Tag: China

Estee Lauder’s New Skin Care Brand in China: The Potential for High-risk, High-reward

Posted on October 15, 2012

Can Estee Lauder Companies make “Osiao” a household word in China’s luxury skin care market?

The New York-based manufacturer of skin care, makeup, fragrance and hair care products is banking that Chinese women will buy a new high-end brand tailored specifically for them, designed to promote what Estee Lauder’s scientists say Asian women want most in a skin care product — “natural radiance.”  

Already known for such brands as Bobbi Brown, Clinique, MAC, Origins and La Mer, among others, Estee Lauder’s decision to launch a whole new brand — rather than simply a new product — suggests the company is confident that an initiative begun more than five years ago will expand Estee Lauder’s footprint not just in China, but throughout Asia. The Osiao product line is expected to sell for between US$45 and US$190.

The venture is not without risk. Osiao — which is being introduced this month in only two department stores in Hong Kong and on some Cathay Pacific Airways Hong Kong flights – already faces competition from other Asian skin care products. In addition, its success depends to some extent on continuing strength in the high-end luxury market, despite weakening in the Chinese economy overall. And some observers question whether a hybrid product like Osiao will appeal to Chinese women. According to a New York Times article, Osiao will use English labels but its formulas will contain such ingredients as ginseng, Asiatic pennywort and ganoderma.

Wharton faculty familiar with the Chinese market are generally optimistic about Estee Lauder’s venture, while also noting the challenges that any new brand faces. “As part of the Estee Lauder family, Osiao can and should leverage the high brand equity of Estee Lauder in the Chinese market, at least in the initial stage,” says marketing professor Qiaowei Shen. “Brand name is still a very important element when Chinese consumers are choosing their skincare products.” While it probably won’t be hard “to convince some consumers to try the new brand, the difficult part [will be] to convert them to loyal customers. The true quality of the product is ultimately the key.”

The concept of using Chinese herbs as ingredients in skincare products is not new, Shen adds. “A brand that claims to specifically cater to Chinese or Asian skin types does not necessarily win market share. Many brands originating from Korea and Japan, which are designed for Asian skin by nature, already have products with ginseng or other Chinese plants as ingredients. How is Osiao different from these?”

The market “is there [and] the brand will enjoy a glow from the [reputation] of the parent company,” says Shen. “But in the end, whether consumers are going to repeat their purchase and spread positive word of mouth depends on whether the product quality lives up to their expectations.”

A More Sophisticated Market

Estee Lauder, founded in 1946, is experiencing strong growth in China. The company reported a rise in fiscal fourth quarter earnings of 25% and a 9.2% increase in revenue, to $2.25 billion. According to an article in The New York Times, fiscal 2012 is the first year that sales in the Asia Pacific region exceeded $2 billion. The company sells its products in more than 150 countries and territories mainly through limited distribution in, for example, high-end department stores and perfumeries, and specialized retail stores. China, with sales of $500 million, is its third largest market, behind the U.S. and Japan.

Wharton marketing professor Barbara Kahn gives Estee Lauder high marks for “understanding how important skin care is to the Chinese consumer. One of the key differences between China – and Asia, in general — and the U.S. is the importance of skin care products. If you look at a typical drugstore, even a Sephora in Asia versus one in the U.S., you will see a larger percentage of the store devoted to [those items].” Kahn also points out that Chinese consumers think of the skin care process “as a multi-step regime, and they take it very seriously. They are generally more sophisticated in this category than the typical American consumer.” Given the importance of the skin care category “and the amount of money consumers are willing to spend, this strategy of developing a new local brand makes a lot of sense.”

Estee Lauder’s initiative is “brilliant [as well as] risky,” according to Wharton marketing professor David Reibstein. In China, he says, a number of trends come into play: “A strong desire to be beautiful, with a heavy concern about skin care; a desire to be on the leading edge of fashion and skin care [as shown by] designer clothes, shoes and cosmetics all coming from other parts of the world; and a desire for, and intrigue with, foreign brands [as shown by] the popularity of some of the most visible fashion brands.”

