Topic of PresentationTitle of Presentation

8 Innovation Myths In China

Mitch BarnsThe Nielsen Company

8 innovation myths in China

1) China ≠ Innovation

2) Innovation in China = success guaranteed

3) China ≠Other countries

4) Innovator > Follower

5) Multinational company = Innovator

6) Local company = Follower

7) Local brand = Mass

8) R&D Spending = Success

Myth #1: China is not an innovator

2) Innovation in China = success guaranteed

3) China ≠Other countries

4) Innovator > Follower

5) Multinational company = Innovator

6) Local company = Follower

77) Local brand = Mass

8) R&D Spending = Success

1) China ≠Innovation

No… China is becoming more innovative

# of patents granted ('000) in China

114 132182 190 214

268

352412

582 596

Y2001 Y2002 Y2003 Y2004 Y2005 Y2006 Y2007 Y2008 Y2009 YTDSep10

Data Source: State Intellectual Property Office of PRC

+19% CAGR +32% CAGR

China is projected to lead in patent activity…patent filings in China will outpace Japan and the U.S. in 2011

Thomson Reuters

2008, Coca-cola constructed global R&D centre in Shanghai (90MM US$)

Attracting global giants’ innovative brains

2003, GE opened global R&D centre in Shanghai (64MM US$)

2006, Pepsi set up the 1st overseas R&D centre in Shanghai

2009, Unilever launchedglobal R&D centre in Shanghai (50MM Euro)

2009, Kraft established their Asian biggest biscuits R&D centre in Suzhou

2010, Nielsen set up the 1st global R&D program outside the US in Beijing

2010, P&G debuted global R&D centre in Beijing (80MM US$)

China is 3rd biggest country in terms of innovation testing

Year 2007 Year 2008 Year 2009 YTD 2010Country Country Country Country

1 USA USA USA USA2 UK UK UK UK3 Germany France Germany China4 France Germany France Germany5 Brazil Brazil Brazil France6 Italy Canada China Brazil7 Canada China Italy Italy8 China Italy Canada Russia9 Mexico Mexico Mexico Mexico

10 Spain Spain Spain Japan11 Japan Russia Japan Canada12 Australia Japan Russia India13 Russia Australia Thailand Spain14 Thailand India India Turkey15 South Africa Thailand Australia Australia

