WSJ

CHICAGO—Chinese companies have for years puzzled over how to break out of low-profit manufacturing for Western companies and expand into the U.S. market with their own brands. Jack Yang thinks he has the answer.

The Chinese company Changzhou Asian Endergonic Electronic Technology sells this dashboard mount for a GPS unit under its Züuma brand in the U.S.

The Chinese entrepreneur makes equipment to mount GPS navigation devices onto car dashboards. The mounts are sold by U.S. companies under their own brands. Now, Mr. Yang is promoting his own line of dashboard mounts, with higher-end features, under his own label.

To promote his line, he has teamed up with two American partners who provide branding and distribution services—a tack many Chinese companies traditionally have balked at.

Like many Chinese businessmen, Mr. Yang has spent little time in the U.S., speaks virtually no English and had no idea how to navigate the U.S. market. Most American consumers have never heard of his company, Changzhou Asian Endergonic Electronic Technology Co., or its English brand, Züuma (pronounced zoo-ma), a name created by his U.S. partners.

"It's not that small- and medium-sized Chinese companies don't want to develop global brands," he said in a phone interview in Chinese. "We don't know how. We don't understand the U.S. market, culture or business model."

The Chinese government is loosening rules for investing abroad and offering educational seminars to encourage companies to develop their own brands and expand overseas, as part of a strategy to move up the value chain, just as Japanese and South Korean companies did decades ago.

Yet only a few Chinese companies have broken free of making products that are sold under others' brands or remaining confined to their home market. Among the handful that have arecomputer maker Lenovo Group Ltd. and household-appliance giant Haier Group. A growing number are trying, though, including construction-equipment manufacturer Sany Group and medical-devices maker Mindray Medical International Ltd. The move is providing opportunities for Western companies ranging from public-relations firms such as Ogilvy Public Relations Worldwideto law firms to global brand consultancies such as Interbrand.

The story of Züuma's creation highlights both the potential and pitfalls facing Chinese concerns looking to build global brands.

The 56-year-old Mr. Yang began making garment bags in 1990 at his factory in Changzhou City, Jiangsu province. In 2005, a Chinese GPS company asked him to produce a mounting device. Mr. Yang designed a dashboard mount filled with steel ball bearings and lined with silicon. The features were aimed at preventing the mount from sliding off the dashboard during sharp turns, a problem with the more common models filled with crushed rock and lined with rubber. Many consumers mount their GPS devices on windshields, but more are now buying dashboard mounts, especially as the use of GPS-enabled smartphones grows.

Mr. Yang, who has U.S. and Chinese patents for his mount, said he sold 400,000 of them in 2009 to North American and European importers, mostly to companies that sell them under their own brands.

With mounts retailing for an average of about $30 in the U.S., Mr. Yang's profit of about 40 cents per unit represented a sliver of what retailers and wholesalers made. Then he discovered that another company was selling knockoffs of his mounts in the U.S. and filed a lawsuit against a dozen retailers that sold them.

The suit presented an unexpected opportunity: Executives at Chicago advertising agency Monogram Group read about the case and proposed to help Mr. Yang create his own brand and to get a richer margin.

"You're very passionate about your product, your invention. Why make such a small margin?" Monogram President Scott Markman asked Mr. Yang through a Chinese-speaking executive at the firm.

Mr. Yang was receptive. The two sidessigned an agreement last September 2009 to work together. Mr. Markman brought on Michael Zakkour, managing director of China BrightStar, a New York-based China-sourcing company, to oversee marketing and distribution. Many Chinese companies have long balked at paying high fees for consulting and other services. Messrs. Markman and Zakkour reduced their fees and agreed to take a commission based on units sold.

The U.S. partners envisioned it would take three to five months to launch a brand that symbolized superior quality at a slightly lower price, conveyed a sense of fun and sounded Western. They also wanted a distribution plan that included pitching to retailers and partnering with Internet retailers.

Mr. Yang, by contrast, wanted to see orders.

The tensions were apparent one morning as the group dialed into a conference call from Chicago and China. Mr. Zakkour said Sitefinder GPS, a Canadian distributor, was continuing to order Züuma mounts, and that Priceless Resource Inc., a U.S. consumer-electronics distributor, was meeting that day with two retail chains to pitch Züuma. In Chinese, Mr. Yang said this news was "good," but then he announced he had reached a deal with a major Chinese telecom carrier to produce a still-in-design Züuma GPS-and-cellphone mount.

It was the first Messrs. Markman and Zakkour had heard about the Chinese-carrier deal. They worried it could undermine their strategy of enticing big U.S. retailers with an exclusive product, or lead to copycat devices hitting the market before theirsdid.

They decided not to tackle the issue head on, suggesting the group hold another call later. "We get Jack's intentions loud and clear. He's living for the short term," Mr. Markman said later.

Mr. Yang separately separately said, "Things haven't moved very quickly." But he notes: "It's like digging a well. If you make superior preparations, you will have big returns."

So far, the reaction from distributors has been promising. Three major U.S. consumer-electronics retailers have agreed to carry the Züuma product line. And Sitefinder, which supplies many oil-field truckers, wants to make the Züuma GPS mount a standard offering. "I did doughnuts [driving] my wife's van to try to knock it off. It wouldn't come off," said Sitefinder President Al Abraham. "It's far superior in terms of build quality and materials" to rivals.

Mr. Yang isn't taking chances. He plans to continue making GPS mounts under original equipment manufacturing, even though they would compete with his line. "Züuma doesn't have any big sales yet," he said. "We'll start decreasing our OEM orders when Züuma can cover our company's costs."