The fact that Estee Lauder understands “the Chinese market, the skin care needs of the market, premium positioning and branding, and how to gain distribution” suggests the new brand will be a “winner,” Reibstein adds. The risk for Estee Lauder is that “it’s a crowded market…. The big question is whether there is room for both La Mer [another premier skin product from Estee Lauder] and Osiao.”

Wharton operations and information professor Marshall Fisher – who was in China recently teaching a global supply chain management course — breaks the scenario into two questions: Will a high-priced product sell in China, and how much should the company adapt the product to Chinese tastes?

The answer to the first question “is clearly ‘yes,’ if you look at the number of successful luxury brands that have entered the country,” Fisher says. “The reason is that even though average disposable income in China is below [that in] the West, it is such a big country that the top of the income pyramid is huge. This has made China a prime target for luxury brands.”

Products entering China have adapted to varying degrees, Fisher adds. “Nike changed little, but KFC changed almost everything; their comment was, ‘All we brought from the U.S. was the picture of the Colonel.’ Both have been highly successful in China. Evidently, people who buy Nike buy it in part because it is a Western brand, and adapting it too much would destroy that value. I would guess that Estee Lauder is more like Nike than KFC.” 

At a dinner on the last day of their course, Fisher discussed this second question with the head of Starbucks in China. The Starbucks executive noted how the company eventually “tweaked Starbucks’ menu and flavors enough to make them appealing to Chinese consumers,” says Fisher. “His remark was that they finally figured out that consumers in China who buy Starbucks are looking for a Western experience, but one that is tuned to their taste buds.”

Competition from Other Brands

Fisher’s co-instructor in the global course was Edwin Keh, CEO of the Hong Kong Research Institute for Apparel and Textiles. He recalls a presentation at Wharton earlier this year in which he learned two things: First, that “Chinese consumers like lightly scented products and think a lot of Western products are too strong and overpowering. And second, that the Asian market sells [more] skin protection, skin tone lightening and moisturizers than the West, probably because the Chinese market is dominated by urban professionals who work in crowded and polluted environments.” Also, he noted, “light skin tone is considered a sign of beauty.”

Osiao “looks to be a very exclusive high-end niche brand” being launched at a top Hong Kong department store that is equivalent to Saks or Neiman Marcus in the U.S., Keh says. “The line can command a higher price point and probably will have fairly small volumes for the immediate future. This may be a good way to test the market and tweak the product.” But Keh, like others, points to the “significant brand competition from Japanese and Korean beauty brands, [which] align very well with the Chinese consumer and have near-market advantages.”

Beauty products and next-to-skin apparel “are tough to sell and expensive to market, especially in China,” Keh adds. “So a new brand will be high risk, high return. It will be interesting to see how this plays out.”

Although some observers express concern that Osiao could cannibalize Estee Lauder’s other brands in China, Shen does not see this as likely. “Given its pricing and positioning, it is targeting a different consumer segment from the average consumers of Estee Lauder and Clinique,” its two best-known brands in China. Instead, “the introduction of Osiao seems to explore the market opportunity with the ever-growing wealthy class in China. There is a segment of affluent Chinese consumers who are willing to spend a lot on skincare products. The economic downturn of China has little impact on the behavior of this segment.” Keh concurs: “The timing of the release could have been better, given the recent doom and gloom, but the rich Chinese consumer is still spending and there are still lots of rich Chinese. So I don’t see [the current economy] as an issue.”

Wharton marketing professor John Zhang describes why he thinks Osiao represents “a very far-sighted strategy. Up to this point, Chinese consumers worship anything Western, especially in cosmetics. However, at some point in the future, Chinese customers will become more rational, they will want to go back to their roots, they will value their own heritage and they will want the things that are good specifically for them. When that day comes, pure Western brands will lose their luster,” but Osiao may not.

Building a new brand from scratch is clearly expensive, he adds. “For that reason, starting in Hong Kong is a good way to test the water. In addition, it is also a good way to establish the high-end positioning. I believe that the success of the brand will depend on two things. First, there has to be solid science behind the new formulation. Without it, the brand will not succeed in China for long, and ginseng alone will not carry the brand for sure. Second, good marketing must balance modernity, tradition and science, especially in cosmetics.”

