·China leads the world in the production of motorcycles

　　·Shanghai will train 1.37 million technicians and manager over the next five years for the financial and internet sectors alone

　　·China is Asia’s largest advertising market after Japan

　　·China cellular customers will number 155 million by 2002　

　　Introduction:

　　Market reform and market anxiety go hand in hand. Who will profit from reform? Domestic producers or foreign brands? Market reform creates a strong impulse for domestic companies to cling to traditional advantages, like local market knowledge and distribution know-how, but it also necessitates re-thinking of business and marketing strategy. If Chinese producers are to benefit from market reform, strategic marketing innovation must be a priority.　

　　Chinese business and government leaders believe that local market knowledge will continue to lend competitive advantage to Chinese businesses in many industries, like retail banking. But leveraging these advantages, and profiting from them, is another matter. Today, China needs to practice a marketing discipline, a discipline based around systematic knowledge of customers, in order to bring latent advantages to life. China will need more than low price and mastery of labyrinthine distribution channels. It will need brand leadership and price discipline to capture the profits that fuel the R&D and marketing innovation found in the world’s leading “built to last” companies.　

　　The Marketing Environment in China:

　　In present day China, market research and marketing information systems are in their infancy. Brand awareness and brand preference are in their adolescence, but growing quickly. Product quality must be improved and improved product innovation capabilities are needed. Distribution management needs investment and stronger legal enforcement to lower costs and improve efficiency. Price wars must cease to be a national passion. There are many areas for marketing improvement.　

　　As the Chinese economy grows and diversifies, customer preferences and behaviors will inevitably change. Already, in the more wealthy cities, the levels of brand awareness are beginning to approach the levels we see in the United States. US consumers can typically name seven brands in a given category without any aid. In the pharmaceutical category, for example, Beijing consumers can name almost five brands without aid, while in trendy Guangzhou, consumers can name almost nine (TC Market Research).

　　In the key barometers of market change, young people, we can see both hopeful and troubling signs for Chinese companies. Foreign brands have captured much of the “aspirational” purchase intention of the young, with brands like Sony, KFC, Nike and Levi’s believed to be the best for those who have the money to spend on occasional luxuries. Chinese brands like Lining and Spring Zhang Lumei have good reputations with young people, but loyalties are weak and price, “look,” and quality considerations are still the strongest motivators of purchase. As brand preferences emerge, Chinese brands should represent more than just acceptable quality at a good price.

　　The remarkable fact is that the Chinese market for domestic and foreign companies is growing internally and externally at 8%, and has reached a GDP of $1 trillion. While that is one-tenth the U.S. market today, the next decade will see a narrowing of the difference. Today the U.S. economy has the strongest marketing engine in the world. China is building its marketing engine. If Chinese producers follow the science of modern marketing management they will get their share of the market’s $10 trillion destiny.

　　Let’s look at some of the marketing issues facing China today.　

　　Branding:

　　The traveler to Quingdao sees thousands of balloons emblazoned with the Haier logo lining the road from the airport. The City Hall is a showroom for Haiers refrigerators, dishwashers, computers, flat-screen TVs and mobile phones (NYTimes July 23, 2000). Mr. Zhang Ruimin deserves high marks for building great awareness for the Haier brand. Haier refrigerators in 2000 achieved an awareness rating of 41%, beating its next competitor Hualing by 35 points and Electrolux by 39 points. Mr. Zhang wants to spread that awareness throughout the world. Advertising and promotion are essential ingredients to branding. But they are not sufficient.　

　　Motorola has opened three high-concept Motorola Towns in Guangzhou, Shanghai and Chengdu. These stores are modeled after Nike Town in the U.S., a pioneer in retail entertainment, and attract 4,000 customers a day.　“Motorola’s latest phones are displayed in glass cases like jewels. They look less like communications devices than like lifestyle accoutrements” (NYTimes November 24, 2000). Customers spend hours in the carnival atmosphere of the store, and indeed may go down the street to buy a preferred phone for 10% less. But it doesn’t matter, because a manger says,　“Improving the image of Motorola is more important than how many phones [they] sell.’’

　　Motorola has a clear strategic aim to capture and retain the high-end customer. They realize that Chinese competitors like Konka and ZTE will compete on price for their low-end market share. Profitability, however, rests in mastery of technology and design innovation for the high-end market, where margins are higher and competition less severe. Motorola is focusing its branding on the profitable high-end customer segment.　

