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Four Obstacles in Selling Foreign Brands to China

Stocks in this article: AAPL ZTCOY HD

TAPEI, Taiwan ( TheStreet) -- Foreign brands might assume that by flogging China with high quality and marketing buzz they can make money because of the country's growing middle class. They have an ever stronger case as the Beijing government pushes people to spend more so the economy can depend less on the volatile business of exports.

That's not how it works. Consumers in China buy according to a peculiar set of habits formed by a history of struggle and red lights on the slow road toward modernization. Some habits are specific to China. Others span developing nations, especially in Asia.

Here are four obstacles for foreign investors equipped only with textbook business strategies:

  1. Growing appeal of proven local brands

    As Chinese brands raise their quality and name recognition, shoppers may choose them over foreign rivals for price and the appeal to patriotism.

    Chinese would rather carry an Apple (NOK) iPhone than a local white-box branded smartphone that makes people ask "what's that?" It's a status problem. But hundreds of thousands would rather save a couple of hundred bucks off Apple's prices to get a branded Chinese smartphone. The local stuff functions fine while the brands carry recognition across China with a patriotic ring that goes a long way when the government is whipping up one of its nationalistic frenzies.

    Chinese smartphone maker ZTE (ZTCOY), took third place, or 3.9%, in global market share among mobile device brands in the third quarter this year, research firm Gartner says. China's Huawei (002502.SZ) came in fifth at 2.8%.

    Domestic developers are positioned for a long-term lead in tablets, as well. "Local firms appear to be more competitive (in tablets), perhaps because there is not so much of a gap in quality between products in the vast middle of the category," says Douglas Fuller, business school professor at Zhejiang University in China.
  2. Finished products only

    After centuries of poverty, Chinese prize a lifestyle free of dirty, sweaty manual labor. Yet hundreds of millions still depend on those jobs for survival, keeping labor rates cheap. No wonder Home Depot (HD) has struggled and British peer B&Q (KGF.L) shut down some of its China stores after trying to sell the glory of building your own castle.

    "After experiencing poor sales in China, it became apparent to B&Q that Chinese consumers were not particularly familiar with the DIY concept and actually preferred to hire migrant laborers to carry out the work on their behalf," market research firm Euromonitor International says in a 2013 report on the middle class in BRIC nations.

    Spotlighting incompleteness also offends a culture intent on moving forward rather than recalling famine, revolution and poverty. "Brand messaging in China needs to focus on the positive and upbeat," says James Berkeley, managing director of the London-based management advisory service Ellice Consulting.

  3. High savings rate

    China's savings rate stands at around 50%, above a global average of 20%, according to the official People's Daily newspaper online. That trend cramps retail shopping and risky investments as savings are massed for home purchases or children's college education. Stashing cash is more than about filling up piggy banks to buy stuff. The habit reflects fear of risk in a country that's full of scams, low on transparency and hardly famous for financial market performance.

    "Even as the government attempts to encourage less personal saving, measuring market potential in China still needs a 'savings mind-set' dampening factor, at a minimum," Euromonitor says.

  4. Alcohol goes with food

    Wine and beer importers foaming about lack of interest in amber ales or Napa Valley cabernet sauvignon should remember that Chinese don't usually drink with meals. They open bottles a lot more often in restaurants than bars. Wine sellers say diners want sweetish not-too-impressive reds with their food, while everyday German-formula lagers, like Tsingtao (0168.HK), do fine for people who prefer suds.

    This consumption quirk applies just to food and beverage, but the sector's imports to China were worth $73 billion in 2011, according to figures from business consultancy JLJ.

At the time of publication, the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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