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Emerging Market Firms Don’t Have a Plan to Create the Next Global Brand. They Have Eight.

6/7/2012

First Japan. Then South Korea. Which country will be next?

Quick! Which brand sells more major appliances by retail volume than any in the world? It’s the same one that had more than $20 billion in sales in 2010, marketing products such as dishwashers, microwaves and washing machines in more than 165 countries. Earlier this year, the company had one of the largest exhibition spaces at the Consumer Electronics Show in Las Vegas. It’s been an official sponsor of the National Basketball Association since 2006.

If you guessed Whirlpool – or General Electric or Samsung – you’d be wrong. Rather, the company in question is Haier, a Chinese brand that, while known in the business community, remains unfamiliar to many American and European consumers. And yet Haier, which less than 20 years ago was a nearly bankrupt state-owned enterprise, is now seeking to become one of the first names that buyers in the developed world think of when purchasing their next stainless steel refrigerator or big-screen HDTV.

JB Steenkamp

It won’t be easy. Companies that hail from emerging markets, such as Brazil, Russia, India and China, face many obstacles when marketing to Western consumers. The countries from which they hail – particularly China – are often associated with poor quality or unsound environmental practices. They generally don’t have the marketing talent and leadership experience in place to build powerful global brands. And many don’t understand what Western consumers want or the kind of emotional relationship they have with the names they choose to buy.

Consider, for instance, that while there are more than 60 Chinese companies on the list of the Fortune 500, which ranks the largest global companies by revenue, not one name from China appears on the latest ranking by the agency Interbrand of the 100 best global brands. Meanwhile, the percentage of European consumers who could spontaneously recall major Chinese brands, according to a study by the consultancy Calling Brands, was remarkably low, ranging from just 2 to 7 percent.

As a result, the conventional wisdom has long been that these companies won’t be a threat to existing global powerhouses. “The top leadership of corporations in the West grew up in a world in which their competitors were all very well-known,” said Jan-Benedict E.M. Steenkamp, the C. Knox Massey Distinguished Professor of Marketing at UNC Kenan- Flagler. Because of that, Steenkamp said, many CEOs, marketing practitioners and business school students believe that a poor perception of products from these countries, combined with a lack of marketing experience, will doom such brands from becoming global players.

But Steenkamp and his collaborator, London Business School marketing professor Nirmalya Kumar, think differently. In their “Brand Breakout: How Emerging Market Brands Will Go Global,” set to be published in 2013 by Palgrave MacMillan (and a special Chinese edition by CEIBS Publishing Group, Shanghai), Steenkamp and Kumar argue that Haier and other developing world brands will one day become household names. They point to Japan in the 1980s or South Korea in the 2000s, both of which built global automobile and technology brands, much to the surprise of their competitors in Europe and the United States. “There is, to the best of my knowledge, no country that has come to economic prominence that hasn’t also developed strong brands,” Steenkamp said.

The question, then, is not if these companies will gain a global following, but when – and perhaps more important, how. Steenkamp’s book seeks to answer that question, offering managers at emerging market companies – as well as their counterparts at global multinational corporations – a roadmap for the best ways to build their brands in developed markets. The book is organized around eight “pathways” for growth that illustrate the strategies that these companies should take to go global, which are different than those for developed market players.

For instance, the most common strategy for emerging market companies trying to gain a toehold in developed markets is to take, as Steenkamp calls it, “the Japanese route.” Steenkamp refers to this approach pioneered by Japanese corporations, such as Toyota and Honda, as “the mother of all routes.” Start by entering Western markets with a decent but very low-cost product, and then build name recognition and economies of scale in order to gradually grow quality and price over time. Ultimately, when these companies are ready to go after the premium market, they typically introduce a separate moniker that’s distinct from the original brand’s more pedestrian history (such as Toyota’s Lexus or Honda’s Acura).

Another of the eight pathways is to “use the diaspora as beachhead” or go after an ethnic population living in the developed market. The idea is that, one day, the brand will generate interest from non-ethnic consumers, too. For instance, Steenkamp points to Reliance BIG Cinemas, part of the Indian conglomerate Reliance Group, which now owns more than 200 screens in U.S. cities where a large Indian diaspora resides. The theaters feature a range of Bollywood and mainstream Hollywood films in an effort to expand the market for Indian fims outside of India, both with Indians living in other countries and hopefully one day, non-Indians, too. (Reliance also has a fi lm production and distribution arm.)

A third approach Steenkamp highlights is for emerging market firms to launch as business-to-business (B2B) companies in the West and then add on a consumer brand identity over time. Such a strategy might never be taken by a B2B company from a developed market as it expands globally – it’s far too risky. But because many emerging market companies start out as original equipment manufacturers, making this transition might be necessary. By building a B2B brand first, managers can begin building a platform for global expansion, developing name recognition (even if it’s with a narrower audience) and attracting better talent to the company. When the company is ready to start marketing to consumers – often in an adjacent product category – it has more of a foundation on which to build.

