This article originally appeared in Forbes.
Aside from airline status and global cuisine, the other perk of my job is observing how branding and marketing differ across the Pacific. And most fascinating to me these days is how Chinese businesses and brands are evolving worldwide.
It’s no secret that China is growing fast. As Chinese companies mature at home, they have sought new routes to growth in North America. Flush with cash, Chinese companies have been expanding rapidly abroad and doing so through acquisitions, not organic expansion. What used to be known in America as “Made in China” is now “Owned by China,” a subtle shift that most consumers in the U.S. likely haven’t noticed.
The “Owned by China” trend was, in part, spurred from lessons learned by Chinese companies that witnessed their American counterparts enter China seeking the spoils of the fastest-growing economy. The success of American companies in China was stymied by a poor cultural and local market understanding, a lack of product and marketing localization, unrealistic growth targets and, of course, failure to work around a myriad of stringent governmental regulations. This is not to say there aren’t some success stories, but those are dwarfed by the large list of failures that have since recalibrated what success looks like in China. So, when the time came for Chinese global expansion, they elected to buy instead of organically build, a strategy clearly based on what they observed at home.
This strategy has worked exceptionally well in recent years. Most Americans would be surprised to learn that their Motorola smartphone is made in and owned by China. The same can be said about AMC Theaters, Hoover, Grindr, Ironman, Volvo, GE Appliances, Smithfield and even some of America’s most iconic brands, like the Waldorf Astoria Hotel in New York City. The quintessential American luxury experience was acquired in 2014 by Beijing-based Anbang Insurance Group, a group which was recently taken over by Chinese regulators. So, in essence, when the newly refurbished Waldorf opens for business, that experience will be delivered by none other than the Chinese government. Let that sink in.
The pace of this acquisition spree is staggering. China’s mergers and acquisitions (M&A) activity has hit a record high in recent years. In 2017, Chinese companies spent $227 billion on acquiring foreign companies — six times what foreign companies spent acquiring Chinese firms, according to McKinsey.
But this strategy of global expansion is hitting a wall due to the rising discourse and debate of tariffs and fair competition. In the first six months of 2018, Baker McKenzie reports the value of Chinese mergers and acquisitions in Europe hit $22 billion, nine times higher than that in North America. In fact, Chinese outbound investments have declined a staggering 92% in the U.S., dropping from $24 billion to just $2 billion within the span of a year. Although Chinese companies continue to take the M&A route, there is a clear shift away from North America.
What does this mean for Chinese businesses looking for growth in the U.S.? Many businesses in China are at a fork in the road and the path forward will look very differently than what led to today.
Where the real potential lies for Chinese businesses is to invest in building their own brands the old-fashioned way — organically — and competing for U.S. customer loyalty on merits beyond price. This hasn’t been a hallmark of Chinese businesses given their deep manufacturing roots. Many established Chinese brands have tried to win organically in the U.S., but most have failed miserably, including LeEco and LiNing, just to name a few.
To be successful in this approach requires a seismic shift in how Chinese companies operate and think. I once witnessed a conversation between one of my U.S.-based clients and a Chinese seller of multimillion-dollar business-to-business (B2B) equipment. My client pointed out to the Chinese sales associate that his product fell well behind a U.S.-based competitor’s offering in the area of up-time and overall performance. The response to that question by the salesperson was: “Our product is less than half the price of the competition. When ours breaks, you buy a new one, and you still save money.”
For B2B customers and consumers alike, manufacturing and price are important. But this can’t be the only lens in how you see the world, at least not in America. Service, customer experience, performance and innovation are essential to facilitating loyalty. But to make that really part of how you do business in the U.S., it has to start with the people who come to work for you every day.
If your company is going to win, it has to start with people. Brands that win in the U.S. win because they don’t just make great products, they are driven by a purpose — a purpose that attracts and unites employees who bring the product and customer experience to life; a purpose that connects different market segments and product offerings into a broader story and an emotional connection to customers who see a brand as an extension of their own value system.
But to do this requires a long view. It requires resources. It requires real marketing know-how, and more than anything, it requires direct support and adherence from the top of the company. It can’t be contrived and it must be authentic.
But if that can’t be done, the path ahead for Chinese businesses in America looks very different. The current political and economic debate shows no sign of slowing. Even if it is resolved in the short-to-medium term, there is likely to be residual fallout for years to come.
What does this mean for Chinese brands that seek growth in America? Most likely, they will be directed into low-value industries where regulators or consumers don’t care about brand or country of origin — industries where technology is nonessential and/or low-cost B2B sectors are deemed as low-risk to national security. They will be in a place that feels eerily similar to the perceptions that dogged Chinese brands in years past — cheap. And that would be unfortunate.
Jason Cieslak is President, Pacific Rim.