuations their companies deserve. MNCs are paying high prices to buy Chinese. In addition to rising prices, the newly enacted anti-trust law will also prevent foreign investors from buying to many Chinese brands. Some foreign companies in China are beginning to shift from an all-out acquisition attack to making more selective acquisitions, giving up the idea of conquering the Chinese market through mass acquisitions. As Chinese, we should keep our markets open to market-based acquisition bids, especially considering the current financial crisis. If China follows the rising trade protectionism we are seeing in the US, it will lead to self-destruction. Over the past 30 years, China has benefited from an open trade environment and the wave of globalization. We should remember the benefits we have enjoyed, rather than shift to protectionism under the name of nationalism. The author is an associate professor of Strategic Management at Cheung Kong Graduate School of Business. His current research and teaching focus on strategic alliances, M&A, entrepreneurship and innovation, and Chinese firms' global strategies. For more articles from professors at Cheung Kong GSB, please visit en.ckgsb.com. (For more biz stories, please visit Industries)
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