Global brands like Adidas, the German headquartered sportswear company, Apple, the inventor of the best-selling iPod, or the fashion label Tommy Hilfiger are all well-known and highly regarded throughout the world. But did you ever question yourself about where their products are actually coming from? Are these quality goods still produced in self-owned manufacturing sites in America or Europe or has production already shifted to countries with cheap labour somewhere in Asia or Eastern Europe?

By far this question is not as complex at it seems, at least for the above mentioned multinational companies. All of them have decided to shift their value chain to China. But rather than owning this chain, they control the value chain in China by giving the production of their branded goods into the hands of fast-growing Chinese suppliers.

Yue Yuen is one of these suppliers. Even if you have never heard of this company Yue Yuen’s products are everywhere. Your footwear, either from Adidas, Nike, Timberland or Reebok comes from the aforementioned Yue Yuen, the largest footwear manufacturer in the world, which is located in south China’s Guangdong Province. The company’s size is hard to over-state as they employ over 200,000 workers and produce 13% of the world’s shoes. Adidas’ world sourcing office is based in Hong Kong and they control the manufacturers in China. The finished products are shipped directly to destinations across the globe.

Another corporate giant sourcing product in China is Apple Computer. They have contracted with a sole manufacturer for the iPod music player (MP-3) and use Taiwan’s Inventec who have their primary iPod production facility in Shanghai. Apple is still finding it difficult to keep its best-selling iPod on the retailers shelves due to enormous demand for the product. Apple is already looking to line up another iPod manufacturer in China. The contracting of a second Chinese manufacturing company by Apple suggests that it does not expect sales of the iPod, with over 5.3 million sold in the first three months of 2005; to fall off any time soon. It also illustrates Apple’s obvious trust in the related Chinese manufacturing practices employed by permitting them to exclusively control the value chain.

In the apparel industry, there are also many companies who outsource the value chain to China including: Tommy Hilfiger, Nautica, Brooks Brothers etc. who source their luxury garments predominantly through the Hong Kong based TAL Apparel Group. Their workforce of over 23,000 produce 41 million tops, 8 million pairs of pants, 1.5 million pieces of outerwear and 130,000 tailored suits annually.

The examples of Chinese companies making products like watches, bags, household goods, DVD players, laptop computers, printers and golf clubs is seemingly without limits but since the product label often does not say “Made in China” we may not know where they were actually made. In any case this globalisation has resulted in lower prices, with the effect that the consumer in the Western world has more spending power than before.

China is well-known as a source for consumer products even though many end-users don’t even know that their Apple iPods or Nike shoes are produced there.

Today, sourcing is not solely restricted to consumer products. Multinationals such as General Electric, Siemens, Dupont and Bosch also have well-developed China industrial sourcing operations, and SMEs from the United States and Europe are part of a new wave of industrial market entrants. Given the advanced stage of globalisation and related cost pressures, these companies often face a simple choice: outsource production abroad and take advantage of China’s abundant manufacturing base or lose out to their rivals at home and in China.

As China has moved up the value chain, an increasing number of manufacturing companies in the technical field now follow this trend: they buy parts and components in China (often at substantially lower cost) that are used in the manufacturing process in their home country. (continued on next page)

This approach is increasingly used by manufacturers of pre-assembled automobile components, machinery and equipment manufacturers. It has the advantage that companies can continue to control IPR issues by limiting the sourcing to non-sensitive parts. They are also able to maintain the “Made in …….” label while capitalising on China’s cost advantages.

Another example is in the aviation industry where the European firm Airbus successfully controls their value chain in China. Over a quarter of the 3,500 aircraft in the Airbus worldwide fleet have components produced in China. This proportion is likely to double within the coming years as Airbus intensifies its industrial co-operation with China.

This progression to complicated technological products proves that China has moved up the value chain.

