A Chinese MBA's Blog

Chinese companies used to be the manufacturers for other brands around the globe. Today, along with more and more contact with global business partners, a growing number of Chinese companies are seeking to expand overseas to build their own global brands, acquire higher profit margin and move up the value chain.

The Chinese toy industry is a useful example showing the opportunities and challenges facing Chinese brands. Nowadays, in terms of the American market, Chinese toys have almost dominated the market, having more than seventy percent of market share ("China Sourcing Report" 1). However, few Chinese toy brands could be recognized by American children or parents. When talking about toys, people always think of Disney, Teddy or Barbie.

As toy making is still a labor-intensive industry, Chinese manufacturers enjoy a big cost advantage over the U.S. firms. At the same time, the quality of Chinese toys has also improved in leaps and bounds. The majority of exquisite Barbies are made in China. But to make a strong recognized brand, Chinese companies lag far behind global competitors. The majority of toy brands in China are only "registered names" despite the fact, reported by the China Toy Association, that there are more than eight thousand firms and three million employees in this industry.

The majority of Chinese toys sold abroad are sold under the distributor's name, and that means that Chinese firms are simply "original equipment manufacturers" (OEMs). OEM is the easiest mode for entering the international market, and it is the most practical way when a firm lacks marketing experience and brand recognition. However, strictly speaking, OEM is not a real export activity but a form of contract manufacturing. The product and the brand are owned by the foreign firm which controls the market and the profit margin as well. A firm could earn only fifty cents from a Barbie idol which would be sold in the US at ten dollars. When the profit margin of Mattel has achieved more than twelve percent (Mattel 2007 Annual Report 37), its Chinese suppliers have only two to four percent (Rocks 3). Meanwhile, things are getting worse because the competition coming from China's domestic market is becoming more intense day by day. Globalization is the only way to survive.

However, the first thing a Chinese toy firm should realize is that low cost, the biggest competitive advantage, would disappear in its course of internalization. Those international rivals, such as Mattel, have been establishing production facilities within China. Low cost is no longer a Chinese monopoly. You must have unique weapons to compete with Mattel.

Brand strategy

When thinking of global branding, people always talk about the concept of COO (Country-of-origin). Dr. Ying Fan, a senior lecturer at Brunel University, said that "COO is roughly defined as the impact which perceptions or prejudices about a country have on consumers' evaluations of its products and brands" (52). It is definite that a brand could have an inborn advantage of customer recognition when it comes from a country which has a positive COO effect. Unfortunately, after a year of massive toy recalls, the most common word which associate with Chinese products is "cheap".  In a poll of 569 respondents outside China, Interbrand Corp., which carry out surveys for BusinessWeek, found that last year's recalls had dealt a serious setback to mainland brands. Although the respondents said Chinese products are "a good value," few labeled them "safe," "high quality," "prestigious," or "luxurious"(Roberts).

Moreover, in general, Dr. Fan remarked that "a firm could use own brand if COO is positive; when COO is neutral, it could use own brand or Western-sounding name; if COO is slight negative, it had better use acquired brand; yet when COO is very negative, the firm should use a third-party brand" (52). According to this theory, it seems that Chinese toy companies should not publicize or globalize their own brand and maybe OEM is the best choice.

However, in toy industry, maybe it is time for Chinese firms to surpass the expectation of those consultants. In the American market, the biggest cake-eighty percent-is dominated by Chinese toy firms (Usatoday). That is say, China is almost the only heavyweight in this arena, and this situation could give Chinese firms special opportunities to more forward.  

Chinese toy firms can take more aggressive strategies to speed up their ambition.  The choices could include developing their own brands, buying an international brand or building a brand alliance. Three years ago, Lenovo, the biggest personal computer company in China, acquired IBM's PC Division and its famous laptop brand equity of ThinkPad. Today, Lenovo is the third biggest computer company in the world, next to HP and Dell Corp. China-based home ware manufacturer Haier Group has been listed in the top 100 most recognized global brands, and ten of America's supermarkets stock Haier goods (strategic direction,12). China's telecom giant, Huawei Technology, has established a joint venture with 3com Corp. to explore developed market, and its product brand is named "Huawei-3com". The road of Lenovo, Haier and Huawei could be great value to the Chinese toy industry.

Another item which should be taken note here is brand positioning, especially when a Chinese firm is developing its own brand in a developed market. Most Chinese companies still concentrate on the low end of the market with low prices. This strategy may not work in a developed market. It can further reinforce the negative effect of COO and may be difficult to overcome when the firm wants to move upper market. A good example might come from SVA's price policy. SVA is a Chinese television manufacturer, and its price policy is very simple: high-end product with a medium price. By this means SVA can avoid brand competition at the top end and the price competition at the lower end.

Product design

How many people know the real reason for the massive toy recalls that happened last year? Many have blamed it on manufacturing in China; however, it is misleading. Professor Paul Beamish, from the Richard Ivey School of Business, and Hari Bapuji, at the University of Manitoba, analyzed 550 toy recalls made in the US since 1988 and found that more than 75 per cent were due to problems that could be attributed to design flaws. Only about 10 per cent related to manufacturing defects (Mayne). "Are there problems in China? Definitely," said Professor Beamish. "But is China the primary source of these recalls? No, it isn't." Brian Stockton, executive vice president, international with Mattel, said: "We have actually manufactured fun and safe toys in China for more than 20 years and the issue is not about China. Companies make products, not countries." A lot of toys had been incorrectly designed with lead paint or could be easily broken. If a firm can only do assembly work according to a blueprint provided by others, it can never make any improvements.

