Lessons From Li Ning's China Stumble

By Anil K. Gupta and Haiyan Wang

The ongoing turmoil at Li Ning, China’s leading sporting-goods company, holds important lessons for Chinese as well as foreign companies about how to win in the country’s rapidly growing and constantly changing market. Founded in 1989 by the famous gymnast of the same name, Li Ning has established itself as a solid No. 2 in China’s sports footwear and apparel market—behind Nike (NKE) but just ahead of Adidas. With an unbroken record of rapid growth in both sales and profits, the company delivered 2010 revenue of more than $1.5 billion and aftertax profits of more than $170 million.

Over the last 12 months, however, Li Ning has stumbled badly, largely as a result of a major brand repositioning in mid-2010 that has gone awry. In the first half of 2011, the company’s revenues declined, in stark contrast to an average annual growth of more than 30 percent during the previous 10 years. In the 18 months to June 30, 2011, Li Ning’s stock price dropped by 55 percent, compared with a 20 percent gain for its downscale Chinese rival Anta (2020:HK) and 36 percent and 45 percent gains, respectively, for the global giants Nike and Adidas.

Li Ning’s missteps centered around an attempt to take its flagship brand upscale. Accompanied by a revamped logo and a new ad campaign (“Make the change”), the company hiked prices and started shifting its distribution focus from lower-tier markets to first-tier cities such as Beijing and Shanghai. These moves failed to attract brand-conscious youngsters who were happy to spend a bit more to buy Nike or Adidas. Worse, the price hikes gave Anta an opening to steal value-conscious customers away from Li Ning.

The Li Ning episode yields several important observations about the quest for the hearts, minds, and wallets of Chinese customers.

Two Economies

First, it is useful to think of China as two economies—China-1 (comprising most consumer goods and services such as sportswear, personal care products, food and beverages, fast food, and retailing) and China-2 (comprising many “strategic” industries such as steel, airlines, telecoms, financial services, and energy).

In China-1 industries, competitive battles are won or lost largely by the logic of the market. In these industries, who emerges as the market leader depends on company-specific advantages, strategic smarts, and timing. Depending on the context, victory could easily go either way: to a global giant or a Chinese champion. Nike is the favorite of Chinese customers in sports shoes and apparel. Procter & Gamble (PG) dominates fast-moving consumer goods, and Yum! Brands (YUM) is the clear leader in fast foods. In contrast, Haier dominates the home appliance sector and, in electronics retailing, the market leaders are the Chinese companies Gome and Suning rather than Best Buy (BBY).

China-2 industries are an entirely different story. In these industries, the government has an explicitly stated goal to help domestic companies emerge as first national and then global champions. Foreign companies face a tough challenge from state-owned or state-supported Chinese players. Often the best option for multinationals in these industries is to partner with Chinese players while lobbying (through their governments) for open markets. The wind turbine industry—where the Chinese company Goldwind has rapidly moved ahead of General Electric (GE) and Denmark-headquartered Vestas—is a classic example of a China-2 industry.

Because the competitive dynamics differ radically across China-1 vs. China-2, it is important for corporate leaders as well as analysts to take note of the type of industry the company competes in.

Multi-Segmented Industries

Second, as the Chinese economy continues to power ahead, most industries are becoming even more multi-segmented than before. At the upper end, China is creating billionaires, millionaires, and the merely affluent in larger numbers than any other country. Even the top 2 percent wealthiest people in China add up to nearly 30 million—a large and very diverse customer base. At the lower end, the next 10 years will see about 150 million people move up from poverty to lower middle income status. Their buying power and needs will be very different from those of their less as well as more fortunate compatriots.

Li Ning was justified in wanting to compete not just in the mid- and low-tier segments (with its Li-Ning and Z-Do brands, respectively) but also the upper end of the market. It stumbled because it pursued an ill-conceived strategy to do so. Companies such as Nike and Adidas face a reverse challenge. They are well-positioned at the top end; however, given the multi-segmented nature of China’s market, they must figure out how to compete effectively against players such as Li Ning and Anta in the mid- and low-tier segments without diluting the brand cachet at the top end.

A Recipe for Disaster

Third, trying to reposition a solid mid-tier brand as an upscale brand is nearly always a recipe for disaster. Brand cachet is a far more important attribute at higher levels on the price spectrum. By definition, an established mid-tier brand does not have the cachet needed to attract brand-conscious customers at the top end. Trying to reposition the mid-tier brand is thus tantamount to competing without competitive advantage.

Companies such as Li Ning need to draw lessons from the strategies of other mid-tier players such as Tata Motors (TTM), Geely, and Toyota (TM). It is hard to imagine how any of these brands could ever be associated with a luxury car. That is why Tata Motors acquired Jaguar and Land Rover, Geely acquired Volvo, and Toyota cracked open the luxury segment by launching an entirely new brand, Lexus.

In its zeal to carve out a share of the top end, Li Ning should also remember that, in China as well as other emerging economies, the middle income segment is and will remain the largest market segment for many decades to come. Thus, as the company attempts to diversify into adjacent segments, it should avoid, at all costs, any risk to its lock on this most important market segment.