　　Both Haier and Motorola are successful companies, but their behavior illustrates a difference in their approach to branding. For Haier, branding is a mass promotional campaign…putting Haier on everyone’s lips. For Motorola, branding is a strategic campaign to build perceived value and brand preference in selected target segments. Haier is tactical. Motorola is strategic.　

　　It is speculated that by 2005 only 2-3 domestic brands in China will compete with the foreign majors, like Electrolux, in household appliances. After swings in the pre-eminence of domestic or foreign brands, foreign brands are making a formidable comeback. After entertaining the idea of fleeing from the China market, as did Whirlpool, Electrolux decided to stay. Electrolux rebuilt its distribution system by learning from Haier, and it introduced its world-class after-service. Electrolux now occupies a promising market position. And Whirlpool is back in the game.　

　　Strategic branding is not just building brand awareness. Very well known names can lose their vigor. Where is Pepsident toothpaste or Chesterfield cigarettes in the U.S.? What happened to Robert Hall, the largest chain of men’s apparel shops? Howard Johnson’s, Burroughs, Wimpies, Hallicrafter, Lifeboy, TWA --- moribund brands are legion. All of these were well-advertised and promoted names, but they lost the fight to bring superior value to target customer segments. Their competitors, like Marlboro, Marriott, McDonald’s, Motorola, Crest, and British Air did a better job of convincing key customer segments that they delivered superior value.　

　　The key to brand preference is not mass promotion alone, but building a sense of trust in the value promised to each of the company’s core customer segments. A great mass brand like McDonald’s launches strategic campaigns to convince families eat there. The McDonald’s playroom, as well as its toy programs, like Beanie Babies, serves that purpose.　

　　Budweiser targets young adult males, because they are the largest segment of beer drinkers. Newport targets the African-American smoker segment to anchor itself in the cigarette market. It did not dominate a segment it would disappear among the numerous other cigarette brands. Even mass brands like Coca Cola launch specific products for different segments of the soft drink market. Diet Coke and Sprite join Coke to blanket the market. One size does not fit all.　

　　The biggest challenge for Chinese brands is to take the strategic step from mass advertising and promotion for awareness-building to building perceived value for each key customer target. Mr. Zhang of Haier may be wrong. It is not enough　to have the name Haier on everyone’s lips. Fairfield Inn prospers by being known by families, Courtyard is known to sales people, Marriott is known to executives, and now Marriott’s Bulgari Hotels will be known to luxury travelers. Haier may need different names for its high end and low-end refrigerators: a brand system that allows Haier to compete on price without sacrificing its brand value to competitive pricing tactics. After all, Whirlpool owns the high-end Kitchen Aid brand; Sealy Mattress owns Stearns and Foster...

　　The Chinese brands that learn the science of market segmentation and branding for target segments will survive to compete with the international brand powers who already know how to do this.　

　　Distribution:

　　There are 400 brands of cigarettes in China. This defies explanation in an ever-consolidating business world of companies eager to focus their marketing efforts and costs on brands with growth potential. The reason for this fragmentation lies in three factors: 1) The diversity of regional tastes; 2) The inadequacy of distribution infrastructure in a vast country; 3) The difficulty of cementing and enforcing adherence to dealer agreements. With respect to the first factor, business should think of China as a country more like Europe than the United States. Europe has a commercial diversity based upon regional cultures, laws, tastes and power structures that is only gradually assimilating through political and media forces. By contrast, the United States is a remarkably homogeneous marketplace.　

　　The second factor is even more inhibiting. China does not have an integrated transportation infrastructure to support a national distribution network. Domestic companies, like Tsingtao Brewery have solved this problem by acquiring 22 local breweries from Shenzhen in the south to Beijing in the North. These breweries are producing and locally distributing the flagship brand, as well as lower priced labels. By contrast, foreign breweries like Fosters and Anheuser-Busch have failed because they constructed enormous production facilities to deliver a volume of production that exceeded the capabilities of the logistical infrastructure. Foreign companies, like Pepsi, are learning to set up intricate makeshift connection points between logistical and distribution nodes, in order to gets its product to smaller cities and rural areas.　

　　The challenge to marketers goes beyond branding products, which is tough enough to do in China, to the issue of getting product to market. In some industries strategic marketing has to master a region, before moving on to the next region. Is national mass marketing right for a new brand, or is it premature? The mistakes of Anheuser-Busch and Whirlpool tell us that national brands may need to start out with a more regional focus.

