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The Little Red Book on Branding

I found myself in the US in the dying days of the last era, the one pre Covid, says Mark Martyrossian of Aubrey Capital Management.

As is the way with conversations that take place contemporaneously with a memorable event, one that I had with a couple of investors in Dallas in late February 2020 has stuck in my mind. They had heard it said that brand development was a more difficult process in Asia than it is in the developed markets.

And that this was particularly the case in China. I was intrigued to know where my audience had picked up this notion. They were discrete but the idea had been suggested to them by a US fund manager who specialised in brands.

As the country continues to develop, we have no doubt branding in China will become ever stronger." I begged to differ. Some brands in the west are certainly much more powerful than in Asia but then they have had a hefty head start.

But the potential for Asian companies to close that gap is clear to see.

This is especially the case amongst Chinese brands - in 2021, 11 of the 25 most valuable brands in the world are from China; it is no coincidence that during the recent UEFA EURO 2020 Chinese companies, such as Alipay (Ant Financial), Hisense, TikTok (ByteDance) and Vivo, had a strong presence in the tournament, accounting for a-third of the total official sponsors.

As 2021 marks the 100th anniversary of China's most powerful and influential brand - the Chinese Communist Party - I thought it might be worth revisiting the concept of branding in China.

Transforming the connotations of the "Made in China" label from cheap and often low-quality manufactured products to innovative and cutting-edge goods and services has been a key goal for the Chinese government and corporations. As outlined in our 2020 article

"Made in China 2025 - the policy and investment opportunities it presents", China has been in the process of emerging out of the "middle income trap" to become self-sufficient in sophisticated, high valued added industries such as robotics, semiconductor chips, and automotive technologies.

The wave of transformation is not only limited in the manufacturing sector; consumer industries have also been undergoing a fundamental "Made in China" upgrade - it seems clear that our confidence in the accelerating power of Chinese consumer brands is being justified as several Chinese product lines are beginning to threaten the household names produced by the more established Western companies.

During the recent shopping festivals such as "618" and "Singles Day", Chinese beverage brand Genki Forest quenched more thirst than Coca Cola; Babycare (infant care brand) changed more babies than Pampers and Perfect Diary painted more faces than Maybelline; even Three Squirrels (a snack food business) remembered where they had buried their nuts at the expense of Nestle. The results from other eCommerce jamborees have been similar.

We believe that these impressive sales of domestic brands will continue, especially with the growing demand from Gen Z - whilst Gen Z only accounts for 17% of China's population, 25% of total expenditure on new brands will be contributed by them (and we expect this number to keep growing!!). To succeed with this band of consumers companies will have to be digitally savvy and able to attract and hold Gen Z's short attention span.

Our February article "If you want to be original, be ready to be copied" discussed the emergence and influence of livestreaming ecommerce sales models and Key Opinion Leaders ("KOL") specifically designed for the Gen Z market. These new forms of marketing allow brands to access local consumers directly and effectively.

It also seems like Chinese companies are taking advantage of this growing marketing trend more seriously than their overseas competitors - as 60% of spending by domestic consumer start-ups goes to marketing vs 15-25% for overseas brands' spending in China.

In addition to being innovative marketers, confidence towards domestic products has grown along with their quality. This is most noticeable with the rise of the "Guochao" trend (the celebration of China's culture, traditions and fashion) which is gaining popularity amongst younger generation.

The "She-conomy", a term referring to the increasing spending power of Chinese women, has also played a part in the growth of Chinese domestic brands (research suggests that 75% of all purchase decisions in China are made by women). A few of our portfolio holdings such as Li Ning and Proya are riding these waves:

• Li Ning has been known as the nation's sportswear and "Made in China" has become a fashionable status - its fashion series "China Li Ning" have gained traction amongst younger consumers. With foreign brands facing more challenges in China, Chinese domestic apparels have risen - Li Ning's first quarter revenue rises over 80%!

• Proya Cosmetics is a leading skincare brand which focuses on functional cosmetic products. Over the years, Proya's brand reputation has grown amongst Chinese females hence compared to western skincare brands with higher price tags, general consumers are quite receptive to Proya's products which offer value-for-money.

Internet penetration rate continues to grow in China and branding has never been so diverse and accessible. From small start-ups to large corporations, businessmen and women understand the value of "Made in China" well and the concept of "traffic is king" is increasingly ingrained in marketing strategies.

As the country continues to develop, we have no doubt branding in China will become ever stronger.

By Mark Martyrossian, chief executive of Aubrey Capital Management


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