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Brand Valuation | High Value Brands Have Healthy Balance Sheets

Business leaders in much of the world have sought for a long time to build local, regional and global brands that add significant value to their organizations. Today, in China, we see the same phenomenon emerging as Chinese brands move from being local to regional to national and now to global entities.

China’s people drive the change. Historically, the people of China generally have been savers rather than spenders. However, as the economy strengthens the Chinese are changing and causing the businesses they buy from to change too. Government policies and initiatives encourage the formerly conservative Chinese consumers to release some of their hard earned money and spend it on goods and services, driving GDP growth.

This slow but steady, and now very noticeable, transformation is affecting every business across China. Consumers are learning to buy more products and services for reasons other than price. They’re paying attention to brand.

Brand Increasingly Influences Purchasing

This brand awareness has been the case in major cities for some time, but we are now seeing it in second, third and even fourth tier cities. The effect is a flight to quality and a more consumer driven attitude that you get what you pay for. With the growing appreciation of quality comes the demand for brands that offer the reassurance of quality and value.

And with consumers paying more attention to brands as they make purchasing decisions, it’s important to understand how brand is valued. The Chinese government and the Chinese Institute of Certified Public Accountants, and brands themselves are demanding improvements in the measurements of brand because these numbers are essential for winning the confidence of investors, inside and outside China.

The credibility of brand value is essential for facilitating brand growth. In China’s rapidly evolving brand landscape, having a highly regarded brand means a lot more than simple name recognition. Brands are expected to adhere to their industry’s international best practices and the highest standards of management and governance. Perceptions are changing and it is a brave business that ignores the change in demands.

Chinese Companies Evolve from Suppliers to Brands

The Chinese interest in brands began with affection for Western brands. The explosion of foreign brands in China over the last 10 years has been in direct proportion to the growth of China’s economy.

Indeed, many foreign brands have seen a massive explosion in growth that far outstrips the Chinese economy. The major American car manufacturers sell more units here than they do domestically. The premium European fashion houses are opening up more stores across China than in other countries. And global sports franchises are doing commercial deals based on the Chinese consumer’s appetite for brands.

But a growing consumer society changes many dynamics. As wages increase, the middle class expands. And with more disposable income to spend, the new middle class drives economic growth. But as wages rise, labor costs increase and China relinquishes its status as a low cost provider. In this evolving economy, companies that prospered as Original Equipment Manufacturers (OEMs) supplying Western brands may themselves move up the value chain to become brands serving global markets. When Chinese suppliers existed as OEMs, we determined their value based on tangible assets, their real estate, plants and machinery. But as these suppliers evolve to become both manufacturers of products and marketers of brands we need to consider the intangible value of those brands when we evaluate the overall value of the company.

Valuable Brands, Healthy Balance Sheets

Chinese companies now create products as good as anything made in Europe, Latin America, the US and the rest of the world, but our wealthy and influential Chinese consumers may be tempted by foreign alternatives.

The challenge for Chinese brand owners in the future is to continue to win the emotional hearts of Chinese consumers as well as their patriotic heads. We advise our clients to focus on activities that generate both shortterm and long-term commercial success. The acquisition of established Western brands by successful Chinese companies appears to be a long-term plan for both balance sheet growth and strategic brand management, both of which impact on brand valuation.

Building strong brands alone is not enough, but the evidence is that those companies that are aware of the power of brands end up building the biggest and most successful enterprises. The commercial success of the BrandZ™ Top 50 Most Valuable Chinese Brands is evidence that the strongest brands are also often the most successful businesses.

Once the appetite has been created for brands, and it most certainly has in China, we will never see a time when brands don’t matter. In China, we now live and work in a consumer economy. Consumers will choose the products and services that best meet their rational and emotional needs—and they may be willing to pay a premium. In this world, organizations that own the most valuable brands will enjoy the healthiest balance sheets.