The Importance of Brand Image and its effect on the Nation’s economy

Here in China one thing is very clear, the brand of goods you buy is more important than what you buy or how many you have.  This is not only true for the upper class but for all classes and for all regions of the country.  Many foreign companies have spent a lot of time and money to develop their brand and now it is really paying off.  One interesting example is that of Starbucks vs.Costa coffee.  As you may know the Chinese are fanatical about their tea and will spend much time and money finding the perfect tea and then accessorize it with just the right brewing pots and tea cups in order to really enjoy the total experience.  So why discuss Costa coffee?  Well I am sure you are aware of the success story of Starbucks coffee in the USA but you may not be aware of it in China.  Starbucks spent a lot of time researching the potential for coffee sales in China before deciding to develop their brand here in China.  What they discovered is that the Chinese really do not like coffee but they really like to think of themselves as living part of the international lifestyle (particularly the American lifestyle).  So it is obvious that most Chinese will never be able to afford a large house on an acre of land or a vacation house or a boat and lavish vacations but what they can afford are the little lavish pleasures.  So what does this mean for Starbucks?  Well if they can convince the Chinese people that the American people enjoy the experience of the “coffee hour” where they sit in fancy cafes, sip overpriced fancy coffees made just the way they like, and enjoy chatting with their friends; then most likely the Chinese will want to do the same thing here in China.  Starbucks also discovered is that the Chinese do not have a lot of disposable income but they do enjoy indulging in luxury items when they can.  So, armed with this knowledge, Starbucks set out to make drinking fancy coffee in their cafes a luxury experience.  So they decided that rather than making the coffee affordable in Chinese standards they would keep the price the same as in the USA and make it a luxury purchase.  They targeted their marketing at the up and coming Chinese leaders and got the upper and middle class Chinese to start drinking fancy coffees in their restaurants.  The idea caught on, so even though the Chinese really prefer tea, they are flocking to Starbuck’s cafes to drink coffee.  The interesting part of this story comes when Costa coffee, a Starbucks look alike, decides that if there is a market for coffee sales in China then they want to be a part of it.  But rather than doing the extensive research that Starbucks did, they decide to move right in since there is obviously already a market for this product in China.  Their strategy was to undercut the cost of coffee at Starbucks and offer the same types of products at more affordable prices; in this way they can broaden the market to all Chinese.  What they overlooked is that the Chinese really do not like coffee, what they really like are luxury items that enable them to emulate the lifestyle of the US.  So although the coffee was more affordable, it really was no longer a luxury item and therefore if you are going to drink coffee, when you prefer tea, then it really needs to be a high priced luxury experience.  So after a disastrous start here in China, Costa realized the flaw in their logic, raised their prices and upgraded the atmosphere in their cafes and now are doing well here in China.  Moral to the story:  if you are going to sell something that people really don’t like then find another way to market it!

So although this is an interesting story and you marketing and economics people can probably enjoy the case study; I really mention it here because it is relevant  to an interesting phenomena here in China;  the importance of brand image.  Now you may say that this is important all over the world but I believe that the importance here in China is far greater.  Americans tend to buy the best value not necessarily the one with the highest image. There are of course exceptions but, by in large, the American will opt for more things rather than the “Designer Brands”.  This creates an opportunity for the Entrepreneur in the US to offer goods at reasonable prices and to bolster the American economy. 

One of the interesting times in American History took place in the mid 80’s; when we saw two emerging movements.  The first is the sudden interest in “Generic” goods.  For maybe the first time in history, the price of the item means more than the brand name or the quality of the product.  This was greatly influenced by the lack luster performance of the economy at the time and the desire of the American people to have more not better. So the national brands had to be players in this game or risk going out of business.  They would sell their product to second tier packagers who would change the name and exploit the low price and the generic nature of the goods.  This generic craze lasted almost 20 years before the resurgence of the economy enabled Americans to once again “afford the good stuff” (the more expensive alternative).    So to Americans, brand seems important when they have enough money to buy the good stuff; otherwise generic is better because it enables them to afford more “Stuff”.  This does not seem to be the case in China.  Where there is a strongly branded product, the Chinese are willing to have less but “better” products. 

I will venture my explanation for this phenomena:  The typical Chinese person has little disposable income because the cost of goods here seems close to those typical prices in Michigan and the income is about ¼ of the typical salaries in Michigan.  This forces the Chinese to live in family groups where the parents live with the married couple and their one child.  This coupled with the fact that housing prices here are also similar to or more expensive to those in Michigan, results in a family unit normally living in a less than 1000 square foot apartment.  And unlike a typical American, they do not have multiple storage units for their junk.  Hence the Chinese are very limited in how many things they can buy and therefore they put a high importance on having  very few things but making sure that they are the best things that they can buy.  So, since the Chinese are always looking for the very best, it has been easy for the luxury brands to really gain a substantial foothold here.  The downtown areas of all big cities are filled with designer stores and these stores are always very crowded. 