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Is Burberry the Canary in the Luxury Coal Mine?

Posted on September 24, 2012

When Burberry recently reported that sales at stores open a year or more were flat, and suggested that profits are likely to be on the disappointing side, some people began to wonder if Burberry might be the canary in the coal mine – a harbinger of lower sales in the luxury sector over the coming months.

A Wall Street Journal article today supports that theory, noting that diamond sales in China are expected to grow more slowly this year than last, while Daimler AG has announced that its Mercedes-Benz division would miss its profit target in China and expects lower sales for its Porsche division.

Is London-based Burberry indeed an example of what we will see in the luxury goods market? What are the implications for the global economy and, equally important, for the upcoming holiday season?  

Burberry suggests that its slowdown is “a sign of an upcoming trend in the luxury segment,” says Wharton marketing professor Barbara Kahn. “Although it is hard to know for sure, there is some indication that this might be a correct analysis.”

Much of the ability of the luxury segment to maintain steady growth has been due to strong performance in China, she adds, and “recently, this growth has slowed down for several reasons. First, as the Chinese luxury consumer gets more sophisticated, [his or her] need for purchasing high-end visible status symbols slows down. Many of Burberry’s products are high status — and visibly so, due to the famous ‘check’ [design].” Now that consumers are gaining more confidence “in their own positions of wealth, these types of purchases may decrease.”

In addition, Kahn says, China’s economy is slowing down, “and there are indications that the government will not provide substantial stimulus mechanisms, as they have in the past, to keep up the growth levels.”

Burberry, a luxury fashion house that sells accessories and clothing for men, women and children, has approximately 235 stores and outlets, and can be found in more than 200 upper-end department stores worldwide.

An article in The New York Times noted that Burberry’s main customers, “known in the industry as traveling luxury consumers, [include] just over a third in Asia, a quarter in the Americas and a little less than a third in Europe.”  The article, published shortly after the disappointing figures were announced by the company, quotes Burberry CEO Angela Ahrendts acknowledging that “the external environment is becoming more challenging,” and suggesting that Chinese consumers may be slowing down their luxury purchases only temporarily, waiting to see how the upcoming leadership changeover in China affects their purchasing power. 

Wharton marketing professor Z. John Zhang has a slightly different take. “I don’t believe that the overall consumption of luxury goods in China is going down, and even if it is, it will not last for long,” he says, adding that economic downturns typically do not affect many luxury goods consumers, “especially in a country where the income disparity is huge. If anything, in a downturn, you need to look even better to impress your peers.”

Burberry’s lower sales could be due to a number of reasons, according to Zhang. “First, more and more people in China are going abroad for shopping. The people who could afford to travel abroad are those who could afford to buy luxury goods, and there will be a substitution effect. Second, there may be more fake luxury goods in the Chinese market. After all, during a downturn, you do what you must to survive. The supply of fake goods may have increased considerably now that the economy is getting tougher.”

The worst outcome for Burberry in China, he adds, is that “it is no longer on the top of the Chinese customer’s list of luxury goods [to purchase]. These consumers are constantly looking for new ways to distinguish themselves and to stand out in a crowd. It is an arms race [among] luxury brands to find new ways to provide exclusivity to their customers.” The disappointing news from Burberry could reflect the fact that the company “is losing favor with exacting Chinese consumers.”

So what’s ahead for Burberry and other luxury goods retailers?

“The luxury retail sector was the first to recover after the recession, partly due to strong demand from China,” says marketing professor Stephen Hoch. “Maybe they are now at a pausing point.” Any weakness that is evident, he adds, “would be due to Europe and China rather than the U.S., where the rich seem to be doing just fine relative to everyone else.” In China, if the new stores — where you would expect the biggest increase in same store sales since they are new — showed any weakness, “then this could be a big contributor,” he points out. “It is hard to predict whether Burberry is a harbinger of anything else. I tend to doubt it, but we will see.”

Kahn notes that the continuing uncertainty in Europe is definitely a factor in lower luxury goods purchasing. In addition, she has read reports suggesting that the new Chinese leadership team – expected to begin transitioning as early as next month – “is not likely to provide as much stimulus to the economy as they have in the past.”  Finally, if Burberry’s slowdown is indeed a general trend, and not unique to Burberry, “I would expect to see similar slowdowns in other highly visible status luxury purchases, such as LVMH and Chanel.”

