Best China Brands: Country Overview
By Thomas Chen
With the growth rate slipping to 7.7 percent in the first three quarters of 2012, there is no question that things have been slowing down in China. Facing both stagnation and fierce competition within numerous sectors, Chinese brands have entered a critical and difficult period. Yet the sheer size of its market remains an asset and is at least part of the reason why the value of the top 50 China brands in 2012 have increased by 13 percent over the previous year, despite ominous figures and predictions.
The continent's burgeoning middle class continues to fuel retail growth (albeit modestly) and e-commerce and social media companies are growing at exponential rates. With only a third of China’s enormous population online and mobile sales tripling in 2012, a potentially staggering growth awaits China’s e-commerce and internet-based companies.
Perfectly illustrating this trend is the success of China Mobile, the world’s largest mobile service provider and holder of the number-one spot in the Best China Brands ranking. Achieving steady growth during the first half of 2012, China Mobile’s profitability is the highest in the industry. Yet, in spite of that fact, the company’s brand value remains stagnant. A symbol of the uncertainty facing the industry—and a symbol of its rising power—China mobile, constrained by its technology, lost considerable ground to its competitor, China Unicom, in 3G services. The development of 4G technology will drive the next battle for relevance, giving China Mobile an opportunity to retain its ascendency.
The mobile revolution
The growing popularity of 3G and the rapid development of mobile devices are driving the growth of mobile in China. Social networking services, location-based services, and mobile e-commerce are booming along with traditional mobile phone applications. In fact, the rates of development and adoption are so high that the number of mobile internet users in China will exceed the number of non-mobile internet users in 2013. Chen Zhou, founder of China’s version of Facebook, Renren, has boldly proclaimed, “the biggest trend of the IT revolution in the future is mobile internet.”
"Chinese brands will have to accelerate their transition to mobile—or they will be left behind."
That the revolution is underway is clear, but who will end up leading it, and how, is less clear. The business model is hard to determine, the app life cycle has shortened, and innovation has stalled. As online activities become integrated into every aspect of Chinese life, from photo sharing, video sharing, and mobile payments to flight and hotel reservations, the brands that can keep up with user needs and evolving behaviors will be the ones that succeed. With the competition rapidly shifting focus from traditional web channels to mobile marketing, communications, and commerce, Chinese brands will have to accelerate their transition to mobile—or they will be left behind. Well aware of the trend, China’s Big Three online services companies—internet service provider Tencent, number-one search engine Baidu, and e-commerce giant Alibaba—are racing to get up to speed. The pressure is intense. Soon, China’s users will make up the world’s biggest internet user group—and most will be using mobile.
Alibaba has faced an additional challenge: allegations of fraud, which prompted an internal investigation that put the company’s integrity in question and resulted in the resignation of two senior executives. Indeed, from Alibaba’s ordeal to melamine-tainted milk, problems with fraud and product quality are rife in China. In this climate, these are mistakes brands can no longer afford to make.
E-commerce: Everyone’s got to have it
Since 2010, many traditional Chinese enterprises have expanded into the e-commerce space. For example, Suning, China’s biggest electronics retailer, is spending billions to expand its online operations and utilizing the power of social media to leverage its marketing, rather than relying solely on discounting to promote its products. A weaker economy and price battles are pushing Suning, and rivals like Gome, to make a bigger push to attract online shoppers.
Of course, it makes sense to invest where future consumer spending channels will be. According to a Beijing-based research firm, Analysys International, China’s online retail transactions are projected to more than double by the end of 2013. Ensuring the continuous boom of e-commerce, the National Development and Reform Commission and the Ministry of Finance jointly issued a notice in 2012 to help e-commerce develop in a swift yet sustainable manner. With optimistic forecasts and strong assurance from the government, it is no wonder e-commerce is becoming a hot target for investment in capital markets.
E-commerce in China is generally going in two directions: brands with e-commerce and e-commerce brands. Yet for many traditional brands, the transition has not been an easy one and competition is constantly escalating. From Procter & Gamble to retailers like Suning and Belle, most brands are realizing that an e-commerce channel is no longer a “nice to have,” but a must in China. Similarly, e-commerce brands are realizing that they need to acquire some of the capabilities traditional brands tend to excel at in order to stay competitive as traditional brands reinvent themselves for a digital future.
The internet industry—and all businesses affected by it—isn’t the only sector feeling the pressures of increased competition. Facing both internal and external challenges, including oversupply and powerful foreign competitors, China’s sports brands have had a tough year. Once the leading sports brand in China, Li Ning has been losing market share and closing underperforming stores, leading to a 41 percent drop in brand value in 2012. Peak, another struggling Chinese sporting goods brand, was forced to shut down about a thousand stores to stay afloat.
While Nike and Adidas dominate the high-end market, local sports brands are not only facing competitive pressure in low-end market homogeneity, but are also squeezed by the casual clothing industry. Most in the sector have been feeling some pain, but due to increased competition and some obvious missteps, Li Ning suffered the largest decrease in brand value in 2012. Xtep, however, sitting comfortably at the intersection of sports and fashion, is one of the few sporting brands that enjoyed positive revenue growth in 2012. As a result of that success, it enters the top 50 tier of the Best China Brands list for the first time.
