China’s entrance into the World Trade Organization in December 2001 meant the opening of China’s domestic market to foreign competition. However, it also opened the doors of other member countries to Chinese competition.

When Western and Japanese multinational corporations enter foreign markets, they also carry with them their own brands, capital and technology. Can Chinese corporations do the same? Chinese companies like TCL and Haier have taken the first successful steps in the internationalization of Chinese enterprises, and have demonstrated that Chinese corporations do have limited success overseas. Their experiences have also become templates for the increasing number of Chinese enterprises that are stepping out into the international market. However, there are still many problems facing Chinese companies on their path to internationalization, as the famous Chinese wool manufacturer Hengyuanxiang discovered when it ventured abroad.

While Hengyuanxiang has great brand recognition at home, its name is meaningless internationally. Also, the names of other famous Chinese companies such as Lebaidi and Yangzi die out once management has been handed over to international corporations.

For Chinese brands to survive, therefore, they must develop, but to develop they need to internationalize. Brand internationalization for enterprises from developing nations faces all sorts of challenges, and this piece will examine the problems and issues surrounding Chinese companies in their journey toward brand internationalization.

Changing the name

Chinese brand names originate with the Chinese enterprise, and all copyrights are owned by that enterprise.
They are registered as Chinese characters at startup, and, as in the West, the company tries to make the name catchy, sometimes even including geographic and personal names. Chinese brand names may also be registered using Pinyin Romanization, eg. = Changhong = Rainbow. Chinese brand names have two major flaws:
1. Because international recognition of Chinese brand names is low, Chinese companies are unable to enter host markets in the same way as globally recognized US brands such as IBM, DELL or Coca-Cola.
2. Even if Chinese brands do have a Romanized version, Westerners will still have difficulty pronouncing it because of linguistic differences. This issue alone can mean the death of Chinese products in foreign markets.
The basic principles of brand name development are that brands should be easy to recognize, easy to remember and easy to pronounce. Chinese brands meet none of these requirements when they enter international markets.
All of the internationally successful Chinese brands changed their names long ago. [ ] has become Haier;
(Haixin) has become Hisense; TCL (simply no Chinese name); (Meide) has become Midea, etc. The first step for internationalizing Chinese companies, therefore, is to make their brand more globally recognizable.
During the 1970s and 1980s, Japanese companies were faced with similar problems when they first entered the international market. When Matushita arrived in the United States, it changed its name to Panasonic; became Canon; and in an attempt to hide its Japanese trace, was renamed Konica. Adapting Chinese brand names to the linguistic styles and customs of the local country is at the core of Chinese brand internationalization.
This certainly does not mean, though, that all Chinese brands must change their names when going abroad. For example, Chinese companies which trade on their products’
unique Chinese qualities and characteristics would be foolish to change names. Examples include the company Tongren Temple, which is a maker of Chinese medicine or Chinese restaurants. In these instances, Chinese characters and Pinyin Romanization become a distinct marketing advantage in the sale of such products to Western consumers.
Establishing international brand recognition
After many years of competitive low prices, an impression has been created that Chinese goods are inferior to those produced by other countries, especially in Europe, the United States and Australia. As a consequence, even more barriers to the internationalization of Chinese brands are created. But where are the greatest difficulties? It is in establishing brand recognition, for without brand recognition and prestige value, a brand has no value at all.
How can Chinese companies establish brand prestige overseas? One method is to proceed gradually, and first establish market prestige and brand consciousness in developing nations and regions. For example, if Konka opens a factory in India and TCL opens one in Vietnam, and their operations slowly take root, brand prestige will establish itself gradually. But there are still some serious flaws in this method: although establishing brand recognition in developing countries’ markets is easier and quicker than in developed markets, establishing brand prestige always needs to follow a course of moving from the unfamiliar to the familiar, and from initial suspicion to trust. Opening up a market in an undeveloped country, then a developing country, and finally a developed country is time-consuming and strenuous. Moreover, the easier the access to a country or area, the more is its capacity to be limited. While the company may have established prestige in the undeveloped country, it cannot translate this experience to other countries in the region. For example, establishing brand prestige in Vietnam does not help brand recognition in the Malaysian or Thai markets, and the so-called easy markets may actually not be that easy to enter. They may possibly be already crammed full of other multinational corporation’s products (such as in the case of Vietnam), or be politically or economically unstable (such as Afghanistan).
Therefore, starting with the seemingly easy markets, and moving on to more difficult ones to establish international prestige is usually time-consuming and ineffective.
This is also a major reason why Chinese enterprises give up on exporting their brands in favor of producing OEMs.
If we hark back to the experience of Japanese companies, we can then see that the only way to really achieve brand internationalization is through the process of starting with the difficult markets, and then moving on to the easier ones. It took Sony a decade of hard work before it first entered the American market in the 1950s, and then found it easier to expand to other parts of the world. Japan’s domestic electrical appliance and automobile industries soon followed the same pattern.
Brand internationalization is therefore best achieved by companies taking the difficult road before the easy.
For example, the reason Haier entered the international market was not because it had entered the Southeast Asian and South American markets first, but because it had come to a standstill in the US market. Matushita, Sony, Toyota also captured the American market first, and then moved on to the European, Latin American and African markets. Moreover, Hisense entered the South African market after it discovered a blank spot, and rapidly expanded across other borders. Why did it do this?
Because South Africa is the most developed country on the African continent and is where competition is at its most intense. Acceptance of a brand name in the South African market meant acceptance throughout Africa.
But Hisense’s success in Africa did not help its success in developing the European and American markets. Haier, however, had a different experience. Success in the American market was akin to global approval of its quality and good standing, and helped it establish markets in more than 100 countries in a very short time frame. A market may therefore seem impenetrable at first, but once a niche market has been found in a country, further breakthroughs become easier and market expansion continues.

