World
Why China failed in creating own brands

Western markets are not dominated by Chinese brands. It is the Chinese market that is being dominated by foreign brands. Even in surveys, local Chinese brands get criticized for poor quality and engineering and lacks the trust

When China started to make cars, a chill went through automakers in the US and Europe. They shared a vision of millions of cars made with exceptionally cheap labour landing on western shores. It looked like a repeat of the success experienced by the two exporting powerhouses, Japan and Korea. Besides, China was well on its way to become the workshop of the world dominating sector after sector. Why not cars?

 

Why not indeed. Something happened that had not been predicted by the economists and analysts. It wasn’t the western markets that were dominated by Chinese brands. It was the Chinese market that became dominated by foreign brands.

 

Ten years ago, Chinese brands controlled 70% of the local market. Now they have been reduced to 45%. If you exclude the barebones pickup trucks and minivans that make up the light commercial vehicle market, domestic brands have only 29.5% of the market.

 

Even in a globalized world, it is distressing to watch foreigners come to dominate a local markets. This is especially, true for an important industrial segment like automobile manufacturing. Even in the US, where the Japanese cars have been present for 40 years, there are places where it is considered unpatriotic to own one.

 

Why have the Chinese failed to build successful brands even in their home market? Obviously, they have not been able to match the quality of developed countries’ manufacturers. Until recently, they were very competitive on price. Why can’t they seem to develop successful brands?

 

The reason for the failure is the way the Chinese government use their legal and regulatory system. Foreign companies coming to China to produce products for export were lightly regulated in every way. China wanted to encourage exports and follow the Japanese model. In contrast, foreign companies that wanted to sell into China faced discrimination.

 

In theory, this sort of protectionism should have worked, but instead it backfired. The first problem for local brands was a lack of trust. For example, large Chinese dairies were only subject to minimal safety regulations. They took advantage of this by lacing infant formula with melamine a byproduct of coal. Melamine was put into the formula to allow substandard milk to pass protein tests. The result was a national scandal in 2008. Six children died and over 300,000 were sickened.

 

To this day, Chinese consumers go to great lengths to buy foreign brands. They even ask their friends traveling to other countries to send back infant formula a few cases at a time.

 

Rather than force local dairies, many of them government owned, to adhere to stricter standards, the Chinese government used laws, policy and even the state media to strike back at foreign brands.

 

The state television has accused Danone, the French food company, of bribing hospitals in Tianjin to use its infant formula. It restricts importation of foreign infant formula created for other markets imported by third parties into China. To help local dairies it has created subsidies.

 

The auto industry has similar problems. Domestic Chinese auto companies didn’t do well in crash tests. In surveys, local brands get criticized for poor quality and engineering.

 

Foreign companies are required to form 50-50 partnerships with local firms. The Chinese were thinking of dropping this requirement. Trading partners might retaliate if China were ever to start exporting cars in large numbers. But since they don’t, the largest politically connected; state owned Chinese companies were able to keep the restriction in force. With this type of protectionism in place, it is even more unlikely that China will be able to develop export markets.

 

The Chinese required foreign companies to produce “indigenous” brands. For example BMW Brilliance makes the local Zinoro. Dongfeng Nissan builds the Venucia. The most successful is the SAIC-GM-Wuling Automobile Company’s Baojun. They sold 100,000 Baojins in 2013 up 20%. This would be great except that Baojun’s achievement came at the expense of local Chinese brands.

 

China has also inhibited foreign competition by failing to enforce intellectual property laws. Stealing intellectual property in China is done on a massive scale including wide spread computer hacking to steal information.

 

Stealing from foreigners may seem like a good idea in the short term. But if Chinese companies can steal from western companies they can also steal from each other. A brand is one of the most important and valuable assets of any company. If it cannot be protected, then companies do not have an incentive to build it up.

 

Consumers in India, Indonesia and the Philippines do not have the overwhelming preference for foreign brands. Indonesia and the Philippines actually have a clear preference for local brands. India gives the foreign brands a slight edge.

 

What is interesting is that although their preferences are slightly different, the views of local and foreign brands in these three countries are quite similar. Foreign brands are considered to be more fashionable and of better quality. Local brands are believed to offer a better price. There is a universal preference to support local companies. As to reliability, consumers in all countries rated both local and foreign brands about equally.

 

It’s not that Chinese companies cannot compete with foreigners. Jin Duo Bao is a cold herbal tea that outsells Coca-Cola in China even though it is more expensive. It sells well because it is appeals to local beliefs and preferences.

