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Producers should move from OEM to OBM
2004-06-08
China Business Weekly
Chinese companies should move from the current original equipment manufacturing (OEM) stage to the original brand manufacturing (OBM) to secure a bigger share in the increasingly competitive global market, experts say.
If companies stick to OEM business, they are subject to a highly competitive environment as many other OEMs can produce the same products for less money, putting pressure on profit margins, said Romain Hatchuel, chief executive officer of Hong Kong-based strategic and integrated communications consulting firm The Key.
Citing analysis from BusinessWeek 2003 Global 1000, Hatchuel said the world's top 100 consumer goods and retail companies which rely on overseas production posted sales of US$3,578 billion and profits of US$228 billion.
In contrast, the top 100 OEMs in the Asia-Pacific region supplying those companies with products under their brands, recorded sales of only US$85 billion and profits of US$4 billion.
"This is a flabbergasting ratio of one to 50," said Philippe Starck, a world-renowned designer who serves as the chief vision officer of The Key.
Many Western companies have become "paper tigers, or mere facades with a name and a logo"' while the know-how and production are in Asia, Starck told China Business Weekly during a recent interview.
Although a shift to OBM requires more know-how and capital input into branding and marketing channels, it is an "irreversible trend," exactly as is the case with many big Japanese corporations that were OEMs themselves a few decades ago, Hatchuel said.
Chinese companies should try to acquire higher efficiency through their own designing, marketing and brand management, instead of continuing to function as nothing more than OEMs in the global market, said Sheng Hailun, assistant to the dean of the Business School of the former State Economic and Trade Commission in Guangzhou.
However, OEMs will continue to exist in China for the foreseeable future together with OBMs, given the imbalance in the economic development of various regions in China, Sheng said.
There are very few successful Chinese brands at present, except a few companies such as Haier, Lenovo and TCL, Hatchuel said.
Haier is China's largest home appliances maker. Lenovo, formerly know as Legend, is China's biggest personal computer maker, and TCL is one of China's largest TV manufacturers.
Some Chinese companies have already established brand presences in emerging markets, with products such as domestic appliances, consumer electronic products and motorcycles, said international management consultant firm McKinsey & Co in a report released last year.
The next move of Chinese companies should be to go into developed markets, a process already under way with some appliances and consumer electronics firms, McKinsey said.
Chinese appliance and consumer electronics companies have a long way to go in this process, given the complexity, hefty cost and uncertainty in creating and sustaining their brand names in developed markets.
However, they have their obvious advantages as well, including the quality and price of their products, and a growing pool of skilled engineers and capital to invest in new products, the report said.
Lenovo adopted its present name last year to attain wider recognition worldwide. Its former brand name Legend had already been registered in various sectors in many countries, which made it difficult for the company to promote its brand overseas, the company said.
The government has also been encouraging domestic companies to create and promote their own brands in foreign markets.
By the end of 2000, brand strategy administrative departments had been established all over the country.
The State Administration of Quality Supervision, Inspection and Quarantine promulgated regulations on the appraisal and administration of China's national top brands in 2001.
China Brand Strategy Promotion Commission was set up in 2002, highlighting the government's role in pushing forward the national branding strategy. The commission, composed of government officials, related organizations, experts and journalists, works to appraise top new national brands.
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