China Faces Outward as West Turns Inward
Transforming Economy Impacts Brand Value Fluctuations
The first appearance of a Chinese president at the Davos World Economic Summit happened as the UK grappled with its Brexit strategy, nationalism gripped other EU countries, and just days before the new president of the United States proclaimed his America First policy. The moment symbolized a geopolitical reorientation, with China facing outward as the West turns inward.
In raising its presence in international affairs, China is reclaiming its place as a political and trading power during earlier periods of globalization, starting when the Silk Road linked East and West two millennia ago during the height of the Han Dynasty. It is also reshaping the western impression of Brand China, from imitator to innovator.
The increased overseas economic activity, including a record level of mergers and acquisitions, helps China transition the main drivers of its economy from production to consumption. China’s GDP grew 6.7 percent in 2016, slightly less than a year earlier, but more vigorously than most industrialized countries.
These circumstances influenced the 6 percent increase in the BrandZ™ Top 100 Most Valuable Chinese Brands 2017, following a 13 percent rise a year ago, and informed related developments:
Of the 20 product categories examined in the BrandZ™ Top 100 Most Valuable Chinese Brands 2017, twelve increased in value, seven declined, and one registered no change.
Consumer-facing categories generally rose in value, and categories driven by production, or dominated by strategic State Owned Enterprises (SOEs), were more likely to decline.
Other influences on category value changes included millennials, e-commerce, and the uneven impact of economic change on the middle class and the less affluent.
As Chinese brands faced outward, they also increased in quality and marketing prowess at home, and competed effectively against multinationals. For the first time, Chinese brands exceeded multinationals in Brand Power, the important BrandZ™ metric of brand equity, the consumer inclination to select one brand over another.
GOVERNMENT POLICY INFLUENCES CHANGE
Along with the many economic, social, and market influences that affected category and brand value fluctuations, the Chinese government played a vital role. Having exerted its influence over the past several decades to drive record economic growth and lift hundreds of millions of people from poverty, the government now managed the emergence of a new economy, balancing the rate of change with the need for stability.
Supply-side policies to remove surplus and match production with the demand of the consumptiondriven era impacted various categories, generally favoring market-driven brands over State Owned Enterprises (SOEs). The banks, insurance, and oil and gas categories, still dependent on the old economy, declined 6 percent in value.
There were exceptions. Alcohol and food and dairy, categories with substantial SOE presence, increased in value, usually because of the marketing activities of individual brands. Several brands of baijiu, China’s traditional white alcohol, continued to rebound in value, for example, after repositioning to grow despite the government’s discouragement of extravagant official entertainment. Moutai increased 41 percent in value.
In more typical examples, the two fastest-rising brands in the BrandZ™ China Top 100, Xueersi and New Oriental, increased 58 percent and 43 percent, respectively, and both are in the education category, which tied with travel agencies as the category with the greatest value increase, 46 percent. Both the education and travel agencies categories address the aspirations of the rising middle class that generally benefits from the government’s promotion of the service sector.
Economic rebalancing affected consumers disproportionately, hurting those dislocated from industries in the production-driven economy, while helping others in the urban middle class associated with the service sector. This division affected diverse product categories and brands and was especially evident in fast moving consumer goods (FMCG). While sales slowed for mass products aimed at less affluent consumers, products desired by the middle class experienced premiumization. Kantar Worldpanel called this phenomenon, “Two Speed China.”
In addition to these factors, brands contended with media fragmentation, which required insight about how to effectively shift investment to emerging digital options. Ultimately, a triangle of influences affected brand builders: the government, and its market impact; consumers, and the bifurcation of purchasing power; and media, with its greater complexity.
The government articulated its “One Belt, One Road” strategic vision in 2014, to encourage global expansion and cultivate overseas markets for its excess industrial capacity. The vision touched multiple categories. In 2011, the BrandZ™ China Top 50 brands with the greatest proportion of revenue derived from overseas business averaged 24 percent. In the 2017 BrandZ™ China Top 100 that proportion rose to 40 percent.
Not surprisingly, the list includes PetroChina, which gained 31 percent of its business overseas. But the technology brand Lenovo gained the largest proportion of revenue from overseas – 72 percent, followed by two other technology brands – Huawei, 58 percent and ZTE, 47 percent – indicating the importance of technology in shaping the future direction of China’s economy. Huawei and ZTE are market-driven brands. Lenovo is an SOE, but consumer facing and market driven relative to SOEs in categories like oil and gas.
The concentration of technology brands also illustrates a shift in the overseas consumer view of Brand China. That shift resulted not only because of brands in the BrandZ™ China Top 100. Recent BrandZ™ global research, conducted in collaboration with Google, found that emerging entrepreneurial, Internetdriven Chinese brands are finding acceptance overseas. These smaller nimble brands, with increasing access to capital, are rapidly establishing overseas, in some cases before they develop in China. This activity by Chinese brands of all sizes is having a measurable impact on the overseas consumer perception of Chinese brands. In 2013, 46 percent of consumers viewed Chinese products as technological, in BrandZ™ research about China’s image abroad, and 54 percent held that view just two years later. Similarly, the impression of China as an innovator increased from 66 percent to 72 percent in just two years.
The change in perception is most pronounced among young people. BrandZ™ research across 18 countries in 2015 found that 40 percent of younger people, age 18 to 35, thought of Chinese brands as creative, compared with only 31 percent of people age 51 to 65. The change in perception is likely to continue as Chinese brands increase the pace of overseas growth.
Chinese brands spent $247.1 billion on overseas mergers and acquisitions in 2016, according to Bloomberg analysis. Among the overseas transactions conducted in 2016 by BrandZ™ Top 100 brands were: the acquisition of Kuka, a German robotics company, and Japan’s Toshiba Appliances by Midea Group, parent of the appliance brand Midea; Haier’s purchase of GE Appliances; and the acquisition of Skyscanner, a UK online travel aggregator, by Ctrip, China’s travel e-commerce giant.
Overseas consumer awareness of the Chinese brands involved in the mergers and acquisitions, and consumer willingness to consider the brands, does not happen automatically. BrandZ™ research revealed that consumer awareness of overseas merger and acquisition activities by Chinese companies is extremely low overall. However, Chinese brand overseas mergers and acquisitions present a potential opportunity to build brand awareness, improve the perception of Brand China, and help facilitate future global growth.