Note: This article was initially written for China Economic Review but we wanted to include it here as well…enjoy.
China’s extraordinary economic growth has been characterised by the production of high volume but relatively low value goods for export markets. This has allowed certain industries such as OEM’s (Original Equipment Manufacturers) to flourish but times are changing.
Increasing labour costs are eroding Chinese firms’ cost-based advantage and squeezing net profit margins. Conversely, China’s burgeoning middle classes have a healthy appetite for brands. These opposing forces create a new market dynamic where consumers’ decisions are increasingly being driven by prestige, conspicuous consumption and perceived quality as opposed to cost. This emerging dynamic creates huge opportunities for brands.
The business case for brands is strengthened by recent National Development and Reform Commission research. The NDRC found that on average manufacturing brands obtained 27% gross margin whilst non branded OEM manufacturers reported 19% gross margins. Brand’s ability to charge price premiums is the primary reason for this differential but why are people prepared to pay premiums for brands? The answer lies in humans’ tendency to make decisions based primarily on emotional grounds. The most successful brands understand and align with target customer’s emotions. Nike, Apple and even B2B brands like IBM and GE are masters of the trade.
So why is emotion so important? When humans’ make a decision the front of our brain (frontal lobes) accesses our memory which comprises of previous experiences. The process of accessing previous experiences goes through the part of our brain that deals with emotions (the limbic system). This means emotions are an integral part of humans’ decision making processes.
Unfortunately, most executives who embark on building brands fail to account for emotion. Instead they focus on the logo or other design elements. This is fatal mistake. Yes, design is seductive but if you take away the logo and so forth nothing is left. There is no brand. People don’t buy Apple products because they like the logo. They buy Apple for deep emotional reasons such as belonging, making personal statements about their creativity and so forth that resonate with them.
BYD is an example of a Chinese brand that understands and utilises emotion. “Green City Solutions”, “Green Dreams” and other emotive language lies at the heart of this brand’s strategy. This language tunes into the human emotion of caring. Caring for the planet, caring for those around us and more importantly wanting to show others you feel this way. Caring is the common denominator that galvanises the brand and the consumer at an emotional level. Who wouldn’t’ want to be regarded as caring? It’s a human truth.
Now. We must not get too emotional so to speak. Emotion is crucial to building brands but you should not forget rationality. This is consistent with the great behavioural neurologist António Rosa Damásio who outlined how emotion and rationality are inextricably linked. Whilst the BYD brand majors on the emotion of ‘caring’ this should not be at the expense of making reliable cars. It is not rational to buy a car if it doesn’t start and if the car won’t start people won’t be interested in exploring the emotional benefits. This is where Korean brands such as Hyundai have excelled. Bodywork and mileage guarantees established ‘rational’ credentials. Hyundai’s now uses the “Hyundai, Drive Your Way” tagline. This tagline gives the brand undertones of intelligence, independence and self expression. Powerful emotions. The base for this emotional connection would be unstable if the rational foundations for the brand had not been laid. After all, who would want to buy a car brand that would not start?
Li Ning is an interesting brand that promised much but has struggled to realise its full potential. A 69% decrease in Li Ning’s Millward Brown BrandZ valuation of $316m for 2013 paints a gloomy picture. Li Ning’s home page potentially provides a portal to their brand related problems.
It shows product’s “For the Baller”, “For the Run”, “For the Fan”. The end use segmentation is clear but it is missing the emotional component. Shouldn’t the image be of “The Baller” celebrating a great victory with his teammates dressed from head to toe in Li Ning? Shouldn’t the “The Fan” be celebrating that amazing victory with his friends and family (wearing Li Ning) at a stadium buzzing with excitement? Both scenarios share stories that are emotional and aspirational. The current product centred imagery doesn’t inspire or fire emotions. A brand essence, values, position and ultimately a tagline that majors on “Winning Together” provides a potential solution. This language unifies competitiveness and winning in the context of collective achievement. These are human truths that have the potential to resonate with target customers both in China and abroad. It’s a slightly different market but Timberland seem to have got it right. They show their product in use and in context. This allows the target market to relate to the brand via the brand placement scenario.
The competitive landscape in China is changing. This is a function of rising labour costs and a growing number of sophisticated brand hungry consumers. Competing purely on cost and volume is one strategy. This is unlikely to deliver superior returns in markets characterised by increasingly discerning and brand savvy consumers. Brands that succeed will have focus. They will focus on target segments that have growth potential. More importantly their brand building efforts will focus on emotions that resonate with their target market now and for years to come.