Although the brand hype surrounding consumer goods cannot be compared with the brand power of industrial goods, the cost structures of Chinese companies compared to those of foreign players are similar. No matter that the company is a German multinational with extensive networks in China, or a Spanish SME (small-medium enterprise) exporting to China; each is challenged by domestic price competition. At the same time, Chinese companies are increasing their product quality and closing the gap on the sometimes more technologically advanced foreign players. In view of the struggle of industrial-goods companies with market expansion in China, it is advisable to look at consumer brands, which entered the Chinese market decades ago. Some lessons to be learned include the following:

1. Position yourself in the premium segment - right at the top.

In recent years, many foreign players have faced the problem of being positioned at the top end of a market, which meant losing market volume in the lower-price segments to cheaper Chinese competition. In highly competitive markets, some foreign players decided to position themselves in the low to medium end to scoop up market share. Now though, they have no alternative but to pull out of what has been for them a loss-making segment. For example, consumer electronic brands such as Panasonic, Samsung and LG are realising Chinese competition will probably always benefit from cost advantages, and in the medium to long term win the battle for the base of the customer-segment pyramid. The escape plan consists of cementing a frontier where Chinese competition is weak, which normally means the premium-brand segment. Companies should not risk the depreciation of their premium brands at any time or level.

2. Reveal your roots the right way.

Being foreign can be an advantage in Chinese markets, at least in gaining a small head start. Although there are powerful domestic brands in China, buyers often have less trust in those brands than in foreign products. However, it is dangerous to assume that trust can easily be transformed into loyalty.

Owning a foreign brand does not imply any automatic, favourable regard from customers and purchasing-decision makers. Japanese consumer goods companies normally avoid associating their brand with their country of origin owing to the difficult past between China and Japan. Sony has set an example by establishing a “dynamic”, “young” and “positive” image, which enabled it to overtake Panasonic in terms of brand power in China in 2004.

To improve scrutiny of Stated-owned Enterprises (SOEs), the Statistics and Evaluation Bureau recently investigated the audits of the 181 largest Chinese state-owned companies, such as Sinopec, China Telecom and Air China. The director of the government-controlled authority, Meng Jianmin, announced the following findings in the Beijing Times on 8 January 2005.

Figure – Results of the investigation of audits of state-owned firms.

The alarming results showed that only five of the 181 audits were correct; 13 included “blatant lies”. The remaining 163 were incomplete, insufficient or had significant technical problems with their auditing methods.  More than 300 agencies carried out the audits in a haphazard manner. Some, fearing withholding of payment, or potential disadvantages accruing from any meticulous investigation of governmental concerns, even wrote falsified re-ports.

Although the Statistics and Evaluation Bureau operates under the state-owned Assets Supervision and Administration Commission, the results of this investigation do not gloss over the fact that SOEs still enjoy a jester’s licence. The problems revealed may be the tip of the iceberg, but are a promising step to-wards a scenario in which state-owned firms obey laws and market forces, as do private companies, in the relatively near future.

o On 4 January, CapitaLand Retail China Pte. Ltd., a wholly owned subsidiary of CapitaLand Ltd., entered into a cooperative agreement with Beijing Hualian Group Investment Holding Co. Ltd., one of the largest retailers in China. The agreement is to acquire two retail malls located in Beijing, namely Anzhen Shopping Mall and Wangjing Shopping Mall, for USD 210.44 billion (RMB 1.746 billion).

o A 50:50 joint venture has been entered into by Japan’s Nissan Motor Co. and the Dongfeng Motor Co. Dongfeng Nissan will set up a USD 362 million engine plant in Guangzhou by early 2006 to produce 360,000 engines a year, and to reduce production costs at their joint-venture car plant in Guangzhou.

One of the American multinational company in question is one of the largest food manufacturers in the world.

China's growing demand for quality traditional foods made it necessary for the company to set up a network of manufacturing plants throughout China. Being close to its consumer markets was important to help it overcome the traditional problems of poor logistics and difficulty producing food products that catered to local tastes.  After the company purchased a failed Sate-owned Enterprise (SOE) , which included its staff and assets, irregularities became apparent in the latter's financial management, factory operations and business-computer systems.

Our investigations revealed that senior Chinese executives were exerting personal influence in the purchase of raw materials and choice of suppliers, and that they were receiving additional and illegal salary compensation. In addition, there was no control of business processes, and critical business data concerning the cost and profit contribution of products were not known.  Also there were the inadequate control of computerized finance-systems operations and deficiencies in the payment of Government taxes.

To overcome the above, our Consultant acted as an Interim Executive, took control of the operation and remained on-site for several months to protect the American owner's interests and bring about necessary improvements quickly.  We examined the cost and profitability of 250 products to determine which were brand leaders, which were profitable and which products were adding little to the company's profit. The product range was rationalized to improve profits and simplify manufacturing planning, production and distribution. All manufacturing processes were examined and documented to aid process rationalization and make the operation transparent to expatriate executives.  In addition, new Chinese computer accounting systems were introduced to replace illegally copied software and satisfy the reporting requirements of the PRC authorities and the American company's head office reporting needs. This also supported the unique American anti-fraud requirements of the Sarbanes-Oxley Act.  Other improvements included financial transparency, improved warehousing and distribution methods, a new staff compensation system and the introduction of a foreign IT/ERP System for overall control of China operations.