BOOK EXCERPT: What to do and what not to do in China

• Do Not Underestimate Domestic Chinese Brands’ Quality

Western executives often foolishly scoff that Chinese brands could never compete with Western ones on anything but price. “They do not have the branding ability or focus on quality like the Japanese have,” one global executive told me. He is underestimating the competition—never a smart thing to do.

Not only has the day arrived when many Chinese firms offer products that are as good as Western goods, but many compete head to head on quality and innovation. The Chinese business landscape is littered with global number one brands that failed when they hit China’s shores. Critics complain that the government creates an uneven playing field by supporting domestic firms over foreign ones, but the reality is that search engine firm Google lost to Baidu because Baidu’s technology for Chinese-language search was far better. Internet auction site eBay lost to Taobao because Taobao adopted an escrow-like pay system called Alipay that limited fraud, while eBay used PayPal.

Among the Chinese product companies starting to compete against Western brands is telecom giant Huawei, poised to overtake Ericsson as the world’s largest network equipment maker, was recently chosen by Tele2 and Telenor over Ericsson in Sweden to install a 4G telecommunications system. Construction manufacturer LiuGong sells similar products to Caterpillar and Terex for 20 percent less. In interviews with dealers and end customers that my firm conducted, the majority said that for most projects, Chinese brands were more than good enough. China’s wealthiest person in 2011 was the founder of construction giant SANY, Liang Wengen, who is worth over $9 billion.

Chinese companies are often able to cut operating costs and set prices below those of foreign brands while still offering comparable quality. To combat rising Chinese brands, Western brands might need to launch secondary brands, acquire Chinese ones, or shape the market to ensure premium positioning.

Key Action Item

Foreign brands should not discount the rise of Chinese brands. They are aggressive and well capitalized, and are spending increasing amounts of money on research and development. They are recruiting armies of engineering graduates from top universities around the world to bolster R&D. To compete, foreign brands must continue to innovate to maintain a technological advantage, cut costs by tightening production processes, or launch or acquire secondary brands to compete directly.

• Chinese Love Chinese Brands, Too

Overall, Chinese trust foreign brands more than domestic ones not to cut corners in the production process. This is especially true in the luxury sector, where foreign brands are viewed as having more refinement and appealing brand heritages.

Don’t think Chinese brands will never beat foreign ones on anything but price, however. Given the choice, Chinese consumers tend to prefer local brands if they feel they are as good as the foreign competition. Buying Chinese brands appeals to rising nationalism, and Chinese believe domestic brands can better capture local flavors and scents.

Mengniu Dairy and Haier are examples of companies that even wealthy Chinese consumers will often choose over foreign brands like Danone and Siemens. Mengniu charges more for their high-end yogurt products than Danone and most other foreign brands to emphasize high-quality ingredients. They use flavors that cater specifically to Chinese. When I interviewed dairy-section heads of supermarket chains, the majority told me that wealthy consumers prefer high-end domestic brands over foreign brands made in China, because they think a truly good Chinese brand will have better quality control than a foreign one.

Likewise, many wealthy Chinese prefer to buy Haier air conditioners and refrigerators, instead of German, Japanese, and Korean brands like Siemens and Samsung, out of nationalism and the perception that premium Chinese brands are globally best in class.

Key Action Item

Western brands should not assume Chinese will always prefer foreign brands over domestic ones, and that consumers always view foreign brands as more premium. Chinese will often prefer domestic brands, like Haier’s consumer appliances, over foreign ones if they feel they are world-class brands. When competing in select consumer-market product categories, as Danone Yogurt is doing versus Mengniu, foreign brands might need to position themselves as cheaper alternatives if a domestic Chinese brand is viewed as having a premium position.

• Chinese Are Often Short Sighted Because Rules Can Change Quickly

It is often very difficult for Chinese businesses to plan long term—not because executives are short sighted, but because rules and regulations change so quickly. For instance, many street-level Chinese stores are ramshackle and do not have nice fittings. The reason? Shop owners do not want to waste money because they fear real estate redevelopment will force them to move. Brands that create a comfortable ambiance move to high-priced malls or recently developed zones. Once urban planning gets more settled, Chinese brands will spend more on nicer shopping environments. In the meantime, smart ones save their money.

For instance, right now most Chinese buyers of luxury products like to do their shopping abroad. Recent initiatives to make Hainan Island a duty-free zone and to reduce tariffs on imported goods could change the luxury retail landscape overnight.

Key Action Item

Company executives need to keep abreast of potential new regulations that could severely impact their businesses. If they do not, they could suddenly find that they have invested in the wrong sectors and locations.

• Real Estate Is Intentionally Ramshackle

Many Westerners say Chinese real estate companies exhibit poor urban planning. A common complaint by visiting Westerners is that malls are not built attractively, or that parking lots are constructed in prime building locations, like on a riverside, while shopping complexes and restaurant zones are built across the street without good river views. Criticism like this does not survive basic analysis. Rules force developers to start construction soon after buying land from the government. It is illegal to hold on to land as an investment, so real estate developers who think that land values will continue to rise either will build something as cheaply as possible, in the hopes of knocking everything down and rebuilding when prices go up, or will put up parking lots to fulfi ll regulatory requirements and delay prime construction on the property until later.

Key Action Item

Simply writing off or underestimating Chinese executives’ long-term strategic thinking because they seem to be building inefficient projects is unwise, because they often have good reasons for holding off on investing and for trying to make money in the short term.

Excerpted with permission of the publisher, Wiley, from The End of Cheap China: Economic and Cultural Trends that will Disrupt the World by Shaun Rein.  Copyright (c) 2012 by Shaun Rein.