Another example, reported by David Rocks, comes from Soleil China Ltd., a pet toys exporter. In 2001 Soleil hired a packaging designer to give its goods an edge, and soon added a product manager. "We immediately saw better results when we started designing our own products," says Kate Feng, Soleil's general manager. Today she has four people creating toys and six others helping make molds. Soleil's designers come up with at least five new products a month. Each can be sold at margins of 10%, vs.2% to 4% for items designed by foreign customers but made by Soleil (China Design 3).

A decade ago Samsung was a second-tier brand and made some so-so consumer electronics. But after years of focusing on design, Samsung today earns more awards for design than Sony or Apple, and it become one of the most valuable brands in the world.

More and more Chinese toy companies have realized the importance of product design. However, there are several problems. To begin with, China lacks professional designers. Chinese-made toys are mostly old-fashioned, with intelligent and electronic ones merely accounting for three percent and 0.6 percent of the total, respectively (Barbie Doll). China needs lots of talented toy designers to turn itself from a big toy maker into a powerful one.

Another problem within China's toy design is that it seems that some Chinese designers prefer looks rather than functionality. They crave impressive appearance to attract customers. This may be useful in China's domestic market, but in international market, functionality always means to what extent a designer can explain customer needs. There is an on-going demand trend for high-tech electric toys and design-for-adult toys. Semi-conductor technology and digital technology are penetrating into the modern toy industry. Many adults, who desire more educational toys, buy toys not just for entertainment but for mental exercise. Toy designing today includes, and more and more relies on high-tech design and psychology. This trend means that a firm should own a toy design team which comprises professionals in different areas.

Finally, Chinese toy designers lack global vision. They can design toys for Chinese customers, but although they have a low-cost advantage, they could not be employed to design for the American market. "They know what Chinese customers are thinking about," A designer in Detroit said, "but they do not know what is going on in Springfield" (Rocks 56). However, the Japanese and Koreans figure out what is going on in Springfield, and their designs eventually succeeded worldwide. The realization is that the Chinese toy industry needs designers working overseas. Or, once these people has spent a few years in Milan or New York honing their skills, some of them will return to China to help it reach to a upper level. Today, Chinese firms should try to use outside talent, which might be expensive but is worthwhile.

Improving management

A Chinese toy firm could buy an international brand or hire high-quality designers. However, it will meet great challenges when it starts operating a global enterprise. Unlike Japanese, who are born in a country with scarce, and have already set up a lot of international enterprises which have trained so many international businessmen. Most Chinese business leaders are only accustomed to domestic business environment and rules, and have little knowledge of international operation.

After Lenovo acquired IBM PCD, the headquarters were transferred from Beijing to North Carolina; the former CEO, a Chinese man, was shifted to an American by the board; the working language, Chinese, from the startup of this company, was changed to English. Among seventeen senior vice presidents, fourteen of them are non-Chinese. Chinese control the broad, but they have successfully created a cooperative atmosphere for both Chinese and foreign colleagues. "We will seek a vacant position globally." One HR manager of Lenovo told me.

Fortunately, since China's economic revolution from 1978, more than five hundred thousand Chinese have gone abroad for advanced study. Among them there are more and more graduates whose major is business, and definitely they will play an important role in Chinese companies' globalization.

Looking ahead, Chinese toy companies will have a long journey when building their international business. But one thing is almost certain: International customers will find more Chinese brands in future years. Meanwhile, this type of change will benefit both Chinese toy industry and customers of the whole world at large.

Sea Jin Chang. "International Expansion Strategy of Japanese Firms: Capability Building through Sequential Entry." Academy of Management Journal. 38.2 (1995): 383-407. Proquest. UWW Library, Whitewater, WI. 22 Mar.2007 <http://proquest.umi.com/>.

Ying, Fan. "Branding in China: Marque in the Making." Brand Strategy Jun. 2007: 52+.

Rocks, David. "China Design." BusinessWeek 21 Dec. 2005: 56+.

"Growth at Haier Group, Pfizer and Electronic Arts." Strategic Direction 22.7 (2006): 11-14.

"China Sourcing Report: Stuffed Push Toys." Global Sources. Jan. 2005. April 23, 2008 <http://www.researchandmarkets.com/reportinfo.asp?report_id=306232&t=d&cat_id=>.

China Toy Association. Map of the Main Production Areas. April 22, 2008. <http://www.toy-cta.com/Introduction_1.asp>.

Mattel Inc. 2007 Annual Report. <http://www.shareholder.com/mattel/downloads/2007AR.pdf>.

Roberts, Dexter. "China's Brands: Damaged Goods." BusinessWeek.com Sep.24, 2007. April 22, 2008 <http://www.businessweek.com/magazine/content/07_39/b4051053.htm >.

O'Donnell, Jayne and Mindy Fetterman. "When it comes to toys, buying American is tough." Usatoday.com Sep. 2, 2007.  May 2, 2008 <http://www.usatoday.com/money/industries/retail/2007-10-04-toy-fear_N.htm>.

Mayne, Paul. "Toy Recall Blame Should Be Shared." Enn.com Sep.19, 2007. April 25, 2008 <http://www.enn.com/top_stories/article/23207 >.

"Barbie Doll Poses Challenge to Mammoth Chinese Toy Industry." People.com.cn Jan.06, 2003. May 1, 2008 http://english.people.com.cn/200301/06/eng20030106_109629.shtml .