Globalization Challenge for a Leading Chinese Home Appliance Manufacturer - Essay Example

Running Head: MIDEA Midea: Globalization Challenge for a Leading Chinese Home Appliance Manufacturer Introduction Midea is one of the key players among the home appliance manufacturers in China, with manufacturing facilities at Shunde, Guangdong, the southern Chinese province bordering Hong Kong. Initially started as a village co-operative facility making plastic caps for medicine bottles, in 1968, Midea has evolved as the largest home appliances manufacturer in China, manufacturing air conditioners, fans, compressors, motors, and other small home appliance like rice cookers, dishwasher, electric room heaters, microwave ovens water dispensers and cooking ranges. Midea is a well- recognized and trusted brand in China. Opportunistically Midea also has been benefited by exports and as a result most of its air conditioners are exported under the importer brand name such a SMC (a family owned Hong Kong trading company having business in Southeast Asia and Europe) and Danby and Kenmore (Sears's owned brand having market place in Canada and United States). Midea attained RMB8 billion revenue for fiscal year 1999 and has set a sales objective of RMB38.6 billion by year 2005. Although Midea has a leading position in air conditioner exports from China and shown a continuous growth in domestic and international market yet with globalization and rapidly changing business scenario, Midea is facing a number of challenges both in domestic and international market. As for major appliances manufacturers are concerned, Asia, and in particular China seems to be with the most potential growth market and hence they are aggressively investing in Chinese domestic market. Almost all major appliances manufacturers are present in the Chinese market either by setting their manufacturing facilities or by establishing the off shore base centers. Compared to these major players, Midea lacks its presence in international market with its brand name and it has to solely rely on its importers brand name. It does not have a well defined global marketing strategy and a more geographical diversified presence with better marketing skills and dedicated international sales and distribution networks. Also major international players like LG (with 74% revenue from international market), Samsung Electronic (66%), Mitsubishi (51% by 2001), Fedders (50%), Carrier (48%) and Sharp and Whirlpool (each with 46%) have immense financial resources with latest technology and state-of-the-art innovation research centers while Midea only generates 10% of its revenue from international market and has limited financial resources, with traditional technology. Moreover the scenario will become more intensive and competitive with the China's imminent entry into World Trade organization (WTO). These are really major concerns to Midea's management team. As in changing global business scenario, any competition can not be viewed as solely domestic and every organization have to defend its position and have to play a double edge knife role to compete both at domestic and global level. For long term business viewpoint Midea too has to play the same role. Being a major domestic player it has to defend its position in Chinese market and also has to show its presence in the international arena. To achieve this Midea has to review its international business strategy and to go for both branding and private label options. In coming sections we will analyze the Midea's strengths and weaknesses relative to domestic and international competitors. Also an assessment of relative attractiveness of domestic and international markets for air conditioners is presented. Finally an international business strategy is recommended to enter and capture market share. Media Group: An Overview Midea was established in April 1968, in Shunde, Guangdong, the southern Chinese province bordering Hong Kong, during the stifled period of Chinese Cultural Revaluation. Initially it was a village co-operative, making plastic caps for medicine bottles. Later it started manufacturing and marketing the glass bottle and few mechanical parts to nearby areas. In early 1980, the small workshop of Midea turned into a factory with more than 180 employees and with annual sale of RMB0.24 million. In November 1980, Midea stepped into arena of home appliances when it lunched its first portable fan. The 1978's, Economic Reforms benefited the Media too, and during 1981-1985, Midea's revenue had gone to 260%. In mid eighties, when the local fan industry was at turmoil, Midea new innovative approach and opportunistic business strategy gave the group some relief. Midea started exporting its manufactured fans to SMC which was a Hong Kong based trading company. Midea competed with other market contenders by innovation and analysis of prevailing market trends. It introduced the new electric shock free plastic body fans to consumers. It also gave incentive to consumers by reducing cast. On the other hand it started building economies and expanded its business by manufacturing other appliance products. In 1985, Midea group jumped in air conditioner industry by establishing a an industrial unit to assemble window air conditioner units using components imported from Japan and Hong Kong. The assembled units were sold in domestic market and also exported abroad through SMC. During 1990s, as air conditioners became a high-growth consumer commodity in urban areas Midea after visualizing the future market decided to heavily invest in this product. Initially it started joint ventures with multinational companies like Toshiba, Shibaura, NCE, Ryosan of Japan Texas Instruments of USA. Midea acquired both manufacturing and design facilities. In 1999, Media upgraded Media Industrial Park in Shunde County and it has attained the domestic sale figure of 1.4 million AC units. It also has exported 0.166 million unit to international market. Regardless of being the largest air conditioner manufacturer in China, Media also has expanded its business by introducing small home appliances including humidifiers, air purifiers, rice cookers, microwave ovens, water dispensers, cooking ranges and electric heaters which account 25% of revenue (including kitchen ware) for year 1999. Midea: