In 2005, Lenovo acquired the PC division of IBM for a whopping US$1.75 billion. The logic was simple and straight forward—Lenovo would ride IBM’s brand equity in establishing itself as a credible brand in the PC industry. This acquisition was splashed across global media as the beginning of the Chinese global brand takeover. In China, Lenovo’s acquisition was heralded as the onset of a new branding era. After all, Lenovo became the world’s no. 3 computer maker in the world after Dell and HP. But a year later, Lenovo has issued an earnings warning that it would not be meeting its financial target—it reported a 16% decline in first-quarter earning. Its profit fell to US$38 million, well short of the US$40 million that analysts had forecasted. In fact, 35% of sales come from China where shipments grew by 25%. Operating margins in the US was 2.2% compared to a whopping 6.5% in China.
Now look at another example—Acer Computers. Acer is a Taiwanese brand. The brand was built from scratch. It did not ride on an acquired brand’s brand equity. Over the years, Acer has been able to penetrate even European and US markets successfully.
Both these examples look very similar. Lenovo and Acer are in the same industry. They both face similar competition inside and beyond Asia. Acer built its brand over the years and Lenovo leapfrogged on IBM’s brand equity. But in spite of these similarities, one striking factor differentiates these two cases—the Country of-Origin (COO) of these two brands. Acer hails from Taiwan and Lenovo from People’s Republic of China. The country, from which a company (product/service/brand) originates, has an effect on the company’s perceived quality and likeability in the minds of consumers—this is COO. COO is not a new concept. It has been leveraged by companies and countries alike for decades now. German engineering, French wine, Swiss watches, Danish design, Japanese electronics, 100% pure New Zealand, and Malaysia-Truly Asia are few known examples of such COO effect.
It has been proven in academic research that COO effect does have an influence on customers’ perceptions towards products/services/brands. China for long has suffered from a very negative COO effect. Given the changes taking place in the global and the Chinese markets, what role does COO play with respect to China? This article examines the Made-in-China effect in the changing global marketplace.
The Country of Origin Eﬀect
Many factors—brand image, brand personality, brand associations, communication messages—influence the perception of customers about the quality of a brand. The very reason a company indulges in branding is to assist customers in making purchase decisions by providing cues on quality, credibility, and value about a product. One such factor that influences perceptions towards brands is the place where it is made. Such effect is referred to as country of origin effects.
Research in international marketing has proven that country associations do lead to customer bias. Such bias is based on the image of the country in customer’s minds. This leads to the next obvious question—what constitutes an image of a country? What makes French the best country for wines, what makes Germany the best in engineering, and what makes Switzerland the best to produce watches? Many factors have been suggested as contributing to the country image. Some of the important ones are discussed below.
Many Factors Cumulatively Impact the Country’s Image
• Economy – One of the main factors that influence customers’ perceptions towards a country is the level of the country’s economy. Level of economic growth acts as a main proxy for the country’s other activities. Most of the countries with a positive COO mentioned above are highly industrialized, developed countries.
• Technology – Given the extent to which technology and technological innovations impact consumers’ lives in today’s world, it is not surprising that the extent of technological advancement of a country bears heavily on consumers’ perception of the country. This factor is usually related to the level of economic development of the country. Higher the technological capability of a country, more positive is the COO effect.
• Wealth index – This refers to the perceived or actual overall wealth of a country as measured through levels of consumption, number of millionaires, number of billionaires, the size on the luxury goods industry, the sophistication of leisure industry, the proportion of individual income spent of leisure and self-enhancing activities and so on. Wealth index offers customers a cue to infer the level of product quality, variety, and perceived credibility of the products/brands.
• Regulatory mechanisms – With heightened globalization, the existence and effectiveness of regulatory mechanisms have become a major factor in creating country images. Regulatory mechanisms such as Intellectual Property Rights law (IPR), online piracy laws, anti-fraud regulations, and others create a sense of perceived security in the minds of businesses and customers about a specific country.
• Government – The success of capitalism and the resulting market economy around the world has created inherent perceptions (often negative) about countries that do not follow capitalism. Similarly, democracy has become the de facto form of governance in most countries of the world. As such, other forms of government such as monarchy, communist regimes, and dictatorships tend to be viewed negatively. As such, the form of government feeds into the generation of country images. A related aspect is the reputation of the government and its corporate governance—how bureaucratic, transparent, corrupt, or efficient is a country’s government?
• Business history – This refers to the evolution of business in a country and what a country has specifically been known for historically. Even though countries evolve through time to specialize in successively high-value industries, it takes a long time to shrug off any negative associations of the past. As such, the business history of the country contributes to the overall image of the country.
These factors discussed above are some of the important factors that contribute towards the formation of an overall image of a country. As such, a countrythat is economically well developed, is technologically advanced, has a high wealth index, has stringent regulatory mechanisms, follows a market economy, is democratic, and has positive historical associations tend to have a very strong positive country of origin image and thus, products of those countries enjoy a positive COO effect. On the other hand, depending on the number of above factors on which countries score low, they tend to have a relatively lesser positive (or negative) COO effect.
Impact of These Factors on China
How does China score on the above factors? If Made-in-China has a negative effect, then the reasons for such an effect can be analyzed in terms of the above factors. China is one of the few socialist countries in the world. This itself creates an image of the country in the eyes of the customers. Given the Chinese government system, it is normal for foreigners to think of it as an inefficient system of governance just because it is different from theirs (often democracy). Further, China is known for rampant piracy, counterfeit products, and thriving gray markets and such. This reflects strongly on the regulatory mechanisms, especially on the effectiveness of IPR laws and their enforcement. Such a reflection does not bear well for China’s image and effect on Chinese brands.
Further, China for long has been known as the world’s factory in many industries. The availability of cheap labor, combined with favorable government policies, resulted in China producing for most of the global companies. These revelations, often by global media (recently Business Week ran a cover article showcasing how Chinese companies hide their practices from Western companies to whom they supply their products) cast a relatively negative image of the country.
But during the past couple of years, China has also been hogging global headlines for its economic growth, ever increasing wealth index, and improvements in technology. With its robust manufacturing and outsourcing sectors, Chinese exports have been contributing to China’s phenomenal economic growth. With increasing employment, there is an explosion of the middle class and the aﬄuent class that are driving consumption. The number of billionaires and millionaires in China is on a consistent rise during the past couple of years. The Chinese luxury goods industry is predicted to become the biggest in the world in the next couple of years. The country is also making impressive strides in research and development and technology sectors. All these factors contribute to a positive image of China.
Given these, it is a combination of both positive and negative effects of these factors that contribute to an overall country-of-origin effect. In China’s case, the cumulative negative seems to overshadow all that is positive for the moment. As such, even today, Made-in-China seems to carry a relatively negative connotation. But with changing global market dynamics, the increasing visibility of Chinese brands, and the global strides of certain Chinese companies such as Lenovo, Haier, and others will facilitate in China overcoming its inherent negative Made-in-China effect. Changing long-held perceptions is indeed a Herculean task. But China is bound to challenge this current state and alter its country of origin effect in a very positive direction over the next 10 to 15 years as Chinese manufacturers are slowly but steadily embracing branding as the primary driver of financial value.
print ed: 04/08