New brands on the horizon

Brands for the twenty-first century
GLOBAL INVESTOR 1.05 Editorial — 5
The rise of China, and more recently India and Brazil, has exerted
great influence on the world economy, crushing the prices of
manufactured goods while creating major new domestic markets
and boosting demand for energy and raw materials. Important
as these trends are, they tend to distract attention from a parallel
process that could over the next few years have an even
bigger impact on businesses worldwide. This is the progressive
move up-market of Chinese companies, followed by Indian
and ultimately Brazilian firms, away from competing merely on
price and, instead, toward developing their own <strong>brands</strong> and
distribution networks, backed up by leapfrogging technology.
Parallels to the rise of Japan in the 1960s
In the 1950 s, companies in the USA and Europe used Japan
as a source of low-cost manufacturing to feed in to their own distribution
chains. In the 1960s, Japanese companies turned
the tables, building up their own <strong>brands</strong> and distribution systems.
They innovated products and production processes at such a
pace that by the mid-1970s, they were dominating American and
European companies in sectors from automotive to consumer
electronics, with <strong>brands</strong> such as Toyota and Sony becoming world
leaders from a zero base. And looking further back, we can
draw comparisons with the rise of upstart American companies
in a late nineteenth century world dominated by European firms.
In both 1960s Japan and China today, young companies have
benefited from the existence of a rapidly growing domestic
consumer market that is willing to embrace new products and
where obvious language issues inhibit penetration by foreign
firms. Chinese companies today are exploiting this advantage,
developing homegrown <strong>brands</strong> in areas such as designer
clothing, with many aimed at the top end of the market. However,
Chinese companies are not enjoying the same free flow
of technological know-how that was offered by US firms to Japan
in the Cold-War era of the 1960s. Moreover, the real costs of
establishing new <strong>brands</strong> in Western markets are arguably now
much higher, given the accumulated expenditure on brandbuilding
and distribution channels by the incumbents over the
last four decades.
timetable. The recently announced link-up between the ailing
UK car company MG Rover and major Chinese automobile
manufacturer Shanghai Automotive Industry Corp. (SAIC) could
turn out to be just such a deal.
These trends would be good news for economic growth and
prosperity in Asia, and possibly for shareholders in US or European
firms that get bought out. For other Western companies,
it amounts to a major new competitive threat as Asian companies
buy into Western markets through takeovers using the financial
firepower provided by today’s capital inflows, and then turn their
weapons of low-cost production and leapfrogging technology
on the incumbent firms.
Companies emerging as global brand leaders
Against this background, this issue of Global Investor suggests
a number of Asian firms with the potential to emerge as new
global brand leaders. These have the potential to offer very high
returns as medium- to long-term investments. We also examine
the more general topic of investment in the emerging giants,
noting the attraction of both bonds and equities in Brazil, with
India also offering possibilities for equity exposure. Meanwhile,
in China, equity valuations are more stretched, making it
important to focus on our long-term brand plays. With demand
from these countries set to keep energy prices high for a prolonged
period, we consider the investment opportunities in alternative
energy sources. And at a time when the profitability of
major pharmaceutical companies is threatened by competition
from generic producers in India and elsewhere, we discuss
the prospects for them to generate strong new branded products
based on new cancer treatments.
A separate insert takes a short- to medium-term view of global
financial markets, noting that the first half of 2005 looks
set to be a turbulent period for investors at the level of the broad
indices, with the US Federal Reserve likely to keep raising
rates, the world economy sluggish ahead of an expected rebound
later in the year, and both equities and (especially) bonds
looking expensive in terms of valuation.
Ultimately, these costs are likely to act more as a brake than
an absolute barrier to the establishment of Chinese and
Indian <strong>brands</strong> in the wider world, given the sheer scale of the
domestic market on which they can build. To speed things
up, Chinese and, eventually, Indian firms have a different and
much more aggressive possibility: to acquire established
Western <strong>brands</strong> and distribution networks through outright takeovers,
or by becoming the dominant partner in joint ventures
with weaker partners. These would then provide the beachhead
for penetration of Western markets on a greatly accelerated