　　The third factor goes to the heart of building powerful regional and national markets. Goods get to market only when dealers are assured a steady source and consistent quality of supply.　And suppliers are assured that dealers will adhere to stipulations of a distribution agreement. The administration of commercial law and the bona fides of personal relationships sustain this mutuality.　

　　Durawool, Inc. an American company, contracted with Chinas Metallurgical Zuhai Sez United to produce chopped-wool fibers for automotive brake pads.　Durawool would market this product to brake manufacturers outside China. Zuhai executives signed a non-disclosure agreement to protect Durawool’s manufacturing process. Subsequently, a key manager who did not personally sign the non-disclosure left Zuhai and started his own company using Durawool’s process. The new company, Sonny Steel Wool Ltd, communicated a lower price offer to Durawool’s customers in the U.S. Sonny’s CEO thought his operation was legitimate since he did not personally sign the non-disclosure agreement. Durawool thought it was violated. A case to enjoin Sunny Wool from export is before the U.S. courts. This is where most breakdowns in distribution agreements end up (NYTimes, May 28, 1996).　

　　China supports effective channel structures in some industries. A good case in point is Samsung. Samsung developed its distribution strategy for its monitor business in China with a Channel Building team. Instead of establishing agent dealers in separate cities, it set up general agencies in seven administrative districts of China, including Beijing, Shenyang, Shangai, Nanjing, Wuhan, Xian, Chonquing, Chengdu, Fuzou and Guangzhou. It recruited ten regional managers for this geographic structure and another ten managers for vertical segments in different industries. Each regional agency works with several distributors who in turn have sub-distributors that serve exclusive regional territories. This organization is the strongest channel management structure in the monitor industry. It has enabled Samsung to become the number one producer of monitors in China (China Business Weekly, December 8, 2000).　

　　Samsung’s extensive product line, local manufacturing capability, and painstakingly built national brand all support the costs of an extensive distribution system. The product line, in particular, supports the distribution investment by permitting a cost effective, focused offering to each major region and city. By contrast, Sony has so far created only a niche for itself in China. The Sony brand is an aspirational brand with excellent connotations of quality and prestige. But this serves only a small portion of the market, and the product line offered in China is relatively small. Hence, the Sony distribution system consists of only two general agencies who focus their efforts on the premier urban markets. Sony will benefit in the long run as it extends its high-end image down to the middle of the market, and the distribution system will be built out gradually.

　　Pricing:

　　For years Chinese brands have been waging a price war. Profitability has been driven down in industries like appliances, television, and computing equipment. Leading Chinese brands threatened by foreign competitors have used price cuts to maintain their dominance,　while over-productive industries like appliances have suffered through a “natural selection” process prior to the expected consolidation around 2-3 domestic brands. Building market share through pricing actions is definitively a major part of the competitive game.　 The strategic question in the midst of a price war is: “how do we position ourselves to own both share-of-market and share-of-heart as the war comes to a close?” The big question following in the wake of any price war is: “how can we convince our customers to begin paying for brand value again?”

　　After twenty years of rapid development, China has reached a productive capacity in many sectors that exceeds internal market demand. There are twenty million TV sets that remain unsold. Eight million air-conditioners, ten million refrigerators, and eleven million washing machines join this surplus. The result is savage price wars that deflate the value of consumer and business products. One response to this situation is consolidation of companies in the different industries. But this will not relieve the excess inventory in either the short or medium terms. One popular strategy has been to dump this excess volume through importers into foreign markets, leading to anti-dumping litigation and little gain in long-term market penetration potential.　

　　Haier, a leading Chinese brand-name manufacturer, already has a 25% market share in the U.S. small refrigerators market. Haier Wine Coolers are sold in Best Buy outlets, which is a value retailer of discounted 1st tier brands. Haier has recently made moves to diversify its product lines into electronics and other areas. This is one way to capitalize on its success as a manufacturer and brand builder. But there is another strategy available that leading brands around the world are increasingly turning to. Instead of burdening returns on their brand investments with the costs of maintaining diversified product lines they have instead opted to focus their energies on brand management, with third party manufacturers carrying the production load. The premier example of this trend is, of course, Nike.　

