Western consumers have changed over the last five years. Once, the middle classes looked down on value brands as cheap and inferior. Now they’re driving to Lidl and Aldi, snapping up bargains and boasting about how much they saved at dinner parties. Value brands are cropping up all over the home, from the food and appliances in the kitchen to the TV and laptop in the living room.
There are several reasons for this. The first is necessity. Median household incomes in the US dropped by 9.8% in the downturn. In the UK over the same period, they fell by 3.8%. Countries like Spain and Ireland saw even more alarming declines. Still, people need microwaves, fridges and televisions. So many consumers lowered their expectations, and moved away from premium brands. In our research, we’ve discovered that they were pleasantly surprised by what they found. The value brands were actually pretty good.
This wasn’t always the case. Twenty years ago, shopping for appliances involved a tricky balancing act; the cheap stuff wouldn’t work as well, and it would break sooner. If you bought a Miele vacuum, it would cost twice as much but maybe work three times as long as a basic one. Now, that’s less likely to be the case. Thanks to better manufacturing techniques and industrial design, it’s quite hard to buy a rubbish product in the west. There are always exceptions, of course. Turkish manufacturer Beko had a disastrous launch in the UK after many of their fridges burst into flames. Even the poorest western consumers have certain minimum standards. It turns out that they don’t like it when you burn their house down.
Now when you pay for an expensive appliance, you’re not simply forking out for better build quality. Brands like SMEG and AGA justify their margins with distinctive design, and American manufacturers compete on features like fancy ice dispensers. High margin TVs must look ultra-cool on a wall and have add-ons like internet connectivity. Ultimately, some people will always pay for a luxury label on their appliances. Chinese manufacturers can leave that market alone for the moment, and go after the middle classes who want more bang, and not badge, for their buck.
Why bother going after this market with your own brand, when you can create OEM products without the headaches of marketing and distribution? In a word, margins. Even the most successful OEM companies in China eventually get pinched by the margins they can command. Western brands own the relationship with the consumer, and mark up the product accordingly. Look at Foxconn: it grew 51% in the first year it assembled iPads for Apple. In 2012 its revenue grew by 1%. Now it’s launching its own brands of accessories and mobile technologies in a bid to kick-start its growth.
The path from OEM manufacturer to low-end brand to high-end aspirational badge might seem like a daunting one. However there are plenty of companies who’ve made the journey, and have the revenue growth to show it’s worthwhile. A decade ago, Samsung and LG sat firmly in the ‘stack ‘em high and sell ‘em cheap’ end of the market. Through innovative technologies and great design, they elevated their status to become sought-after brands with enviable margins. ASUS and Acer used to make laptops for Sony, Hewlett Packard and the rest, and saw their own computers sell at a fraction of the price. Thanks to beautiful product design, they’ve started to compete with the big players. Personally, I’d rather have a lovely ASUS Zenwatch than an Apple Watch.
In the meantime, Sony, which once seemed unassailable, has been crushed as consumers realised that a great-looking, reliable television could cost only $600.
Finally, there’s the whole question of origin: are US and European consumers ready for a Chinese appliance brand? In my experience, it’s not a question at all. A quick poll of my office, staffed by a diverse selection of super-smart and widely-read consultants, showed that nobody knew where Electrolux, Beko and Maytag came from (Sweden, Turkey, USA), and only one person guessed Zanussi was from Italy. Miele, Bosch and Siemens play off their German origins, and its association with high quality engineering and efficiency. The rest seem to go out of their way to obscure their roots. For many years, Zanussi claimed its products came from a different planet in its UK advertising. If British consumers will happily buy appliances made in outer space, they’re ready for microwaves from Shenzhen.
Chinese brands invented the ‘good enough’ category for developing world consumers; it took a downturn for it to catch on in developed markets. Western brands aren’t going to stand still, though. They don’t want to become the next Sony, and many have developed competitive products for Asian markets – the Electrolux range hood for stir-frying is a great example. It won’t be long before they start taking these products back to penny-counting North American and European consumers. There’s an opening for companies like Haier, SVA and Haisense to get into this market now. It won’t be there forever.This article originally appeared in China Daily