Another interesting observation is that we come to China to buy “fakes” and the Chinese go abroad to buy the “real thing”.  Recently on a trip to German my colleagues decided to forego the sightseeing opportunity and went shopping.  Much to my surprise they all bought $5000 - $7000 dollar Rolex watches and ipad 3s. The reason they bought these goods overseas is twofold. The first reason is that in this way they could guarantee that the goods were really authentic.  The second is that everything is better if it is made overseas.  So what potential effect will this have on the economy of China?

So getting back to the movements in the 80’s in the USA, the second is the “Buy American” movement. So when the economy began to suffer due to foreign imports and foreign brands, the Americans responded by creating the “Buy American” campaign rather than imposing trade restrictions.  This type of thinking really does not exist here in China, quite on the contrary; anytime the government feels threatened, they simply impose another law to prohibit the action.  In the USA however, Americans will limit their purchasing of imported products voluntarily if they believe there is a real threat to the American economy.  According to a recent poll, 80% of Americans think it their patriotic duty to give preference to American-made products.

America's distinction among all the nations of the world is that it enshrined political and economic freedom. Although we have departed greatly from our original laissez-faire principles, to the whole world America still symbolizes capitalism. Americanism means understanding that a free market, domestically and internationally, is the only path to general prosperity.

International trade is not mortal combat but a form of cooperation, a means of expanding worldwide production. The benefits of international trade flow to both trading partners, even when one of the countries is more efficient across the board.

In purchasing goods, we are expected to view ourselves and the sellers not as individuals, but as part of a nation. We are expected to accept lower quality or more expensive goods in the name of alleged benefits to the national collective.  Interestingly enough, the Chinese have no such feelings and in fact have no confidence in anything that is branded as a China product.   So whether or not we subscribe to the “Buy American”  as a conflict to our free market ideals or not, at the end of the day, Americans will change their habits to protect the economy that we have so long and hard struggled to create. We can however learn from the imbalance of the value of products from outside our borders.

More and better production is good for everyone, everywhere. What's good for Toyota is good for America. That's individualism, and that's Americanism.
Government interference with free trade is un-American. Sacrificing one's standard of living in order to subsidize inefficient domestic producers is un-American but has proven to be necessary when we forget that it is a global economy and that we must produce world class products.

But what do you do when the country’s people have no confidence in locally made and designed products; such is the case in China.  So far China has survived by getting the rest of the world to buy their products but I believe that for China to continue to thrive, they will need to create a middle class which will fuel its economy.  This is because China is no longer the lowest cost producer and their quality is not significantly higher than the lower cost alternatives.  But as I am sure is the case, once someone is able to be part of the middle class, he/she will quickly aspire to have the leading brand which undoubtedly will come from abroad. 

I recently attended an automotive conference where I was fortunate to be introduced to the CEO of Chery automotive company.  Chery is one of the leading brands of China automakers and continues to lead the more than 20 other China auto brands.  I asked him what he thought of the future of the China automakers.  His reply was interesting and insightful.  He said that the near term outlook is bright as the population places high value on auto ownership and Chery is able to offer low cost entry level vehicles for the masses.  But the long term outlook is questionable. 

As many of you know, my biggest challenge here in China is to help the Chinese convert from a copy to an invent society; but without the educational system support and the encouragement from the upper management, the task is daunting.  So I was in a quandary as to how to stimulate the creative spirit and encourage these people to dream.  So one day during  a trip to one of our suppliers I asked my colleague if he has dreams and aspirations for the future.  Here the focus is on technical achievement and loyalty and support for the boss so I didn’t think I would get very far with this approach but it was worth a try.  He related to me a boyhood dream that he once had.  He came from a small village in the north of China where opportunities were scarce and the work was long and hard.  One day one of the villagers bought a car, something that he had been saving for his entire life but saving for such a thing meant a lot of personal sacrifice.  My colleague, at the age of 9, decided that his goal was one day to have a ride in that automobile. A mere 20 years later he not only rides in a car everyday but he owns that car; something he could have never imagined.  But now as he moves into the middle class, he is now setting his eyes on owning not just a car but a Global branded car; a Buick or a Volkswagen, and to one day own a BMW.  So I mention this here to say that this is the issue which the CEO eluded to, the middle class wanting not just a car but a status symbol.

So if indeed China needs a middle class in order to continue to advance, and the middle class has no confidence in local products or wants the status of a globally recognized brand, where will Chery be?  Chery is working now to strengthen their brand by offering higher class vehicles but no matter how great they are, they are still viewed as a low class alternative.  If this is worrisome for the auto industry then what does this mean for the Chinese economy.  With little nationalistic pride and a desire to have an international lifestyle, there may not be much room for local products.  As is typical of government intervention here in China, the government is forcing the international companies to offer locally branded products made by the international companies.  So far the demand for these products is lacking and only the future will decide if this strategy can save the future of the Chinese brands.  Maybe this is part of the natural evolution of a society and soon we will see the “Buy Chinese” movement, but for now the battle of the brands continues and the global players are winning.