 

Rather than attempt to regulate the market, the Chinese should take a lesson from the Indian processed foods market. The local companies view their competitors as positive. With large advertising budgets foreign firms have been able to increase the size of the market and create new market segments that nimble local companies with better distribution and local knowledge can exploit.

 

Every policy, every law, every regulation created by governments to solve a problem will have unintended consequences. These are sometimes worse than the issue that was meant to be solved. Sometimes the best use of power is not to use it at all.

 

( William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.)

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COMMENTS

Nathan

3 years ago

Well your argument may be true in consumer goods, but I see the opposite in industrial goods. In every industry, be it telecom, energy, Chinese companies have built brand value and are gaining market share. So how do we explain that?

Ways of ECI: Turn voters out and complain about poor voter turnout

When CEOs do not follow ECI guideline of maximum 1,200 voters per booth, it  certainly reduces the voter turnout, by design and not due to voter apathy as pronounced by armchair experts and authorities

At 5 past 7 O’ clock on 17th April, I was the third person in queue in front of my polling booth. One voter was inside the booth, arguing that his name was in the voter list while the polling booth officer was unable to find the name in the list. After about five minutes, which felt like 50, he cast his vote and allowed the queue to move. With the rate at which the queue moved, I hope that the 1,359 voters in my booth could cast their votes by 6pm, the deadline for voting.

The Election Commission of India (ECI) has taken exemplary steps to set up polling booths in remote areas even to cater for a single voter. A Times of India story states, “Mahant Bharatdas Darshandas is the lone voter in the midst of Gujarat’s Gir forest, home to the Asiatic lion, for whom an entire election team sets up a polling booth every election — and will do so again on 30th April. … a polling team [of 4 to 5 people] travels around 35km to reach the hamlet of Banej inside the Gir forest, located in Junagadh district.” We salute the spirit and efforts of ECI to include every eligible citizen in the democratic process of elections.

However, this exemplary step is only an example. We have many booths with voter population much higher than what ECI has stipulated, making it impossible for people to vote within the time available, even with the usage of electronic voting machines (EVMs).

Technical features of EVM:

“Operationally an Indian EVM is a set of two units – the ballot unit and the control unit. A vote can be recorded only after the presiding officer enables the ballot unit through the control unit. However, even the presiding officer cannot enable the ballot for twelve seconds after every ballot is cast. Thus, a maximum of five votes can be cast in one minute.” – Dr SY Quraishi, page 192, “An Undocumented wonder; The Making of the Great Indian Election”, Rainlight/ Rupa.

For each voter to move out of the polling box and the next person to enter, we can consider about 18 seconds. Thus, practically, we expect maximum two votes cast in one minute if (a) the voters are enthusiastic and clear about the voting process; (b) the polling staff is efficient and ensure smooth uninterrupted flow of voters; (c) electoral rolls are clean and unambiguous …

Remember that the officials search voter names in paper rolls – not on a computer terminal. People on polling duty take time to find a name in the rolls if the voter does not carry a voter slip with correct details. Though required, chief electoral officers (CEOs) do not give voter slips in some areas. Queues stagnate when a name is not found in the rolls.
Polling booths remain open for 11 hours as directed by ECI. With uninterrupted flow of voters and super efficient polling booth staff, 120 votes cast per hour, 1,320 votes may be cast per booth in a day. If a booth has more voters, then the administration is at fault. Even with voter enthusiasm and efficient staff, we cannot expect good voter participation.

Paragraph 37 of Handbook for Electoral Registration Officers (EROs), published by ECI in 2012 states, “… Registration of Electors Rules, 1960 indicates that the number of names to be included in any part should not ordinarily exceed 2000. The commission has however, with voter’s convenience in mind, has desired that a part should not have more than 1200 electors in urban area and 1000 electors in rural area.”

ECI guidelines are not only for voter convenience, but are necessary to allow the system to work even in ideal conditions. If the voters in a booth exceed 1,200, many voters may not get their turn to vote. Serpentine queues would form demoralising the voters. Many could return without voting.

