Chinese brands take on the global players at home

Andrew Clifford, Chief Investment Officer at Platinum, recently visited China, and shares his observations in a recent report. One of these was how social marketing lets local upstarts cheaply reach their target market, and take on the foreign brands.   

“One meeting was with the distributor of fast-moving consumer products (shampoos, soap powder, etc.) that represented a very large and successful multinational company in a region within Guangdong province.  He highlighted that one of the challenges for the business was the rise of new local brands.  In the past, these start-ups had been kept out of the market because of the sheer cost of large-scale advertising on TV and in print.  The advent of digital advertising has opened a door for these companies and, what is more, it enables them to target very specific groups, such as 15 to 25-year-old women. 

Interestingly, many of these new brands are having success with products priced at a premium to foreign brands.  Together with digital marketing, e-commerce is a distribution channel that has also reduced the barriers for smaller local companies.  

A meeting with a company that manages the online presence for some of the smaller multinationals in China highlighted that selling online is much more than just setting up an e-store on T-Mall (the Alibaba e-commerce platform) and sitting back and waiting for sales.  There is an ongoing daily need to adjust the offering, put on promotions, bid for keywords and the like.  According to the distributor we spoke to, this poses another challenge for his multinational principal who, while well aware of the need to respond to these challenges, simply cannot move fast enough.

The rise of local brands highlighted in these discussions comes as a direct contradiction to the often-heard mantra in the financial markets that the multinationals have a sustainable advantage in China due to concerns around product safety.  An amusing story, though, is that of one successful local company which had given itself a name and brand to create the impression as if it were a Korean company.  This worked well until China’s recent fall-out with Korea for facilitating the US anti-missile defence installation which led the Chinese government to direct its patriotic citizens to avoid all things Korean!

The other observation on local brands came from the auto market.  An industry expert (an American who has had a long involvement in the Chinese market) reported that the difference in quality between good local Chinese carmakers and foreign brands is by and large imperceptible to the Chinese buyer.  This may well be somewhat of an exaggeration, but the independent JD Power survey on product quality actually supports the claim with respondents citing only a minor difference between local and foreign makes in terms of product quality.  Of course, more important than perceptions are sales, and numbers have spoken louder than words with the domestic producers’ market share having risen from 30% in 2012 to over 40% in 2016.  In this period, China’s passenger vehicle market increased by approximately 10 million vehicles annually, of which 5.7 million were supplied by domestic brands in 2016.”