An increasing number of Chinese companies are accelerating efforts to strengthen their brand power through the acquisition of foreign brands. Recently, the property rights to Pierre Cardin in China were sold to a Chinese company. This was followed by Hong Kong YGM's acquisition of the right to possess and manage Aquascutum in Asia. Sichuan Tengzhong is also in talks with GM to acquire the latter's Hummer brand.
From 2008, Chinese companies took over a variety of foreign brands in various industrial sectors.
The current financial crisis has increased merger and acquisition (M&A) opportunities for Chinese firms to buy foreign brands because many famous brands from the US and Europe faced a management crisis brought on by the financial crisis.
Main drivers
Despite great improvements in industrial competitiveness, Chinese companies still lag in global brand power. In fashion, for example, China is the world's largest country in terms of apparel production and spinning and weaving capacity. However, China has failed to establish a household name in this area primarily due to excessive focus on production and processing. With a lack of brand recognition, Chinese companies are having difficulty in achieving globalization. In the computer market, the market price of Lenovo computers is more than 30 percent cheaper than those of Dell.
The acquisition of foreign brands makes it easier for China's processing and trade companies to expand their domestic market base and launch into overseas markets. With an increasing number of Chinese consumers showing a stronger preference for foreign brands, it is increasingly difficult for local companies to compete with their own local brands. Considering that a brand is regarded as being synonymous with product quality in the US and European markets, famous brand products have an advantage when exploring new markets.
The acquisition of foreign brands also enables local agencies to operate more stably. Armored with an abundance of local marketing know-how and an extensive retail sales network, these agencies can enhance profitability through brand M&As.
To address their unstable contract-based relations with foreign brands, major local agencies are increasingly reviewing the idea of acquiring the property rights to foreign brands. Fairton, for example, which has served as the Chinese agent of the Swiss shoe brand Bally for more than 16 years, lost its agent status when Austria's Labelux Group acquired the Bally brand in 2009.
With an awareness of local market conditions coupled with an extensive sales network, local agencies can also reduce the risks arising from the acquisition of foreign brands. YGM, which once served as the Asian agency for Aquascutum, has enjoyed stable sales growth since it took over the property rights to the brand.
Even those with existing brand power, are continuously pursuing brand M&As, aimed at strengthening their competitiveness further, as well as making bigger forays into the overseas markets. Leading Chinese companies are exploring ways to expand their global presence through brand M&As. China's Youngor group, for example, spent $120 million to acquire the brands SMART and KELLWOOD, the fifth largest fashion company in the US, in February 2008.
The acquisition of foreign brands is an opportunity but also a risk for Chinese companies. It can contribute to the expansion of the domestic market base and breaking the brand barrier that prevented them from increasing their presence in the international market. China Dongxiang, which acquired the property right to Kappa in 2006, adopted a successful marketing strategy and succeeded in expanding its presence in the global marketplace.
However, it still remains to be seen if all of the foreign brands acquired by Chinese companies can contribute to enhancing their presence in the domestic market. Considering that most of the foreign brands acquired by Chinese companies are second or third class brands without much influence, they are not very helpful.
The acquisition of influential brands requires strenuous investment and development efforts to maintain and develop their power. For example, Belle acquired the property rights to FILA in China in 2007. Thereafter, however, Belle suffered a deficit of HK$32.18 million due to a lack of follow-up investment and marketing efforts. Eventually, Belle sold FILA brand to Anta.
The author is a researcher with Samsung Economic Research Institute (China). The views expressed here are his own.