It's Strengths Since 1968 to 2000, starting from a small village co-operative unit to the China's largest air conditioner manufacturer, Midea has achieved many mile stones to exhibit its great much strength. Following are Midea's few strong points relative to its strong competitors. a. A Strong Presence in Home Appliance Market: Midea had lunched its first portable fan in domestic market in November 1980. Since then it showed a great commitment towards home appliances products in domestic market. Though it involves in manufacturing five different category of home appliances yet air conditioner is the major product with 58% of total revenue and having 13% domestic air conditioner market share. Midea has 1.5 million units capacity with manufacturer facilities located in Shunde County. Midea's other major competitors are Chunlan, Kelong Huabao, Gree and Hair. Chunlan has its manufacturing facility in Taizhou, with 2.3 million capacity units. Chunlan has 17% estimated China market share 4% greater that Midea. The second major competitor is Kelong Huaboa, located in same Shunde County, with equal 1.5 million units capacity is marginally behind the Midea. It has 12% of China's domestic market share and presently manufacturing three brands namely Kelong, Huabao and Kelong-Sanyo a joint venture. Among others Gree and Hair are significantly important competitors, each have 10% market share. Another emerging domestic competitor is Chang Hong from Sichuan County, which has 5% of estimated market share in China. In international market Midea is exporting its product to Southeast Asia, Europe and North America through importers brand name such as SMC, Danby and Kenmore. During year 1999 Media exported 0.166 million of AC units to international market while for year 2000 it earned US$136 million from its exports. b. A Well- recognized and Trusted Brand in Domestic Market: Midea has offered its customers long term incentives like long warranties and free annual product checkups through its largest sales and services network. Due to its close interaction with its customer Midea's products are well- recognized and trusted brand in domestic market of China. c. Innovation and State-of-the-Art R&D Center: The successful exploitation of new ideas is very crucial for long term business scenario. This exploitation often involves new technologies or technological applications. Innovation is very essential because it can deliver better products and services, new, cleaner and more efficient production processes and improved business models. On consumers end, innovation means higher quality and better value goods and more efficient services. For businesses point of view, innovation leads to sustained or improved growth. For employees, innovation means creativity new and more interesting and challenging work. Apart from above facts innovation is more urgent because trade liberalization and a rapid fall in communication and transport costs creates an enormous competition among the countries which have identical proportion of well-educated labour force but different wages rates. Also technology and scientific understanding rapidly changing the world scenario. Developments of new Information and Communications Technologies (ICT), have turned the world to a global village and unleashed a new waves of competition for entrepreneurial businesses. Global communications, the 24 hours, 7 days of the week, is the media phenomenon of the 21st century, mean that consumer tastes are also changing faster, as new fashions, ideas and products spread across the world almost instantaneously. After recognizing the fact that innovative companies or organizations can earn higher profits less rely on external technology and ideas and hence can offer better products and serves to its consumers Midea decided to set its own state-of-the-art research and development (R&D) centre. The Midea Research and Development Center (MRDC) comprises of latest design and testing facilities, with 11 technology centers and a post- doctoral research laboratory. Midea committed to spend 3% of its revenue to R&D each year. d. Large National Sales and Services Network: Midea has a large national sales and services networks which comprises 24 regional offices and over 1,000 service centers. In 1998, Midea enhanced its marketing and servicing network by developing small regional distributors to further penetrate into smaller cities and towns. e. Midea Strategic Business Units Structure: The continues and stable growth of an organization is directly related to its sub-division and it demands that every entity of organization contributes its share to achieve the overall objective of an organization just like the parts of human body. Centralized and profuse body structure of an organization proved to be a hamper to clearly set the entity's individual goals to make its contribution. Since Midea group has involved in five different categories of home appliance business, hence 1997, it reorganized its main body structure into five independent strategic business units (SBU): air conditioners (sharing 58% revenue for year 1999), fans, small appliances (21%), compressors (10%) and motors (7%). Each SUB was given autonomy in their operations, from product development, procurement, production, sales and marketing to capital investment. An annual performance contract between the SUBs' and management and the group management detailed sales and profits targets. A detailed company hand book spelled out the responsibility and reporting lines of each management position. This reorganization has boosted the Midea home appliances business and within one year its domestic air conditioner sales has increased to 133% in 1998. Midea has sold out 13 million fan units. It has set the goal to generate revenue of RMB5 billion from small appliance by 2002. Midea's compressors sales has reached to 1.39 million units in 1999 and it is expected to attain the figure of 2.3 million units in 2000. Midea: It's Weakness Although Midea is a key player in home appliances industry yet compare to other market competitors it has few weakness too. Following section analyze these weaknesses. a. Uneven Presence in Domestic Market: Midea manufacturing facilities lies at Shunde, Guangdong, the southern Chinese province bordering Hong Kong. Hence