By René Kerkhoff, analyst for the technology, automotive and retail sectors and fund manager of DJE - Mittelstand & Innovation at DJE Kapital AG
Chinese brands: new favourites at home
Whether it's chic sports shoes, baby food, make-up or luxurious electric SUVs: through clever marketing, low prices and not least by appealing to national sentiment, Chinese brands are making serious competition for global providers on their home market. An investment theme for DJE - Asia.
After scandal - Chinese producers gain consumer confidence
In 2008, a scandal involving contaminated milk powder shook young parents in the Middle Kingdom. At least six babies died - and about 300,000 became seriously ill - after drinking infant formula made in China. This contained the toxic industrial chemical melamine. The substance, which was supposed to simulate a higher protein content in infant food, led to severe kidney disease. As a result, trust in Chinese infant food manufacturers was deeply disturbed. Many Chinese parents switched to foreign brands whose quality was considered safe. In response to the scandal, several countries, including Singapore and Japan, stopped importing Chinese milk. The EU tightened its existing ban on imports of milk and dairy products from China. The Chinese government imposed drastic penalties on those responsible and assured that it would take decisive action against food safety problems in the future.
In the meantime, the situation has changed. Among Chinese milk powder producers, China Feihe Ltd. from Beijing has managed to regain consumer confidence and has been the leading supplier of baby food in China for two years. At the beginning, its success was probably linked to a branding campaign that implied foreign provenance: until 2013, Feihe was listed on the New York Stock Exchange as American Dairy Inc. Returning to its Chinese name, Feihe insists its domestic baby food has the highest quality in history and is comparable to that of leading global brands. In addition, its advertising promises that its product is better suited to the needs of Chinese babies than foreign products.
Increasing competitive pressure for global market leaders
Global leaders in baby food, such as Nestlé and Danone, are now facing more competitive pressure from local suppliers in the Chinese market than they were just a few years ago. Corona has further accelerated this development. In the course of the pandemic, the Chinese government massively restricted the so-called daigou trade - which means a person outside China buys goods for a person living in China. As a result, the high growth rates of the past could not be maintained by Nestlé and Co. The declining birth rate in China did the rest.
Improved quality of Chinese products
Whether it's baby food, mineral water, sportswear or skin cream - the domestic brands in China are competing with the well-known brands of global corporations. In terms of quality, Chinese suppliers have now caught up massively in practically all sectors. Sports shoes from leading Chinese producers such as Anta Sports are comparable in quality to products from Nike, Adidas and Co. but are often much cheaper. In 2020, for the first time, a domestic producer made the hottest trainer - for a while. But it was not improved quality alone. In recent years, a growing national consciousness ("Buy Chinese" or "Buy Chinese") has also given a boost to domestic products.
Corona pandemic reinforces change
The Covid 19 pandemic has also reinforced this change. In times of tight or uncertain household budgets, the attractiveness of cheaper goods increases and locally made products usually cost much less than those of foreign brand suppliers. In addition, local brands are usually better positioned on the leading Chinese online platforms. As these platforms have experienced great popularity in the pandemic, multinational companies are finding it increasingly difficult to compete with Chinese brands in marketing and sales.
Premium segment - still dominated by foreign manufacturers
Market researchers confirm: Chinese buyers now have more confidence in local brands. According to Daxue Consulting, local companies now account for seven of the ten largest cosmetics brands. As recently as 2017, there were only three. Emerging Chinese brands such as cosmetics suppliers Perfect Diary or Yatsen tend to have a digital presence from day one, for example on Tmall, an online retailer of the Alibaba Group, and invest a lot in marketing via social media channels. This puts pressure on the profit margin. Yatsen, for example, has an operating margin of only about 5 per cent. Multinational companies like Estée Lauder and L'Oréal also invest a lot in their online offering, but clearly focus on the much more profitable premium segment. Against this backdrop, it is not surprising that L'Oréal's make-up line Maybelline has lost around 10 per cent of its market share in the Chinese mass market since 2010. At the same time, however, L'Oréal has successfully established two new make-up brands in the premium segment, Yves Saint Laurent and Giorgio Armani, and has gained around 15 per cent market share in the past five years. It will only become dangerous for Western cosmetics manufacturers when Chinese competitors also penetrate the much more lucrative and faster-growing premium segment for skin care. So far, L'Oréal has been able to hold its own very well with its Lancôme brand.