In sample booths of some cities, we find the following:

Rolls of

Version

Sample

Booths

Booths with

> 1200 voters

Booths with

> 2000 voters

Voters in largest booth

Hyderabad

Mar 2014

7,556

3,824

277

AP0450068: 5,530

Delhi

Mar 2014

11,763

4,210

90

DL0540109: 4806

Bangalore

Mar 2014

7,712

2,028

6

KA1600280: 3101

Chennai

Oct 2013

3,254

1,029

4

TN0150060: 2,530

Mumbai

Sept 2013

2,545

402

0

MH1780157: 1,723

Kolkata

Jan 2014

4,561

62

0

WB1160023: 1,598


The features of the EVM technically put a limit of five votes per minute. This could be achieved in a simulation, without any gap between two voters and achieve 3,300 votes in the 11 hours duration of voting. Thus even in a simulated run, not all the voters in a booth can vote. Being illogically optimistic, if we consider a gap of 3 seconds between two voters through the day, then we have 4 voters per minute, which allows 2,640 voters to cast votes during the day.

However, the ECI guideline of maximum 1,200 voters per booth is pragmatic. In the sets of samples, 36% of booths in Delhi, 32% in Chennai, 26% in Bangalore, 16% in Mumbai and 1.4% in Kolkata have more than 1,200 voters. This will certainly reduce the voter turnout, by design and not due to voter apathy as pronounced by armchair experts and authorities. We should be alarmed if we find a high voter turnout in large booths.

When ECI cares much for the lone voter in a forest, provisions in several populated areas are grossly inadequate to allow citizens to vote.

Bad electoral management can turn voters out and complain about poor voter turnout.

(Commander (Retd) PG Bhat is a retired naval officer, an educationist and a social worker.)

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Sensex, Nifty to rally upto 16th: Weekly Closing Report
The market shot up on expectations of strong showing by BJP and NDA. If so, the indices will stay buoyant till 16th.

The BSE 30-share Sensex closed the week that ended on 9th May, at 22,994.23 (up 590 points or 3%), while the NSE’s 50-share Nifty closed at 6,858.80 (up 164 points or 2%) for the week. We had mentioned in the past week that this reporting week may see the Sensex, Nifty making gains. Although the markets started the week on a weak note, on Friday the indices surged to new life time highs.
 
The indices closed in the positive on Monday. Although the index tried edging higher the gain were marginal with the index giving up most of the intra-day gains by the end of the session. Nifty closed at 6,699 (up 5 points or 0.07%). The positive news from the US labor market played on the market sentiments. The 288,000 increase in employment marked the biggest upside surprise since February 2012 and followed a 203,000 rise the prior month. An index measuring the share of industries hiring climbed to 67, the highest level since January 2012. The jobless rate dropped to 6.3%, the lowest since September 2008.
 
On Tuesday the market tried moving higher, as well. The OECD said that India's economy may make a gradual recovery this year, helped by a rebound in capital investments as well as a pick-up in private consumption, but rising bad loans at its banks threaten to choke the recovery. Nifty closed at 6,715 (up 16 points or 0.24%).
 
On Wednesday, Nifty edged lower and closed at its lowest since 27 March 2014. Nifty closed at 6,653 (down 63 points or 0.93%). On one hand, US trade deficit narrowed in March as exports grew by the most in nine months, while on the other hand, services index in China from HSBC Holdings Plc and Markit Economics dropped to 51.4 in April from 51.9 in the previous month. On Thursday too, Nifty was listless closing at 6,660 (up 7 points or 0.11%).
 
India Ratings & Research, a Fitch Group Company anticipates gold prices to decline in  FY15 to the range of Rs25,500/10g to Rs27,500/10g.
 
On Friday the market began slowly but soon it rose vertically as speculators massively build positions in frontline banking and cement stocks, on an assumption that NDA is likely to get a majority and come to power easily. The index closed at its new life time high. Nifty closed at 6,859 (up 199 points or 2.99%) and Sensex closed at 22,994 (up 650 points or 2.91%).
 
For the week, the top two performers among the NSE indices were Bank (7%) and Energy (5%) while the worst two performers were I T  (-3%) and Pharma (-2%).
 
Among the Nifty stocks, the top five stocks for the week were ICICI Bank (10%); Hindalco Industries (9%); IndusInd Bank (8%); Bharat Heavy Electricals (8%) and Reliance Industries (7%) while the top five losers were Bharti Airtel (5%); Lupin (-4%); HCL Technologies (-4%); Infosys (-3%) and Tech Mahindra (-3%).
 
Of the 1,422 companies on the NSE, 656 companies closed in the green, 722 companies closed in the red while 44 companies closed flat.
 
 Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:

ML Top sector   ML Worst sector  
Refineries 3% Telecom Services -5%
Con_EPC_Infra 2% Software & I T Services -3%
Industrial Intermediates 2% Media -2%
Consumer Durables 2% Financial Services -2%
Chemicals 1% Cement -2%

 

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