How Should Brands Compete in the Chinese Market? An Interview with the CEO of Isobar Asia Pacific

Alibaba, China's largest e-commerce company, which also listed on the New York Stock Exchange in 2014, has expanded its influence beyond China, increasing its presence in Southeast Asia, the US, and elsewhere. On November 11, 2016, "Singles' Day," Alibaba's annual mega-sale event, saw total transactions reach $17.8 billion in 24 hours, significantly surpassing last year's figures and setting a new record. The rapidly changing Chinese market. Jane Lynn Burden, CEO of Isobar China and Asia Pacific, joins Hidetoshi Tokumaru, CEO of Dentsu Isobar, and Greg Smiley to discuss the latest trends in digital branding in China, where Japanese companies are increasingly expanding their presence.

The Evolution of Chinese Digital Marketing Unseen from Japan

Tokumaru: At Dentsu Inc. Isobar Japan, we increasingly receive consultations from overseas companies entering Japan and Japanese companies expanding overseas. I'd like to consider how significant digital marketing is for brands targeting China.

Jane: To understand the importance of digital marketing in China, it helps to grasp just how powerful China's digital economy has become. Three pillars underpin the development of China's digital economy: the first is e-commerce, the second is mobile, and the third is brand communication. Let me introduce them in order. First, the development of e-commerce, the first pillar, has been remarkable.

China is said to have become a massive data society. Data exchanged within China is growing at an incredible pace and is projected to account for 20% of the world's total by 2030. By then, it's estimated that one billion people and devices will be connected to the internet. In this environment, for companies to succeed, "mastering data" is an absolute must.

Companies that cling to local business models and maintain brand strategies disconnected from e-commerce almost invariably fail in China. Conversely, successful brands are those that embraced e-commerce from the outset. This reality proves e-commerce is inextricably linked to success in China.

High mobile usage underpins digital economy growth

Greg: The second pillar is mobile. Mobile e-commerce is developing rapidly in China. Jane, how do you see the reasons for this?

Jane: China's economic development reflects its digital economy, with mobile at its core. This rapid growth isn't solely due to high IT literacy among Chinese people. China's information infrastructure development lagged for years, but its mobile communication networks advanced first. Driven by necessity, mobile internet penetration surpassed desktop access, leading to mobile's dominance in e-commerce.

For residents in rural areas, mobile was often the only channel to purchase goods, especially higher-quality items, and it was also cheaper than other methods. As many consumers began buying via mobile, brands naturally shifted towards e-commerce.

China's e-commerce is growing rapidly. Data from Alibaba Group's 2016 "Double 11" (Double Eleven) sale, held to commemorate November 11th "Singles' Day" (Editor's note: a day similar in concept to Japan's Valentine's Day or Halloween), showed that approximately 82% of customers used mobile devices, a significant increase from 5% in 2010. By 2019, China's e-commerce is expected to triple in size, with the vast majority of transactions occurring via mobile.

Tokumaru: I imagine Singles' Day sales happen everywhere, including physical stores, but mobile consumption has been booming lately. Are there any trends in the types of products users prefer to buy specifically on mobile or online?

Jane: No, it's not that people buy or don't buy because it's mobile. Chinese people buy almost anything on mobile.

What's a bit interesting is that buying British products has become a boom over the last six months. The pound's decline sparked a UK boom, and it seems Chinese money that was going to Japan is now flowing to the UK. This is also influenced by the fact that British products were already easy to buy online. It's not just products or fashion; you can buy houses, land, cars – pretty much anything you can imagine – online.

Tokumaru: But don't people test drive cars before buying them?

Jane: Normally, yes. But the Chinese don't do that. They buy extremely expensive cars online. Their mindset is that as long as they can check the specs before buying, it's fine, so more people are purchasing online.

Tokumaru: That's unimaginable for Japanese people. This mindset, including for products other than cars, is something Japanese marketers really struggle to grasp.

WeChat is no longer just an app, it's a platform

Jane: Another crucial factor is the contribution of the messenger app WeChat to mobile commerce. Japan has LINE, but I constantly stress to clients entering the Chinese market that "WeChat is not just a chat app." Every app is integrated here, and you can do anything on WeChat. It's essentially an OS and a platform – that's no exaggeration. One example is its payment and money transfer system.

