New brands on the horizon

GLOBAL INVESTOR 1.05 Emerging-market equities — 37
<strong>brands</strong>, or legal products inspired by them, is testament to their
attractiveness.
In a recently published study, we examined the role that luxury
goods <strong>brands</strong> play. Overall, these <strong>brands</strong> communicate to
customers or consumers an array of desired attributes: for
instance,1) tradition, which guarantees that the company has
spent many years enhancing its product; 2) quality, which shows
customers that they are getting the appropriate value in exchange
for their money; and 3) consistency, which ensures that the goods
purchased retain their value over time. The right <strong>brands</strong> guarantee
the use of leading technology, so buyers can demonstrate the
status achieved to their peer group. All of these desired attributes
are communicated by a (luxury goods) brand. Closely tied to these
attributes is a global distribution system, which, besides distribution,
concurrently ensures the function of protecting the brand –
a factor that is of paramount significance in the luxury goods sector.
Our analysis reveals that a company’s operating margin and,
in turn, its stock-market valuation rises with the increasing exclusivity
of its distribution network. For other consumer sectors, such
as beverages or mobile phones, a similar but generally less rigorous
set of criteria apply when assessing brand value.
research and development, and building China’s most modern
chip plant. This will allow it to compete with leading international
chip producers such as Infineon and Micron. TCL is the leading
Chinese producer of multimedia consumer electronics and mobile
phones. Sales growth has averaged 30% in the past three years
on the back of increased outsourcing by US and European OEMs
of mobile phones and electronics production. TCL had been
mostly focused on the Chinese market in recent years, but is currently
switching its strategy to international expansion. In July
2004, TCL won European Union approval to buy control of Alcatel's
mobile-phone unit. One month later, it started a joint venture
with Thomson SA to gain access to international markets for TVs.
Other possible companies of interest include Sichuan Changhong
Electric in the consumer electronics sector, Vitasoy in the food
and beverages area, and Haier, which supplies telecom equipment.
We will provide further information on this crucial investment
area as more information becomes available. |
Identifying potential interesting companies
Chinese domestic <strong>brands</strong> are developing rapidly, but it will only
become apparent gradually which of these have the potential to
follow in the footsteps of the success of companies such as Sony
or Toyota. In the coming months, we will publish a number of
reports on this topic, as one of our major investment themes. For
the time being, we are not making firm investment recommendations,
but we would tentatively suggest a number of companies
that might be of interest. Possibly the best-known is the Chinabased
brewery Tsingtao, which already has a significant global
distribution network, but has potential to go much further. Another
well-known name is Lenovo, China’s leading manufacturer of PCs
and handheld devices. Formally known as Legend Holdings, it
launched the brand Lenovo in 2003, primarily for use outside
China. The Chinese government holds a majority stake in the
company, which helps it obtain major domestic contracts. The
authorities will likely encourage Lenovo to grow its international
business rapidly to improve the added value of Chinese exports,
and to create a Chinese high-tech giant. Lenovo has started
to expand in the USA by purchasing underperforming assets,
acquiring IBM’s PC operations for approximately USD 1.75 billion
in December 2004, and obtaining access to IBM’s US distribution
network.
Other important but less well-known names include Semiconductor
Manufacturing and TCL. The former is China’s largest
semiconductor producer, specializing in integrated circuits. Sales
have grown by 29% since 2002, and the firm is now moving one
notch up in the value-creation chain by increasing expenditure on
Table 1
The world’s ten most valuable <strong>brands</strong>
Source: Interbrand Corp., J.P. Chase&Co, Citigroup, Morgan Stanley, Business Week
Rank Brand 2004 brand value (USD billions)
1 Coca-Cola 67.4
2 Microsoft 61.4
3 IBM 53.8
4 GE 44.1
5 Intel 33.5
6 Disney 27.1
7 McDonald’s 25.0
8 Nokia 24.0
9 Toyota 22.7
10 Marlboro 22.1