China’s Chance

May 18, 2007


I just got back from a six day trip to Beijing, where Al and I did an all-day seminar, media interviews and met with local business leaders. It was our very first trip to China, a country we have been anxious to visit for some time.

China has a lot of potential, but it also has several obstacles that could prevent it from becoming the next branding superpower.

A battle of business philosophies is taking place in the world today. You might call it Theory A versus Theory J.

Right now, China has a major decision to make. Will it follow Theory A or will it follow Theory J?

Theory A is the American style of business philosophy which is basically narrow and deep.

Individual American companies tend to focus on a single product line which they attempt to dominate on a worldwide basis. Dell in personal computers. Intel in microprocessors. Microsoft in computer software.

Theory J is the Japanese style of business philosophy which is basically broad and shallow.

Fujitsu, a typical Japanese company, makes microprocessors, personal computers and computer software as well as many other products including mainframe computers, air conditioners and television sets.

What’s the difference between Theory A and Theory J? American companies are focused, Japanese companies are unfocused, or line extended.

There is nothing inherently wrong about line extension. Managers often make the point that line extension allows a company to take advantage of the equity it already owns in manufacturing skills, existing distribution channels and brand awareness.

Nor is there anything inherently right about being focused. What about opportunities that might be missed or efficiencies that could be gained?

Today is China’s golden opportunity, today everyone is talking about China, today is the day China needs to decide if it will follow Theory A or Theory J.

So which theory will help China realize its enormous economic potential? Well, the numbers are in and Theory A wins by a wide margin.

Actually by six to one. Over the years, the net profit margins of the 100 largest American companies have averaged in the neighborhood of 6 percent while a comparable group of Japanese companies has averaged around 1 percent.

Take the focused companies (Dell, Intel and Microsoft) versus an unfocused company like Fujitsu which makes a comparable range of products (and then some).

In the last 10 years, Dell had revenues of $308.6 billion and a net profit margin after taxes of 6.3 percent. Intel had $306.3 billion in revenues and a net profit margin of 20.3 percent. Microsoft had $275.3 billion in revenues and an astounding 30.0 percent net profit margin.

Fujitsu is a larger company that either Dell, Intel or Microsoft. In the last 10 years, however, Fujitsu had revenues of $417.5 billion, yet managed to lose $1.8 billion.

Why is it so difficult for large, unfocused Japanese companies to make money? It can’t be product quality. Most Japanese companies have a well-deserved worldwide reputation for high quality.

Conclusion: Line extension inhibits the branding process.

You can’t build a brand if you put your name on everything. When a company makes and markets a broad range of products under one name, it is extremely difficult to build that name into a powerful brand.

If you don’t build brands, then you have to sell your products on price. And if you do, it’s very difficult to make money in the long run, especially if you produce products in a country with a rising standard of living.

Today, Korea, India and China are booming, much like Japan was in the 1980s and early 1990s. But this initial success foreshadows troubles to come.

Early in a country’s economic development, low production costs make a country’s products very attractive on the world market. Sales and profits zoom.

But this success comes at a price, as a country’s standard of living rises, production costs go up, too. At some point, the only way to be competitive is to sell products and services at break-even prices. Otherwise the business will go to lower production cost countries.

Solution: Build brands.

Brands are the only way for a high-cost country to sell products on the world market and still make money. Germany, for example, has perhaps the highest production costs of any country in the world. Yet German products like Mercedes-Benz, BMW and Porsche automobiles are profitable and in demand worldwide because they are powerful brands.

Today is China’s chance, today is the day for China to not just make products but to also build powerful brands.

Next up: How to position Beijing and what Lenovo is doing wrong with its brand.