Why Chinese Brands Can't Compete

A difference in culture means American brands will continue to dominate for years to come.

Aug 9, 2014 at 9:27AM

Pop quiz: Off the top of your head, how many Chinese brands can you name? 

If you said zero, don't worry: You're like 94% of Americans, according to findings from research agency Millward Brown. Perhaps it's not our fault, though. On Interbrand's latest list of the 100 most valuable global brands, not a single company is Chinese. While American brands dominate the list, 14 other countries are represented, with even tiny Finland cracking the chart. How can not even one brand from China, the world's second-biggest economy and most populous country, be on the list?

There's no simple answer for China's lack of representation, but several contributing factors help shed light on the issue.

Food safety scandals are all too common in China. Most recently, fast-food sales slumped after workers at a supplier for McDonald's and Yum! Brands were allegedly caught using meat that had fallen on the ground and were accused of changing expiration dates.

The concerns haven't just tainted products sold in China, but also items made there. Earlier this year, leading pet food retailers Petco and PetSmart halted the sale of pet food made in the nation after a rash of dog deaths were linked to some China-made treats. Other safety scares that have sent Chinese running to imported brands include a tainted baby formula outbreak that in 2008 resulted in thousands of Chinese babies falling ill and some dying.   

The "Made in China" label is ubiquitous in this day and age, but it often carries a stigma of inferior quality. In a recent poll, nearly one-third of Americans said they wouldn't support a brand they knew to be Chinese-owned. 

Intellectual property 
The regulatory issues in China extend beyond safety concerns. Intellectual property rights, which underpin the system of patents, trademarks, and copyrights necessary for brands to thrive, are much more lax in China. According to a recent U.N. report, over two-thirds of the world's counterfeit goods come from that country, and brand owners have often complained about the lack of enforcement of intellectual property rights in China.  

The culture of fraud in China is sometimes laughable. In 2011, 22 fake Apple stores were found in one Chinese city alone. Knockoff brand-name goods are regularly sold around the country, and some see piracy as a deeply ingrained part of the culture. Tom Doctoroff, the author of the book What Chinese Want and a marketing expert on China, told Forbes: "When it comes to innovation, the Chinese won't deliver. China is the total flip-side of the U.S. Piracy goes back to the China world view that individual rights don't matter."  

As Doctoroff said, the Chinese downplay the value of the individual, compared to the U.S. Its state capitalist system means that success in business often comes from the assistance of the government, not from a brilliant idea, a superior product, or a better strategy. 

The difference in culture begins with the Chinese education system, where rote learning and standardized testing are a much bigger part of school life than in the U.S,  and where the system favors memorization over creative thinking. While the U.S. lacks so-called STEM (science, technology, engineering, mathematics) graduates, it has no shortage of creative minds, be they in Hollywood or brand management.

China's state capitalist economy and communist policies further reinforce those differences as individuals lack freedom of speech and property rights, and the planned economy de-emphasizes the need for individual innovation.

How it all adds up
China is making strides to bring its regulatory systems up to Western standards and alter its education system, but culture is hard to change. The differences in China are underpinned by an opposing set of values that de-emphasize the individual, and with it concepts such as innovation and branding that come out of the creative mind rather than state planning.

The Chinese economy has boomed over the last 20 years, along the way becoming the world's largest manufacturer, surpassing the U.S. in goods produced in 2011. But being a manufacturing-based economy means that Chinese companies are largely competing on price, which is much less sustainable of an advantage than having a strong brand. Along with China's boom, wages have skyrocketed, quadrupling in the last five years, making it less competitive for manufacturers than other developing countries. Many U.S. companies have shipped jobs from China to Mexico, where labor costs and transportation are cheaper, while others have moved production to Vietnam and other parts of Asia.  

China's GDP continues to grow at a blistering pace, and the country will likely eventually become the world's largest economy by virtue of its enormous population. But without a cultural change that enables successful brands, the country will struggle to move past a manufacturing-based economy and match the living standards of Westerners and the profit margins of Western companies.  

That means Western brands will continue to prosper in China and dominate the rest of the world, while China's cultural influence will lag even if it has more economic weight to throw around.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends McDonald's and PetSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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