Apologists for the still state run economy of China like to argue that without the large investment and the guiding hand of favored state owned enterprises, Chinese business would not be competitive. This logic is used to defend the ongoing channeling of credit to favored firms and the rapid expansion of debt levels in special purpose vehicles backed by local governments.
The Chinese consumer, however, has chosen its preferred companies quite clearly and the winners are not state owned enterprises. According to a recent study, private brands grew three times faster than state owned brands. While state owned firms were producing respectable brand returns at 9%, private brands were innovating, improving efficiency, and building brand loyalty returning 27%.
Private brands are outperforming because to compete with state owned giants, they need to produce a better product, cheaper, and building more consumer trust. As one of the authors of the study notes, “…consumers are gravitating toward brands that promise them high quality of life and trust.” Chinese consumers are moving beyond price as the determining factor becoming increasingly discerning shoppers.
Nor is this expansion of brand value limited to high end luxury good makers but rather spread across the consumer spectrum. The third most valuable brand in China Tencent with its popular QQ chat program and most surprisingly is food and dairy company Yili which is the 15th most valuable, which has tried to carve out a niche as a trusted provider of milk and milk powder. In fact, 2 of the 5 fastest growing brand values came from private dairy firms.
While there is almost no week that passes without some new public food scandal, both Chinese companies and consumers are rapidly learning about their mutual relationship. Private firms understand the brand loyalty and consumer trust are valuable assets that take years to build but can be destroyed in a day. Private firms in China are working to build that trust and provide value to consumers.
Chinese consumers are learning about the power they have over companies. Companies need to compete for the consumers business and if they are dissatisfied, other competitors are willing to fight for their business. Chinese consumers have choices and are increasingly willing to exercise the power of the purse to get what they want. They can find milk producers selling untainted milk and companies that value and compete for their business.
While Chinese brands have not established brand names outside of China, numerous private companies have incredible potential to be the first major Chinese brand overseas. Lenovo with its line of well priced but top quality smart phones is a formidable competitor with Apple and Samsung given the pricing pressures from populations demanding more for less. Tsingtao is a great beer and would be a great cultural ambassador if it can find the right international partner with better distribution. At best it seems unlikely that any state owned firm will be a major player in international markets and none with the product line and price needed to make an impact.
The recent reforms declared a desire to increase the role of the market. Rather than restricting Chinese economic development and growth, private companies are growing faster, innovating more, providing better product value, and building greater brand loyalty among consumers than the favored state owned firms. Hopefully, the impact of private firms will be seen as positive unleashing the potential of the dragon and the power of Chinese firms and consumers.