Ranking

Data Source: The Nielsen Company

Projected 2nd in Y2011

Client spending on innovation testing with Nielsen by country

迷思二：在中国创新很容易Myth #2: Innovation in China is easy…

1) China ≠Innovation

3) China ≠Other countries

44) Innovator >

Follower5) Multinational company

= Innovator

6) Local company = Follower

7) Local brand = Mass

8) R&D Spending = Success

Business potential in China = 1.3 Billion Population

X 10% PenetrationX Once purchase per year X 10 RMB per purchase

= 1.3 Billion RMB

2) Innovation in China = success guaranteed

1.8 million0.5 million0.8 million# of Handlers

1.8 billion RMB1.6 billion RMB2.0 billion RMBYearly Retail Sales

94% WTD68% WTD88% WTDDistribution

> 100 SKUs~ 100 SKUs~ 40 SKUsProfile

18 years17 years18 yearsExperience in China

ToothpasteLaundry Powder/LiquidShampooCategory

Brand

No… Mega brands require long term commitment

Data Source: The Nielsen Company

2% of ideas are actually successful in market

~ 1000

~ 200

~ 80

<25

Prioritize Concept

Refine Mix

Launch Product

Track Performance

SnapshotPreBASES

BASES IBASES II

20% pass screening stage

40% pass final validation stage

30% sustain in the market

BASESTests in China

InnovationProcess

Data Source: The Nielsen Company

Myth #3: China is different from other countries

1) China ≠Innovation

2) Innovation in China = success guaranteed

4) Innovator > Follower

5) Multinational company = Innovator

6) Local company = Follower

7) Local brand = Mass

8) R&D Spending = Success

3) China ≠Other countries

While China is different in terms of culture and habits

More likely share negative

More likely to share positive

China most likely to share negative opinion online

Chinese take shower at night

White is perceived beautiful

Child is the king in the family

Chinese prefer indirect expression

…the ingredients behind innovation success are common across countries

Salience

Communication

Attraction

Point of Purchase

Endurance

Distinct consumer proposition

Catching attention

Internalized message Focused message

Credibility

Find in store & on shelf Acceptable Costs

Performance versus Expectations Longevity

Interest

Lack of barriersSubstantial need/desire Unique solution

12 success criteria derived from 78 measures

But the hurdle to reach on these measures is higher in China

Competition is intense

Retail environment is diverse

• 3.3 million outlets in Y2009• Only 2 of top 10 retail chains are multinationals• Huge difference between regions (only 7% retailer chains

operate in both Shandong and Guangdong)

Data Source: The Nielsen Company

Success hurdle of innovation is higher in China

Global Database China Database

+10%

Median CPI-2%

26.3% 29.4%26.8%

US, UK Database

# of Brands contributing 80% sales (Shampoo)

China20

Brazil10

France 11

Myth #4: Innovators are more successful than followers

1) China ≠Innovation

2) Innovation in China = success guaranteed

4) Innovator > Follower

5) Multinational company = Innovator

6) Local company = Follower

7) Local brand = Mass

8) R&D Spending = Success

3) China ≠Other countries

Not always… First mover can have advantage if you are able to…

Create the categorySet high entry barrier&

• Target relevant needs by better understanding consumer

• Be disruptive and provide unique solution

• Educate consumers to adapt to the new category and in the long run change the behaviour

• Promote expert image as the category founder

• Quickly build strong awareness and accessibility

• Plan a long-term investment and sustain the support

23% Hair conditioner : Shampoo 23%15% Fabric softener : Laundry 15%

But there is no guarantee that first mover can win

Listerine came first into China but mouthwash is still an underdeveloped category

Mouthwash is only 4% of toothpaste today in SH, BJ, GZ

Nescafe successfully introduced instant coffee into China and is still the #1 brand in today’s market

Same size as Tea PowderDouble size as Tea Bag

Data Source: The Nielsen Company

Comparatively…

As a follower, simply copying rarely works

Ba Wang Softto

Data Source: The Nielsen Company

National  ‐ Value % Share

0

2

4

6

8

MAR05 AUG05 JAN06 JUN06 NOV06 APR07 SEP07 FEB08

Softto

Ba  WangBa Wang boomed from Y05Softto launched a similar campaign in Y07

• Quick action: beat first mover before it dominates the market

• Outspend the first mover in terms of distribution and awareness building

Second movers also have a chance to win

For “me too” followers To enter a saturated category

Xiang Piao PiaoMilk Tea L’Oreal Paris

Shampoo

Sales Performance

JAN0

8

MAR

08

MAY

08

JUL0

8

SEP0

8

NOV0

8

JAN0

9

MAR

09

MAY

09

JUL0

9

SEP0

9

Media Support

JAN0

8

MAR

08

MAY

08

JUL0

8

SEP0

8

NOV0

8

JAN0

9

MAR

09

MAY

09

JUL0

9

SEP0

9

Distribution Support

JAN0

8

MAR

08

MAY

08

JUL0

8

SEP0

8

NOV0

8

JAN0

9

MAR

09

MAY

09

JUL0

9

SEP0

9C 100 Hello C

• Be salient to differentiate from the first mover and be an innovator in specific domain

• Leverage on manufacture / parent brand equity

Myth #5: Multinational companies are innovative in China

1) China ≠Innovation

3) China ≠Other countries

4) Innovator > Follower

6) Local company = Follower

7) Local brand = Mass

8) R&D Spending = Success

2) Innovation in China = Success guaranteed

5) Multinational company = Innovator

Import, localize and acquire are three more common ways for multinationals to play in China

