After 30 years of reform and opening, China has undoubtedly become a world factory. Statistics show China is the world's largest manufacturer of more than 100 categories of products, including washers, TV sets, air conditioners, refrigerators, clothes, cement, steel, bicycles, fertilizers, shoes and tobaccos.

However, we only have a few internationally well-known brands. Every year, the Business Week magazine publishes the world's 100 valuable brands from a list compiled by Interbrand. Most of them are from the United States, the United Kingdom, France and Germany, and some are from Japan and South Korea, but there is not even one from the Chinese mainland.

We consume a large amount of land, minerals and labor - even at the expense of destroying our natural environment - but what we get are just some meager processing fees. When computers and clothes made in China are given foreign labels, those foreign companies make many times more money than Chinese manufacturers.

The problems Chinese manufacturers are facing include the following:

1. There has been too much reliance on the original equipment manufacturer (OEM) model, and they do not pay enough attention to brand building. It is undeniable that OEM played an important role in the early period of the reform and opening. In Ningbo, for example, 75 percent of commodities exports are in the form of OEM, and most of the brands are from overseas.

OEM has fewer risks, does not need a large amount of investment and allows companies to enter or exit a market flexibly. At the same time, manufacturers can also learn from clients in technology and management to lay a foundation to build their own brands.

However, the OEM model is a double-edged sword. On one hand, most profits belong to brand owners. For example, the average price of Chinese clothing exports is only $3.2 per item, but when a foreign label is put on the products, the prices increase several times over. On the other hand, OEM firms become more and more reliant on brand owners, because they do not have access to consumers and cannot predict market situations and trends or build their own brands.

2. There has been a loss of domestic brands to foreign firms through acquisitions. After years of operation, many domestic firms accumulated experience in processing, quality and marketing, and gained some competitiveness in international markets. But in the process of forming joint ventures, foreign companies usually take advantage of the anxiety on the Chinese side about capital and technology from foreign parties. And these Chinese firms often feel insecure about their lack of strong brands and, consequently, minimize the roles of domestic brands in joint ventures.

Currently, seven of the top eight beverage makers have been purchased by Coca Cola or Pepsi, which have taken over more than 90 percent of the share in the soft drink market. In the detergent market, three out of the four major manufacturers with manufacturing capacities of at least 80,000 tons were acquired by foreign companies.

In the goods and pharmaceuticals market, foreign brands own 30 to 40 percent of the market share. And 70 percent of breweries that produce at least 5 million tons annually formed joint ventures with foreign companies.

3. Time-honored brands face a difficult situation. In the beginning of the People's Republic of China, there were 16,000 time-honored brands. By 1993, the number had decreased to 1,600. Even so, the situation these brands face is very difficult: 70 percent of them are in the red, 20 percent break even, and only 10 percent are profitable. And these brands often suffer from infringements, such as the counterfeiting of their products or malicious registrations.

A brand is a collective consequence of innovation, management, quality, culture and service. But, fundamentally, it is an extension of a product and its quality.

In other words, a brand is a direct and visible weapon enterprises use for market expansion that is backed by innovation and technological strength. When a brand is established, it can boost companies' innovation and capital, and it can increase marketing strength.

This has been proven by brand-building efforts in many countries and regions. The research and development investment of multinationals usually accounts for more than 10 percent of their total revenues. IBM alone invested more than $4 billion in network software in 2001.

In China, however, 90 percent of domestic enterprises have never applied for a patent, and only three in every 10,000 companies have their own. In hi-tech areas, such as automobiles, aircraft, equipment, information technology, biotechnology and new materials, 80 to 90 percent of patents in China are owned by foreign companies. Chinese companies own some patents in utility and design categories, and their presence in the more advanced invention category is very small.

It is a pity that many enterprises believe brands are built through huge spending on advertising. Advertising is an important tool to build brands, but it is not the only one. Some believe branding comes from awards, so they spend a lot of money on government relationships to win various kinds of awards. But real branding does not come from awards; rather, it comes from winning customers' trust and recognition with quality and service.

Innovation is the key to shedding reliance on the OEM model, avoiding losses of domestic well-known brands, saving time-honored brands and shifting from "made-in-China" to "innovated-in-China".

Innovation and branding in a competitive market are represented as intellectual properties (IP). Experience from other countries has showed that a scientifically developed country must have a comprehensive and effective IP system, and a country with such a system also has a developed science and technology industry.

Brand building, development, and protection are all reliant on IP protection. So an IP system is the foundation of domestic brand building.

1. A comprehensive and effective IP system stimulates brand building. The production of IP requires a lot of human resources, goods and capital. An IP system provides an economic, effective and lasting stimulus mechanism. And an IP system also grants creators and owners of brands exclusive use of their IPs for a certain period of time.

2. A comprehensive and effective IP system provides intellectual resources for innovation. Any innovation is based on previous achievements. So, an important precondition of innovation that is innovators have access to previously public information, knowledge and technologies. On one hand, they know the latest developments in the world and stand on the shoulders of giants, while on the other hand, they can also avoid repetitive work, save time and increase output.

(By WU HANDONG. The author is president of Zhongnan University of Economics and Law. The article is an excerpt of his speech a Chinese brand Strategy summit in Hohhot, Inner Mongolia Autonomous Region, in August. The opinions expressed in the article are his own.)

(China Daily 09/17/2007 page9)

2013-07-17