How to Beat 'Made-in-China' Fear

China's companies have been hurt by product recalls, but Lenovo and Tsingtao lead a list of brands that can go global, says consultant Interbrand

Made. In. China. Those three words are shaping up to be a marketer's worst nightmare. After a year of massive toy recalls, tainted toothpaste scares, and poisonous pet food incidents, consumers around the globe are thinking twice—or more—before buying Chinese-made goods. Indeed, in an online survey of 569 international marketing and business professionals by brand consultant Interbrand, 69% of respondents said the slogan "Made in China" hurts mainland brands.

The word most frequently associated with Chinese brands? "Cheap." Says Jonathan Chajet, Asia-Pacific strategy director at Interbrand, which did the survey for BusinessWeek: "Conservatively, it will be five years before people will let go of their fear of 'Made in China.'"

Those widespread negative attitudes are a big setback for Chinese brands' global aspirations. The goal of both government officials in Beijing and China's top companies for the past few years has been to move toward higher-value production, with less emphasis on low cost. Part of the strategy, of course, involves boosting quality. But equally important, companies must build their brand's reputation and value. And as the survey shows, that will prove a real challenge for at least the next few years.

Assessing Awareness of Chinese Brands

Yet this is a good time to look at Chinese brands, precisely because of the challenges they face. In its survey, Interbrand asked marketing and business experts outside the mainland to assess their awareness of 28 product names. Interbrand also asked respondents whether the brands are "an ambassador for China," an indicator of quality. In addition, the consultancy analyzed available financial data from the companies as well as their marketing strategies to create a list of 12 brands that have a chance to make it on the global stage.

The five players that Interbrand considers "already serious and recognizable" are personal computer maker Lenovo, beermaker Tsingtao, appliance maker Haier, telecom giant Huawei, and automaker Chery. A second group of "contenders" poised for success over the next three to five years includes electronics manufacturer TCL, Huawei's telecom equipment rival ZTE, automakers Geely and Brilliance, and air conditioner manufacturers Midea and Gree.

China's most ambitious brands hope to follow the path originally trod by Japanese and Korean giants such as Sony (SNE) or Samsung: They aim to make the leap from low cost and low quality to become world brands of real repute. "In the past we created a brand that was well-known throughout China. But in recent years we have realized that our key goal must be to take our brand to the world," says Tomson Li, chairman and chief executive officer of TCL, which raked in 57% of its $6 billion in revenues from overseas last year.

"We will see one or two Chinese brands among the top 10 world brands within five to 10 years," predicts Christophe Bezu, senior vice-president and head of the Asia/Pacific region for Adidas (ADSG.DE).

Competition from Vietnam and India

Of course, companies will have to overcome China's image problems. More than 40% of product recalls in the U.S. this year have involved Chinese-made products, Interbrand says, dealing a "serious setback" to the "Made in China" brand. Although respondents in Interbrand's survey said Chinese brands are "a good value," few labeled them "safe," "high quality," "prestigious," or "luxurious."

But it's not only the image of poor quality that is holding back Chinese brands. Many companies still operate as original equipment manufacturers (OEMs) rather than selling under their own names. And while Chinese companies compete on price, thanks to their low manufacturing costs, they increasingly face rivals at the low end from countries such as India and Vietnam.

That trend, plus the desire to create a more innovative, higher value-added economy, explains why Beijing is pushing companies to begin manufacturing and selling more technologically advanced products and services under their own names. "Brand was not something that Chinese businesses have been accustomed to [thinking about] in the past," says , chief financial officer of Chinese search engine company (BIDU). "How to build a brand is a struggle that many Chinese brands must now face."

Lenovo Goes for the Gold

Chinese companies are taking different strategies as they try to build global brands. Lenovo and other companies plan to trumpet their products by investing heavily to sponsor next year's summer Olympics. Thanks to its purchase of IBM's (IBM) PC business in 2005, Lenovo is recognized by more international marketing experts than any other Chinese brand. Fully 53% of the respondents in the BusinessWeek/Interbrand survey named Lenovo as a top emerging global player. And when the marketing professionals were asked which brand best serves as an "ambassador" for China, Lenovo came in second place behind Tsingtao Brewery.

Now the Beijing computer maker is using its status as a top sponsor of the Beijing Olympic Games to further boost its exposure. "The Olympics are a golden opportunity for us," says Alice Li, vice-president for Olympics marketing at Lenovo. "Within China we already have high brand awareness. But outside China we still need to build our brand."

To do that, Lenovo hustled to win the right to design the Olympic torch (, 8/3/07), a first for a company. The Beijing Olympic Committee in April selected Lenovo's submission out of a field of more than 300 entries. The Lenovo Olympic torch, made of a lightweight aluminum magnesium alloy, is shaped to resemble a Chinese scroll. The torch will be carried to 20 countries before arriving in Beijing next year. To increase the marketing payoff, the company is organizing an online contest with Google's (GOOG) YouTube to choose three international torchbearers for the China portion of the Torch Relay. Lenovo is also selling a limited-edition notebook PC with design elements of the Olympic torch.