Directly import …

Localization…

Home grown innovation …

versus

Acquisition …

ImportMNCNestleBreakfast Cereal

ImportMNCNescafeInstant coffee

ImportMNCLiptonTea Bag / Tea Powder

ImportMNCCokeVitamin Water

Create BrandLocalWang Lao JiAsian Traditional Tea

Create BrandLocalNutri ExpressJuice Yogurt

ImportMNCPampersBaby Diaper

Create BrandLocalJojosLiquid Hand Wash

ImportMNCListerineMouthwash

ImportMNCNiveaToner

ImportMNCNiveaMale Skin Care

ImportMNCNiveaDeodorant

Way of InnovationMultinational / LocalInitiatorNew Category

There are few “true” China specific innovation from MNC’s

MNC’s should initiate more China specific innovation

。 Immersion Better understand Chinese consumers, not only the superficial behaviour

but needs and culture in depth

Co-creation Develop concept and product locally with

the end users

Execution Be prepared for great investment and long term

commitment

Myth #6: Local companies do not innovate

1) China ≠Innovation

3) China ≠Other countries

4) Innovator > Follower

5) Multinational company = Innovator

7) Local brand = Mass

8) R&D Spending = Success

2) Innovation in China = Success guaranteed

6) Local company = Follower

No… Local companies can be innovative thanks to superior consumer understanding

Apple Peel

Electric Racket

Nutri-Express

Myth #7: Local companies cannot play in premium segment

1) China ≠Innovation

3) China ≠Other countries

4) Innovator > Follower

5) Multinational company = Innovator

6) Local company = Follower

8) R&D Spending = Success

2) Innovation in China = Success guaranteed

7) Local brand = Mass

Demonstrate the advantage by using Chinese elements•Ingredients: Yun Nan Bai Yao, Ba Wang, •Origin: Telunsu (Inner Mongolia), •Emotion: Vive (Shuang Mei)•Nationalistic feel: Wang Lao Ji

Wrong… Local companies can also be successful in premium by playing the “Chinese card”

Yun Nan Bai Yao

Price index = 400

National ‐ Value % Share

02468

SEP07 FEB08 JUL08 DEC08 MAY09 OCT09 MAR10 AUG10

Data Source: The Nielsen Company

• WTD reaches 66% and still increase• Sales per store is continuously growing

Heavy support by leveraging strong relationship with retailers and media channels, especially

•Local retail chains•Sales network in traditional trade

Leveraging on domestic brand recognition

Myth #8: Success of innovation heavily depends on R&D spending

1) China ≠Innovation

3) China ≠Other countries

4) Innovator > Follower

5) Multinational company = Innovator

6) Local company = Follower

7) Local brand = Mass

2) Innovation in China = Success guaranteed

8) R&D Spending = Success

No… Success of innovation is a combination of knowledge, process, engagement and talent

Talent

Process

Engagement

Market Knowledge

• Long-term plan• Continuous support• Responsibility of consumer

education

• Strong leadership• Creative team• Innovation mindset

• Consumer understanding• Category knowledge• Forward looking

• Systematic• Rigorous• Speed to market

Success = Knowledge X Engagement

X ( Process + Talent )

Voice ControlBluetooth

Touch Screen WifiMulticolorScreenWheelMini HD

Y2009Y2008Y2007Y2006Y2005Y2004Y2003Y2002Y2001

iPodTouch

3G

iPodTouch

2G

iPodTouch

1G

iPodVideo

iPodNano

iPodPhoto

iPod3G

iPod2G

iPod1G

Apple is recognized as the most innovative company with all 4 qualities

Windows System

iPodMini

Photo Function

iPodShuffle

Video Function Voiceover

Innovations

New Functions

Find your own innovation strategy

Nutri-Express(Juice Yogurt

(VC Juice)

Ji Huo – “Activate”(Functional Drink)

Smoothie(Juice Milk)

You You(Milk Tea, Milk Coffee)

Pi Er Cha Shuang(Beer flavoured Carbonated Tea)

(Hair Care) (Deodorant)(Hair Care)(Skin Care)

Feicha Cola (Coffee Cola)

)Shuang Wai Wai

(Yogurt for Children)

8 innovation truths in China

1) China = Land of innovation

2) China = Opportunity + Investment

3) China ≌ Globe

4) Innovator <> Follower

5) Multinational More localized China innovation

6) Local Be bold to innovate

7) Local Break the boundary of price barrier

8) Successful Innovation = knowledge X engagement X

( Process + Talent )

Topic of PresentationTitle of Presentation