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.)