And the outlook for the luxury goods sector during the all important holidays? “As usual, it is hard to predict the upcoming holiday season,” Kahn says. “The back-to-school season was reasonably strong — relative to our new, more moderated expectations — so people are cautiously optimistic. I think the current thought is that we should see a holiday season fairly similar to last year – which is reflecting the slow but steady growth patterns.”

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Starbucks Moves to the Express(o) Lane in China

Posted on April 3, 2012

Starbucks is on a caffeine-fueled growth spurt in Asia. According to a report from the company newsroom, Starbucks plans to go from around 500 stores to at least 1,500 stores over the next three years, and predicts that its operations in China will be its second largest, outside of the U.S., by 2014. Starbucks coffee stores are currently located in 48 Chinese cities.

The company has had mixed success with expansion, however. Although it has strongly rebounded from flat sales in the U.S., it faces continuing resistance in Europe — where “fickle regional palates” and a sagging economy have weighed down performance, according to a recent New York Times article. Starbucks has yet to make a profit in France, the article adds, and “even in the parts of Europe where the company does make money, sales and profit growth lag far behind results in the Americas and Asia.”

Given this uneven track record, and continuing uncertainty over the global economy, how successful will Starbucks be in China?

“It has already been proven that there is a segment of consumers [willing to buy] premium coffee – given the huge success that Starbucks enjoys in big cities of China,” says Wharton marketing professor Qiaowei Shen. “In recent years, the number of coffee shops – national chain stores or local independently owned stores – that target high-income white collar [consumers] has been increasing dramatically. This is another piece of evidence to show that there is demand for high quality premium coffee, and the potential demand is likely to grow in the future.”

Also, according to Shen, the assumption that Chinese consumers tend to favor tea over coffee “may not be true for the young generation in China who grew up with Western food and drinks — such as McDonalds, KFC and Pepsi.”

At the same time, Shen adds, “Starbucks needs to be cautious about its expansion plan. The goal of tripling the number of stores in China within three or four years indicates that Starbucks is not only going to add new stores in the first-tier and second-tier cities, but is also expanding to third-tier or even smaller cities….. For large cities, the concern with proliferating stores is within-chain cannibalization, when the expansion rate exceeds the rate that the pie grows. For the new markets – third-tier or smaller cities — the concern is whether premium pricing is sustainable in less Westernized and economically less developed places. On the other hand, the aggressive expansion plan could potentially fend off some competitors and strengthen Starbucks’ foothold in the Chinese market.”

Wharton management professor Lawrence Hrebiniak is also enthusiastic about the expansion — with a few caveats. “China looks very good for Starbucks,” he states. “Coffee sales are up significantly as traditional tea drinkers [opt] for the newer form of caffeine. Sales are booming — revenue is up 38% — and margins are high, 35% versus 22% in the U.S.” When the company raised prices last year in China, he adds, “demand actually went up, a sign of a luxury good. Chinese customers seem to be enjoying the socializing at Starbucks’ sites, much like the original craze in the U.S. In addition, coffee sales forecasts show predicted increases of more than 50% by 2015.”

So, is there anything at all to be concerned about? “Perhaps,” he says. While the projected rate of growth is very robust — 200% in only three years — not all cities in China are alike. “Smaller cities with lower income levels may not react as strongly as their larger counterparts. Lower economic growth may affect the smaller markets more than the larger ones. And management attention definitely will be taxed somewhat as the top planners try to grasp and control such rapid growth.”

A “slightly slower, incremental approach” may be in order, he suggests. For example, the company should avoid undertaking too many initiatives simultaneously, such as openings, marketing programs, management controls and so forth. “This can tax even the best management team. China looks good and deserves a commitment to expansion and growth, no doubt about it,” he states, but “taking things a bit slower and opting for a less hectic growth program to avoid the problems of a too-large, complex change” may prove more successful, he notes.