Of course, the sporting goods industry is not the only one getting squeezed. Ctrip, China’s leading online travel service brand, saw a 27 percent decrease in brand value and dropped six spots on the list. Ctrip provides comprehensive travel services to over 60 million members through the integration of technology and traditional travel agency services. But as the price war with other online competitors intensifies, Ctrip’s market share has begun to shrink.
Slowdown in the fast lane
China’s GDP growth reached 9.2 percent in 2011, but more recent statistics show that the domestic economy is showing signs of stagnation and entering into decline. Most sectors have been hit, with the banking and liquor industries being notable exceptions—for the time being.
Though the economic slowdown is creating challenges for financial services brands, banking as a whole maintained higher income and profit growth than other industries. While that certainly sounds like good news, it may be a sign of future trouble. In 2011, net profit growth rates for these sectors exceeded 20 percent and 30 percent. With strong financial performance that is rivaled only by liquor, brand value growth in banking exceeds those of other industries.
Not surprisingly, seven of the ten fastest-growing brands on the Best China Brands list are in the banking and liquor sectors. However, with credit risk emerging and spread level declining, banking sector profit slowed in the first three quarters of 2012, even among large state-owned banks. The revenue and profit of the liquor sector also declined dramatically in the first three quarters of 2012 compared with the previous year. This was largely due to tougher policy on the T&E (Travel and Entertainment) expenses of SOE (state owned enterprises) and government institutions, which has hurt premium liquor consumption.
In the midst of the 2012 slump, Chinese insurance and securities brands saw some steep declines, as well. China’s oldest insurance brand Taiping, for example, saw a 29 percent decrease in brand value. An imbalance in the product structure of the market, overreliance on invested revenue to drive sales, and a lack of differentiation between insurance products and the financial products offered by banks, all contributed to losses and sluggish growth. With China’s stock market also showing a downward trend, the net profits of brands like China Merchant Securities, China Life Insurance, and Pacific Insurance have shrunk dramatically. Although brand strength scores remain stable, the brand value of these companies has declined significantly.
The road has been challenging for the Chinese pharmaceutical industry as well. Coming under fire for product safety issues, 999, Yuron Food, and Shineway all exited the Best China Brands list in 2012 as steep declines seriously impacted brand strength scores. Shineway’s profits, for example, declined more than 50 percent. This exodus leaves Yunnan Baiyao, which brings modern science to traditional Chinese medicine, as the only pharmaceutical company in the top 50, and dairy giant Mengniu as the only food sector brand on the Best China Brands list.
Weathering the storm
"China’s best organizations, as is the case anywhere, think beyond marketing and manage their brands skillfully"
When times get tough, some brands falter and others manage to grow, even in an economic downturn. China’s best organizations, as is the case anywhere, think beyond marketing and manage their brands skillfully. Through the integration of brand strategy and business strategy, smart brands create a strong internal corporate culture and build closer relationships with customers. In fact, great brands often arise from within, and Haier is a prime example.
While the overall growth of the home appliance industry slowed in 2011, Haier’s 2012 performance surpassed the whole market. The electronic giant’s revenue and net profit increased and its market penetration rose 1.7 percent higher than in 2010, the highest in the large appliance market. Its secret? Haier actively promotes a spirit of innovation and entrepreneurship among employees, and embraced the internet early. The company transitioned from selling products to selling services and adopted a new business model that encouraged each employee to face the market directly, fulfilling consumers’ needs for customization and personal attention.
Self-driven and motivated by Haier’s can-do, customer-centric culture, employees execute the new business model efficiently by focusing on meeting specific customer needs. Ever the innovator, Haier also continues to launch state-of-the-art energy-saving products, has built up its online sales platform, and implemented digital marketing to increase its brand value. Paying off big for the brand, Haier enjoyed a 25 percent increase in brand value in 2012, despite the market downturn.
Ping An is another success story, displaying characteristics all great brands share—excellent communication as the foundation to successfully align business strategy and brand strategy. In order to better integrate insurance, banking, and investment, Ping An proposed a new model—“one customer, one account, multiple products, one-stop service”—to provide a superior customer service experience. The brand continues to spend big on market communication, which has helped it become one of the best-known comprehensive financial service brands in China.
Most importantly, Ping An’s marketing and communications focus on the value the brand’s services bring to clients’ lives, rather than focusing on functional benefits, as it did in the past. Recognizing that consumers are struggling with complex financial services, the Ping An brand promises to make financial life easier. In an industry full of complicated financial products, choices, and formalities, this message resonates with consumers. The company’s ability to clarify its brand promise and speak to real human needs is the reason Ping An retained its value, while the rest of the insurance industry was struggling.
As Haier, Ping An, and many others on the Best China Brands list demonstrate, adversity doesn’t have to sink brand value, but it will test it. As deceleration sets in, the Chinese brands that are poised for success will be those that are focused on the long-term. These resilient companies have a viable plan for sustainable growth, and know how to harness the power of their brands—which includes recognizing and responding to real human needs, both internally and externally, and taking integrity seriously. With a vast populace and dramatic social, economic, and technological changes underway in China, including rapidly developing digital technologies and growing social networks, Chinese brands have unlimited potential to contribute to a thriving global economy and the well-being of its people, as well as those beyond its borders.