Is Chinese brand internationalization exportation or localization?

Another issue regarding Chinese brand internationalization is whether products should be domestically produced with a view for sales overseas, or whether Chinese companies should carry out production overseas. There are currently two opposing views in regard to this issue. The first view is firmly opposed to establishing factories overseas. It sees China’s large population and cheap labor as the chief reason for its cheap manufacturing costs. It is also why China has become the world’s production processing base for electrical appliances, clothing and electronic products. The argument goes that while Europe, the US, Japan and other developed countries are moving their production bases to China, if China sets up factories in these countries, it will sacrifice its cost superiority. Therefore, proponents of this view approve the internationalization of Chinese brands, but also place Chinese labels on Chinese products that are being sold overseas, thus being a form of localization.
Another viewpoint suggests that, while Chinese companies should exploit the cost superiority of domestic production, when the time is ripe, and the Chinese market has reached its capacity, China must internationalize its production base and establish factories overseas. What are the advantages of this? On the one hand overseas market information can be better understood, and faster market responses made. On the other hand, it relays a message to the customer that Chinese corporations are ready to solve problems as necessary, and meet the needs of overseas customers.
The latter opinion is the more convincing. The internationalization of Chinese brands is not an urgent demand, but rather one that is more of a long-term strategy. China possesses cost superiority today, but, in ten or twenty years, this advantage may vanish. Brand names need to live much longer. Therefore, it is inevitable that Chinese brands will internationalize, and this demands both overseas managed factories and internationalization. Even in the short term, Chinese corporations must leave China.
What can Chinese corporations learn from Western MNCs? All MNCs have their antennas in the global market, and are extremely aware of market conditions. They possess brand superiority, and their brands (such as Coca-
Cola, Sony etc.) have taken root in consumers’ minds.
Compared with Chinese corporations, they also have vast superiority in research and development, and are able to design products that meet the needs of the international market. China’s only advantage is its low production costs. But now that Western and Japanese MNCs are using Chinese OEMs (original equipment manufacturers) on a large scale, and taking away this cost advantage from local companies, how can Chinese enterprises compete?
Chinese brand internationalization must do the opposite of what Western and Japanese MNCs have done in the past. Western and Japanese MNCs have entered China, and so Chinese MNCs must venture out so that they too can have an equally keen market antenna and reaction capacity.
Hisense has said that nobody can understand local people more than local people. Just as important is the low international confidence level in Chinese brands. In order to express the determination and sincerity of Chinese corporations, China must establish manufacturing bases and retail networks overseas and gradually establish local consumers’
confidence and trust. In summary, Chinese brand internationalization must continue, and go along the road to overseas factories sooner or later. If it doesn’t, it will be impossible for Chinese companies to internationalize their brands’ images and international prestige.

To OEM or not to OEM?