For his part, Wharton marketing professor John Zhang suggests that Starbucks may not be moving fast enough. “The fact of the matter is that the U.S. would have a good year if its economy grows by 3%, and China would have a bad year if its economy grows by only 8%. Given the size of the China market and the projected high growth rate — 7% to 8% — for the coming decade, investors if anything may question why the company does not aim to grow faster. For instance, KFC already has more than 3,000 restaurants in 650 cities in China and is adding a new one every day. In comparison, Starbucks is definitely not turbo-charging its growth.”

There is “no question that the American brand is a big draw,” Zhang adds. “More importantly, consuming a cup of bitter-tasting, very expensive and foreign liquid is a sure way for someone to stand out as one of the sophisticates in China. Indeed, given the popularity of the brand” there, Starbucks can surely ride on the swelling middle class and fast urbanization in years to come. The risk lies in opening stores too slowly and losing the rare window of opportunity.”

As for the competition that Starbucks faces in China, Shen cites McDonald’s as one candidate, “but probably not the major one [because] McDonalds’ coffee is much cheaper and attracts different segments of consumers…. Currently, major competition comes from similar coffee chain stores from Taiwan and Japan, with some well-known brands. Competitors also include bakery stores that serve high-quality coffee. Many independently owned local coffee shops also are starting to populate the large cities. They typically have a very unique style and beautiful atmosphere,” attracting the same type of consumer that Starbucks is targeting. “The local competition,” Shen adds, “is intensifying.”

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Troubled Times Ahead for North Korea?

Posted on December 19, 2011

The death this weekend of North Korea’s Kim Jong-il, who ruled the country with an iron fist since his father’s death in 1994, had immediate repercussions throughout Asia and beyond.

The New York Times reports that South Korea — which has been at war with North Korea since the early 1950s — immediately put its military on alert, “boosting surveillance along the 155-mile border between the two countries, one of the world’s most heavily armed frontiers.” The tension between the two countries escalated during the past several years after North Korea demonstrated nuclear capability.

According to The Wall Street Journal, Asian stock markets took a dive in response to the news, “with South Korea’s stock market and the won tumbling to multiweek lows…. With markets already reeling from the European debt crisis and global growth concerns, Kim’s death has added a dangerous layer of instability to the Korean peninsula,” the Journal noted, adding that “many Asian neighbors [are] uneasy about the leadership transition phase in one of the world’s most reclusive regimes.”

That unease was further heightened by the announcement that Kim’s son, Kim Jong-un, has been named the country’s new leader, despite his youth (he is in his twenties), lack of experience and isolation from other governments.

Wharton faculty echoed the anxiety expressed in news reports. “Missiles have already been fired in the Sea of Japan” by North Korea, says Wharton management professor Witold Henisz. “This gesture demonstrates the internal uncertainty over succession, with Kim Jong-un or others trying to demonstrate their loyalty to the military or, perhaps, the military trying to demonstrate its independence. No one knows very much about the new potential ‘great successor.’ He will have to consolidate his power internally after having been raised in a two-generation cocoon [removed] from reality.”

The next days and weeks “are fraught with hazards such as Asia has not seen in years,” Henisz added. “Is China ready to step up and assume a position of international political authority? How will Japan, South Korea and others respond to provocations? Making the situation even worse, Europe is focused internally on the need to avoid the break-up of the euro, and the U.S. is increasingly turning inward as its election campaign heats up. In these circumstances, North Korea will have to act out even more to gain the international attention that it so craves. These are dangerous days.”

Wharton management professor Mauro Guillen points out that “leadership transitions in North Korea are a big deal because this is only the second one in half a century. The key issue is whether the youngest son has the support of the army or not, or whether the generals will use him as a puppet. His father alienated everyone, including China and the U.S., with his nuclear policy.”

Along with the country’s isolation is the fact that the North Korean people “are starving and are politically repressed,” Guillen adds. “Korean unification is still far away, and one can only hope that when it comes, it does not destabilize South Korea. Just think about how hard it was for West Germany to absorb East Germany. North Korea is much poorer and larger, and South Korea is not as resourceful as West Germany was. I think [U.S. President] Obama should go to the Demilitarized Zone separating the two Koreas and deliver a Reagan-style speech to [Chinese] President Hu, demanding that he ‘ cut off this barbed wire.’ China must seize the opportunity to put an end to this disaster.”

