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Western Companies Need to Adapt, Not Pander to China

By  +Follow June 30, 2014 6:00AM
Tickers Mentioned:

us stocks in china, best us companies in china, growth in china market, china consumers, chinese stocks in U.S.Time-honored investment theory dictates that markets are usually rational, limiting upside. It is when markets act irrationally that arbitrage opportunities surface, granting courageous, seasoned investors a window of unreasonable, but very real upside.

Western attitudes towards the Chinese market have been and will continue to be irrational, thanks to corporate media and the ingrained delusion that the Chinese constitute a monolithic, inscrutable, behind-the-times bunch. Those of us on the ground in China, who see the lines at Starbucks (SBUX) only two blocks away from another Starbucks, the middle-schoolers scrambling for authentic NBA gear from newly-crowned San Antonio Spurs, and most importantly, the epidemic quickness with which the Chinese have turned to their mobile devices and online shopping as an obsession, know better.

Chinese consumers are global consumers. Just like westerners, they define themselves by what they buy, and they want western quality goods whenever possible – be it apparel, furniture, even FMCG. Lacking physical upscale retail penetration into the 50 China cities with populations of more than two million, the online market will continue to be where such populations shop, driving big Chinese tech stocks, as well as the bottom line of western companies that manage the channel shift.

True, this market of which we speak is not an equity market, but is nonetheless tied intimately to equities through China’s Internet “BAT” troika: Baidu (BIDU) , Alibaba ($BABA), and Tencent (TCEHY) , and the many public western companies who rely on BAT to carve a larger share out of the market that will dominate our half of the 21st century.

The takeaway: western companies that communicate their brands authentically via BAT, rather than pandering to China by sino-fying their offerings, and getting squeezed out by China’s Internet consolidation, are positioning for long term growth and profits in the only country on earth right now with a consumer base already eclipsing the West’s largest, while still in its nascent stages.

Alibaba: Real Value Play

Another takeaway– Alibaba, by virtue of its property TMall, which owns more than 50% of China’s $300 billion B2C in 2013, is China’s value tech stock. Whereas Baidu has triumphed in no small part by contributing to Google’s (GOOG) excommunication from the mainland, whilst riding in the tail wind of Google’s R&D, Alibaba founder Jack Ma tamed the Wild East by offering consumers indelible comments, incorruptible ratings, and rock-solid return policies.

As a result, Alibaba’s brand equity is unassailable. Furthermore, its core mission of providing vendors the tools to position and advertise effectively against each other has proven effective enough that traditional online retailers such as JD.com and Walmart’s (WMT) 1mall are now forced to mimic them.

A quick case study: Pantone, the world’s leading color solution provider and a subsidiary of Fortune 200 Danaher Corp. (DHR) , has been laboring under the traditional mainland China distributor approach, with typically suboptimal results: diluted brand, and an ostensibly unbridgeable gap between brand and Chinese end user.

True, opening a Tmall flagship store was only the first step towards using the platform to advantage. After all, there were distributors - both quasi and official - already selling on Tmall. A flagship store is brand-verified, and grants privileges for positioning and advertising that must be exploited. If this sounds unfair, it does prevent brands from simply setting up and providing sloppy service, locking out more nimble vendors who can better serve shoppers.

In any event, Pantone is executing a full range of SEO & PPC style advertising within the Tmall ecosystem, as well as banner advertising on fashion sites. More importantly, however, it has taken steps to stamp its store with the imprimatur of brand authenticity, keeping design and offerings in line with that to be found on its home site. Even better, it has implemented the same color selector tool on its Tmall store that has simplified shopping on its home site, a step which instantly rocketed sales.

As a result, Pantone is implementing a slow, savvy channel shift away from its distributor model that will see higher margins, increased penetration, and sustainable growth in this must-win market.

Baidu Maintains Solid Revenues

As to Baidu, what it lacks in Google-esque depth of offering, it strives to make up in advertising revenue. It’s bad news for visitors, who lack the variety of organic results to browse, but good news for advertisers, upon whom visitors are therefore more compelled to click.

Knowing this, Leica Microsystems, another subsidiary of Danaher’s, employs a synergistic SEO and SEM approach on Baidu to scoop up the opportunities that its competitors are missing. It speaks to theme of western opportunity that Leica Microsystems has no Chinese competitors in this exploding segment of the China market, as only international brands are considered for high-end medical devices. Leica fully satisfies Chinese target customer demand for add-value information with ongoing localization of its information assets and upgrading of its web presence in China, which drives organic SEO results for its keywords.

On the PPC front, Leica outflanks competitors with fast-loading landing pages hosted in-country, and custom dashboards to close the loop between form fills and sales, dramatically cutting lead times and boosting ROI on its campaigns into the 1500% range. Sales in this channel are robust enough that more resource intensive, less targeted channels are made unnecessary.

Conclusion: western companies who understand their brand advantage in China, and how to exist with China’s internet giants in symbiosis, are positioning for sustainable 21st century growth.

By Ernie Diaz, a director at Web Presence In China, a full service digital marketing agency headquartered in Beijing. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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By  +Follow June 30, 2014 6:00AM



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