Haier Electronics Group (HRELF)

[Stock]

Chinese Brands Moving into the U.S. Market

by: China Market Research Group October 27, 2009

| about: FPAHF.PK / HRELF.PK / SNE / TM

By Ben Cavender and Michelle Wei

While the US continues to struggle, China’s economy remains strong and Chinese companies are flexing their muscles as they set their sites on becoming top global brands.

US companies have long been concerned with how to compete against Chinese companies in China, but the day is approaching when they will have to compete against Chinese companies on American soil. To do so, it is important to understand what Chinese companies bring to the table, the challenges they are facing and how they are working to overcome those challenges.

In our research, we have found that 70% of large Chinese companies have ambitions to enter the United States and Europe in the near term. Most Chinese companies have already taken steps to go abroad and have made inroads in developing markets in Africa, the Middle East and Asia, but movement into the United States and Europe signals a shift in company outlook. So what are the obstacles for Chinese companies as they move abroad and how are they tackling those problems?

Weak Branding

Chinese companies have traditionally not been great at branding. Historically their way to win was to compete on price and do things cheaper than the other guy. While this is often still the case, Chinese firms also understand that long term they need to add value and grow profits along with revenues, rather than just grow revenues at the expense of profits.

To do so, Chinese companies are increasingly turning to international advertising firms and are using modern marketing techniques to truly develop their brands. Marketing has taken off to such an extent that China’s ad market is on track to surpass the UK to become the world’s 4th largest ad market, according to ZenithOptimedia.

Chinese companies understand that it can take decades to truly develop brands, but they are betting that their price position along with savvy marketing will allow them to seize market share that they can then expand upon.

Lack of HR Understanding and Talent

Two major hurdles for many Chinese companies that are thinking about expanding abroad has been weak understanding of winning HR practices and a lack of human capital. Firms say that a lack of understanding of local markets has hampered their ability to grow organically and put in place the talent necessary to be competitive.

To overcome this challenge, more and more companies are turning to acquisitions, not just as a way to buy brands or technologies but also to get the expertise needed to grow successfully. Haier (HRELF.PK), the world’s largest refrigerator maker is an example of this as it pursues a 20% bid of New Zealand's Fisher & Paykel Appliances (FPAHF.PK).

Sichuan Tengzhong’s acquisition of the Hummer brand is also interesting because the company stated that most of Hummer’s current employees would remain intact. Chinese companies are not just buying brands, they are purchasing the expertise necessary to compete in developed markets.

Number One Ambitions

Chinese companies don’t want to be number 3. They don’t want to be number 2. They want to be number 1. When Japanese car makers and electronics makers like Toyota (TM) and Sony (SNE) entered the US market, they took their time and were OK with taking 20 years to get to the top. Chinese brands want to be number one now.

Car markers like Geely Automotive are producing $5,000 USD cars and competing on price, but they are also rolling out the $60,000 USD Geely GE to capture the luxury market. And it might not take too many years before they do.

As US companies work to shake off the effects of a major recession they will be facing new challengers from China, they need to be prepared.

Disclosure: None

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