Diy Market in China
| Sector-Specific Considerations for EU Businesses considering entering the DIY Market in China. | | | | As Deng Xiaoping once said “Cross the river by feeling the stones”. This saying is very relevant for the DIY market in China because you are threading down a road into the very unknown.
In 2004 the Chinese DIY and home improvement market reached an all-time high of RMB 195 Billion and has been depleting ever since. DIY stores are constantly losing popularity within the market . The market demand currently is for “soft decoration”, with the rural family’s moving to the fast growing cities to attain employment, there is a demand for moveable decoration in case they have to re-locate again.
The younger generation are also leading the market for multifunctional, low cost furniture, such as DIY kitchens and bathrooms; this is due to the culture of the Chinese families with the kitchen and bathroom being the most personal area in their homes. (Allience, 2007) A major competitor and threat to the DIY businesses already established in China are the growing number of smaller contractors, as their knowledge of DIY is improving with the market trends.
A high percentage of new homes being bought are being left unfinished and require a major investment in home improvement, this is where they just decide to hire a smaller contractor to do the time consuming work instead of doing it themselves thus the companies are losing out on the profit, but with China’s property prices rising it is entirely possible that the Chinese consumer will simply be pushed in the direction of DIY as a cheaper option. But what will happen when Chinas sees a fall in construction and property? Will the DIY companies suffer? This can be construed as a major economic threat to new European companies entering into China. Allience, 2007) Who are the major competitors? There is not one but many already established competitors within the Chinese DIY market. B&Q is the major contender with it being the largest Western DIY retailer in the country. B&Q opened its first store in China in 1999 and has continued to establish strong brand awareness. As The Guardian reported, the local culture did not fit with the DIY practices that B&Q already had and therefore B&Q had to adapt their once very successful European format to a Chinese one, hence making it a CIY (create it yourself) strategy. Tran, 2007) Another competitor for an EU DIY business to go up against is a well-established Chinese DIY company called Orient Homes. Orient Homes was founded in 1999 in Beijing. It receives its stock from local manufacturers consequently lowering the cost of the goods for consumer, thus making it a very large threat not just economically but because it is so well established within its home market.
It has come to my attention in according to the China National Interior Decoration Association there is an estimate of more than 40,000 registered companies engaged in home improvement in China alone. (Unknown, 2009) The market is so densely populated that an EU company trying to enter the market is going to have some major struggle. Joint Venture or Wholly Foreign Owned Enterprise (WFOE)? Many companies entering china have to ask themselves this very difficult question, it’s a difficult decision to make as there are many advantages and disadvantages to both.
Entering into a WFOE I believe is a lot harder than a Joint Venture, because with no Chinese partner they are left to approach their chosen market alone. It’s also difficult for the company to “create a market for their chosen products, especially when there’re already local competitors. Sometimes even with a local sales and marketing team it can take years to have a name on the Chinese Market” (Bergonovo, 2011) . The culture of the market can be very diverse and for a WFOE it can be difficult to understand alone.
There are advantages as well as disadvantages, “unlike in JVs where there’re different views because the different partners and the negotiations and compromises are the only key to keep the business alive. Especially for small-medium business it is much better to have a WFOE, in order to avoid getting stuck in cultural differences with a local partner. So if you’re a small business maybe with sole ownership in your mother company that has a clear strategy for the Chinese market and can afford long term investment WFOE is the right choice. ” (Bergonovo, 2011) Joint Ventures an be very successful in some instances, because you will have the advantage of having a culturally and linguistically adapt partner, but “it’s crucial for foreign investors to understand the purposes of the joint venture and weather their Chinese Partner is capable of fulfilling them. The popular Chinese idiom “same bed, different dreams” has become the failed joint ventures mantra” (Ireland, 2012) Trust is the major issue in this venture. My considerations for a DIY company would be a Joint Venture because the company will have a stronger understanding of the market and I believe this is crucial for a successful move to the Chinese market.
Are there barriers for new entrants? “The key difference between domestic marketing and marketing on an international scale is the multi-dimensionality and complexity of the many foreign country markets a company may operate in. An international manager needs a knowledge and awareness of these complexities and their implications they have for” (Doole & Lowe, 2001, p. 9)the company and the market they are entering. I will use the SLEPT (Social, Legal, Economical, Political and Technological) method to determine the various trends and environment for a European DIY company attempting to enter the Chinese DIY market.
Social, Cultural problems and differences can really take a toll on a new immature company entering a country where religion and material culture play a major role. The language would have the most significant role and impact to play on the way the products and services many be seen to the new consumers. Coca Cola had huge problems when they first entered the Chinese Market, their brand name translated to “kooke koula” which in turn translated to “A thirsty mouthful of candle wax”. Now with their new translation it means “joyful tastes and happiness”, mistakes must be made by one major company for another to learn from their mistakes. Over the next 20 years more people will migrate to China’s cities for higher-paying jobs. These working consumers, once the country’s poorest, will steadily climb the income ladder, creating a new and massive middle class. ” (Farrell, Ulrich A. , & Stephenson, 2006) This society has struggled to come to terms with the phrase “do it yourself” because they are not educated in the home renovation area. It also seems to be giving off the perception that you are peasant like if you do it yourself. It’s all about social status right now n China, if you are seen doing manual labour that you can subsequently hire someone to do then you are seen as a scrooge. “In recent years China has become the world’s number one country in terms of attracting foreign investments. As the second-fastest growing economy of the world it attracted USD 74. 6 billion of foreign direct investment in 2007. With a current position as the world’s fourth-largest economy (in nominal GDP), and an average annual growth of more than 8% for the last 30 years, only very few other countries in the world can match the business opportunities present in China today. (Unknown, General Considerations before Entering the Chinese Market) In order for an EU DIY company to succeed in the market they need to be aware of what direction the specific market they want to enter is developing economically in order to make a well-rounded assessment on whether it would be financially viable to enter and compete with firms already established in the market such as B&Q and Home Depot. (Doole & Lowe, 2001) The company may also face some long term challenges with the rapid development it could put a strain on resources such as the infrastructure and the migration rates within the country.
