Made in China: Can China build an Apple or Ikea?

Frederic J. Brown | AFP | Getty Images

The Middle Kingdom tends to do things on a grand and decisive scale.

The Three Gorges Dam, the world's largest power station, tamed Asia's longest river. The once-reclusive communist state is now the world's second largest economy. And already, four of the world's Top 10 companies are Chinese.

Yet China still doesn't have a truly mammoth, global brand. No Apple. No Samsung. No Ikea.

And it needs one. In fact, it needs many, experts say, if it's going to succeed as an economic superpower.

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"Their [companies'] previous competitive edge — being the cheapest — is increasingly impossible to sustain," argues Jan-Benedict Steenkamp, professor of marketing at UNC Kenan-Flagler Business School and co-author of "Brand Breakout: How Emerging Market Brands Will Go Global."

"They need to start to add value to the product," he adds. "This is impossible without branding the product."

But how exactly do you build a global brand?

That's the big question that many big Chinese companies are grappling with. It's one task to run a textile factory or build an electronics plant — you need to raise money, hire engineers, manage employees and the like.

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It's an entirely different and more nebulous challenge to create something as intangible and valuable as a billion-dollar brand that people relate to.

The bad and the good

Some major hurdles stand in the way of Chinese companies seeking to build global brands. One is the association with inferior quality — after all, brand is all about reputation. "Chinese companies face a worldwide stigma that their products are low quality. To achieve international brand loyalty, they must make high quality products that consumers will buy again and again," said Stuart Strother, professor of economics at Azusa Pacific University.

Worse yet, Chinese firms have made news for covering children's toys in lead paint, soaking rice in toxic chemicals and even allegedly employing prison labor. "Made in China" is not a label that many consumers explicitly seek out.

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Another obstacle is that, despite its success, China remains an insular place. It has long been difficult for Chinese to travel abroad, particularly to the West, and so its managers are not exactly cosmopolites who readily grasp what works in the trillion-dollar markets of the West.

In order for Chinese brands to breakout they must "first understand globalization," says Thomas Chen, managing director for Interbrand Shanghai. They need to ditch what made them successful at home and instead "commit to organizational change," he adds.

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That said, China also has a significant competitive edge: it's the world's factory. Its sophisticated manufacturing infrastructure "provides a good foundation for Chinese brands to expand to other countries," said Peking Tan, greater China R&D director for Millward Brown, a brand consultancy group. This infrastructure allows firms to innovate and create products that would be difficult to make elsewhere.

That should help them reach global prominence much more quickly. "China's manufacturing infrastructure now goes beyond good machinery," said Steenkamp "it has built entire manufacturing networks, including specialized suppliers of components and related services. No other emerging market can match this."

A palette of strategies

China also benefits from the experience of its neighbors, so it doesn't have to reinvent any wheels. Like China, Japan and Korea traveled the fast road to world class economic status — creating global brands like Sony, Honda, LG and Kia.

"Twenty years ago Korean cars such as Hyundai were considered some of the world's worst cars. Consumers only bought them because of the low price. Today Hyundai and Kia vehicles are very high quality and frequently score higher than BMW and Mercedes in terms of quality," said Strother.

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Steenkamp calls this slow-but-steady-growth strategy the "Asian Tortoise Method." Some of China's largest companies are deploying this model.

For instance, since entering at the bottom of the market in 1984 Haier has slowly moved up the home appliance manufacturing ladder to become the world's largest white goods manufacturer. Pearl River Piano began operations in 1956, jumped on the US market and is now the world's best selling piano. Both companies started at the bottom, selling at the lowest price possible. They have slowly crawled their way up to the top, drawing in more consumers and raising prices.

According to Steenkamp and co-author Nirmalya Kumar, the "Asian Tortoise Method [is the] mother of all routes." It's historically successful, and secures the strongest consumer loyalty.

Chen argues that acquiring a global brand works just as well; this is the approach that catapulted Lenovo to stardom.

In 2005, Lenovo purchased IBM's PC division and leveraged its brand image to "pave the way to enter the US and high-end PC market." Just one year after the buyout Lenovo's gross profit rose almost 400 percent. Lenovo not only acquired IMB's famous ThinkPad brand, but also reaped the benefits of IBM's marketing expertise allowing Lenovo to globally leverage its brand image.

Acquisitions and the "Asian Tortoise" method might be the favored growth strategies, but some Chinese companies are pursuing an alternative model: building inroads in a specialized business area before penetrating Western consumer markets.

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Telecom equipment maker Huawei — which is perhaps second only to Lenovo in achieving global brand status — "leveraged business to business strength into the business to consumer market," Steenkamp says. Today, Huawei is the world's third largest smartphone provider.

Likewise, e-commerce site Alibaba started out facilitating international business to business commerce. In 2003, the company used its prominence to open Taobao for consumers. Last year Alibaba and Taobao handled more than US$170 billion in sales, more than eBay and Amazon combined, the Economist reports.

Regardless of the strategy, Chinese brands will be increasingly dominant in the West.

As the Chinese say, "冰冻三尺,非一日之寒" — "three feet of ice isn't the result of one cold day." And global brands aren't built overnight.