Generic Giants

This is how the Chinese approach brands—as a fact or skill set to acquire, not an art to master. Wen's speeches on the issue, and new Beijing loan programs to address it, reflect this thinking. So do the efforts of local governments in cities like Dongguan, a major export hub that still focuses mainly on assembling products for Western brands. Officials here admit that local firms have little or no brand savvy, and they are pouring in money to fill the gaps. Using part of a $20 billion stimulus package from Beijing, they are subsidizing companies that set up R&D centers, train staff in marketing, and register trademarks. In typically deliberate Chinese fashion, the campaign includes target metrics—the eventual goal is that half of the products made in Dongguan will be sold under Chinese brand names, with an eye first to capturing the domestic market, says Cai Kang, vice director of Dongguan's Bureau of Foreign Trade and Economic Cooperation. "It would be a mistake if we didn't help our companies to tap into China's rapidly growing consumer market."

Many of these firms look to Huawei, located in the nearby but more upscale city of Shenzhen, as a model. But it's an incomplete model at best. The company got its start in the early '90s by essentially reverse-engineering products and copying competitors' know-how, and has benefited massively from the growth of the domestic market. When it began selling fixed-line hardware in 1988, China had about 3 million landline phones. Today the nation of 1.3 billion people has 271 million landlines and 647 million mobile-phone subscriptions. Once housed in a cramped downtown office, Huawei now has a sprawling campus that would make Google proud. Employees take classes in a training center designed by British architect Norman Foster. Huawei gets its pick of China's top graduates, and has done a good job of tapping foreign talent, too. The company has set up R&D centers in 14 nations—employing Indian computer programmers, Russian mathematicians, and former Ericsson engineers—in an effort to move away from the old model of mimicking competitors' technology. As recently as 2003, Cisco sued Huawei for copying computer codes used in routers, forcing the company to pull the contested products from the market before dropping the case.

The moves have increased foreign sales; three quarters of Huawei's contracts (by value) came from outside of China last year, and it recently made its first big deals in the United States. Yet Huawei still makes most of its money by servicing better-known businesses, rather than investing in breakout products and selling them directly to consumers, where profits are highest. While the engineers of Silicon Valley have come somewhat grudgingly to respect the marketers, Huawei remains proudly a company of engineers, for engineers. It has tiny marketing and advertising departments that spend a fraction of what Western competitors do as a percentage of revenue. Chief branding officer Fox says the company makes a "microscopic" investment in product design, even in China, where some cell phones are cobranded. It's not necessary, since the focus of the business is almost solely on influencing "between 3,000 and 5,000 key decision makers working in the telecom industry," says Ross Gan, the company's chief spokesman. Those folks are swayed mainly by cost. Mark Natkin, the managing director of Beijing-based Marbridge Consulting, says that Huawei management generally offers discounts "in the range of 30 to 40 percent" to gain entry to new markets.

Chinese companies that copy Huawei could go far, but only within what the industry calls the "business-to-business market." Even if Huawei wanted to, it would face big hurdles selling itself to the public, when its leadership and ownership are hidden in shadows. The company offers only a one-paragraph bio about its CEO, which leaves out details such as Ren's membership in the Communist Party. While Huawei claims to be employee-owned and hires the inter-national accounting firm KPMG to audit its books, analysts, government officials, and telecom operators question its financial health and even whether the Chinese government might have a stake. A 2007 report prepared for the U.S. Air Force by the RAND Corporation, a U.S. government–affiliated think tank, says that Huawei "maintains deep ties with the Chinese military, which serves a multifaceted role as an important customer, as well as Huawei's political patron and research development partner." It's not likely the People's Liberation Army is the kind of patron that would push Huawei to think more like Apple.

The state connections of all big Chinese companies still raise red flags among customers. Huawei dropped a joint $2.2 billion bid for American telecom equipment maker 3Com last year after U.S. lawmakers called the deal a threat to national security. It withdrew an earlier bid for Marconi, a landmark British electronics and information-technology firm, after Conservative Party leaders called for an investigation of whether China's government could use Huawei ties to Marconi to spy on the British defense industry.

Huawei executives say accusations that China could use their equipment to steal sensitive data are ludicrous. But, as every good marketer knows, perceptions matter. If Huawei wants only to cultivate a few hundred elite industry buyers, perhaps it can explain itself to them directly. But if China hopes to build dominant names in the global consumer market, it needs a very different role model. One that has some interest in becoming a famous name.

© 2009