The Brand Game

Chinese companies try to move up the value chain by buying established brands.

The brand may say Dell or IBM, but the computers are assembled in China using Chinese components. In a globalized economy, this separation of marketing/sales using U.S. brands from production using foreign manufacturing is now ubiquitous. But increasingly, some well-known brands have also migrated to China through outright acquisitions or licensing. Huffy Bikes is now owned by the Chinese. So are Dirt Devil vacuum cleaners, Revlon beauty products, and IBM ThinkPads. And the Rover brands for cars and Maytag brand for home appliances were almost acquired by Chinese companies.

Brand acquisition is a logical step to move up the value chain. Fierce competition among low-cost contract manufacturers and the relentless pressure from big-box U.S. retailers has led to paper-thin profit margin. By dealing directly with retailers, brand owners could see a potential jump in the profit margin from 3 – 4% to 8 – 10%.

Well-known brand names could also bring instant prestige and mature sales channels which would have taken years to establish. Brand names are like a degree from a prestigious university. They open some doors, but do not guarantee eventual career success. Successful integration of acquired brands with the indigenous corporate culture could be unexpectedly difficult. The ultimate market test is whether the brand-transplanted companies can bring out innovative products that enhance the brand value.

While the Chinese companies are in hot pursuit of well-known U.S. brands, U.S companies are gearing up to deny the Chinese these prized fruits. The recent over-priced $2.6 billion acquisition of Maytag by Whirlpool is a transparent attempt to deny China's largest appliance maker, the Qingdao Haier Group, access to Maytag's U.S. distribution channels.