Although Chinese companies generally use the full set of possible brand building strategies, most Western brands do not. While focusing on product (e.g. Head & Shoulders, Tide, M&M’s)) and umbrella brands (often corporate brands like Siemens, GE, Motorola), more abstract and psychological brand building strategies, like those behind placebos, symbols, alter egos or fantasies are seldom applied. This is a challenge for Western brands. They have to generate consumer insights and build new strategies based on this know-how. IKEA provides an example – the successful retailer brand is a symbol of the modern Western lifestyle.

In China traditional and modern values are mixed. More recent values like modernity, technology-orientation and the new patriotism overlap traditional Chinese values. As such, symbolic brand consumption results from a successful mixture of traditional and modern components. They have to make it possible for the Chinese consumer to put traditional Chinese values into action, and they have to satisfy their demand - resulting from materialism, hedonism and social status orientation. The definition of a social value-added advantage has to consider that most Chinese do not express individuality and distinction, but similarity with other people and affiliation with a social group. In China collectivism is a central value. Brands have to convey the common and popular, as well as emphasising harmony and group experience.

There are several possibilities in positioning a consumer brand, but in China only a handful are promising. While traditional product features and attributes, particular product benefits and the company’s leadership, do not deliver a competitive advantage any longer, satisfaction of desires and emotional needs, as well as experience will do so. In China a combination of nationwide uniform brand positioning and regional / local adaptation of products, distribution, logistics and communications features is recommended. Uniform positioning is efficient because it aims at widespread consumer needs and motives. Therefore, this combined approach can generate a critical mass of brand equity cost-effectively.

Identity Instead of Image

Due to the fact that there are too many similar images in dynamic markets, the image of a company doesn't appeal to consumers anymore. Today most of the consumer brands have selling-attributes like “modern”, “sporty”, “dynamic” or “healthy”. Permanent social changes, as well as a turbulent market environment, tend to destroy these images almost as quickly as they are developed. Moreover, In China permanent updating of image costs too much money to make it a viable option. In this country images burst very soon - like colourful soap bubbles in a windy environment.

An alternative focus is identity, which is drawn from sources like history, heritage, personality, story or myth of a brand. While image is the appearance, identity is the substance. So identity always delivers a stable and durable basis for marketing a brand. Who and what is a brand, really? These questions target the attributes, roles and values of a brand. Brand identity corresponds strongly with the long-term oriented Chinese style of thinking, feeling and acting, which looks for and responds to history and tradition.

Effective Brand Communications

Although Chinese consumers tend to assess the functional attributes of Western brands more favourably than the attributes of Chinese brands, their purchasing behaviour is mainly determined by the social and symbolic attributes of brands. Therefore, brand communications in China should be focused on interactivity, events, word-of-mouth and symbolic issues.
The use of personality is a very effective means of brand communications. Charismatic entrepreneurs, managers and other well-known or reputable persons are applicable in developing and sustaining a strong brand identity. They stand for the brand. Chinese consumers and stakeholders trust people much more than anonymous companies from foreign countries and cultures. People stand for something and give brands an unmistakable face and a clear vision. (continued on next page)

Pure facts cannot transfer identity and personality adequately. Rather, it’s the story behind a product that most effectively transfers identity and personality. To tell a tale is often the most effective way to create brand awareness in an information-flooded, noisy and turbulent Chinese market environment. Stories have a lasting effect because they stimulate emotions, trigger pictures and create contexts and connections. Nobody remembers facts, but everybody remembers a touching story.

China is a print culture and a word-of-mouth society. A neighbour’s statement, a newspaper article and public opinion are much more important than in individualistic European countries. This means that the management of reputation must have a preferred position in the Chinese brand communications portfolio. Western companies should, therefore, strengthen their PR and word-of-mouth activities, as well as lobbying and managing them professionally.

Today we place brands on a stage, bringing them to the market like plays in the theatre. Brand dramatisation is extremely fruitful in China because dramatisation and staging are central parts of the Chinese culture. There are many plots which are suitable for the staging of brands, such as stirring scenes from everyday life-episodes or striking historical scenes. Brand staging considers picture worlds, cultural archetypes, myths and social rituals. China is full of them.