　　Can Chinese TV and electronics manufacturers partner with a company like Haier to market a diversified product line in the U.S. under the Haier brand name? Should Haier invest in creating burdensome manufacturing assets for unfamiliar technologies, or should it focus on product line growth through leveraging its brand assets and marketing expertise?　

　　A second strategy for quality manufacturers carrying surplus is to store-brand their products for price-based mass retailers. This would require a joint venture marketing partnership rather than the typical JV manufacturing organizations. These arrangements will fetch a better price than simple “dumping,” which is only　a bonanza for buyers. The motto should be “Don’t dump…Market instead!” Ames in the U.S. has 298 stores with $79 million in appliances sales. Its shoppers trust　the store brand and its promise of quality at a low price. They do not shop at Ames for 1st tier brands. Chinese appliance manufacturers need a private label strategy for this segment of the mass retailer market.

　　Product:

　　There are three strategic product issues facing Chinese manufacturers. The first is quality. The second is product specialization. The third is product innovation. Quality improvement can make China more competitive in the market for standard products, like refrigerators, cell phones and TVs. Product specialization can get China into the high performance segment of product categories. This means higher prices and better margins. The third stage is product innovation, which enables China to not only get the highest prices and margins from early adopters of advanced technology, but also positions companies for market dominance.　

　　Chinese executives have been wrestling to overturn the general impression that “Made in China,” means low quality and low price. In order to succeed in the Chinese market against foreign competitors, as well as to win market share for value added brands in global markets, managers must match foreign quality. When Zhang Ruimin, Chief Executive of Haier assumed direction of Haier he moved with a passion for quality. When a customer complained about a broken refrigerator, he stalked through the factory and identified 76 defective appliances. He piled them up and handed sledgehammers to the workers who assembled them. At his signal, they all set upon the fridges, reducing them to junk. That singular act of destruction impressed on employees that poor quality would no longer be acceptable (NYTimes, July 23, 2000). This heavy-handed approach paid off. Haier now has 62 distributors and 30,000 sales outlets in developed-country markets.　

　　In the era of WTO accession, Mr. Zhang believes that Chinese companies will not be able to dominate the Chinese market unless they succeed in capturing market share in the markets of developed countries.. The quality strategy is not just for export purposes, but also for success and profitability in the domestic market.　

　　Lack of improved technology can be costly to Chinese companies. While Chinese manufacturers dominated the VCD market, they were slow to develop DVD products. Consequently, Panasonic, Phillips, Sony and Pioneer captured the DVD pie. Chinese companies are just shaving off small slices with copycat products and steep price-cuts. It will be hard to dislodge foreign brands from DVD control.

　　Some companies are trying to move up the value chain in terms of technology.　

The Konka Group has 25% of the Chinese television market, selling 4.7 million sets in 1998. In spite of the fact that foreign brands are reaching 40%-50% of the domestic market, and that foreign technology is perceived to be superior, Konka is planning to introduce high definition TV in the U.S. market. It will offer large screen HDTV at half the price of foreign brands. As technology improves and competitive prices decrease, Konka feels that it can sustain a significant price difference for the consumer at a profit to the company. Rather than being content to play in the conventional TV segment, it is seeking the higher margins of new technology. It is making a leap forward in consumer electronics through technology (NYTimes, April 1, 1999).

　　With foreign TV companies seen on store shelves by half the domestic market, Chinese manufacturers are convinced that their mainland future requires technological innovation. The era of dominating market share through price-cutting is coming to a close. A GM for Sales at Panda firmly states, “without technical support and highly competitive products, the industry is beset with difficulties and threats” (China Economic Weekly, Feb 26, 2001). There are now five state-level R&D institutes pioneering innovation. Skyworth has unveiled a “Green TV” and Xiahua launched a variable frequency TV.

　　Price cutting wins more share of low-end markets, while new product and technology offensives always win at the high end where brand value and long term advantages are created. Phillips and Sharp use China as the first market to launch new state-of-the-art TV models, like rear projection TVs and plasma panel TVs. Focused R&D and product introduction strategies can bring China’s companies into this game.

　　Conclusion --The Five Guiding Principles of Marketing for Chinese Firms:

　　1.Focus marketing strategy on building brand value

　　2.Price strategically, not tactically

　　3.Bring distribution strategy in line with the long term brand plans

　　4.Use customer-focused R&D investment to selectively enter high-end markets - both domestic and international

　　5.Marketing is a learning game. Invest in knowing your customers better, because your foreign competitors definitely will!

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