Foreign firms need to snake into China's second and third-tier cities with co-branding strategies

So, with the Year of the Snake under way, it is now time for the majority of Chinese companies to put in place their annual business plan. The Chinese New Year, rather that the calender year, is also regarded by many foreign firms operating in China as a natural business year-ending event.

Firmly on the agenda of most business planning meetings will be expansion into China's second and third-tier cities, mostly in central and western China, where more and more foreign firms should also be focusing attention.

Despite a definite cooling in China's economy, growth prospects outside the tier-one cities of Beijing, Shanghai, Shenzhen and Guangzhou are more and more attractive.

But how do you achieve competitive advantage in these areas? Should foreign firms adapt their China business model for these cities?

The key to success is first to "unlearn" the knowledge and experience gained in tier-one cities due to vast differences in the smaller cities. With a clear mind, multinationals should embark on detailed research into all aspects of life in the mostly uncharted parts of China. Chinese inhabitants of these less developed areas are often suspicious of foreign firms and, therefore, a huge exercise in gaining trust is necessary before any real market penetration can be achieved.

The key to gaining this trust will be the formation of joint ventures with local companies. However, these ventures need to go further and should consider co-branding. Note the difference between joint ventures and co-branding, where co-branding entails the public presentation of two or more brand names on the final market offering - Sony-Ericsson or Intel Inside.

There are two choices of co-branding strategy for foreign firms seeking to expand across China: ingredient co-branding and composite co-branding. The former involves a renowned brand in the production or final product of another renowned brand, for example, Intel with its "Intel Inside" logo. The ingredient brand is usually subordinate to the primary product brand, which is the case with Intel and PC producers with whom it forms a co-branding alliance.

Many small and medium-sized foreign suppliers could take advantage of ingredient co-branding opportunities. For example, the Southwest China city of Chongqing remains home to China's motorcycle industry and, therefore, offers huge opportunities for foreign firms supplying this industry to co-brand with the most well known motorcycle brand names in China such as Loncin and Jialing.

Erdos, the Inner Mongolia-based largest producer of cashmere clothing, also offers an excellent opportunity for foreign suppliers in the textile industry to develop co-branding initiatives.

Composite co-branding refers to the use of two renowned brand names that are presented publicly. Sony-Ericsson is a classic example of composite co-branding. China's second and third-tier cities are replete with local brand favorites that the locals value but that can also benefit greatly from composite co-branding initiatives with respected foreign brands.

Successful co-branding will lead to a mutually beneficial relationship between Chinese and foreign brands. The lesser known Chinese brand will receive a huge boost in trust and credibility from the public association with a foreign brand, even if the foreign brand is not that well known.

Country-of-origin image will help if the foreign brand is not that famous. Foreign companies that originate from developed countries can piggy-back on any reputation the country has in certain industries, such as Britain in education, Germany in engineering, and France and Italy in fashion.

The foreign brand will gain with immediate access to the Chinese brands' loyal customers and with this, opportunities to build trust and gain greater insight into all aspects of the local business environment.

But how do you choose a co-branding partner? Co-branding partners need not necessarily be from the same industry, they need only seek to serve the same target market.

Chinese consumers outside top cities are wary of foreign enterprises, but at the same time it is foreign brand names that command their respect much more. A co-branding alliance will, therefore, capture the attention of the local consumer and present a competitive partnership.

Such a co-branding tie-up will also serve to minimize any reaction from other local competitors and also help cement good working relations with all local stakeholders including the local media and local government.

Of course there are risks, as there are with any expansion into relatively unknown territory. However, co-branding helps to limit these risks, especially any capital investment. The foreign partner brings brand awareness and respect as well as technology know-how and management skills, while the local brand operator should play a leading role when it comes to financial investment and local knowledge.

Furthermore, any accusations of exploitation leveled at any foreign partner company will have very little strength if a co-branding relationship is firmly in place.

As a result, the foreign firms should learn from their Chinese partners whose workforce would be motivated to build a competitive combined brand. The Chinese partner's management and workforce should also acquire more modern management and technological skills necessary for their own international expansion.

A patient approach is also key to success for foreign firms operating outside the main cities. Do not expect, or even seek, explosive gains in the short term. Rather, build a firm base with gradual penetration and acknowledge the contribution made by all local brands

It is the Year of the Snake, an apt symbol of the snake-like strategy that foreign firms need to follow with their expansion plans across China. But when the snake decides to attack, it does so with deadly, decisive speed. Foreign firms should do likewise.

The author is a visiting professor at the University of International Business and Economics in Beijing and a researcher at Nottingham University's School of Contemporary Chinese Studies. The views do not necessarily reflect those of China Daily.

(China Daily 03/01/2013 page11)