Nowadays, I might go out without a wallet, but I absolutely never leave home without my smartphone. That's because I handle all payments through WeChat. I use it at restaurants, for massages, taxi fares, and even to tip homeless people when I feel inclined. It's entirely possible for a homeless person to show me a QR code, which I scan with my app to send them 10 yuan. It feels like absolutely everyone is equipped for mobile commerce. Mobile accounts for 87% of China's online payments, and WeChat has been a major contributor to this.

Greg: Japan is still said to rely heavily on cash payments.

Jane: I recently visited Germany, and compared to China, mobile payments seemed almost nonexistent. Maybe because there are more Chinese tourists trying to pay with their smartphones, a shopkeeper actually asked me, "Do you actually have cash on you?" (laughs).

Tokumaru: Is mobile payment use spreading even in rural areas?

Jane: Absolutely. Even farmers' fathers use it. In China, many children leave their hometown villages around age 13 or 14 to attend schools in the city. The parents left behind send monthly allowances to their children. They do this via WeChat. It also helps that, unlike Japan, there aren't ATMs everywhere.

Tokumaru: So does that mean mobile sales revenue doesn't differ between urban and rural areas?

Jane: As desktop ownership declines, mobile payment rates are actually higher in rural areas. Furthermore, the average purchase amount per mobile user in rural areas is higher than in urban areas. According to research conducted by Isobar China, only about 50% of people in rural areas have used mobile payments, so it's still growing.

Furthermore, the government is promoting plans to relocate people to rural areas to drive urbanization. This means the future growth potential for e-commerce lies precisely in these rural regions.

Shifting from High-End Brands to Domestic Brands

Tokumaru: We've looked at China's e-commerce market so far , but let's shift perspective slightly and discuss brand communication. From a Japanese perspective, Chinese consumers inevitably evoke images of tourist shopping sprees and a preference for luxury brands. Considering domestic consumption patterns, what are the actual spending trends?

Jane: Simply put, they want imported goods they've never seen before. Over the past three years or so, Chinese consumers have rapidly shifted from a preference for high-end brands to a preference for boutique brands. Previously, just being a famous brand was enough to make it onto their "shopping list," but that's a thing of the past. Now, with just a smartphone, they can purchase all kinds of rare products.

Consumer attitudes have changed. Previously, middle-class individuals flaunted their economic power by buying luxury brands. But now they have enough money and no longer need to show it off. So, the middle class has started buying things like rare regional agricultural products from Japan to showcase their discerning taste. They seek out and buy things with no physical store or advertising, relying solely on online word-of-mouth. Then they brag on social media, saying things like, "Look, I bought this incredibly delicious Baumkuchen that's only sold at a highland resort in Japan!" Even when buying the same Japanese product, the mindset is completely different from buying it at a Tokyo department store.

Tokumaru: It seems the brand story and the process leading up to the purchase have become incredibly important. Japanese consumers went through the same path, but in China, the speed is incomparably faster, and the shift in consumer sentiment happened in the blink of an eye.

Greg: Social media must play a huge role there. We hear about posts about purchases or services received, and how online word-of-mouth boosts purchase intent. For brands, it's also crucial to visualize how brand stories spread among consumers and what shifts in sentiment occur.

Jane: Thanks to e-commerce, we're seeing more examples of brands succeeding on Tmall (China's mall-style online shopping site) starting with small budgets. The key to success is social media management. One orange brand, directly run by farmers, rose to become China's second-largest in just two years. They launched from scratch, relying solely on social media for promotion. While this is an example of a domestic Chinese brand, it really illustrates the power of social media engagement.

According to Isobar China, China's current social media penetration rate is 83%, higher than the US's 70%. Because search engine Baidu is overly dominated by paid search, it's become common practice not to blindly trust search results, but to combine search and social to gather information.

Greg: It's a natural path for consumers to buy online what they discover through online word-of-mouth. It makes sense that online marketing is thriving.

Jane: In the physical economy, brick-and-mortar sales are still nine times larger than online, but online continues to rise while physical stores gradually decline. Online offers richer product SKUs (stock keeping units per item, including sizes, colors, etc.), so the consumer shift online shows no signs of stopping. For Chinese consumers, if the content is worth buying, they don't need a shop.

