No Place Like Home: Chinese Companies Stung by Trade War Build Up Domestic Brands

SHENZHEN, China / SHANGHAI (Reuters) – For over a decade, manufacturer Matsutek went away from building 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 overseas. markets.

This strategy paid off, helping 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 fifth last year in the wake of 25% Chinese tariff rates, forcing them to close two of its 11 assembly lines – all located in mainland China.

Already disenchanted with the US market after a legal battle with rival iRobot Corp in 2017, tariffs were the last straw, and in December Matsutek switched its focus to its own "Jiaweishi" vacuum cleaner – promoting them on Alibaba & # 39; s Tmall and Pinduoduo & # 39; se trading platforms.

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

“This was our waking moment. We figured we couldn't rely on foreign markets alone, but we should build our own brands in China, "Terry Wu, general manager of two Matsutek units in Shenzhen, told Reuters.

The trade war proves to be a turning point for the countless Chinese original equipment manufacturers (OEMs) who supply products to Western companies to redirect and sell, and which has built China's reputation as the "Factory of the World". [19659004] For someone like Matsutek, it has triggered a major strategic reassessment, while for others who have developed brands targeting the Chinese consumer, it has asked them to strengthen this effort.

"Being an OEM is like being a farmer who expect a good year of rain, why not build our own brands, lower prices a bit and offer products 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 moving 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 spell tougher competition for large foreign companies.

"Chinese companies that used to be business partners and suppliers become rivals," said Jason Ding, partner in consulting firm Bain & Company, adding that foreign brands in the Chinese market would have to strengthen the game.

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 most important growth market until this year, but because of the trade war, customers 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.

Additional tariffs that went into effect this month will bring Chinese glass taxes 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 sales of 500 million yuan last year, and Shenzhen MTC Co, a TV supplier to Walmart Inc under the Onn brand with 13 billion yuan in annual revenue, spent months investigating a shift on some production to Vietnam.

But they resigned after US President Donald Trump's administration in June threatened to add the Southeast Asian country to its customs list.

MTC, which acquired the rights to the JVC mark 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 would quickly expand the domestic market with a program launched in December that offers consulting services on product development. It also promises to share data and provide ad time.

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

Matsuteks Wu said that the company's new focus on the Chinese market has been a great success, and it has sold more than 100,000 robot vacuum cleaners under the Jiaweishi brand. It plans to reopen the two assembly lines it closed 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 in China it is only 1.5%, Wu says.

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