For the Chinese taste
The Chinese companies' marketing is catching on with the locals. While the foreign brand touts the nutritional value of its infant formula, the local brand Feihe cultivates relationships with consumers through loyalty programmes, support groups for new parents or book volumes with bedtime stories. And Chinese brands are increasingly adapting their goods to domestic tastes. China Mengniu Dairy Co., for example, increased sales of its dairy products through innovations such as pineapple-flavoured cheese and squid-flavoured snacks in addition to its basic milk and fruit yoghurt offerings.
Few international corporations are as agile and operate with innovative distribution strategies. For example, Estée Lauder sold more than 2 billion yuan (more than 250 million euros) worth of products on China's Singles' Day(1) - with a livestreaming campaign, two-for-one discounts and instalment plans. And US fast-food chain Kentucky Fried Chicken (KFC), which specialises in poultry - still the largest in China - supplemented its fried chicken for customers stuck at home during the pandemic with products such as quick-cooking sour snail noodles. Foreign brands still dominate in high-priced categories like exclusive handbags and luxury cars. But car manufacturers in particular have to watch out.
Car market: German top brands' lead is melting away
China is by far the largest car market in the world - and therefore a key market for German manufacturers. These have a very good reputation. So far, the Chinese like to buy the top-equipped luxury models and profitability in China is incomparably higher for German manufacturers than in Germany. But according to a recent survey, the hottest car in China is no longer a Porsche or Tesla, but a NIO. The brand has only been around since 2014 and cannot (at least not yet) compete with European brands in terms of tradition and appeal. Nevertheless, NIO has made a huge leap in quality and design with its electric SUV, offers a decent range and is significantly cheaper than a comparable model from BMW, for example. The competitive pressure on European manufacturers is increasing due to Chinese suppliers.
Chinese car brands score with innovative business models
NIO is not alone. Other Chinese car manufacturers such as BYD, BAIC or Geely are currently entering the market with new e-cars. They are not only beckoning with modern technology and cheaper prices, but are also breaking new ground. The three-year-old Geely subsidiary Lynk & Co, for example, saves on an expensive distribution network. The cars are configured and ordered online. As an alternative to purchase, Lynk also offers a low-priced subscription package including maintenance, tax and insurance, where subscribers can share their car with third parties and thus earn money. Aiways is also starting with an unusual concept for its E-SUV. Thanks to new battery technology, it offers a long range even in sub-zero temperatures at a competitive price - and not only in China. In Europe, customers can test drive the car at the branches of the electronics retailer Euronics. Orders are placed online, and for maintenance Aiways has teamed up with the car accessories and car parts dealer A.T.U., which operates a wide network of workshops. At the heart of e-mobility is the battery. Therefore, car manufacturers need to partner with successful and innovative battery manufacturers. One of the world's leading battery manufacturers is called CATL and is based in China - a potential advantage for Chinese car brands.
Chinese suppliers are catching up - and offer interesting investment opportunities
Western brands are still highly valued in China. But Chinese suppliers have caught up massively across sectors or are sometimes a step ahead of their foreign competitors in terms of marketing and sales or even technology. E-mobility is just one example. "Buy Chinese" also goes down well with Chinese customers. For investors, this expands the opportunities to invest in the Chinese domestic market.
1 Singles' Day is a day for single people that is celebrated in China on 11 November - flanked by appropriate advertising: for example for restaurants, karaoke bars and online shops. Singles' Day has thus become the biggest online shopping day in the world.
Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care, the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.en-de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.en-de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.