Getting a grip on China

From the outside looking in, China seems to be a market full of opportunity and one many multinational companies look to gain a foothold in. Since opening its doors to foreign investment, China has seen international brands bringing their marketing strategies ashore looking to take advantage of the vast consumer audience that awaits. However, for the last decade many of these brands have failed to take a strong hold of the market, seeing profits tumble and domestic brands remaining supreme.

The struggle of many MNCs has been well documented, yet Apple recently reported optimistic revenue growth within Greater China, partnering with China Mobile to deploy the new iPhone 5 throughout the region. So is the tide changing for international brands in China?

International brands have classically focused on affluent, middle-class audiences, applying the same business models as the rest of the world, neglecting the 185 million value consumers with low household incomes. These consumers demand cheaper products that many MNC’s are unwilling to produce due to diminished profit margins.

Swedish furniture manufacturer IKEA only recently responded to this issue after nearly a decade trading in China. It realized that the value consumer just wasn’t prepared to pay the price premium and was forced to rethink their price-value equation. Adapting to local ways has seen market success, with turnover of HK$7.5 billion in fiscal 2012 and more than 15 million visitors to the nationwide stores.

As mass urbanization continues to spread across China, a reported 60 per cent of the population will live in urban areas by 2020, with Chinese GDP accounting for 19 per cent of world economic output in the same year. This changing demographic will see the percentage of affluent middle classes leap to a predicted 82 per cent by 2020, thus changing attitudes towards foreign brands.

Aspirational will become accessible for many, as increasing digital penetration opens the wider region to new brands and marketing strategies.

This growing middle class will also start to value trust at a premium, with brands going out of their way to position themselves in a compelling way that resonates in the hearts and minds of the consumer. Whilst many local brands will benefit from local knowledge and esteem, international brands will look to trust as a driver of differentiation as they plot to create a climate for growth, pushing marketing harder through diverse channels using global best practice to stay one step ahead.

China may not quite be ready for a mass influx of foreign brands, but those that are looking to the horizon and planning for the long term are set to benefit. It may be a rocky road getting there though.

Tom Child is a strategist at Landor Associates, Singapore

References

1. McKinsey & Company Insights China, ‘Meet the 2020 Chinese Consumer’ (March 2012) www.mckinseychina.com

2. Kim Wall, ‘Ikea at last cracks China market, but success has meant adapting to local ways’ (September 2013) South China Morning Post

3. Smollan & BrandZ, ‘8 Retail Trends in China’ (2014) The Store, WPP Media