Written by Dr. Hans Joachim Fuchs, Managing Director at CHINABRAND Consulting Limited, an European-Chinese consulting firm focused on brand building and management in China. www.chinabrands.de

Across China, major opportunities exist for Western companies to make use of the Chinese value chain. Capabilities that could range from owning the value chain to “simply” controlling one or multiple business entities in China. If problems like copyright infringement, loss of data capacity, win-lose thinking and other looming dangers can be overcome, then SMEs as well as MNEs can become significantly more competitive and cost-efficient by outsourcing their manufacturing process to China.

These outsourcing models have been used by FMCG (fast moving consumer goods) companies for many years and are now increasingly being used by US and European manufacturing companies for industrial supplies and components.

By extending this traditional supply chain model to a new model that comprises the complete value chain of a product, companies can benefit from directing centralised savings to other areas in China. In these areas they can achieve higher economic returns, creating new revenue channels and cost-reduction opportunities by interacting in new or less-conventional ways.

One prime example for owning the value chain is Techtronic Industries (TTI), a leading marketer of floor care products, manufacturer and supplier to the home improvement business and , owner of four factories in China with three of them located in Dongguan and one in Shenzhen. With a workforce of more than 20,000 people, mainly employed in China, TTI exports brands like AEG, Ryobi and Milwaukee to markets worldwide via its Hong Kong based parent company. Almost 70% of their sales are made in the USA and the other 30% are transacted in Europe. While running their own value chain, TTI can further leverage their scale, efficiency and knowledge by improving information flows with the goal of providing simpler, more integrated one-stop-solutions while synchronizing R&D, manufacturing processes and sales through one location in China.

The second aspect is the transformation from the traditional model to solely controlling the value chain in China. This step enhances Western companies’ flexibility and agility because they will not have working capital tied-up in property. They can overcome the resistance to change in various regions or countries. (continued on next page)

BOSS is a first-rate example of a foreign company successfully controlling the value chain in China. Their contractual manufacturer Esquel, a Chinese premium cotton shirt manufacturer, headquartered in Hong Kong with their biggest factory located in Gaoming, an hour's drive west of Guangzhou, turn out thousands of men's dress shirts everyday produced by more than 21,000 employees. With this control-based collaboration by BOSS it is possible for both partners to develop a thorough understanding of each others crucial operating needs as well as a unified process that drives down costs and increases the effectiveness in order to create a “win-win” situation for both parties.

Despite this “win-win” situation one should never lose sight of potential risks and challenges involved in the dependence on each other. Manufacturing and design needs to be coordinated, joint capacity planning needs to be synchronized and order fulfillment needs to be controlled to be on time. Further challenges include culture, communication, destination country expectations with respect to quality packaging which needs to be overcome by both parties. Possible solutions are to ensure full understanding of the “home country” requirements or to ensure full compliance in China.

This type of collaboration between a Western company either owning or controlling the value chain in China is necessary to succeed in many industries. We at Fiducia are prepared to advise you about the different outsourcing options available to you. A summary of these options is available by request at
info@fiducia-china.com

Fiducia Management Consultants - Shenzhen moved to new premises on May 30th 2005.

9/F, International Culture Building,
3039 Shennan Road (Central),
Shenzhen 518033 P.R. China
Tel: (+86)-755-83292303
Fax: (+86)-755-83290821
Email: shenzhen@fiducia-china.com

Fiducia Management Consultants participated in the following meetings:

1. Mergers & Acquisitions – China 2005 at Beijing Grand Hyatt Hotel on June 15th 2005. Mr. Juergen Kracht, Managing Director spoke at the conference on “Company Search: Finding the Right Match in China”.
    
2. China Workshop by ZfU Zurich on June 3rd 2005. Mr. Juergen Kracht also spoke at the conference on “What Keeps Managers in China Awake at Night?”

Should you like to receive a copy of the presentation, please contact us at contact@fiducia-china.com

Fiducia would like to thank the many subscribers who responded to our survey in the June issue. For all of you who did not get the opportunity to complete the survey earlier we would definitely like to hear from you now at http://www.fiducia-china.com/surveys/cfn/Add

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