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Home / Business / Chinese companies stricken by trade war build up domestic brands

Chinese companies stricken by trade war build up domestic brands



By Pei Li and Brenda Goh

SHENZHEN, China / SHANGHAI (Reuters) – For over a decade, manufacturer Matsutek went on to build its business with major Western brands, supplying companies such as Philips and Honeywell with products made in its Chinese factories for the United States and other foreign markets.

This strategy paid off and helped it grow into the world's second-largest robot vacuum cleaner manufacturer. But then the Taipei headquarters became one of the many corporate accidents in the escalating trade war between Washington and Beijing.

Sales of Masutek's products in the US plunged by a five-year mark in the wake of 25% duty on Chinese goods, forcing it to close two of its 11 assembly lines – all located in mainland China.

Already disenchanted from the US market after a legal battle with rival iRobot Corp in 2017, tariffs were the last straw and in December Matsutek switched focus to their own "Jiaweishi" vacuum cleaners – promoting them on Alibaba's Tmall and Pinduoduos e-commerce platforms .

Although the brand was created in 2015, Matsutek had not done much with it until then.

"This was our waking moment. We realized that we could not rely on foreign markets alone, but rather build our own brands in China," Terry Wu, general manager of two Matsutek units in Shenzhen, told Reuters.

The trade war is proving to be a turning point for the countless Chinese original equipment manufacturers (OEMs) who supply products to Western companies to redirect and sell, and on which backs China has built its reputation as "the world's factory".

For someone like Matsutek, it has sparked a great strategic rethink, while for others who have developed brands aimed at the Chinese consumer, it has prompted them to increase efforts.

"Being an OEM is like being a farmer expecting a good year of rain. Why not build our own brands, lower prices and offer products that are of the same quality as foreign brands," Wu said.

For China-based companies that are highly exposed to the US market, it is one of the few strategic alternatives apart from shifting some production to other countries – a tactic that is also gaining momentum.

In the longer term, the greater impetus for Chinese companies is expected to more aggressively develop their own brands to stiffen stronger competition for large foreign companies.

"Chinese companies that used to be business partners and suppliers become rivals," said Jason Ding, partner at consulting firm Bain & Company, adding that foreign brands in the Chinese market would have to increase the game. [19659014] E-COMMERCE PUSH

Anhui Deli, a wine glass and other glassware manufacturer with an annual revenue of 800 million yuan ($ 113 million), has also been hit hard by the trade tariffs.

"The United States was our main growth mark this year, but because of the trade war, clients have been hesitant to place an order, and many orders from the United States have been canceled," said Cheng Yingling, the company's marketing director.

Further tariffs that went into effect this month will bring taxes on Chinese glass to 40% – a big hit for the industry, he added.

However, selling e-commerce at home has helped to offset some of that pain. Recently, together with Pinduoduo, sales of a new glass container have hit more than 50,000 a month – about three times more than what a similar product will sell through stores.

It has also decided to open a factory in Pakistan, which is expected to start in January. But transferring production to other countries takes time and can be full of risk.

Both Matsutek, a small company that made 500 million yuan last year, and Shenzhen MTC Co., a TV provider to Walmart Inc under the Onn brand with $ 13 billion in annual revenue, spent months exploring a shift of any production to Vietnam.

But they gave up after President Donald Trump's administration in June threatened to add the Southeast Asian country to its tariff list.

MTC, which acquired the rights to the JVC brand in China in 2017, has also begun to partner with Pinduoduo.

The e-commerce company was partially requested by the trade dispute, asking for companies that will rapidly expand in the domestic market with a program launched in December that provides product development consulting services. It also promises to share data and provide ad time.

"Pinduoduo reached out to us and said that they want a consumer to business model manufacturer. Considering that they do very well in lower cities and have fewer appliances in the home appliances (than other e-commerce companies) we decided us to work with them, "said David Fang, MTC vice president.

Matsuteks Wu said that the company's new focus on the Chinese market has been a huge success, and it has sold more than 100,000 robotic vacuum cleaners under the Jiaweishi brand. It plans to reopen the two assembly lines it dropped and add another three by early next year.

"We believe there are great opportunities in China. The penetration rate for robotic vacuum cleaners in the US market is 17%, while China is only 1.5%," Wu said.

"At the end of the day, there are more than 1 billion people here."

(Reporting by Pei Li in Shenzhen and Brenda Goh in Shanghai; Editing by Edwina Gibbs)


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