Write to Kathy Chen at kathy.chen@wsj.com

3 thoughts:

1) classic chicken-and-egg situation: no quick short-term sales for chinese brand in new markets and hence they stop focussing on global expansion and stick to OEM contracts. it takes some courage to break through this paradigm, but it really is the only way. global expansion + OEM contracts = competing with your own products!

2) bearing the made in china label is still considered a 'sin': a new name (zuüma?!) is deemed necessary and efforts are made to make everything look non-chinese. again, it takes loads of courage to step up, stick with the made in china label, and be proud of it. unless chinese brands are willing to take that leap of faith, chinese products will always be considered to be of inferior quality.

3) it is applaudable that chinese brands try to go global. and it is inspiring to see 'western' firms helping them ferociously. as in virtually every case, the international potential starts with quality.

Both our societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the United States, it is a prolonged jobs and earnings recession which, when combined with widening inequality, could create a political backlash.

clever article on what all this yuan appreciation malarky is about. in the end, it still comes down to the fundamental difference between the USA and china: the one is a full-blown consumption society, the other a production society. thus, china will never truly appreciate the yuan in the way the USA wants it to, for it will threaten china's exports.

all these facts are also strong indicators that china will sustain their push for 'chinese champions'. chinese firms that can compete on global markets - often with foreign technologies obtained through joint ventures and outsourced R&D.

although the rise of china's companies to a global scale still seems like a black swan event to many, the chinese - as well as their asian neighbours - are fiercely betting on their own surge.

We see four features in these investments over a short period of time. First, China's enterprises accelerated the pace of overseas investment and benefited their partners while many transnational companies shrunk their investment scale due to the worldwide financial crisis. Second, all the aforementioned Chinese businesses chose the United States as their investment destination. Third, investment occurred not only in traditional manufacturing industries, but also in alternative-energy industries. Fourth, they are all large leading enterprises in China.

US might be the most clear example of Chinese investment eagerness, but it is certainly not the only one.

The European Union remains China's largest trading partner, and generally investment strategies will reflect that. Recently, for example, Geely acquired Volvo in a massive deal, but relatively little attention has been paid to the matter. The observers have been specifically quiet on how China is moving into the EU more generally; Volvo was not the first example of a European firm being bought by a Chinese one.

The EU still harbours many large and successful firms that could provide China with the technologies and innovations it is looking for to promote its 'national champions'. But this buying spree could very well go largely unnoticed on the EU level, while separate nation states clamber to rebuild national industries without China's interference.

This is not to say that Chinese investment is a bad thing. On the contrary, it could provide the EU with an exceptional cooperation opportunity. But it does need to be addressed on a wider scale than just EU Commission papers and think-tank audits.

“Made in China, which we're proud of!”

they cooperate with Zhongneng Motors in Taizhou and the China Jialing Group to offer these all Chinese scooters to the picky Vespa-loving Amsterdam crowd.

we'll be watching how this works out, and commend these lads for their boldness.

“Furniture manufactured in America has a stand-off with furniture manfactured in China.”

Now let's talk about the current state of Chinese companies, generally:

1. Their lawyers earn less in one week than our lawyers charge for one hour.

2. They expect us to have ready answers to virtually all of their legal questions without any research.

3. They wait until they are facing a significant problem before they ask for our assistance.

4. Many Chinese companies say they want to hire us for one thing (let's say, to form a U.S. company), but they really have another goal in mind (like getting visas for their families).

4. Once they hire us, they want to tell us exactly how we should do our jobs. For example, we were retained by a Chinese company to sue a U.S. company that owed the Chinese company millions of dollars. We sent our Chinese client a memorandum explaining our proposed course of action and we took a few of the initial steps. We soon received a memorandum back from our non-lawyer client setting forth the steps we should follow--steps that made absolutely no sense at all in the U.S. We told our client they had to trust our competency as lawyers or let us go and we would return what they had already paid us. They let us go.

Just as our dealings with Russian and Korean companies slowly evolved, we are starting to see movement with Chinese companies, too. We are starting to get hired by Chinese companies that have been doing business in the U.S. for a few years and realize just how helpful good attorneys can be. They are reticent to use American lawyers for cost reasons, but they do not have crazy expectations, either. Like all smart companies, they simply do not want to get involved in situations where their costs could spin out of control. We understand their concerns. When possible, we work on a flat-fee basis and, when not, we charge by the hour, with a cap. We also tell them how important it is that we stay in constant contact and to stress this, we often tell them we will not bill for client-attorney communications.

One of the things we have not done with these companies, however, is charge them less than we charge our other clients. I am aware of many law firms that took on projects for Chinese companies at loss-leader prices while planning to raise their rates as the client relationship matured. Instead of building long-term relationships, however, the Chinese companies pressed for even lower prices and then ended their relationships when the law firms refused.

Slowly but surely, the Chinese companies that have been in the U.S. long enough to realize how differently things are done here than in China now want to learn how to play by U.S. rules. They are starting to gain confidence that their U.S. operations can support a U.S.-based cost structure.

What happened with Russian and Korean companies on the legal front was always being mirrored in other business arenas. And what is happening with Chinese companies on the legal front is, I believe, no different from what is happening with Chinese companies on all fronts as they expand into developed economies worldwide.

If you are a service provider looking to work with Chinese companies, you need to understand where those companies are coming from and where they are headed. You need to show patience. And you need to be willing to help those companies along.