China’s new first lady, Peng Liyuan, has set the fashion blogosphere ablaze. She’s sharply dressed and most notably, she's wearing domestic brands. "China's First Lady Sparks Homegrown Fashion Frenzy," said one AP headline, following the publication of photos of Peng wearing the Guangzhou-based label Exception.
If you didn’t know, China is brand-crazy.
"I'd rather cry in a BMW than laugh on a bicycle.”
The above quote is now a famous Chinese expression which was uttered by a female contestant on one of China’s most popular dating programs, If You're the One
. When a young man offered to take the contestant for a ride on his bike on the game show, she gave the above response as she rejected him. This comment digs deep into the Chinese psyche about materialism and brand consciousness – especially regarding foreign brands.
Overseas brands dominate the high-end market in China, evidenced by Gucci, Prada
(HKG:1913), and Cartier stores that line the most prominent streets of Tier 1 and Tier 2 cities. By contrast, domestic brands are relegated to the likes of household products and other categories where quality and branded status don’t matter. For example, 70% of car sales in China in 2012 were foreign brands. Foreign products are used as a symbol of prestige, and as of late, higher quality and safety standards.
Why Is China’s First Lady Wearing Domestic Brands?
China is trying to move away from being the world’s factory with an export-dominated economy, to one that's focused on domestic consumption. Promoting China's brands has been a goal of the government for some time now. At the 2012 National Commerce Work Conference (NCWC), stimulating consumption in China as well as promoting the country’s own brands in the Mainland market were key goals. The message
at this year’s NCWC was no different.
Furthermore, the government is cracking down on corruption and lavish spending, and part of that is encouraging governmental departments to buy local cars instead of foreign ones. As of now, Audi
(PINK:AUDVF) is the choice of vehicle for government officials, but as cars must be replaced, more and more government vehicles will be domestic brands.
What’s Good for the Goose Is Good for the Gander
The promotion of domestic brands within China will also benefit international brands in the China market.
Last December, the Chinese Ministry of Commerce issued the Guiding Opinions on Promoting Brand Consumption report in China (go here
for detailed analysis). While the primary purpose of these opinions is to encourage the cultivation of domestic brands, they encourage international brands within China as well. There is recognition that Chinese brands have failed to compete with their Western counterparts for a host of reasons -- including branding and marketing -- and that should be a focus for Chinese brands.
While the government desires to promote domestic brands, the market is also seen as playing a vital role.
Chinese consumer goods companies and retailers have been struggling to compete against global competitors, particularly on product quality, marketing, level of technology and trendiness and customer service. A lot of this has to do with the lack of experience and expertise Chinese companies have since their histories of operation are relatively short. The government is well aware of its country’s shortcomings and therefore will continue to welcome foreign competitors to grow alongside Chinese companies.
The Ministry of Commerce guidelines stress that any policy should be market-orientated and view the success of foreign brands in China as going hand-in-hand with the long term development of domestic brands and the Chinese consumer market. Chinese brands can learn how to market from the foreign brands and consumers would benefit from the competition between domestic and foreign brands, which would increase the range of products and lower prices. (Products made in China by a foreign brand are often more expensive in China than in the US or even Hong Kong. One of my coworkers from Hong Kong often acts as an iPad mule for our other colleagues every time she goes home because of the price difference – even though these Apple
(NASDAQ:AAPL) products are actually made in China, an iPhone 5 is 5,300 RMB in China ($850), but about $650 in the US.
The Chinese government recognizes that companies, not governments, create brands. It seems clear that the Chinese government wants to encourage Chinese enterprises to build and develop brands that are recognizable both domestically and abroad. However, it also realizes that a strong domestic market is necessary to achieve such goals. Therefore, foreign brand owners will benefit, alongside their domestic counterparts, from a more welcoming and better regulated market, secure online platforms, and better enforcement and protection of intellectual property rights
Kristin Graham, CFA, is currently a consultant partnered with CRG, a multi-channel retail services company that assists retailers entering and expanding in China. She lives in Shanghai.
No positions in stocks mentioned.
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