initially it focused on its neighboring areas and dominated in those areas but not in the China's economical powerhouse and the most influential consumer market like Shanghai ranging RMB2.5 million air conditioners. About every major international air conditioner brand had invested in China and particularly in business hub areas like Shanghai and Beijing. Hitachi and Mitsubishi established their manufacturing units and workshops in these areas. Carrier, Fedders and Copeland were already present there since 1980s'. It was estimated that an investment of about 10% of Midea total advertising budget is required to compete with popular brand like Sharp Hitachi and Mitsubishi and to have any significant share in Shanghai and Beijing area's market and this was not feasible, hence it failed to attained ant reasonable market share. Another weakness of Midea is that previously it only concentrated in Chinese urban market which only constitutes 29% of total 1,2000 million populations while remaining 71% resides in rural area. b. Lack of Well-defined Marketing Strategy: Since 1986, Midea group has shown its indirect presence in Southeast Asia, Europe and North America. It exported its products under the importers (SMC and Sears) brand name and it successfully exported 0.286 million AC units, for 1998-99, with a total turn over of US$1.24 million. Even though Midea does not have its brand name in international market and it has to rely on its importers brand name. Compare to major international players like LG (with 74% revenue from international market), Samsung Electronic (66%), Mitsubishi (51% by 2001), Fedders (50%), Carrier (48%) and Sharp and Whirlpool (each with 46%) Midea only generates 10% of its revenue from international market. Geography Midea's major importer SMC concentrated its imports only in Southeast Asia and Europe which is a small portion of over all worlds AC market. Nevertheless there exist other vast potential Asian markets like Middle East comprising 5% of total world AC market equal to the size of European market. Despite the fact that Midea products are present in international market over fourteen years yet like most of Chinese producers Midea barely has a branded presence in international market. This is true due to fact that traditionally did not devise any strategic policy to export or to race the international market. Rather than it had adopted an opportunistic approach in international market and exported its products through importers brand name. c. Small Investment on R&D and Low Throughput: Although Midea has a state-of- the-art design and testing facilities, with 11 technology centers and one post- doctoral research laboratory yet only 3% of total revenue investment on R&D every year are nearly less than a half of its major international competitors like Sharp, Mitsubishi, Toshiba, Samsung and Carrier with 7.7%, 6.5%, 6% AND 5.4 % R&D expenditures respectively. Midea's capability and investment in basic research to develop latest technologies or high quality products for international market remained limited. Previously Midea Research and Development Center (MRDC) remained focus on technology adaptation strategy to meet the provisions of domestic and international market. Therefore among patents resisted in 1997, 67 were for external design, 40 were for product design and only one was classified as technology invention. Relative Attractiveness: Domestic and International AC Markets a. Domestic Air Conditioners Market: For appliance manufacturer China proved to be the most attractive and growth oriented place among other regions with a population of over 1,200 million. Reforms in China has brought a tremendous increase in purchasing power and size of middle class and home appliances became the fastest growing sectors in Chinese Economy. During 1999, as per capita spending on durable goods among urban population increased to 14.9%, it boosted the home appliance industry to a production increase of 17.3%. Due to 35% compound annual growth the air conditioners demand reached to 8 million units in 2000. Since 1980, more than thirteen international companies including major giants like Carrier, Toshiba, Sharp, LG, Mitsushita, Hitachi, Panasonic, Copeland and Fedders and many national companies including Midea, Chang Hong, Chunlan and Kelong Huabao only able to cover half of Chain's air conditioners market. According to 1995 population and income distribution figures 4% of China's population is concentrated in ten major cities and over all about 11% of population is concentrated in 46 major cities with huge buying potential. During 1997, only Shanghai proved to a RMB2.5 billion air conditioner market. Like many national producers international manufacturers have their concentration on 29% urban areas while 71% rural market till remains intact. Another thing that makes Chain most attractive for international investment is its low-cast manufacturing facilities. Multinational companies are not only aggressively perusing the domestic market in China, they also taking advantage b. International Air Conditioners Market: For appliances manufacturers Asia, continued to be the most blooming market place for world wide room air conditioners comprising 73% of total world room air conditioners. Out of 73% only Japan accounts for 29% while Middle East 5% equal to whole European market. Since the major 39% accounts for most of Asia's developing economies with low labour and facilities cost like India, China, Thailand and Vietnam hence about every major air conditioners manufacturer have invested either to penetrate local huge intact market or to establish offshore manufacturing bases. The air conditioner markets in European and North American also gaining volume. Although Europe chilly weather avoid the use of air conditioner yet during 1999, a 20% increase in air conditioner sale is observed. American air conditioner market proved to be more vibrant as its volume increased 100% for 1999 while Latin American market shares 4% to world market for air conditioners. Midea: Global Vision and International Business Strategy There is no hidden perception that we are moving towards globalization. Technology and scientific understanding are changing our world faster than ever before. As developments in Information and Communications