Take Huawei (pronounced WAH-way), for instance. The Chinese telecom equipment maker has grown into one of the world’s largest, selling products first in developing countries, such as Brazil and Mexico, and later in European markets, such as Ireland and Finland. But it’s now also going after the consumer market, too, selling cheap smartphone handset devices to lower income consumers in countries ranging from Nigeria to the United States. Huawei hopes to become one of the world’s top three handset brands by the year 2015. Even if it’s a long way from there now (“I think it’s called a Maui,” one consumer told a Wall Street Journal reporter), the company saw its global handset market share nearly double last year, from 1.3 to 2.4 percent, according to the research firm Gartner.

The primary audience for Steenkamp’s book, of course, is managers at emerging market firms looking to expand their products or services to developed markets. In addition to outlining eight key strategies for doing so, Steenkamp shares some critical lessons from the brands that have already begun to make these moves.

For one, patience counts. This is a gradual process that might end up being measured in generations rather than years. Those who try to move too fast too early can fail. In addition, far too many of these managers don’t understand the fickle relationship that U.S. and European consumers have with the brand they buy. “They think too often that brands are about functional quality,” he said, “whereas to be successful in the United States, a brand has to evoke an emotion.”

Steenkamp’s book is also designed to be a wakeup call for managers in companies from developed markets who don’t yet see the threat that their overseas competitors pose. By outlining strategies that these opponents might take, Steenkamp hopes executives will better understand what moves their competitors might make next, as well as what kind of potential exists for acquisition targets in emerging markets.

What’s more, it’s not just people who work for companies based in India and China these days who are trying to expand new brands to the United States and Europe. More and more global companies are practicing “reverse innovation,” launching new products first in emerging markets and then trying to expand them back into their home countries. For instance, Steenkamp points to denizen, a value priced line of jeans started by Levi’s in Asia that is now being introduced (launched in Target in July 2011) to the United States. “These companies are truly global product developers,” Steenkamp said. “They’re harnessing the best ideas around the world.”

Steenkamp believes consumers, too, will increasingly be looking for the best brands around the world, no matter where they originate.

“The brand equity of brands from these emerging markets is lagging behind the actual quality of what they deliver,” said Steenkamp. And it’s only a matter of time before they catch up.

Here are the eight paths for emerging-market brands to go global described by Steenkamp and Kumar in “Brand Breakout.”

1. Business to consumer: Leverage B2B strength in B2C markets.
By building a B2B brand first, managers can start to build a platform for expansion, developing name recognition and attracting first-rate talent. When the company is ready to start marketing to consumers — often in an adjacent product category — it has more of a foundation on which to build. Example: Indian tractor maker Mahindra & Mahindra.

2. Asian tortoise: Migrate to higher quality and brand premium.
Brands that start by entering a developed market on the low end can slowly build brand recognition and economies of scale over time in order to improve quality and raise prices. When they’re ready to go after the premium market, these brands typically introduce a separate premium brand that’s distinct from the original one. Example: Chinese major appliance manufacturer Haier.

3. Diaspora: Follow emigrants into the world.
As a global market leads to unprecedented numbers of people not living in their native countries, companies can enter developed markets by going after ethnic groups first. Over time, the brand might attract Western customers, too. Example: Filipino company Jollibee.

4. Brand acquisition: Buy global brands from Western multinationals.
An emerging market company acquires a Western company, a move that allows it to “buy in” to the developed market and gain both an instant international reputation and access to distribution channels in the process. Example: Chinese computer maker Lenovo, which bought IBM’s PC group in 2004.

5. National champion: Leverage strong support from the state.
A company is championed by the state and receives subsidies or preferential treatment, such as state resources to expand both domestically and, subsequently, internationally. There is plenty of evidence that this pathway does not always produce winning brands. Example: Dubai (United Arab Emirates) airline Emirates.

6. Natural resources: Brand commodities in four steps.
A brand can be created for natural resources, standing in as both a quality guarantee and a provider of emotional satisfaction. Often, it’s done by either explicitly linking it to a country or by branding the commodity itself. Example: South African company De Beers.

7. Cultural response: Position on positive cultural myths.
Because Western consumers often associate different emerging markets with certain positive attributes, an apparent weakness can actually be turned into a strength. Example: Brazilian company Natura, which capitalizes on Brazil’s image of beautiful, untamed nature and biodiversity.

8. Positive campaign: Overcome negative associations of the country-of-origin.
Rather than flaunting their nationality, companies that use this approach deliberately repress their country of origin, either by hiding it or attacking the stereotype that developed-market consumers have of their countries. Example: Mexican beer company Cerveceria Modelo (Corona beer).