May 26, 2010

Beijing tries to push beyond ‘Made in China’ status to find name-brand innovation

Quick: Think of a Chinese brand name.
Last year, China overtook Germany to become the world’s largest exporter, and this year it could surpass Japan as the world’s No. 2 economy. But as China gains international heft, its lack of global brands threatens its dream of becoming a superpower.

No big marquee brands means China is stuck doing the global grunt work in factory cities while designers and engineers overseas reap the profits. Much of Apple’s iPhone, for example, is made in China. But if a high-end version costs $750, China is lucky to hold on to $25. For a pair of Nikes, it’s four pennies on the dollar.

“We’ve lost a bucketload of money to foreigners because they have brands and we don’t,” complained Fan Chunyong, the secretary general of the China Industrial Overseas Development and Planning Association. “Our clothes are Italian, French, German, so the profits are all leaving China. . . . We need to create brands, and fast.”

The problem is exacerbated by China’s lack of successful innovation and its reliance on stitching and welding together products that are imagined, invented and designed by others. A failure to innovate means China is trapped paying enormous amounts in patent royalties and licensing fees to foreigners who are.

China’s government has responded in typically lavish fashion, launching a multibillion-dollar effort to create brands, encourage innovation and protect its market from foreign domination.

Through tax breaks and subsidies, China has embraced what it calls “a going-out strategy,” backing firms seeking to buy foreign businesses, snap up natural resources or expand their footprint overseas.

Domestically, it has launched the “indigenous innovation” program to encourage its companies to manufacture high-tech goods by forcing foreign firms to hand over their trade secrets and patents if they want to sell their products there. Since 2007, thousands of Chinese businessmen have attended government-sponsored seminars on “going out,” learning everything from how to do battle with domineering Americans and Britons during conference calls to why a Chinese boss should think twice about publicly humiliating his wayward foreign workers — as he’d do to his staff at home.

In recent months, the Western media have hyperventilated with stories about China’s going-out strategy and about Chinese firms buying up the globe — Oil! Gas! Cars! — and even investing in the United States. In 2000, China had $28 billion in overseas investments; this year, it could break $200 billion.

But a little perspective: Even if China’s total foreign direct investment hits $200 billion, it still pales in comparison to smaller economies, such as Singapore’s, Russia’s and Brazil’s. And China has plunked down only about $17 billion in rich countries, equivalent to the overseas assets of a single medium-ranked Fortune 500 company.

The 34 Chinese companies on the Fortune 500 list basically operate in China only. The world’s three biggest banks are Chinese, but none is among the world’s top 50, ranked by the extent of their geographical spread. China’s attempts to fight what it sees as the stranglehold of foreign patents and intellectual property rights have also had hiccups.

China is estimated to have paid foreign firms more than $100 billion in royalties to use mobile telephone technology developed in the West, according to executives of Western communications companies.

So in the late 1990s, it decided to develop its own. But after more than $30 billion in development costs, its unique technology still has fewer than 20 million users in a market of more than 500 million.

Handset makers have told China’s government that they won’t produce phones equipped with the new technology unless they are given subsidies. And China has resorted to giving away the technology to Romania and South Korea to encourage broader use. “China is still stuck,” said Joerg Wuttke, former president of the European Union Chamber of Commerce in China and a 25-year veteran of doing business in China. “There is a huge disconnect between the money spent in universities and the lack of products.”

China also faces enormous challenges to creating globalized firms. Studies of Chinese executives show that they spend far more time with government officials — who in China are the key to their profits — than with customers, who are the key to international success. “Chinese executives like me need to spend a generation outside China to learn how business is done around the world,” said Hua Dongyi, who chairs a massive Chinese mining company in Australia but has also built roads in Algeria and infrastructure in Sudan.
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That’s definitely true for Hua. In April, he was forced to apologize to his Australian workers after he told Chinese media that the workers were money-grubbing and lacked the “loyalty and sense of responsibility existing in many Chinese enterprises.”

Lenovo’s lessons

The Chinese computer maker Lenovo, which bought IBM’s ThinkPad in 2004, wasn’t the first Chinese company to acquire a big foreign brand, but it’s still considered the pioneer.

That’s probably because China’s other forays into buying foreign brands have ended in disaster. An attempt by the Chinese electronics firm TCL to become the world’s biggest TV manufacturer in 2003 fizzled when its French subsidiary lost $250 million.

A move by a private Chinese company to take over a once-dominant U.S. lawn mower company, Murray Outdoor Power Equipment, ended in bankruptcy because, among other mistakes, the Chinese firm didn’t realize that Americans tend to buy mowers mostly in the spring.

Lenovo purchased IBM’s laptop division for $1.25 billion — a gutsy move considering that IBM’s renowned ThinkPad brand lost $1 billion from 2000-2004, twice Lenovo’s total profit during that time.

Although Lenovo’s move was portrayed by many in the West as a sign of China’s rise, Lenovo acted out of desperation, said Yang Yuanqing, who has been a senior executive at Lenovo since it was founded in the 1980s with government funds.

Lenovo was losing market share in China. Its technology was middling. It had no access to foreign markets. With one swoop, Lenovo internationalized, purchased a famous brand and got a warehouse of technology as well.

But from the start, things were tough.

Lenovo’s American competitors fanned anti-Chinese flames in Congress, insinuating that Lenovo could insert spyware into the computers it was selling to the U.S. government. The firm also faced enormous challenges bridging cultural divides among U.S. workers at its Raleigh, N.C., headquarters, the Japanese who made ThinkPads and the Chinese who made Lenovos. William Amelio, the firm’s second chief executive who had been lured from a top job at Dell, remembers his first trip to Beijing as the new Lenovo boss in late 2005.

“I was greeted with rose petals and the red carpet treatment and company songs. In Raleigh, everyone’s armed were crossed. It was like, ‘Who died and left you the boss?’ ” he said. “You had the respect for power in the East and the disdain for authority in the West.” Meanwhile, Lenovo’s competitors were moving. In 2007, Acer, the computer powerhouse from Taiwan, snapped up the European computer maker Gateway, effectively cutting Lenovo off from European customers. Lenovo slipped to fourth place worldwide behind HP, Dell and Acer.

Lenovo might not have much of a brand overseas, but its association with a foreign firm has helped it in China. Lenovo’s computers routinely command twice the price in China that they do in the United States. Lenovo offers its top-of-the-line ThinkPad W700 to the Chinese government at $12,500; in the United States, it runs for $2,500
Chinese officials pushing the going-out strategy have looked at Lenovo as a model for Chinese firms seeking to become known multinational brands. But for China’s companies, going out might be the secret to staying alive at home.

This year, the Chinese car company Geely bought Volvo from Ford. Pundits figured it was to expand China’s economic heft — and its brands — overseas. But as Geely’s founder, Li Shufu, put it, “Volvo will find a new home market in China.”


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