Why Chinese firms in Hong Kong need reputation/brand alignment

Most Chinese companies in Hong Kong understand why their reputation is important. It's a bit like your health: if you don't have it, nothing else matters.

But many companies make the mistake of equating their reputation with their brand. They reason that if their brand is solid, their reputation must be, too. This isn't always true. Often, there is a gap between what companies want to stand for (their brand) and what customers experience when dealing with the company (their reputation). Bringing these two things into alignment results in authenticity.

Traditionally, Chinese companies have focused more on operational aspects of their business (such as price and product quality) than they have on reputation. This emphasis is understandable, but can result in some negative side effects. For example, several Chinese companies have cracked the FORTUNE 50 Global Companies list, which ranks enterprises according to their earnings. But not a single Chinese company appears in the Top 50 "Most Admired" list, which judges corporate reputation. Given that many Chinese businesses aspire to expand globally, this should serve as a warning signal.

Measuring authenticity

After decades of serving as "the world's workshop," Chinese companies want to move up the proverbial value chain. Many of them recognize that a stronger reputation will help them capture more of the value associated with the goods and services they produce. A reputation for producing lower-end products also makes it harder to negotiate prices with buyers and suppliers.

Moreover, research published in the March 2013 issue of The International Journal of Production Economics shows that product recalls result in greater financial losses for Chinese companies than for their non-Chinese counterparts. The research indicates that some industry sectors in China are especially vulnerable: food companies, for example, take a bigger hit when they recall products than do automakers.

This finding is consistent with Fleishman-Hillard's own recent research measuring authenticity. We looked at various industries and countries, including China, where authenticity is lowest among makers of Packaged Foods, Family and Fast Casual Restaurants, Fast Food Restaurants, and Discount Retail. Three of the four lowest-scoring categories in China involve food, reflecting the many food-related scandals that have occurred or originated there over the past few years.

Overseas expansion: a new phase of development

China is undergoing a political transition as its top leadership changes. It is also in the midst of a profound economic transition, moving from the catch-up growth that marked the end of Soviet-style central planning into a more normal growth mode. As China shifts into this new phase of development, it is moving away from exports and focusing more on its domestic economy.

Nevertheless, overseas markets remain key. According to China's National Bureau of Statistics, there are more than 18,000 Chinese businesses operating abroad. As these companies seek to establish themselves in foreign markets, their reputations will become more important than ever.

The impact of reputational damage can be clearly seen among Chinese enterprises that have sought to raise capital on international stock exchanges. Many were singled out by firms such as Muddy Waters, a company that published reports attacking them for improper accounting practices, then selling their shares short. As a result of this scrutiny, the share price of many companies plunged, dozens were de-listed from foreign exchanges, and China's IPO market effectively went into hibernation.

All of these consequences have severely limited the amount of capital such firms can raise today. Li Kaifu, a Taiwanese-American venture capitalist and popular microblogger who served as founding President of Google China, recently wrote that these scandals even harmed Chinese companies whose accounting and governance practices were impeccable. In the minds of many overseas investors, all Chinese companies were tarred with the same brush.

Media coverage tends to focus on resistance to overseas direct investment by Chinese companies, particularly in the United States. But the Committee of 100, a Chinese-American organization, conducted a survey showing that about two-thirds of the US general public and more than 80% of US business leaders believe that Chinese investment should be encouraged. Forty-three percent said such investment would help the US economy by creating jobs. Clearly, opposition is not monolithic. Chinese companies just have to do a better job of communicating their intentions when as they prepare to enter foreign markets.

Thus far, most Chinese enterprises have concentrated on developing a brand, which they associate broadly with a combination of product quality and attractive pricing (perhaps with a dash of advertising thrown in). Those factors are important. But without a sterling reputation, Chinese companies will soon encounter the gap between how they portray themselves and how they are perceived in the markets where they are trying to gain a foothold. To plug that gap, they must establish a solid reputation, and then align it with their brand.