Competitive Intelligence

Chinese Firms Buying Up Trademark Brands to Compete for Premium Prices

The move by Chinese firms to "go premium" and capture prestige brands and the awareness and loyalty they convey has long been a goal of a country most commonly thought of as the low-cost-producer, but recent moves by some firms to buy up everything from Dirt Devil to Revlon remind us of their rather more upscale aspirations. Here’s a few choice excerpts from the San Francisco Chronicle:

In 1905, in a backyard factory in Cleveland, workers began making vacuum cleaners for a company that became known as Royal Appliance Manufacturing Co. Almost a century later, Royal, which established the popular Dirt Devil brand, stopped making almost all of its vacuums in Cleveland because it realized it was cheaper to pay a Chinese company to do it.

Dirt Devil's departure would have been a relatively minor chapter in the grand exodus of American manufacturing to China. But this year the Chinese company that got the contract to make Royal's vacuums acquired something potentially even more valuable: It bought Royal and the Dirt Devil brand name, too.

Other Chinese manufacturing companies are also starting to buy the brand names of products that they formerly only produced. In some cases, they acquire the company, as with Nakamichi stereo gear, in others they get an exclusive licensing deal, as with Benetton eyeglass frames.

Hong Kong-based Techtronic Industries Co., the company that bought Royal and Dirt Devil, also grabbed the Ryobi tool brand from the parent company, Ryobi Ltd., in every market but Japan. As with Royal, Techtronic had been making Ryobi products for years. The Hong Kong company also bought two brands with products similar to ones Techtronic already made: the Homelite outdoor-products brand from Deere & Co. of Moline, Ill.; and the VAX brand of floor-care products, formerly owned by England's VAX International Ltd.

The purchase by Chinese manufacturing companies of Western and other foreign brands signals an important shift in the supply chain forged during the past three decades between the West and Asia. While such deals so far aren't numerous, conditions are ripe for many more, pointing to what may well be the next major phase in China's industrial evolution. Instead of constantly trying to lower their production costs to increase margins, Chinese companies are now trying to capture brand value - the ability to sell their products at a higher price directly to consumers who are willing to pay for a recognized label. If this trend continues, it means more dollars paid for brand-name products will wind up in China.

Several factors are responsible for the increasing Chinese purchases of American brands. Many U.S. companies - particularly those that own midsize brands such as Dirt Devil - have been under pressure as Asia's cheaper, no-brand goods flooded into the U.S. and competed directly with American brands. Major U.S. retail chains have played these weaker brands against each other, demanding bigger discounts, faster delivery and lower inventories.

In addition, Chinese factories themselves are feeling the trickle-down effect of this pressure. The country's rapid development has produced an oversupply of factories, forcing Chinese manufacturers to vie with one another to produce the same goods for the American and European markets. The intense competition has driven down prices and made their margins razor thin.

"We looked at our product lineup and we saw this trend of shrinking margins, greater competition," says Christopher Ho, chairman of Grande Holdings Ltd., a Hong Kong-listed consumer-electronics manufacturer, which supplied Sony, Pioneer, JVC and others.

Grande snapped up three Japanese electronics brands in bankruptcy proceedings. Its margins on those lines are between 8 percent and 10 percent, compared with 3 percent to 4 percent on the products it makes for others.

Similarly, Hong Kong firm Moulin International Holdings Ltd. in 2001 bought the licenses to a portfolio of brands including Benetton, Revlon and Sisley, from three European companies that were struggling.

In general, the Chinese companies acquiring foreign brands have been focused on making products, not marketing them. And managing brands sometimes puts them in unfamiliar territory, as they must respond to the changing tastes of consumers half a world away.

In the course of its brand-buying spree, Techtronic has increasingly moved away from its roots as a no-name, low-cost Chinese manufacturer and toward an integrated marketing and sales company. It deals every day with major U.S. retailers such as Home Depot Inc. and Wal-Mart Stores Inc. as well as European retailers. Since its first acquisition in 1999, Techtronic's revenue has risen more than threefold to $1.2 billion last year; profit has almost tripled in the same period, to $53 million.

At this stage, Techtronic maintains the same close relations with its Royal unit that it developed as a supplier. The U.S. subsidiary, based in Glenwillow, Ohio, still handles much of the marketing for the Dirt Devil brand, although Techtronic has begun working in that area, too. Hong Kong staffers are more involved with retailers and have taken a bigger role in dealing with product design and presentation.

There a fascinating history of Techtronic also included in the article, so I’d encourage you read the whole thing. And, keep watching Asia for brand migration. Odds are, we’ll see more U.S. dollars flowing that direction in the future, especially if Beijing successfully resists Washington’s pressure to let their currency float, even as the U.S. continues to devalue the greenback in hopes of making America more competitive abroad.

- Arik