The Home Depot in Chinese Market - Essay Example

Introduction Do it yourself is a largely American culture that has spread to the rest of the north American continent throughpopular culture and social factors, as well as economic ones. As such, do it yourself culture involves cutting costs and an increased sense of independence for those that engage in it since it allows home owners and individuals to improve their homes and even fix problems in their homes by themselves without the need for independent contractors. With this, home improvement comes up and there are numerous stores and companies that supply products and advice on how to make one’s home better by installing additional hardware and items to it. This is widely appreciated throughout the world, but in some cases it is only done by contractors based on the economic status of the people involved. One such company that provides these supplies Home Depot which operates across North America. However, attempts to venture into Asia failed miserably when the company attempted to establish itself in China by providing supplies for home improvement through do it yourself antics. Different reasons have cited for this failure, but there is no full consensus on the key causes of the failure of such a large company that was unable to replicate the success of its north American operations in China. This makes it necessary to look into the causes of this failure and how they served to drive the company out of China. Background The history of Home Depot spans over three decades since its inception in the year 1976 in Atlanta Georgia, where the initial Home Depot store was inaugurated in the same year. The main concept of opening the store was to provide comprehensive supplies to all clients who sought after home improvement equipment and provisions in the name of “do it yourself”. This made the company into a di it yourself supply chain across the state of Georgia after the establishment of additional stores. Besides this, there was also the provision of giving advice on home improvement to their clients and other customers purchasing supplies from their stores. With this home improvement target market focussing on do it yourself population types, it supplied partial and full components and products such as building, plumbing and electrical supplies. This is in addition to having a large selection of hand and power tools catering to both customers who preferred the traditional feel of hand tools over electricity powered tools (Miller 2). These also included an assortment of brands for maximum variety that even went beyond convention in regard to stocking gardening tools, where home improvement did not just imply the house or its aspects but the home in totality. The expansion of the store over the years has featured its listing in the New York Stock Exchange and even opening stores to hit a 100 in the year 1989 across all of the United States. Further expansion has gone to an extent of having over 2200 stores across the North American continent ranging from USA, Canada, Puerto Rico, Guam, Mexico and the US Virgin Island, and with these, expansion still continues (“Home Improvement Industry Profile”). With the success of the company across the continent, there were talks of further expansion into the world most populous nation, China. Reasons for the expansion into China was due to the large population that China has and the saturated retail market across the US, which saw the company seek to expand into China. Another factor in consideration was the high amount of competition in China, where economic indicators were supportive of Home Depots expansion into China due to rapid growth of the Chinese economy especially following reforms after Mao’s reign as the Chinese communist leader. As such, the housing market had a lot of potential at the time of the feasibility for Home Depot to expand into China in that most of the houses in China were hardly complete or rather finished in that they needed further addition of features so that clients or home owners are charged with the responsibility of finishing the house into their particular taste (Miller 4). In addition, moving into the Chinese market meant expanding their influence since Home Depot had already become a household name in America and the perception of Do it yourself culture was part of the reason for expansion into China. This saw Home Depot buy out twelve stores from Home Way, which was a Chinese company, so that it could have room to establish its base in 2006. However, by 2012, all Home Depot stores in the country were closed down and no longer in operation, marking the need of Home Depot in China. Economic slump One of the reasons cited for the downfall of Home Depot in China lies in the economy, where the economy is in a slump or is slowing down since the beginning of reforms in the economic sphere of the country. With this in mind, the economic slowdown of the beginning of 2008 has hurt the global market in terms of spending and other financial factors that include inflation and availability of capital to spend. Support for this is indicated by the fall of Burberry stock prices by roughly 20% which was indicative of a fall in Chinese consumer demand (The Week Staff Para. 2). As such, the most or worst hit players in the industry were the producers of furniture, paint, and other home improvement products due to further slum in the economy and reduced spending capacity. In addition, data from 2012 indicates that the Chinese economy has dropped significantly in regard to the rate of growth to a three year low of 7.6%, when using the Gross Domestic Product to gauge development and growth (Durden). As such, even the International Monetary Fund lowered its forecast for China in terms of growth to grow at roughly 8% which is the lowest growth rate for China in twelve years. The illustrative power of this data is evidence enough that Home Depot did not enjoy its full potential in spite of favourable forecasts in its feasibility studies at the time of expansion into China. Besides, there are also critics that talk about the unbalanced nature of the Chinese economy, which is heavily reliant on investment and exports for growth of the country as a whole, and this meant that there was little domestic consumption of products that Home Depot provided to the Chinese market. This is in spite of Home Depot being a retail store and all its products meant for the domestic market, but consumption is rarely done internally. In addition, with the financial crisis of 2008, there was reduced demand for Chinese exports which meant that the entire