[lbo-talk] China brands go global

uvj at vsnl.com uvj at vsnl.com
Mon Nov 29 05:38:22 PST 2004


Business Standard

Monday, November 15, 2004

China brands go global

MIHALCA ON CHINA

Matei Mihalca / New Delhi

The journey will be difficult, says Matei Mihalca

Cash-rich and ambitious, Chinese companies are buying up global brands. At the same time, China's home-grown brands are going global, hoping to replicate the success of Samsung, which has by many measures overtaken Sony in the last few years. But expansion overseas, either organically or by acquisition, won't be easy.

This year has seen a number of ground-breaking transactions involving Chinese enterprises acquiring foreign brands. TCL bought 55 per cent of Alcatel's mobile phone business for US$55 million.

The resulting joint venture is the largest manufacturer in China and the seventh largest in the world; its goal is to join the top five.

Earlier, TCL established a similar structure with another French company, Thomson, to jointly manufacture television sets. Shanghai Automotive purchased a controlling 49 per cent stake in Korea's Ssanyong Motor, a sports utility vehicles specialist, for US$500 million.

UTStarcom, the US-based but China-oriented telecom equipment maker, bought the wireless business of Audiovox, the US maker of consumer electronics, for US$165 million.

Chalkis, China's second largest tomato processor, purchased a 55 per cent interest in Conserves de Provence, a troubled French company with sales of 69 million euros, for only 7 million euros. China's tomato production cost is said to be 30 per cent lower than France's.

A pattern is clear: acquirers are taking advantage of financial troubles at the target companies. When Grundig, the German consumer electronics maker, went bankrupt last year, interest on the part of Chinese enterprises was high.

Unfortunately, Grundig's main business is television sets, and China's television set makers aren't doing particularly well: annual demand is some 35 million sets but capacity stands at 50 million. They couldn't afford the purchase and various partnership permutations came to naught. In the end, a UK-Turkish consortium bought the insolvent German company.

The problem of a weak home market is a serious one as Chinese enterprises contemplate offshore brand acquisitions. Competition in China is cut-throat, especially in the consumer sector.

It doesn't help that some players benefit from local government support, including bank loans, tax rebates, preferential access to land, and other freebies. Outside of government monopolies in restricted sectors, China's corporate landscape is characterised by fragmentation; few markets are oligopolistic in structure.

There are few signs of consolidation. In home appliances, one of the most competitive markets and one in which China may develop global champions, some mergers and acquisitions have occurred: giant Kelon has bought Weili and Meiling, while Midea, another leader, bought Hualing. More is needed.

In theory, China's large domestic market should provide a healthy platform for native companies to use as a base for their global ambitions. If Taiwan and Singapore can have quasi-global brands (Acer, BenQ, Creative), with their relatively small populations, then surely China can do the same, or better.

But not quite, if profits are absent. The cost of success in developing a true global brand is high: Samsung spends about US$2 billion a year on marketing. D'Long, the Chinese conglomerate which acquired the Fairchild Dornier airplane-making facilities in Germany, financed its growth at home and overseas largely through debt, as do many Chinese companies, and it is now in restructuring, having sent jitters through China's financial markets.

Why do Chinese enterprises want to go global? There are various answers. One is, to escape the vicious cycle of competition in the domestic market. Selling overseas should be more profitable. Buying a foreign brand and bringing it to China is another option.

This is counterintuitive but, upon reflection, makes sense: buying a foreign brand not for foreign sales but for sales in China. That's because Chinese consumers are willing to pay premium for a product they perceive as foreign-made.

Many new brands in China, especially in the apparel sector, claim some foreign heritage although they are purely domestic.

Another reason: Those Chinese companies that are lucky enough to enjoy secure leadership positions in their industries, and as a result are cash-rich, nonetheless feel they're missing something. Most do what they do in the name of others.

Shanghai Automotive, for example, makes cars with GM and Volkswagen; it is the latter's marques that adorn the cars. In the process, Chinese manufacturers add limited value: components and raw materials often come from the US, Japan, or Europe, as does most of the equipment.

Profitability is restricted by the fact that fundamental value resides upstream, in research and development, of which China does little, and downstream, in brands, which Western consumers know and are willing to pay extra for.

Most China companies sit in the middle, and it's getting uncomfortable. The answer is to develop or to buy brands.

Hong Kong entrepreneurs, who have long helped Western companies source from China, are providing the lead. They're not content to merely assist clients as intermediaries any more; they want some action as principals.

Grande, a contract manufacturer of consumer electronics, acquired the Sansui and Nakamichi audio brands. IDT, a similar group, bought "Oregon Scientific" in 1996 and has invited the legendary Philippe Starck to contribute designs. Harvey Nicks is a British institution made famous internationally by the bags featured in the TV series "Absolutely Fabulous".

The retailer is now owned by Hong Kong tycoon Dickson Poon, who earlier acquired S T Dupont, the French accessories maker. Guy Laroche, another French luxury name, was recently bought by YGM, a Hong Kong trading company.

As in the case of Dickson Poon's purchase of S T Dupont, the rationale behind YGM's acquisition of Guy Laroche is to push sales in China, where luxury sales are booming. More down to earth, Techtronic, a Hong Kong handtool company, has been a serial acquirer since 1999.

It now owns brands such as Dirt Devil, Ryobi, Ridgid, and Homelite. Techtronic's strategy is one of arbitrage: make the products at low cost in China, then sell them overseas.

Hong Kong companies, using China as a manufacturing base, are also developing brands organically. One indigenous Hong Kong brand that is becoming global is Esprit, a clothing retailer. (Ironically, its position in China itself is weaker.) Two other chains, Baleno and Giordano, are not far behind.

Where Hong Kong has led, mainland China will follow. But buying up foreign brands is fraught with various dangers, from post-acquisition integration to cultural misunderstandings. It was interesting to note, in this context, that the new TCL-Thomson joint venture named a non-Chinese national as its head.

So has Taiwan's Acer, following the retirement of founder Stanley Shih. Politics may pose challenges: continued acquisitions by Chinese companies may raise concerns in the host countries. No one likes national institutions to fall into the hands of foreigners.

Brands may be less susceptible to such concerns than, say, sensitive telecommunications assets, but they do have symbolic value. Chinese acquirers often miss these emotional dimensions: TCL is said to have had little appreciation of the classic RCA dog-and-record-player logo when it acquired Thomson.

The trend, however, is clear: China will develop or acquire global brands, reflecting its new-found economic importance. The country's economic strength can't rest merely in low-level contract work or in the domestic market alone. But the road to global brands won't be easy or short.

matei_mihalca at hotmail.com

(The writer's column on Greater China appears on alternate Mondays)



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