According to Howard Pack, Wharton professor of business and public policy, the death of Kim Jong-Il has been widely anticipated following rumors that he suffered from pancreatic cancer. Meanwhile, the succession issue “is very unclear – he favored his third son, but it is not [apparent] that [this son] is acceptable to the military. North Korea’s economy is very weak. While precise estimates of income per capita cannot be calculated, stories from emigrants both in China and in South Korea suggest a very low per capita income. [Yet] the country’s military capacity, especially in rocketry and atomic knowledge, is more than capable and has also been the only major source of foreign exchange.”

Pack adds that the “South Korean government has intensively explored the possibilities of an implosion of the North Korean economy and alternative policies to deal with it. South Korea is much larger, and its per capita income is probably 15 times greater. However, the government is well aware of the enormous costs to West Germany of absorbing East Germany. Except for the unlikely scenario that the new government would launch a war against the South, the death of Kim Jong-il has no obvious short-term implications for financial markets given its absence of exports, imports and financial interaction with the rest of the world.”

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To Bolster Manufacturing, India Tries the China Way

Posted on October 31, 2011

In an effort to build the country’s manufacturing base, the Indian government is planning to establish seven national manufacturing and investment zones (NMIZ) — large industrial parks that, similar to counterparts in China, promise to ease the compliance and tax burdens of doing business.

The zones are part of a national manufacturing policy, the country’s first, unveiled by the Indian government on October 25. Officials hope to create 100 million jobs over the next decade and to help spur growth in a sector where India lags behind other nations.

Conventional wisdom is that China is the factory to the world while India is the back office; the country’s strengths have traditionally been in providing outsourcing services in areas including information technology, business processes and health care. Currently, manufacturing only contributes 15% to 16% of Indian GDP, compared to 34% in China, 28% in South Korea and 27% in Indonesia. The goal of the new policy is to raise the share in India to 25% by 2022.

Anand Sharma, Union minister of commerce and industry, has been steering the manufacturing policy through different layers of the political arena and the government for nearly two years now. “The policy is a reality today,” he told Indian financial daily Business Standard. “All of us understand that this was needed.” But three critical issues related to the NMIZs that have generated controversy in recent times — labor, land acquisition and environmental clearance — have been left for the states to handle.

And many critics note that, unlike China, India doesn’t have enough funds to finance the infrastructure needed to make the NMIZs a success. “China’s manufacturing success is because of three reasons: cheap logistics, cheap labor and cheap money,” says C.R. Sasikumar, chief executive officer of the Shanghai branch of the State Bank of India. The Chinese government was able to build roads, extend power supplies and offer other incentives to bring in foreign companies, adds E.B. Rajesh, chief representative of the Confederation of Indian Industry (CII) in China.

Instead of trying to follow the exact path of the Chinese, many analysts say that India must concentrate on the strengths it can bring to the table, such as innovation and what Renault CEO Carlos Ghosn described as “frugal engineering.” For example, a Renault joint venture with the Mahindra conglomerate produced the Logan, a compact sedan. Local engineers managed to cut 15% of the production price.

But trying to compete on innovation won’t rid India of China as a competitor. Weimin Yao, vice president for corporate affairs at Shenzhen-based telecommunications and networking firm Huawei Technologies, predicts that China’s days of being purely a manufacturer of other countries’ products are coming to an end. “Our new thrust is research and development,” he says.

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A Toy Story with a Twist

Posted on September 8, 2011

India’s toy market is no longer child’s play — though small, the industry is on a high growth track. Sunil Nanda, senior vice president of the Toy Association of India (TAI), estimates that the retail turnover of the country’s toy market is around $1.4 billion and growing at a rate of 20% to 30%. A recent report in business daily The Economic Times cited a study by market research firm Euromonitor showing that “spending on toys and games in India is expected to grow at 157% between 2009 and 2014, much faster than other Asian countries such as China (84%), Taiwan (35%), South Korea (33%) and Singapore (17.2%).”