There are also some very appealing political reforms that have taken place in China that any international company would be pleased about. The reform and opening up policy has been a major boost to the Chinese economy and political system. These reforms policies were put in place between 1979 and 1984 and it was aimed at improving Chinese relations with neighbouring countries. Despite the success of this open door policy many companies have been faced with difficult obstacles in relation to ownership rights and intellectual property.
It was released this year that the CCP would decrease taxes for foreign companies entering China by 50% as they believed it would attracted more foreign investment in China. (Davies, 2012) ““The bigger picture is that because of the economic situation globally over the past couple of years, China sees the need to create a friendlier environment for foreign investors,” said Khoon Ming Ho of KPMG China. ” (Davies, 2012) This is a major opportunity for EU based companies to enter the market at reduced tax rates. “Legal systems vary both in content and interpretation.
A company is not just bound by the laws of its home country but also by those of its host country” (Doole & Lowe, 2001) In the west business is based on careful negotiation in contracts and agreements, they may be enforced by a court of law, however in China business is based on personal relationships, they call Guanxi in China. Two companies have to have guanxi before they can cooperate together, the specifics of a contract me be discussed after they have agreed in principle and this could cause hassle for a European DIY company who base their laws on the west.
Technology is currently playing a major role in Chinese society and “is a major driving force both in international marketing and the move towards the global marketplace” (Doole & Lowe, 2001) China has the largest mobile phone and internet users with 420 million people using such services daily (Ireland, 2012), leaving the market place wide open for a new EU company to market their products via smartphones and internet. However there are some censorship issues in China at the moment, it is implemented by the Communist Party of China and goes for the whole mainland.
Censorship is put into place to uphold and preserve the law of the Communist Party of China; it helps to stop unapproved reformist, separatist, “counter-revolutionary”, or religious ideas. It also stops the citizens of China educating themselves on the past, present and future let-downs of the Party. Marketing Mix Product With many new foreign products entering the Chinese market the consumers are becoming overwhelmed by the abundance and are relying on the image that the company has made in its producing country. “Each region in China has differences in economic growth, living standards and education.
For foreign products, there are sharp differences between rural and urban attitudes. Typical Chinese consumers do not want to be amongst the first to try a new product. They are reluctant to be pioneers, especially for an expensive, unrecognised (in terms of brand), foreign product. ” (Doole & Lowe, 2001) My considerations for an EU DIY company would be not to take your company’s products for granted, just because they have been very successful in the West does not mean they will be equally successful in the East.
They must think of China as they would think of Europe, with its many different regions and its many different cultures it must adapt to what are culturally acceptable. They are entirely interested in products that are going to suit their needs, as I spoke of before, when new apartments are bought they are just a shell and need a lot of investment and renovation, if a company could access the Chinese people’s needs in this regard they might have a large opportunity. Price “The pricing of a product or service is not an easy decision for any company.
There are many issues that must be taken into consideration, especially when a multinational company is entering a new international market such as China. ” (Waller, 2012) The price must cover the manufacturing and distribution costs and in turn must not be too low as the company could sustain long term losses. There are many approaches that a company can take to decide on what marketing strategy to consider. For example; “Skimming: This is where the product is introduced in the market at a high price, and then lowered over time. (Waller, 2012) Apple Inc. is a company that is partial to this method as they believe that people are willing to pay extra to have the newest technology on the market. “Prestige: A company will use prestige, or premium pricing as a strategy where companies with luxury products or exclusive brand image/reputation will price the product at the high end of the price range. Customers knowing that they are buying high quality will expect to pay the higher price. ” (Waller, 2012) Companies that use this such method are Louis Vuitton and Rolex.
My sector specific considerations for an EU DIY company’s pricing strategy is to introduce new products at a lower price to suit the Chinese market, leaving them with a competitive advantage over the companies that are already established. Place “Rapidly improving infrastructure, high-tech facilities and an increasingly well trained workforce mean there is greater choice than ever before for investors seeking to expand, set up new regional headquarters or relocate key functions to new locations within China. (KPMG, 2012) The future of the company’s success can rely on the choice of location that you choose. “There is a growing number of young professionals with significant disposable income on the major coastal cities who aspire to higher standards of living and increased wages and thus are more likely to spend credit for mid to high range consumer products” (Ireland, 2012) With profit and manufacturing opportunities in major coastal cities this could lead to the start of a very successful DIY company.
Promotion Marketing plays a significant part in any company’s success of their brands especially in the Chinese market. They must establish their target market for example what Tier/Class, Age, and Income the company will market to and then once they have found their target market they must evaluate their market potential. A successful marketing campaign will recognise the various needs and wants of their target market; in China for example it varies from region to age to culture values.
As I previously mentioned China’s internet usage is the highest in the world, by advertising online you could reach and provide a huge segment of your target market with the brand information they need. Finally, based on my above predictions and opinions I have produced this SWOT analysis for a DIY company entering into the Chinese market. Strengths: * well established EU presence * Large Population and consumer base * wide variety of DIY products * High quality services * Cheaper than competitors
Weakness * Must incorporate Chinese culture * Less advertising and brand awareness than competitors * Little brand loyalty in China * Lack of innovation in product development for China * Lack of market information Opportunities * Property growth * Unfurnished houses * Income levels rapidly increasing * Wide internet usage * New middle class impressionable/available * Cheaper manufacturing costs. Threats * Already some well established companies * Local cultures and values are unknown