Watching Warren Buffett on CNBC try to give a clean slate to Goldman Sachs stirred a number of thoughts. First, I was surprised the “Sage of Omaha” was willing to spend his personal good will to try to help Goldman, but then again, his company has a $5 billion primary investment and options on another 5 billion shares, so maybe it makes economic sense.
Western brands don’t always carry over in China
Second, it brought to the forefront the question of what is good will and what is it worth.
Warren Buffett is a brand. He is generally well-regarded everywhere, and China is no exception. Goldman Sachs also is a brand that the Chinese used to hold in high esteem. We will see what the future holds.
Over the years, other brands that have been involved with scandals which were reported in the Chinese media include HP, American Airlines, Adelphia, AOL Time Warner, Arthur Andersen, BAE Systems, Bank of Credit and Commerce International, Barings Bank, Bayer, Bre-X, Bristol-Myers Squibb, Clearstream, Chiquita Brands International, CMS Energy, Compass Group, Deutsche Bank, Duke Energy, Dynegy, El Paso, Enron, Exxon, Fannie Mae, Firestone Tire and Rubber Company, FlowTex, Ford, Global Crossing, Guinness, Halliburton, Harken Energy, Homestore.com, IG Farben, Kerr-McGee, Kmart, Krupp , Lernout & Hauspie, Lockheed, Merck, MG Rover Group, Mirant, Morrison-Knudsen, Nicor Energy, Nortel, One.Tel, Parmalat, Peregrine Systems, Phar-Mor, Qwest Communications, RadioShack, Refco, Inc., Reliant Energy, Rite Aid, Royal Dutch Shell, Société Générale, Southwest Airlines, Tyco International, Union Carbide, ValuJet Airlines, WorldCom, Xerox, David Wittig, Northern Rock, Satyam Computers, S-Chips Scandals, AIG, Marsh & Mclennan, Waste Management, Siemens, Volkswagen, Lehman Brothers, Bear Sterns, Health South, Toyota and Mercedes Benz.
This is not an exhaustive list – just a few of the highlights of the past two years. It skips over con men such as Bernard Maddoff, the savings and loan crisis and the back-dating scandals, which involved hundreds of other well-known brands, but it should stir a few memories. Some of these companies no longer exist. Ohers have recovered.
So the question arises; what is the future of Western brands as the markets shift eastward? What does a Western brand mean to a consumer in Mumbai or Beijing, and will it mean the same five years from now?
At one time, brands were about quality and reliability. Car companies, sports teams, cereal makers, banks, insurance companies and anyone who offered a good or a service tried to build their brand through reliable performance and advertising. As companies developed their brands, the successful ones grew their market share and production capabilities and vied with other brands in their market segments.
Brands leaped to the forefront when Madison Avenue created a new playing field, which favored those who were willing to advertise heavily. Today, fueled by available funds, MBA technocrats, production efficiencies and advertising economies of scale, most market segments are dominated by a few players.
These super brands are tied to increasingly short-term financial goals, which came with the financing, fueled by their last leveraged buyout (LBO), initial public offering (IPO), acquisition or expansion.
From an accounting point of view, brands are “good will” which can yield a multiple vs. other brands. But unlike a hard asset, “good will” can vanish overnight. Just ask Lehman Brothers, Enron, BP or the hundreds of other companies that have woken up with their reputations in tatters.
Putting aside the issue of what this has done to the efficiency of the market. For instance, look at the breakfast cereal industry, which is dominated by four major brands. They take fifty cents worth of sugar and grain put it in a cardboard box and sell it for more than steak.
The rise of the super brands begs the question: is the value real or is it Memorex?
In developed countries, known brands are part of the landscape. From early childhood on, we are surrounded by an unending cacophony of multi-media marketing, which becomes intertwined with our lives and cultures. Children know the golden arches long before they know how to write, and they can sing their favorite commercial jingle long before they can sing the national anthem.
However, in the East, while brands such as McDonald’s and Nike are doing their best to re-educate and assimilate a new flock of believers, most Western brands face stiff obstacles in terms of dealing with business issues, migrating their marketing message, anticipating the tastes and preferences of the different local markets and dealing with immature distribution and advertising systems.
Having said this, many brands are doing well in China and are committed to the long haul. But in a market where these super brands do not enjoy the same controls they exercise in their home markets, are their brands really worth more? Given the numerous incidents of brand failures and missteps of Western companies, when does the honeymoon end and the local consumer start responding to locally grown brands that are more in touch with their markets and the competitive conditions?
The question needs to be asked, because the value of brands has been ratcheting upward in many cases on the expectation of success in the markets of the East.
Have we overestimated the brand value of our companies based on an unrealistic expectation of their ability to conquer the East? If this is true, what consequences could it have to an already battered world economy which places a half trillion dollar value on these “assets” (the sub-prime mortgage market was also a half trillion dollar market)?
Things to think about as you buy your next batch of stocks or anticipate a move into the China market.