Buy vs. Build: Chinese Firms Seeking Familiar Brands in Global Strategy

September 14, 2005

Last year, the Chinese manufacturer TCL acquired the television operations of Thomson SA, a multinational electronics manufacturer based in France that owns the RCA brand. In December, Beijing-based Lenovo completed the purchase of IBM’s personal computer business, acquiring among other things the ThinkPad brand.  In June, Chinese white goods manufacturer Qingdao Haier Co. launched an unsuccessful $1.3 billion takeover bid for the venerable Maytag.


These acquisition moves represent a strategy on the part of Chinese companies to ease their entry into Western markets by hitching a ride on well-known American names. The tactic contrasts with the development of the strong Korean and Japanese brands that have become icons in the West -– brands such as Samsung, Toyota and Honda, which were built from the ground up.


"Historically, Asian companies in Europe and the United States built their own brands. The Chinese are trying something different –- buying strong brand presence rather than building," observes Ajith Kumar, a professor at the W. P. Carey School of Business who specializes in marketing strategy. Examining the trend lends interesting insights into China’s approach to globalizing its industries, but buy versus build is a strategic decision many growing companies consider.


"When entering a new market, is it better to buy or build your own brand?" Kumar asks. "While the answers are complex, the reasoning is based on common business principles such as brand loyalty, price and the state of the vertical industry itself."


The power of a known name


Each market sector carries its own unique characteristics.


"In certain categories if you don't have a known brand, you're going to go nowhere," says Erik Thoresen, senior analyst with market research firm Mintel. "In other categories, there are so many brands that a new one may not get to the top of the market right away, but it has a chance of succeeding."


For example, Thoresen notes that for baby products such as strollers, car seats, and high chairs, trusted brand names are important to the consumer –- new parents. He adds that in the energy drink category, where Red Bull holds a lead spot, there is plenty of room for a new name.


The large appliance market, where Haier seeks to expand, is one of the brand-sensitive sectors. Refrigerators, washer and driers and other big ticket items are purchased infrequently, yet they hold an important spot in the consumer landscape. The reassurance of a quality name resonates.  


"There are three big players in the U.S. appliance market: Whirlpool, General Electric and Maytag," says Kevin Burkhardt, assistant vice president of Symmetrics Business Intelligence Solutions, which researches customer loyalty for Whirlpool and other firms. "They have huge market share, huge bases of customers loyal to their firm. Trying to break in at the ground floor using value proposition versus the emotional side for customers takes a long time."


"Emotional factors far outweigh rational factors such as quality and value," Burkhardt  continues. "Another firm could come in and manufacture a high-quality, high-value product, but the emotional side pays a bigger part in customer decisions."


In Haier’s case, acquiring the Maytag name and the image of the lonely repairman with no appliances to fix would have given the company instant cache as it broadens its reach. In this case, however, the Chinese bid failed.


Capital -- intellectual and financial


Along with the name recognition, Haier would have been buying the actual products that go along with it –- and the design creativity and partnerships to produce them, Kumar noted.


"Haier does sell things such as the small refrigerators students keep in dorm rooms in the U.S.," Kumar said. "Why would they not attempt to build their own brand? When it comes to manufacturing and marketing high-end appliances, it requires a lot of intellectual capital. Especially in designing very sophisticated products, it takes time to build that intellectual property."


In some cases, American brands are also attractive because of financial considerations. Maytag’s financials made it a highly desirable acquisition: a quality brand with high consumer recognition that had stumbled but not yet lost its brand equity.


"If you look at the S&P 500 over last 10 years and look at their stock prices, Maytag significantly underperformed. When stock prices are weak, it is easier and cheaper to buy the company," Kumar said.


He also noted that private equity firms were among the parties interested in Maytag. "This provides additional evidence to support the hypothesis that Maytag's stock was underpriced. Because these firms need to realize a large return on their investment in a fairly short period of time, they are unlikely to buy something that isn't priced 'right.' In fact, Haier launched its bid in partnership with two U.S. private equity firms -- Blackstone Group and Bain Capital. Ripplewood Holdings, another U.S. private equity firm, had also made an independent offer to buy Maytag, but withdrew following Whirlpool's takeover offer."


Whirlpool announced Aug. 23 that it had an agreement to pay $1.7 billion-plus in cash and stock and will assume almost $1 billion in debt to acquire Maytag. If the deal clears anti-trust hurdles, it is expected to be complete in nine months.


This case, in turn, contrasts with the successful purchase in December of IBM's personal computer business by Lenovo. IBM, which has moved toward consulting and enterprise computing, wanted out of the PC business. Lenovo, already a strong supplier of PCs in Asia, gained use of the IBM ThinkPad name for five years and boosted itself to No. 3 in the PC business worldwide with the purchase. IBM will continue to partner with Lenovo after that and will endorse the Lenovo-branded products.


In a sense, Lenovo got the best of both worlds. For $1.25 billion in cash and equities and an 18.9 percent stake in the company, worth about $50 million, Lenovo gets to enter the U.S. PC market with the IBM brand, and then transition to its own brand with the backing of IBM.


Kumar points out that there are advantages to buying, but they may not be as great as they seem at first.


"It would seem that buying a brand if you can buy it at a good price would be a less risky strategy," he said, "but if you look at the history of mergers and acquisitions, three-quarters of them fail."


Alternative strategy: break new ground


One other way to gain name recognition in the United States, Thoresen pointed out, is by entering a market with new technology, such as the emerging high-definition DVD electronics segment. While China has already settled on a standard, elsewhere Sony is pushing its BluRay standard and Toshiba its HD-DVD.


"In the next two years, that's an opportunity for Chinese companies to introduce a brand new brand with brand new technology," Thoresen said. "They could really make a big impact on the market. Consumers are introduced to a new technology and also introduced to the brand. As they go through the learning curve, they associate the company with the technology."