Technologies (ICT) paced, world cultures and economies are going to merge. These developments are occurring at a speed and on scale never seen before. It has also created many opportunities and challenges for entrepreneurial businesses to gain competitive advantage. As a result, profit maximizing firms tend to curtail their activities in countries with high labour cost and move to places where the cost of labour is low and where the facilities are less expensive and less extensive. As in long tern business scenario it is indispensable to see business growth in global context, hence every organization has to device its business strategy to defend its position and prestige both in domestic and international market. Midea group is too facing intensive global and domestic competitors. Its competitors have modern manufacturing facilities with latest technology and state-of-the-art innovation research centers. Also with better brand names, they have more geographical specialized marketing work force with better marketing skills and enthusiastic international sales and distribution networks while in international market, Media is solely depends on its importers maturity and effectiveness. With globalization any competition can not be viewed as solely domestic therefore Midea too has to play the same double edges knife role. Being a major domestic player it has to defend its position in Chinese market and it also has to show its presence in the international arena to pre-empt its competitors. To achieve this Midea has to review its international business strategy and to go for both branding and private label options. Midea has to explore the most vibrant global air conditioners markets like Asia with global market share of 73% and also Latin America with 4% global market share approximately equal to European market size. Both Asia and Latin America markets comprise of developing economies with low labor and facility costs. Also a major segment of world population is concentrated particularly in Asia and can be view as future market place. Midea: Future Market Place and its Strategy The perception towards globalization also changes world business strategies and it creates a number of inspirations, inevitabilities and facts towards internationalization. The value of new markets is no more a hidden fact. As transportation developed and foreign markets became less remote a new variant of this motivation developed. Industries with significant economies of scale found that incremental sales added a disproportionate amount of profit. With new technological development, the conventional scale efficiency is becoming less important as a motive for internationalization. Also to acquire resources, to diversify markets and sources of raw materials, to pre-empt a competitor's international expansion and to protect home markets, are few additional stimulations towards this globalization (Schell, 2006, p.53). Since compared to domestic business scenario where one enjoys the unified homogeneous markets with familiar cultures and ethnic values and stable regulatory environment, international markets presents diverse cultural and markets environment often vulnerable to country's political uncertainty with uncertain financial climate and fluctuating exchange rates. Hence before perusing any international business activity the firm needs to determine the most important factors like cost, risk, and control, legal constraints and competition. Any organization before going to play in international arena must conduct an appraisal of internal strengths and weaknesses, the environmental constraints, threats and opportunities, and the objectives and goals of the organization (Schell, 2006, p.9 & 58). In international business viewpoint there are different modes for international involvement like export/import entry modes, contractual entry modes and investment equity modes. Each mode has its benefits and risks. Adoption of any entry mode to international dome depends on the firm commitment to international market despite its risks and its internal restrains and motivations and same are true for Midea. Considering its previous market portfolio Midea case study implies that it should follow the contractual mode business strategy to enter in international market. Midea: Contractual Modes of Entry Since Midea is already involved in international market through its two major importers hence consolidating it as first step towards internationalization Midea now should take step towards Contractual Mode Business Strategy. For those market places in which Midea is already has its presence through its importers brand name, it should make agreements with its importers to concentrate and to enhance their marketing networks with more skilled and enthusiastic work force. As contractual mode entry involves certain contractual agreements like Licensing, Franchising, Management contracts, Construction -turnkey contracts and Contract manufacturing hence Asian huge intact market is the best place to invest as it has diversified political, cultural and business sceneries. For those Asian economies which are vulnerable to regional or political uncertainty particularly in South Asia and Middle East licensing is the feasible mode of investment as it does not involve host government regulations and protectionist measures (e.g. tariffs, quotas). Also it provides a foothold in a foreign market or the creation of production facilities without capital expenditure. The Midea limited financial resources also implies licensing mode business strategy. The huge Asian market comprises of many emerging economies. Although they have huge work force yet they lack sufficient capital and management expertises of large-scale enterprises hence Midea can generate sufficient revenue through Management contracts business strategy. Also by using South East Asian expertise's and, talent Midea can penetrate through huge future market by adopting Construction - turnkey contracts or Contract manufacturing Bibliography Schell, C. (2006). The International Business Environment. Study Guide Unit, 1. Bangor Gwynedd, Manchester Business School Worldwide. Yuan, P. (2000). Midea: Globalization Challenge for a Leading Chinese Home Appliance Manufacturer. University of Western Ontario, London, Ivey Publishing. Read More