|"The Challenge From China"
Kerry A. Dolan and Quentin Hardy, 05.13.02
Chinese companies, yesterday's subcontractors, aim to build tomorrow's brands. Look out, America. In Guangzhou, China, a factory spanning 2 million square feet--the world's biggest piano plant--cranks out 250 pianos every day. White-smocked workers for the Pearl River Piano Group steer computer-driven kilns that bake oak planks en masse. Individual piano keys are hand-checked for precision and balance. Five pairs of ears listen to each piano's tuning, speeding another instrument out the door--and into America's living rooms. Just two years after Pearl River set up a U.S. sales arm, its high-quality, low-priced pianos have snared 10% of the market, and the company vows to capture a 25% share by 2005. It already has won the hearts and minds of some U.S. consumers.
"In the history of mankind there probably hasn't been as good an entry-level piano," gushes Robert Witmeyer, a 40-year veteran of the business and owner of San Jose Piano, upstate from Pearl River's Ontario, Calif. warehouse and sales office. He eyes the attention to detail on the $3,200 model and deems it arguably superior to pricier models from Korean and Japanese rivals. Pearl River, the American dealer says, "doesn't plan on being second-best."
Nor do other Chinese companies now intent on invading the U.S. market and building global brands. U.S. companies hailed China's membership last December in the WTO, eyeing lower tariffs and a huge waiting market. But the smartest Chinese manufacturers see it as a ripe time to strike back and establish markets for Chinese-branded goods here and across Asia and Europe.
China has long held "most favored nation" trading status with the U.S., which grants it the same tariff rates that many other foreign countries get. Its admission into the WTO forces places like the European Union, Mexico and Taiwan to lower trade barriers those governments have had against a host of Chinese products. WTO membership places looser restrictions on China's apparel exports worldwide, too. Moreover, it has steeled the savvy Chinese companies for harsher competition in their home market; they aim to keep growing by moving onto the competition's turf.
"As [foreign companies] come to China, we not only need the domestic market, we also need the international market," says Tong Zhi Cheng, president of Pearl River, which relied on the U.S. for 10% of total revenue of almost $90 million last year.
Chinese companies got their first taste of the U.S. market two decades ago, when it seemed like half of the items in the local Wal-Mart were made in China, often for U.S. brands. Now a handful of powerful Chinese exporters have bolder ambitions--to sell goods under their own brand names and gun for the extra profits that a distinctive name brings.
Household appliance maker Haier Group, brewer Tsingtao and refrigerator maker Kelon are all trying to build brands in the U.S. In the corporate world auto parts and telecom equipment makers are knocking elbows with bigger U.S. competition, aiming to undercut the pricing of such vulnerable titans as Cisco Systems.
The Chinese presence could run into some perception problems among U.S. consumers. Some Americans equate "made in China" with "cheap and shoddy." Others see the country as a chop shop, where innovation is nonexistent and technology is copied, often illegally. But "made in Japan" was similarly disdained 30 years ago, and the Japanese went on to own consumer electronics. The China contingent will catch up faster.
"The Chinese are fast learners," says Shirley Young, a marketing veteran who opened General Motors' first and only plant in China five years ago. "When they realize what it takes to build a brand, they'll really get into it." Nicholas Lardy, China scholar at the Brookings Institution and author of the new book Integrating China Into the Global Economy, adds, "The perception is that the Chinese are never going to get anywhere because they don't have their own brands. That was true ten years ago, but it's changed dramatically."
At first most of these Chinese companies don't target the high end of the market but are content to build brands with lower prices and dependable quality. The hope is to move upscale later. Japanese companies tried a similar tack in the 1970s and 1980s. Toyota went low-end when it first entered the U.S. auto market and later moved up to the Lexus arena. Yamaha expedited the demise of most U.S. piano makers (Steinway is the only major survivor) and now makes high-end models, since it owns more of the market.
Haier, a 17-year-old appliance maker based in the port city of Qingdao, crept into the U.S. market in 1994, selling just three mini-refrigerator models through a distributor named Michael Jemal, an energetic appliance entrepreneur in Great Neck, N.Y. By 1999 the two parties formed Haier America Trading Co. to broaden the line, and nine months later they opened a factory in Camden, S.C. to make full-size refrigerators for the U.S. market.
"We're looking to build a brand," says Jemal, 36. "We'll do it faster than Panasonic did."
Today Haier sells 250 models of home appliances, from dishwashers to microwaves, in big retailers like Wal-Mart and Costco and over 1,000 appliance dealers. The company claims to have 50% of the U.S. market for the small fridges that inhabit offices and college dorm rooms. Its share is 60% in refrigerated wine chillers. In early 2000 Haier introduced a stand-alone model specifically designed for the U.S., and sales sparked; last fall Sanyo launched its own version, and early this year General Electric introduced a model priced to compete with Haier. Two global appliance makers have since approached Jemal, Haier's New York connection, to see if Haier will make its popular new compact chest freezer for their brands. Jemal gladly accepted.
Haier Chief Executive Zhang Ruimin vows the company will join the ranks of the 500 biggest companies worldwide. It already is the world's second-largest maker of refrigerators, and runs sixth in worldwide sales of large home appliances, according to Euromonitor. Sales in the U.S. more than doubled to nearly $200 million last year. Back in China the Haier parent company pulled in revenues of $7.3 billion in 2001, a 46% increase.
