Scandals put paid to made-in-China multinationals?

HONG KONG Fri Aug 3, 2007 9:50am EDT

Visitors check Lenovo computers at the '9th China Beijing International High-Tech Expo' in Beijing May 26, 2006. Scandals involving Chinese products in recent months have caused the ''made in China'' label to mean defective, dangerous, and -- in the case of poisoned cough syrup in Panama -- deadly. Fret not, experts say, brands such as PC maker Lenovo Group Ltd. could still capture global market share and become multinationals. REUTERS/Claro Cortes IV

Visitors check Lenovo computers at the '9th China Beijing International High-Tech Expo' in Beijing May 26, 2006. Scandals involving Chinese products in recent months have caused the ''made in China'' label to mean defective, dangerous, and -- in the case of poisoned cough syrup in Panama -- deadly. Fret not, experts say, brands such as PC maker Lenovo Group Ltd. could still capture global market share and become multinationals.

Credit: Reuters/Claro Cortes IV

HONG KONG (Reuters) - Tainted pet food, toxic toothpaste, unsafe tires and toys -- the list goes on.

Scandals involving Chinese products in recent months have caused the "made in China" label to mean defective, dangerous, and -- in the case of poisoned cough syrup in Panama -- deadly.

Fret not, experts say, brands such as PC maker Lenovo Group Ltd.(0992.HK) or Brilliance China Automotive Holdings (1114.HK) (CBA.N) could still capture global market share and become multinationals like Japan's Sony Corp. (6758.T) or South Korea's Hyundai Motor Co. (005380.KS).

However, that process could take years.

For now, image problems will force savvy players to shape up for a global marketplace and weed out weaker firms, while the massive domestic markets of the world's fourth-largest economy cushion short-term pain.

"In terms of their own management and operating policies, they will be raised to a much more international standard," said Jonathan Chajet, Asia-Pacific strategy director for Interbrand.

"It's how much (they) play 'this is from China' in the branding. That's the part that will probably be set back a little bit."

In July, Chinese officials said that nearly a fifth of the country's food and consumer products were substandard.

Just this week, Mattel Inc. MAT.N recalled 1.5 million Chinese-made toys around the globe over fears their paint might contain too much lead.

The government, anxious to restore China's image as the world's factory, last month executed its former drug and food safety chief on charges he took bribes and approved fake medicines.

LAND OF THE RISING MULTINATIONAL

But the potential to become a global player can lure investors: Lenovo's stock gained more than doubled in the past year, versus the market's .HSI roughly 31.8 percent.

Haier's Shanghai-listed arm, Qingdao Haier Refrigerator Co. Ltd (600690.SS), roughly quadrupled over the past year, outperforming the market's roughly 175 percent .SSEC rally.

Experts say an internationally prestigious Chinese brand will most likely emerge first in consumer electronics, because of that sector's dependence on constant innovation, with new devices -- think iPods or Blackberrys -- quickly able to spur markets.

"Because the industry is changing constantly, you would expect that new leaders will emerge with each generation of electronics," Chajet said.

But most Chinese firms still lack marketing savvy, analysts say, specializing as they do in low-cost manufacturing. Not one Chinese firm made Interbrand's "Best Global Brands 2007" list.

Many are learning, however. China's top corporations boast impressive foreign partners, such as Shanghai Automotive and General Motors (GM.N) or IBM (IBM.N) and Kingdee (0268.HK), from which they are keen on picking up technology, management and marketing expertise.

Some brands, including Lenovo, top TV and cellphone maker TCL Corp. 000100.SZ, Brilliance, and appliances vendor Haier (600690.SS), are making slow -- if bumpy -- progress.

TCL, which Philips (PHG.AS) lauded years ago as a potential future Sony, racked up losses in Europe after buying businesses from Alcatel and Thomson TMS.PA.

Lenovo -- which in 2005 bought IBM's PC division for $1.25 billion -- has gone toe-to-toe with Dell DELL.O and Hewlett- Packard (HPQ.N), but has struggled abroad.

Longer term, the firm should overcome negative country of origin stereotypes due to its affiliation with IBM, analysts say.

"Pricewise, consumers think that ThinkPad products are IBM, and lower priced Lenovo products are Chinese. This is how Lenovo has taken advantage of it, and it has helped them break into international markets," said Alex Tang, an analyst at Core Pacific-Yamaichi in Hong Kong.

Holly Leber, a graduate student at Chicago's Northwestern University, hasn't had major problems with her Lenovo laptop.

"It gets slow sometimes, but any computer I've ever had does," Leber said.

LOCAL RELIEF

JP Morgan's Charles Guo said consumers know large quantities of electronics are already made in China.

"It's very different from cars. Cars are made in the U.S., cars are made in Germany. People still want to pay a high price for a car made in Germany," Guo said.

Indeed, in a crash test by Germany's ADAC auto club, Brilliance's BS6 model received a rating of one star out of five, making headlines in German newspapers.

But China -- on course to become the world's second-largest consumer market by 2015 -- offers local players an escape hatch: a massive and rapidly expanding domestic market.

Staking out home markets before going global is a well-trodden path. Samsung grew from selling fish and fruit in the 1930s into the global conglomerate it is today.

Lenovo controls its home market, as do firms in other sectors from brewery CR Snow (0291.HK) to Mengniu Dairy (2319.HK).

But to go international, those brands eventually need to be linked with a larger "China Inc." theme.

"With France you might think luxury, Japan you think precision, Germany you think efficiency, America creativity," said Chajet.

"But for China, it's difficult to understand what it's going to stand for, what it's going to mean in the world."

(Additional reporting by Regan Doherty in Chicago)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.