According to the “Global Toy Market Estimates: 2011 Edition” by research firm NPD Group, in 2010 global toy sales stood at $83.3 billion with the United States being the largest market at $22 billion, followed by Japan, China, the United Kingdom and France. The NPD report says that while the global growth rate was 4.7%, Asian markets grew at 9.2% and emerging markets like Brazil, Russia, China and India grew at 13%.

India’s toy story comes with a twist, however. The key factors driving the growth in the country are a population with increasing disposable incomes and access to inexpensive toys. But the biggest business beneficiaries of this growth are not the domestic players — that distinction belongs to Chinese toy manufacturers. “Chinese toys, which are priced very competitively and offer a huge variety, account for two-thirds of the country’s retail market,” says Nanda, who is also the director at manufacturer Tripple Ess Toys.

According to Nanda, the Indian toy industry is very fragmented. “The players suffer from a lack of funding and scale and are therefore not able to invest adequately in technology, development and design, and marketing,” he says. “China, on the other hand, is the supplier of toys to the world. Chinese manufacturers produce for some of the best known brands, they have the economies of scale and are able to invest in developing a variety of new products.”

Brand strategy consultant Harish Bijoor says China “has learned the quality game in the toys market by the stringent quality norms set by importers in the U.S. and all across Europe.” Commenting on the lack of strong toy brands in India, Bijoor adds: “India has not invested in robust story-building. [Instead,] it has depended on the efforts of the cottage industry. Western brands, however, have depended on marketing, branding, advertising and allure-building at large as a basic tool.”

Santosh Desai, managing director and CEO of consulting firm Future Brands offers another view. He points out that strong ecosystems around categories and brands, such as Barbie or Lego, are built over generations. “In India, most of today’s generation that is buying toys for their kids did not have easy access to toys and so don’t have any strong preferences. They make scattered purchases.”

Desai goes on to say that along with strong brands, much of the toy market is also led by novelty and curiosity. Drawing parallels with China’s success in the low-cost mobile phone sector, Desai notes that the toy market caters to the strengths of the Chinese players. “It is not just about cost. It is a combination of new, attractive, glitzy products with novel features.”

But with the Indian toy market on the upswing, are domestic firms likely to catch up to their Chinese counterparts? “Unlikely,” says Bijoor. ”India is just not competitive in this space. China with its cheap labor is way ahead. Add to that the fact that China is a third-generation toymaker for the best brands across the world.” According to Desai, the only way to compete is by building strong brands and categories. “But there is nothing happening in the Indian toy market to suggest that we are working towards that.”

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More Growth and Investment Ahead for China

Posted on July 7, 2011

Although China’s emergence as an economic power is a hot topic around the globe, the country and its culture remain a mystery to many, particularly in the West, according to the head of one of the largest Chinese investment firms.

Speaking at the recent Wharton Global Alumni Forum in San Francisco, Levin Zhu, chief executive of China International Capital Corp., noted that, although Chinese civilization is millions of years old, the country only became a republic in 1911. And it has only been since the 1970s that the now-Communist country has been opened to the world.

“Some in the West find China almost incomprehensible,” Zhu said. “Indeed, the traditional culture and history of the East and the West are so different. People don’t even realize that when they are making arguments, they are naturally making assumptions based on their own experiences.”

According to Zhu, China has made “great progress” in terms of modernizing and overcoming problems related to widespread poverty and illiteracy among its population. But he also noted that the country is still in the early stages of becoming a developed nation. “China is listening and learning from the West and from the world,” he said. “We have many issues to deal with, including the economy and social development, which is still the most challenging task for us. There have been a lot of debates over models of economic development and changing from an export-led economy to a consumer-driven economy.”

China’s long-term growth potential, however, is rooted in the population’s work ethic and drive to succeed, Zhu said. “We’re probably facing some near-term challenges [such as] overinvestment and inflation. As for how we do this long-term in a sustainable way, in an effective way — there’s a lot to work out. But for at least the next 10, 15, 20 years, China can still continue to grow.”

As China develops, Chinese investors will look for ways to diversify their wealth outside the country’s borders, Zhu noted. His company, CICC, was founded in 1995 and is now one of China’s leading investment banks. “Our company will help [Chinese investors carry out] this diversification, and find better investments in this part of the world.”