Haier and other exporters first sharpen their skills by competing with multinationals in China, then export to developing nations and smaller economies. Once they learn lessons in those markets, they head for the U.S. and ramp up. The influx of foreign competition in China, particularly in manufacturing and electronics, has provided the locals with tough, world-class training. A decade ago Lucent, Siemens, Motorola and a few other outsiders dominated the Chinese market for telecom equipment. Then a Chinese rival, Huawei Technologies, began producing network switches that were less expensive and slightly less sophisticated but adequate for Chinese needs. "Now they have a very large market share in China and have begun to export," says the Brookings Institution's Lardy.
Huawei sells Cisco-type routers at a fraction of Cisco's price and gets a boost from IBM's marketing know-how. Last year overseas markets provided 10% of Shenzhen-based Huawei's $3.1 billion in sales, a threefold increase from 2000; the company hopes the overseas component can more than triple again, to 35%, by 2006. "There will be a lot of changes in the next five years," vows William Xu, a Huawei executive vice president.
Cisco wasn't paying much attention to Huawei--until recently. Now Cisco says it is considering legal action (for theft of intellectual property) against Huawei, hoping to stop a company one Wall Street analyst calls "the biggest reason I know to sell Cisco stock."
So far the China bunch has been strong on manufacturing but wobbly on management, so Huawei and some other players are hiring foreigners to train them, fast. Huawei has 70 IBM employees at its headquarters. Since 1999 they have linked Huawei's switch development with marketing and sales, aiming to design for customer needs. It's a great leap forward for a company with communist roots. One of the IBM-ers involved, executive consultant Chris Fickenscher, compares the overhaul with IBM's own remodeling under Louis Gerstner.
Huawei, founded by a former officer in China's Red Army, faces other public-relations problems. Two years ago it was accused of linking Iraqi missile stations with fiber-optic lines, a charge the company denies.
Marketing is still a nascent notion for many Chinese executives, so some outfits turn to U.S.-trained countrymen to build a presence here. Auto parts supplier Wanxiang Group has seen its U.S. sales increase 78% to $96 million in three years, and expects to more than double that again this year. It set up a U.S. business in 1995, tapping Pin Ni, a Chinese national who was studying for his Ph.D. in Kentucky, to run it.
At the time, "Wanxiang didn't have a work force to do international business," says Ni, now 38 and the president of Wanxiang America. "Some Chinese schools will give you an M.B.A., but there are no marketing degrees." Wanxiang couldn't get money out of China--currency restrictions are still a problem--so Ni started with $20,000 of his own money. He retooled Wanxiang's products for the U.S. market.
Today Chinese engineers at Wanxiang America's Elgin, Ill. headquarters talk to customers by day and plants in China at night. "American companies know what they want, and we know what we can make," says Ni. "This isn't a Chinese company or an American company. Why should we care? The key is to make money."
Wanxiang is starting to build a brand with Visteon, the $18 billion (sales) auto supplier spun out of Ford, says purchasing manager David Piejak. "Their quality is good--we're going for zero defects per million parts--and they are hungry."
Pristine production, however, won't be enough to win over rank-and-file consumers. "The Chinese need a Sony: a company that will stand for high quality, that will produce incredible amounts of innovation," says Martyn Straw, president of brand consultancy Interbrand in New York. To achieve that, he says, "they've got a lot of work to do."
To support a large distribution and sales network, "you have to hire ad companies and invest in sales and marketing. Chinese companies are not used to spending that kind of money," says Howard Chao, a Taiwan-born partner at law firm O'Melveny & Meyers in Menlo Park, Calif. who works with clients in China.
Tsingtao Beer, perhaps the best-known Chinese brand in the U.S., has a tepid annual marketing budget of $2 million or so, funded mostly by its distributor, Monarch Imports in Chicago. Tsingtao rates only 34th among imported beers in the U.S., says Impact Databank, with some 850,000 cases shipped last year. The Mexican beer Corona, with a $20 million marketing budget, is number one.
Margin is an issue, says Chao: "People in China have this view that they do all the hard work of manufacturing and the margin gets taken by the people with the brands." He continues, "They've seen how Procter & Gamble took over large parts of the Chinese market using a blitz of advertising." Domestically, ad spending is growing, hitting $11.2 billion last year.
The sheer size of the Chinese market is one reason more Chinese brands haven't yet arrived on U.S. soil. As some parts of the market become saturated--home appliances were among the first--more companies are setting their sights on exports. Five or ten years from now Chinese firms that have found their place, leveraged their formidable manufacturing prowess and mastered Western-style marketing may well become household names in middle America.
Wanxiang Group, Zhejiang
Having set up one of China's largest home-grown auto parts manufacturing services, Lu is looking to financial services for growth and continues to expand Wanxiang's business in the U.S., where it is already one of China's largest foreign investors. As a member of the National People's Congress, he is active in public affairs.
Wanxiang America Corporation / Contact Info:
Pin Ni, President
Gary E. Wetzel, COO/CFO
Michael J. Schaal, General Manager
88 Airport Road
Elgin, IL 60123
[email protected] (Pin Ni)
[email protected] (Gary E. Wetzel)
[email protected] (Michael J. Schaal)