economy was in a state of cool down after a vibrant period of sales and high powered exports. As a result, there was a state of uncertainty to an extent that the Chinese population could not spend that which it had due to an improbable future and this saw a decline in the sales of Home Depot, which was yet to be fully established as a retail shop in the Chinese market and with its own clientele. From this, there is further evidence pointing towards an attempt to balance the economy and the grave consequences it had on the economy, which the spelt doom for Home Depot, which is the lack of a consumerism culture amongst the Chinese population in that only brands well known to the population have a fanatic like following. With this, private investment was highly curtailed by the government so that consumers can subsidize their investments, which when analysed from the perspective of Home Depot and its failure in China reveals that the economy contributed to the failure of Home Depot due to the interference of the Beijing government in regulating how much private investment can be made towards any project (Schuman). It is from this that there were concerns due to a growth in consumer price index coupled with low inflation that caused the population to feel the pressure of inflation, though minimal. As a result, the prices of commodities went up and in a bid to remain relevant and profitable, Home Depot had to push its prices to achieve acceptable profit margins. An increase in price is indicative of inability to splash money around buying items for home improvement by self. As a result, the prices of goods supplied by Home Depot may have been an enemy of the people by being too high to afford for the local population considering the financial and economic pressure that was exerted by the financial crisis on an export oriented market. In addition, there is also the competition, which may have been part of the expansion by Home Depot into China, but then saw it bring about its downfall and shut down operations. This is due to stiff competition for low prices in a nearly saturated market for home self-home improvement products and tips. This may not have entirely been a main cause for the decline, but when coupled with other factors such as local Chinese culture, it might as well have been a major reason for the shutting down of operations. Chinese Culture Home Depot may have had all he good intentions to open up shop in China, but there are factors that it may have overlooked, which is more certain than not, considering that the spread of western culture in the orient is not considered graceful. The only western culture embraced in the orient, but still with misgivings is that of capitalism thus bringing the “do it yourself” culture into China through Home Depot did not work as well the company may have wished. As such, Home Depot ran the Chinese Home Depot stores the same way it did in the American ones, which was similar to importing Home Depot from America and planting it in China without any changes or modification to fit the market. With these, market dynamics come in as the company only focussed on providing similar services as it did in its other American stores. China is well known for having cheap labour, which is what has made it a very vibrant economy that is highly based on exports and investments, where even the exports are cheap due to the labour aspect. As a result, the do it yourself culture is not embraced in China since there is no room for one to improve one’s home due to economic considerations of it being cheaper than hiring a contractor to do the same (Fengjiang). Instead, the Chinese prefer to hire independent contractors to do the improvement due to low fees involved in construction and home improvement. It is this that has led China be termed as a “do it for me market” and not a “do it yourself market” due difference in social structures and organization that is different from the conventional capitalistic markets that Home Depot is accustomed to in North America (Tulshyan). As per Home Depot estimates, most of its “do it yourself” tasks are mainly economically viable due to a large amount of savings expected for the client rather than hiring a contractor. As such, the cost of hiring plumbers to fix leaking faucets is termed to be astronomical as compared to a do it yourself plan, which is expected to cost only a quarter of the contractor’s fee (JP). Chinese culture, on the other hand has dynamics that allow a comparison of IKEA and Home Depot to support the failure of Home Depot due to cultural differences. From this perspective, Home Depot only offers supplies and advice on how to improve one’s home, while a look at IKEA provides know-how to the consumer on western culture (Bhasin). This comparison is adequate evidence as to how Home Depot failed on the culture test and fell apart since it failed to educate its clients on western culture, while at the same time failing to conform to Chinese culture, but this only provides lessons in case of a similar venture in future and in the same market. Besides this, there is the overlooked cultural concept of appealing to the female gender in China following research in America and Asia stating that women are consulted in a majority of the homes in home improvement (Tulshyan). This brings up the earlier point of not selling ideas, which points a finger at the increasing number of Chinese middle class moving to cities, and a failure to appeal to this population saw Home Depot lose out in a large amount of the market. In addition, recent studies highlight lack of a western sell-out idea was partially to blame for their failure of Home Depot in China due to lack of western cultured designs to sell out to newly rich Chinese middle class. Instead, Home Depot in China concentrated mainly on a do it yourself concept and not on selling designs, but ideas. These are what other competitors of Home Depot and model companies that sell furniture such as IKEA do meaning that the cultural shortcomings of Home Depot are to blame for the failure and their failure to catch on fast on the market dynamics towards women’s role in home improvement although not by the self but by independent contractors due to cheap labour. There is also the concept of a highly complicated market in China, where there are traditionalists, while others openly embrace the western culture, which is partially the reason for companies like IKEA to flourish, while Home Depot declines marginally to closing operations due to complicated dynamics in the market (Bhasin). Housing boom Home Depot invested in the Chinese