At present China’s manufactured goods, especially consumables, are mostly exported as rebadged products.
This is the case with Changhong, Midea, Gree Airconditioning, Shinco, and Galanz, who rebadge for companies such as Sanyo, Mitsubishi, Carrier, etc. In an article entitled ‘The two sides of Galanz’ in the March 2002 edition of Sino-Foreign Management, Galanz’s Vice President Yu Yao Chang stated ‘What are brands? Brands are gold stacks.’ He then asked himself, ‘How many stacks of gold do we have?’ His meaning was that China does not have the money nor resources to internationalize its brands, and is only capable of manufacturing OEMs. With this in mind, Galanz has positioned itself to be one of the world’s largest production workshops, and allows multinational corporations to manage the marketing networks. Galanz, therefore, makes brands to order.
China’s largest DVD manufacturer, Shinco, is also doing the same. Midea’s President, He Xiangjian, clearly said in an interview for the same article, ‘I have yet to see one Chinese factory that has been set up overseas become successful in selling its own products under its own brand, including Haier. While it may be true that TCL’s operations in Vietnam posted a profit at the end of 2002, this one instance to date is hardly sufficient to give Chinese enterprises sufficient courage to enter the international market.
Certainly there is another viewpoint which believes that producing OEMs is a way of better understanding the needs of the international market, and is a way of preparing Chinese organizations for the eventual internationalization of their own brands. There is a lot of validity to this argument. Manufacturing OEMs can enable Chinese companies to grasp the product’s production technology, enhance the enterprise’s management level, and allow it to understand what types of product foreign markets are seeking. But, after all, the manufacturing process and marketing networks are in the hands of the foreign corporation, and consumers purchase not only the product, but the brand. Ultimately, it is the owner of the brand that is responsible for the consumer. Most consumers recognize a brand more than a product.
Also, once a multinational corporation finds a better production base, it will move there. Even though rebadging raises the management levels and technical abilities of Chinese corporations, they will always be behind with those of the multinational corporation. The Secretary-General of China’s Electrical Appliances Association, Mr. Jiang Feng, has frankly stated that OEM products are popularist and mainly used for mid- to low-grade products. The Vice President of Siemens (China) responsible for sales of electrical appliances, Dong Quanxin, also indicated that, because it will be very difficult for Chinese producers of electrical appliances to reach Siemens’ technical standards within the next 3–5 years, Chinese producers will not be manufacturing high-end products for Siemens. Obviously, therefore, it is highly unlikely that producing OEMs will greatly enhance the technical ability of Chinese enterprises, and is also unlikely to bridge the gap in technical disparities between them and foreign multinational corporations.
It is impossible for Chinese enterprises to truly understand the international market by producing OEMs. International markets are constantly changing, and, by only producing OEMs, Chinese corporations are closing themselves off by staying in their workshops and passively responding to orders from outside. An understanding of global markets and economic fluctuations is vital to the success of international corporations. Chinese companies therefore have to try and break the cultural and linguistic constraints and venture forth into the open world.
Therefore, by producing only OEMs, it will be impossible for China to attain the technical support abilities, the HR skills and the ‘combat readiness’ that is needed for the internationalization of Chinese brands. Only the products made in China will be for sale in international markets. But brand internationalization and product internationalization are two completely different concepts.
Product internationalization occurs when your products are available for sale in many countries, but consumers don’t care where they are made. They only care about the prestige and quality guarantees that are manifested through the brand name. OEMs cannot influence the internationalization of Chinese brands, and so Chinese companies must persist in exporting their own local brand names.

Conclusion

In conclusion, there are huge hurdles facing the internationalization of Chinese brands. The time line is long and the costs will be enormous. But in order to create truly international brands on the scale of Coca-Cola, McDonald’s, Toyota, Sony, Phillips, or the like, China’s entrepreneurs cannot base their decisions on the poor short-term results for one specific time period at one location, such as the case with Haier to date. Establishing a brand name and brand prestige needs patience and a lot of money. But the payback for China in terms of economic profits, and indeed its national dignity, is potentially enormous.

Questions

1. Evaluate the process followed by Chinese companies to gain brand-name recognition internationally.
2. Is the experience of Japanese companies in the 1950s and later really applicable to Chinese companies today? Explain.
3. Can Chinese SMEs internationalize their brands or is this only possible for larger firms? Why or why not?