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Free Trade Between China and Taiwan: This Season’s ‘Mega Trend’?

Posted on July 1, 2011

The popularity of free-trade agreements (FTAs) are something like national fashion statements — in one day, out the next. Not that the 23 million citizens of Taiwan have expert knowledge of such matters. Long blocked in one way or another by the People’s Republic of China from joining them, Taiwan has sat on the sidelines. Apart from a small number of FTAs, Taiwan has done without the no or low bilateral or multilateral trade tariffs accorded other export-dependent economies.

Even so, there probably wasn’t much celebrating to mark the first anniversary of the signing of Taiwan’s and China’s groundbreaking Economic Cooperation Framework Agreement (ECFA) at the end of June. Indeed, ECFA is as controversial today as ever, putting under scrutiny the China-friendly policies of Ma Ying-jeou, Taiwan’s president who is up for re-election early next year, and the 539 categories of Taiwanese exports to China falling under ECFA.

ECFA’s proponents in Taiwan see it as a way of addressing a major weakness in the global trade strategy of the island. Cheryl Tseng, director-general of the government’s Overall Planning Department of the Council for Economic Planning and Development at the Executive Yuan, notes that before last year, Taiwan’s only trade pacts were with a few Central American and Caribbean nations. “Those five countries – Panama, the Dominican Republic, Honduras, Guatemala and El Salvador — collectively provide less than 0.5% of our foreign trade,” says Tseng.

In contrast, mainland China accounted for 31% of Taiwan’s exports and 15% of its imports last year. Roy Chun Lee, associate research fellow at the Taiwan WTO Center, notes, “A free trade agreement [FTA] with one’s single-largest trading partner is a milestone for any country that depends on foreign trade, like Taiwan does.” He adds that it’s an important step — although more of a symbolic one, “because the actual tariff reductions will take place over the next five to 10 years.”

But is the FTA a lopsided one? “There is a giant sucking sound coming from China” observes Z. John Zhang, a Wharton marketing professor. ECFA is “a very intelligent move for China [because it] puts Taiwan further in the orbit of the mainland.”

According to Wharton management professor Marshall W. Meyer, “The Chinese are focusing on using trade to expand their influence.” ECFA has been a way for China to strengthen its bid for cross-Strait unification, he notes, by increasing trade rather than pursuing military means to regain Taiwan.

Lee also wonders whether ECFA will open the door to aggressive Chinese M&A. “That is something we should be worried about, given the fact that at least some people in China are hostile to Taiwan,” he says. Takeovers could be particularly worrisome if target companies have critical, high-value technologies, he adds.

Some say this is a storm in teacup. In the bigger scheme of things, Taiwan’s economic prosperity has been cemented the global exporting success of its high-tech companies, which produced 95.5% of the world’s motherboards, 95.3% of its notebook PCs and 90.7% of its netbook PCs in 2009. Despite longstanding political tensions with mainland China, many Taiwanese companies have been shipping products labeled “Made in China” for years. “At some point, it becomes hard to tell if they are really Taiwanese companies or Chinese companies, since so much of their business is in China,” says Zhang.

Billy Ho, CEO of MiTAC, a Taipei-based manufacturer of electronic devices, says, “ECFA will give more competitiveness for Taiwanese companies in the high-tech business [in China], all the way from upstream materials to devices to components to downstream products.” Established in 1982, MiTAC built its own brand of PC, and then designed PCs for Compaq, among others. In the late 1990s, it made PDA devices for HP. As costs rose in Taiwan, MiTAC closed its last factory on the island in 2006. Now, it employs over 10,000 workers in mainland China and 1,400 in Taiwan.

“The most sophisticated processes [at MiTAC] will stay in Taiwan, and we will release the less sophisticated processes to China, close to the market,” Ho says. Another major benefit will be that “Taiwanese companies may have more access to Chinese government contracts, because more of their business will be in China.” ECFA should also help Taiwanese high-value added firms such as MiTAC expand their sales outside China. According to Ho, “Free trade is a megatrend, and while most IT products already have very low or no duties, this will help us with some products in some countries.”

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