The Future Belongs to Brands

By Al Ries & Laura Ries

There are many theories as to the cause of the financial crisis in East Asia.

• Some experts believe the Asian crisis is a banking problem. What the world needs to do is to help the financial institutions to restructure their loans and tighten up their lending policies.

• Some experts believe the Asian crisis is a political problem. What these countries need is more responsive and more democratic leaders.

• Some experts believe the Asian crisis is a monetary problem. "The first clue to solving the crisis in Asia is to recognize that it’s a monetary crisis," says the world’s leading business publication. "Expelling crony capitalism and rescheduling loans and privatizing state companies are all of course good things, but the immediate problem is to stabilize exchange rates."

We believe the cause of the Asian crisis is none of the above. We believe the crisis is a branding problem. For the most part, companies in those stricken economies do not build brands. Instead they have handful of companies who make a wide array of products under the one name. The companies are unfocused and consequently are unprofitable. And if you don’t make money, you can’t pay off your bank loan.

In Asia or America. That is the cause of the crisis.

Too simple an explanation? Maybe, but the easiest thing to overlook is always the obvious.

Compare Japan with the United States. The top 100 companies in the United States had sales last year of $2.8 trillion. As it happens, the top 100 companies in Japan also had sales last year of $2.8 trillion.

But the real difference is in profits. The 100 American companies had profits on average of 6.3 percent of sales. The 100 Japanese companies had profits on average of just 1.1 percent of sales.

That 1.1 percent is the average net profit in Japan. With so many companies close to the breakeven point, you can be sure that many are losing money on a regular basis.

Look closer. Japan is a line extension society. And so is Korea, Malaysia, Indonesia and Thailand. Everybody makes everything. Nobody builds a brand. Everybody sells on price. Nobody makes any money.

For the most part, Asian companies are unfocused and line extended.

What’s a Mitsubishi? Sixteen of the 100 largest Japanese companies market products and services under the Mitsubishi name. Everything from automobiles to semiconductors to consumer electronics. From space equipment to transport systems.

What’s a Matsushita? Eight of the 100 largest Japanese companies market products and services under the Matsushita name. Everything from electric equipment to electronic products and components. From batteries to refrigeration equipment.

What’s a Mitsui? Eight of the 100 largest Japanese companies market products and services under the Mitsui name.

As brand names become more important, companies like Mitsubishi, Matsushita and Mitsui are going to suffer even more. A name that tries to stand for everything winds up standing for nothing.

The Asian practice of fielding a wide variety of products under the same brand name has drawn favorable comments from many business writers who don’t always look under the financial covers to find the real story.

Korea is in even worse shape than Japan. Last year the 25 largest Korean companies made 0.8 percent net profit on sales.

Take Hyundai, for example. This $71 billion Korean chaebol brags about a "chips to ships" strategy. Hyundai makes microprocessors, telecommunications satellites, passenger cars, commercial vehicles, subways, high-speed trains, turn-key engineering & construction projects, super-tankers, LNG carriers, among other products. All under the Hyundai name.

Hyundai makes everything except money.

The most successful companies in the world are those who are building strong brand names in the minds of consumers.

What’s a Volvo?

Volvo is focused on "safety." Currently, the boxy, old-fashioned-looking Volvo has become the largest selling imported European luxury car in America. Volvo has consistently outsold both BMW and Mercedes-Benz. In the past decade, for example, Volvo sold 896,000 cars in the United States versus 762,000 for Mercedes and 744,000 for BMW.

The most successful companies and brands are usually focused on a single word or concept they can own in the mind. Mercedes-Benz owns "prestige." BMW owns "driving." Crest owns "cavities." The Body Shop owns "natural." Maytag owns "dependability." Prego spaghetti sauce owns "thick." Domino’s Pizza owns "home delivery." Little Caesars owns "two pizzas for the price of one," or in the vernacular of their television spots "pizza, pizza."

When you try to own everything, you wind up owning nothing.

What is the key to a company’s success in the future?

Strong brand.