Japanese brands likely thought in the past that expanding in China required massive infrastructure, but that's no longer necessary. Now, even small brands can succeed solely through digital channels. And even for well-known brands, crafting compelling stories is essential to fueling word-of-mouth. Luxury brands are probably also bewildered by consumers' rapidly shifting preferences.

Tokumaru: But it's not just about having a story, right? If consumers' aesthetic standards are rising, it's only natural they'll become more demanding about both quality and content.

Jane: Exactly. One luxury brand spent years building its presence in the Chinese market and achieved significant success a few years ago. The very next year, they launched a limited-time product exclusively in China featuring a design with a Chinese character logo... It was unnatural for an overseas brand to have a Chinese character logo, it was too conspicuous, and it was hugely unpopular with Chinese consumers. What even luxury brands fail to realize is that Chinese consumers no longer buy products that scream "branded goods." They now prefer something more subtle. This demographic is highly confident in their own aesthetic judgment, so brands need more sophisticated approaches that don't scream brand identity.

"Making decisions with 70% certainty" is the winning formula in China

Tokumaru: How should so-called famous brands behave in China going forward? That's a major challenge. What advice do you give, Jane?

Jane: First, establish a system that allows moving forward swiftly even amid uncertainty. I always emphasize that it's crucial to "act quickly with 70% certainty" rather than seeking 100%.

Recently in China, overseas brands are increasingly being pushed out by domestic brands, with domestic products now holding 70% of the consumer goods market share. I believe the reason this is happening lies in the way organizations and planning are structured.

Greg: We see the same challenge in Japan . Among foreign brands competing in Japan, those with decision-making authority within Japan tend to succeed. Compared to Europe and America, the market is so different that competing on the same level as local companies requires that level of investment in the local market.

Jane: Going forward, foreign companies will struggle to grow their business unless they establish organizations with decision-making authority within China. I've seen firsthand how waiting for decisions from headquarters leads to missed opportunities. What Japanese companies need is to create special forces. Don't try to replicate Japanese organizational structures; prioritize speed, develop and execute strategies with 70% accuracy, then review and refine them monthly. That's the strategy of brands succeeding in China today.

You absolutely cannot grasp how rapidly China's digital market is changing unless you're immersed in it. Without this understanding, you will fail. For example, a popular skincare brand in China opened physical stores in four cities when it launched 5-6 years ago, but soon closed them and shifted entirely online. After solidifying their online popularity, they began expanding offline physical stores again. Their product launch cycles operate at a different speed. New product lines launch almost monthly, and if a product released this month doesn't perform well, they'll discontinue it the next month. Essentially, they're conducting a kind of test online, making only successful products available in physical stores.

Tokumaru: Japanese companies often open physical stores with two-year plans, but successful brands operate at a different speed and even compete on a different playing field.

Greg: The larger Japanese companies are , the more complex their organizations become. There are departmental positions and power dynamics, and often separate teams handle different projects, creating numerous obstacles to decision-making. However, deliberately choosing not to sell in physical stores is a smart decision.

The key to entering China is a "special forces" approach with lean startups

Tokumaru: With the term "cross-border e-commerce" gaining traction, how should overseas companies, including Japanese ones, compete in the Chinese market?

Jane: The skincare brand mentioned earlier is a good example. If a major brand in China wants to do something now, they shouldn't think about moving the entire company at once. Instead, they should create one or two small brands, form a special forces team, and try an online launch there. In this case, both online and offline are fine, but I recommend trying 100% online if possible. This is because 80% of China's promotional budget is spent online, so for cost-effectiveness, you should focus on online.

Tokumaru: So start with online marketing and adjust as you go.

Jane: Yes. Don't spend too much time on annual plans or forecasts. Start with online initiatives, analyze the data, and then decide the next move. You can figure out infrastructure and other details as you go. I think most international brands haven't realized this approach yet.

Tokumaru: One last question: Data acquisition and utilization are essential in digital marketing. Given how advanced digital marketing is in China, I imagine collecting data is easier than in Japan. How do you use the data?

Jane: Actually, it's not that simple. While data flow is high in China, transparency is low. Without the technology and know-how to filter out noise, tracking customer responses could end up wasting your entire marketing budget. That's why, as I mentioned at the beginning, mastering data is what's truly needed going forward.