Why China Can't Create Brands

Huawei may be the best company you've never heard of, and that's a big problem for China. Founded in 1988 by a former People's Liberation Army officer with less than $4,000 in startup capital, Huawei has grown from a small importer into a growing giant—revenue rose 43 percent last year to more than $18 billion—now poised to overtake Nokia Siemens as the world's second-largest maker of telecom hardware, after Ericsson. Even a decade ago, China watchers were touting Huawei as one of the companies most likely to become China's first big global brand. Its headquarters in booming Shenzhen look like a Silicon Valley transplant, with high-tech laboratories, manicured lawns, and staff swimming pools. It made BusinessWeek's latest list of the world's 10 "most influential" companies, alongside Apple, Wal-Mart, Toyota, and Google. Yet Huawei is by far the least internationally recognizable name on the list.

Outside of China, even staff have trouble pronouncing its name. It should be pronounced "hwa-way," but "people say it in all sorts of ways," says Robert Fox, the chief branding officer of Huawei's wireless-product line.

China is famous as the factory to the world, but even its best companies enjoy little if any fame. That paradox has become a vexing problem for China's leaders. The nation is now too rich to continue growing at a double-digit pace by simply putting more peasants to work in factories, and then underselling its Western, Japanese, and South Korean competition. The job of making cheap clothes, toys, and electronics is moving on to even cheaper labor markets, like Vietnam. In a March report, Premier Wen Jiabao called for China to create companies that can innovate and churn out "brand-name export products"—meaning companies with reputations for quality, innovation, and service so strong that customers are willing to pay a premium for their products.

The global financial crisis adds urgency to the campaign, by raising the prospect of a prolonged slump in demand from Western consumers, who are turning to value brands they trust at a time when China's reputation for quality has been savaged by product-recall scandals. During a Guangdong road trip in April, Wen called the crisis an opportunity for Chinese firms to innovate and expand abroad. Beijing has ordered state banks to make tens of billions of dollars in loans available to firms eyeing the global market.

Visit Huawei, however, and you get the sense that none of its executives hears the call. The company has built its success the old-fashioned Chinese way—by selling to other businesses, rather than directly to consumers around the world, and by competing on price rather than on innovation. Its founder and CEO, Ren Zhengfei, is the anti–Steve Jobs—he has never given an interview to the foreign press. (NEWSWEEK's requests for an interview were declined.) Huawei Internet routers and cell-phone switches (with names like Quidway-S9300 Series Terabit Routing Switch and GSM/UMTS Home Location Register 9820) are used by many of the world's biggest telecom carriers, including the likes of Vodafone, providing phone service to more than 1 billion people worldwide. That means one out of six people on the planet uses Huawei hardware. But because Huawei rarely sells goods directly to consumers, few people outside of China know about its products.

While Huawei has invested heavily in research and development and boasts of filing the highest number of patent applications globally last year, much of its "innovation" has gone toward tweaking existing technologies to meet the demands of industrial customers. Two of its most recent products are bulletproof equipment for a Mexican telecom operator and gear capable of withstanding Russia's frigid winters, hardly items the average consumer is clamoring for. "Even when it's our product that's out there, the end user may be completely unaware," says chief branding officer Fox, adding that because the company's "whole motivation" is to serve its industrial customers, that lack of brand visibility is "a strength."

Huawei is typical of China, where most multinationals still sell mainly to other businesses. The latest Boston Consulting Group list of 100 "global challengers," or firms "disrupting the established order of many industries," includes 36 Chinese companies, more than from any other country, and most even more obscure than Huawei. Wanxiang sells joint bearings, Midea sells electric fans, and so on. The few with any name recognition bought it by purchasing foreign brands, and with only limited success. Lenovo bought IBM's personal-computer manufacturing unit for $1.75 billion in 2006, but has struggled to expand sales abroad and is now focused mainly on protecting its market share at home. Haier, China's biggest manufacturer of home appliances, has carved out a share of the low-price global market, and has been trying to go upmarket by buying a foreign brand—most recently taking a 20 percent stake in Fisher & Paykel, the luxury New Zealand label. Haier's biggest problem is a perception that its products are cheap, says Paul French, chief China analyst for the Shanghai-based consultancy Access Asia. "To go into the high end, they'd have to completely rebrand."

The simplest explanation for China's failure to build global brands is cutthroat domestic competition. In most product categories, hundreds or thousands of firms compete for domestic market share, leaving profit margins razor thin. China has 150 firms licensed to make cars and other motorized vehicles, and more than 500 bicycle manufacturers. And because foreign brands have taken much of the market's high end, most companies are forced to compete on cost, leaving little room for investment in R&D or marketing. China's weak protection for intellectual-property rights—the patents and ideas that are the solid core of any brand—makes it risky for companies to invest heavily in innovations that could make them famous worldwide but could easily be stolen by rivals at home. Finally, the recent string of product recalls—including poisonous pet food and faulty tires—has left consumers wary of made-in-China goods. A report last year by Interbrand, a London-based consultancy, found that 66 percent of 700 international business professionals cited "cheap" as the attribute best describing Chinese goods. Only 12 percent of respondents said that made-in-China quality was improving. Eighty percent said a "low quality" reputation "most prevents Chinese brands from succeeding in overseas markets."

The mix of solid engineering and marketing razzle-dazzle that goes into a brand like Google or Nike is an art, and mastering it still evades China Inc. Buying it at auction has evaded Lenovo and Haier, and likely will fail the latest bidders: Beijing Automotive Industry Group is making a play for GM's Opel line, and Sichuan Tengzhong Heavy Industrial Machinery has reached a tentative agreement to buy the Hummer brand—which, in any event, is largely discredited in the West for its gas-guzzling signature vehicle. Most mergers fail when both companies are in rich countries, and mergers between the West and China are even more prone to culture clash, but that won't deter others from trying. Since last December, China's banks have given hundreds of billions in loans to help companies expand, according to state media. "If the crisis gets worse, there will be more companies with formerly strong names that will be on the block for relatively small sums," says Hong Kong design professor John Heskett. "Chinese businessmen are very pragmatic, and there could be a trend toward more brand buying."

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.