market following a strong presence of the construction industry, which was highly active at the moment churning out new building complexes at high pace. This marked the potential to make immense revenues from the large housing market due to mass migrations form rural areas and into cities with the Chinese government going ahead to construct new cities and increase housing as did private investors. This, to Home Depot, meant more home improvement, but the complicated nature of the Chinese market did not offer this at all due to labour factors and design culture aspects. However, the increasing number of residential buildings coming up was the result of speculators building homes but there was not much of a population to move into them thus the move by Home Depot was miscalculated and this was what made the bust of the Chinese housing boom since it was speculation driven. Besides this, the housing sector only faced buyers who bought homes without the intention of living due to speculation, which in turn resulted in failure by the population to buy Home Depot products to improve homes in which they would not live (“Why Home Depot…”). The decline of the real estate industry was also affected by the economic crisis of the previous decade and this adversely affected the operations of Home Depot through lack of buyers of its products and lack of a clientele due to constraints by the Beijing government in failing to allow private investments that could see the real estate get back on track. With this in mind, a major slump in the real estate sector lowered the sales and even affected the business atmosphere for Home Depot since there was not much progress in the sector and the future did not look any better either. This was further coupled by price wars in which case foreign companies selling international brands do not do well in the Chinese, market thanks to the presence of cheaper brands and customer loyalty to home grown products (Zhuoqiong). A further look at this bust of China’s housing boom highlights the need for increased private investment in order to contribute to a balanced economy for the country due to over-dependence of the export sector (Schuman). This for Home Depot implies that the Home Depot did not meet needs of the market adequately thanks to a lack of market to which the goods could be sold since the shift to fixed assets was meant for the state and not private residential buildings (Ni). From these partnerships were meant between private investors and the state to grant the economy a much needed push to cushion it from further decline in regard to growth. This means that all construction work related to residential buildings was left to the government and with no occupants to finished houses, there was no need to conduct home improvement implying no sales to Home Depot. There is further information stating that the government ordered reduced output of construction materials due to the slump in residential construction and reduced construction of real estate. Steel and cement companies were ordered to lower their output and even shut down plants that are not needed such old and out-dated ones. This is evidence to show the burst bubble in regard to real estate development and lack of economic stimulation to advance the sector. This spelt doom for Home Depot since its feasibility only looked at the profit making side and not the potential failures and burst bubble of real estate considering this has not only occurred in China but the US, out of which home is based. Altogether, the decline or crash of Home Depot operations in China can be blamed on numerous factors that do not necessarily focus on a single aspect of the Chinese economy or environment, but also the shortcomings of Home Depot itself. As such, blame can be laid on the culture of the Chinese people in having different ways of handling construction and home improvement needs than native practices of Home Depot in America. Competition can also be blamed from other companies and brands native China, as well as low costs of their products and brands. All this coupled with customer loyalty to certain brands and cheap labour available in the country shows just how much Home Depot was meant to fail from the beginning. In addition, there is the issue of a collapsed real estate industry that slowed down much to the disappointment of Home Depot in losing the little clientele base it had. This could have been the main reason, but all the factors combined point to only main challenges, which are interrelated, as the reasons why Home Depot failed and ended up shutting down operations in China. Works cited “Home Improvement Industry Profile”. Yahoo, n.d. Web. 11 Aug. 2013. http://biz.yahoo.com/ic/prof/25.html Miller, David. The Home Depot Considers Entering China. n.d. Web. 11 Aug. 2013. http://bear.warrington.ufl.edu/oh/IRET/Cases/Home_Depot_China_Revised.pdf Bhasin, Kim . "Why IKEA Succeeded, But Home Depot Failed In China - Business Insider." Business Insider. N.p., 14 Sept. 2012. Web. 11 Aug. 2013. . Durden, Tyler. "These Retail Companies Are Most Exposed To China's Economic Slowdown | Zero Hedge." Zero Hedge | On a long enough timeline the survival rate for everyone drops to zero. N.p., 16 June 2013. Web. 11 Aug. 2013. . Fengjiang, Li. "Orient Homes chief Li Fengjiang tools up for China's DIY revolution - Telegraph." Telegraph.co.uk - Telegraph online, Daily Telegraph, Sunday Telegraph - Telegraph. N.p., 29 Aug. 2009. Web. 11 Aug. 2013. . JP. "Save Big With These DIY Home Improvements - My Money (usnews.com)." Business News and Financial News - US News Business. N.p., 26 Apr. 2013. Web. 11 Aug. 2013. . Ni, Vivian. "Chinaa€™s Economic Slowdown Triggers Guesses on Policy Modification | China Briefing News." China Business News - China-Briefing. N.p., 21 Oct. 2011. Web. 11 Aug. 2013. . Schuman, Michael. "Chinaa€™s Economic Slowdown: Why Stimulus Is a Bad Idea | TIME.com." Business & Money | The latest news and commentary on the economy, the markets, and business | TIME.com. N.p., 26 June 2012. Web. 11 Aug. 2013. . The Weekly Staff. "Why Home Depot is failing in China: 4 theories - The Week." The Week Magazine: Political News and Cartoons, Current Events and Entertainment Online. N.p., 18 Sept. 2012. Web. 11 Aug. 2013. . Tulshyan, Ruchika. "Home DepotA?A€A™s failure in China: Ignoring women - Atlanta Business Chronicle." Business News - The Business Journals. N.p., 29 Apr. 2013. Web. 11 Aug. 2013. . Zhuoqiong , Wang. "Home Depot closes stores as it shifts focus | China Daily Asia Pacific." China Daily Asia Website. N.p., 15 Sept. 2012. Web. 11 Aug. 2013. . Read More