Midea Backs Swimming

While Lenovo is the only Chinese "global sponsor" of the Olympics—a privilege that Chinese media reports estimate may have cost up to $65 million—other brands are sponsoring Olympic teams.

A leading maker of air conditioners, Midea plans to back the Chinese swimming and diving teams to improve awareness of its products and its slogan—"Creating a Better Life for Humans"—around the world. Although the Shunde (Guangdong) company sells to 13 countries, including the U.S., Germany, and Japan, 80% of its exported air conditioners carry other companies' names. Now, Midea aims to use the Olympics to boost its sales of Midea-branded product in Eastern Europe and Southeast Asia. The company's "old model can no longer meet the need of development. Branding becomes increasingly important instead," says Dong Xiaohua, branding director at Midea.

Other companies have decided to channel their investment into research and development to improve the image of their products. Last year, ZTE spent just 1% of its $3 billion in revenues on branding, but 12% on R&D. The company's 20,000-strong research team is working on wireless technology and handsets in research centers spread across China, as well as in the U.S., Sweden, France, and India. "The most common opinion of China products today is that they are low cost and also of low quality. A change needs to be made." says Hou Weigui, chairman of ZTE.

Meanwhile, Huawei devotes 10% of its revenues and almost half of its 70,000 employees to research and development. By the end of last year, their work had generated almost 20,000 patents, more than any other company in China and No. 13 in the world. "Huawei has gotten rid of the low-cost, low-quality image of many Chinese companies," says Johnson Hu, Huawei's vice-president of corporate branding and communications.

Haier's Portable Wine Coolers Are Hot

ZTE and Huawei are also bolstering their images by developing more sophisticated products and seeking to expand in the U.S. ZTE recently signed a deal with Sprint (S) to provide the carrier with wireless equipment, and in late September, Huawei announced that it was teaming up with Bain Capital to acquire U.S.-based networking equipment maker 3Com (COMS).

Haier Group, for its part, has honed a particularly local strategy for both its products and marketing. The appliance maker, which was recognized by nearly a third of respondents to the BusinessWeek/Interbrand survey, designs its products and shapes its marketing based on local preferences. The company has eight overseas design centers stretching from Tokyo to the French city of Lyon to Sydney, where it develops products geared for special niches. In Pakistan, Haier builds extra-large laundry machines, popular because of the custom of washing large quantities of robe-like clothing in one load. As a result, Haier boasts that it controls more than 20% of the Pakistan market. In the U.S., Haier's small refrigerators are a hit on college campuses, and its portable wine coolers have grabbed 30% of the market.

The company also tailors its marketing. Haier spends on advertising in major business districts: Tokyo, Hong Kong, Paris, and Dubai all feature huge Haier billboards. The company sponsors events such as the MTV Asia Awards. Its high-definition television serves as the official National Basketball Assn. TV, and its sponsorship of Russian tennis player Anastasia Myskina (ranked No. 3 in the world in 2004) has heightened its popularity in Russia. The formula seems to be working: Haier says its total overseas sales were $3.3 billion last year.

Geely Retools Its Mainland Reputation

Even as the likes of Lenovo, ZTE, Huawei, and Haier push their brands overseas, others are working to overhaul their reputations on the mainland first. Take automaker Geely, long known for cheap cars such as its $4,300 Merrie Star subcompact, about $1,000 less than General Motors' (GM) cheapest mainland offering, the Chevrolet Spark. "In the past we always have had to sell our product at a big discount to foreign brands," explains Lawrence Ang, Geely's executive director. "We could live with that when we knew our design, our quality, and our reliability were not as good."

In the past few years, though, Geely has tried to close that gap. The automaker has turned to foreign companies such as German engine technology house FEV to develop improved engines. And now it's trying a new marketing ploy to change customer attitudes: contests. The company is holding a series of competitions in cities across China to pit its models against foreign rivals in tests of everything from engine noise to comfort. The Geely King Kong sedan, which runs on a newly designed, fuel-efficient 1.8-liter engine, is touring 26 cities and squaring off against competitors such as Audi and the Buick Excelle. "We realized that without a brand to differentiate our products from others, it would be very difficult for Geely to survive," says Ang. Unit sales in August, 2007, were up 33% over the same month last year, and up 22% over July.

Increasingly, Chinese companies will go up against better-known global players—and low-cost rivals from neighboring countries. Although shoddy product quality represents the most immediate crisis, the long-term challenge for companies is to invest to develop goods of greater value that can sell for higher prices both at home and abroad. Just as South Korea and Japan overcame their reputation for low quality, Interbrand's Chajet predicts that so eventually will China: "We know that someday China will be known for more than just low cost," he says.

For more on emerging Chinese brands, visit BusinessWeek's slide show.

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