The Chinese Way To Brand Identity
A CHINESE company’s plan to acquire I.B.M.’s personal computer division is just one example of current Chinese efforts to buy [...]
February 13 2005 by Chief Executive
A CHINESE company’s plan to acquire I.B.M.’s personal computer division is just one example of current Chinese efforts to buy or build recognizable brand names in the United States, says Oded Shenkar, professor of international business at the Fisher College of Business of Ohio State University and the author of “The Chinese Century” (Wharton School Publishing, $25.95). Here are excerpts from a conversation with him.
Q. Will Chinese companies be as successful in establishing brand names in this market as those in Japan and South Korea?
A. Absolutely. They’re going to take a different path, but I definitely believe they are going to get to the place where the Japanese and Koreans are now.
Q. If Lenovo, the Chinese company, actually acquires I.B.M.’s PC division, what challenges will it face?
A. We have to see if the deal gets approved by the U.S. government. But if it does, I see this a sign of things to come. Yes, managing it will be an enormous task, a very difficult exercise. We know that success rates for cross-border acquisitions are fairly dismal. We know that they are especially dismal for companies that have little experience in managing such acquisitions. Lenovo obviously has zero experience in overseas acquisitions.
Q. Lenovo says it will keep I.B.M. managers. Will that make the acquisition successful?
A. It’s a hybrid between an alliance and an acquisition. I.B.M. will retain a certain equity stake in the venture, and I.B.M. executives will be working there as mentors to the Chinese. If they are able to pull it off, I see a big part of the value of the deal to the Chinese as being not only distribution and the trademark, but also learning how to operate a world-class global enterprise.
Q. What are the prospects for two Chinese companies, Haier and Kelon, in establishing brands for appliances in America?
A. Both Haier and Kelon started with niche products, such as small refrigerators used mostly in offices. They are gradually expanding. They already are opening manufacturing facilities in the United States. Because of the nature of their products, there are substantial shipping costs from China.
My own guess is that one of the two at some point will buy an established brand.
Q. Could Whirlpool or Maytag sell to one of the Chinese appliance makers?
A. Yes, they are at risk. I will not be surprised if one of them decides to exit the business. But a more likely possibility would be that Haier or Kelon will acquire General Electric’s appliance business.
Q. Both Japanese and Korean companies were sophisticated in their initial establishment of distribution channels, marketing and advertising methods and brand names. Are Chinese companies that sophisticated?
A. Not at this point, which is the interesting thing. They’re entering this market at a much earlier phase of development than the Japanese or Koreans. They are looking for a shortcut, which is where this brand acquisition strategy is coming from. Instead of developing your own brands, which takes many years and costs billions of dollars, you buy an existing brand. The idea is to use the acquisitions to leapfrog.
Q. Are there other examples of Chinese companies acquiring foreign brands?
A. TCL in television has obtained majority control over Thomson’s television business, which also has the RCA trademark. Previously, they bought Schneider, which was a defunct German manufacturer of appliances. In autos, Shanghai Automotive Industry Corporation [SAIC] has acquired the automotive operations of SsangYong in South Korea and soon could gain majority control of MG Rover in England.
Q. Wal-Mart, Target and the other superretailers have emerged only in recent years. That’s a much different retail environment from two decades ago. Does that help or hurt the Chinese?
A. There’s a very nice complementarity there. Without a Wal-Mart that now controls much of the retail landscape, they would have difficulty executing the strategy they are following. These Chinese companies start as no-name makers of generic products. If you lack marketing capability and distribution and don’t have a global supply chain, which is the situation most Chinese companies face, you sell to Wal-Mart or Target and they will do all that for you. That capability didn’t exist when the Japanese entered. Sony had to build a brand name. They didn’t have a choice.
Q. Has China progressed toward having 50 companies among the world’s largest 500?
A. SAIC would already fit into the top 500, barely so, but they would make it. They make not only parts but also cars in joint ventures with Volkswagen and General Motors.
Q. Many Chinese enterprises are controlled by the Communist Party. How can they understand world markets?
A. The situation is changing. The Shanghai government has a controlling interest in SAIC, but this is definitely a government that understands business. The state players are learning fast. We also see the emergence of private companies.
Q. Are any of the so-called Big Three automakers vulnerable to Chinese takeover?
A. None of the Big Three assemblers are candidates. The logical candidates are the component makers, such as Delphi and Visteon, that are not doing that well financial-ly.