Attractiveness of the Chinese white good industry
Michael Porter developed a five forces frame work for industry analysis that can help us define the attractiveness of the Chinese white good industry. Attractiveness refers to the overall profitability in the industry. The following are the five forces, three of which are from internal threats and two are due to external forces.
The threat of substitute products or services
These are products offered in other industries. When a change in the price of a product affects the demand of its close substitute then there exists a threat of substitute (Anon. 10). This will depend on the buyer’s propensity to substitute, product differentiation level, value of substitute product, amount of substitute products, etc. Chinese white good industry was attractive since there were no substitute goods available in the market. They enjoyed a monopoly power. They also had diversified property with different products. They used advanced technology, low prices, and their style and methods of distribution were suitable for the china market (Palefu, Khanna & Vargas, 10). This made it difficult for other firms to produce substitute goods.
The threat of entry of new competitors
Competitors focus on the markets with high profits which eventually result into decreased profit. The entry of these competitors can be reduced by measures such as existence of barriers to entry, government policies etc. China holds policies that limit the entry of multinationals especially in logistics related areas. Even though these multinationals had more experience than Chinese in terms of understanding and performance, the competitive advantage of Chinese was higher over them due to high cost of logistic and the complicated network (Palefu, Khanna & Vargas, 20). This made it difficult for the multinationals to enter the Chinese market; the labor cost for such multinationals was also high as compared to labor cost of the domestic industries.
The intensity of competitive rivalry
The higher the competition among rival firms, the lower the profits (Anon. 6). Rivalry is normally determined by the industry concentration indicator. An industry characterized by only a few firms that hold the largest share in the market experiences less competition. The Chinese market is characterized by two major rival firms’ i.e. the Haier’s and kelon’s group. This reduces competition and makes the Chinese goods market attractive since the less rivals there are the more profitable the industry is. Haier and Kelon had established an efficient sales and marketing tactic to accommodate distribution changes therefore it was hard for other rival firms to enter the market.
The bargaining power of customers (buyers)
This is the impact of the customers to a producing firm. The customers’ power is influenced by their concentration in the market, existing channels of distribution, cost of products, etc. Buyers’ power is weak in markets with few supplies that are in control of the market. In the Chinese good market there are few firms who hold some monopoly powers and therefore the buyer had no control over prices which resulted into high returns. The industry offered a variety of products in the white goods market. Haier’s group also considered culture and taste of the locals in their products. This offered client satisfaction.
The bargaining power of suppliers
These are the suppliers of labor, raw materials among other services e.g. expertise. The traders, if powerful can easily put forth an influence in the industry (producing), for instance raw materials overcharge so as to earn profits (Anon 10). In the Chinese industry the firms had established huge warehouses which enabled them to buy raw materials in large quantities thus enjoying economies of scale. Due to the huge warehouses they could buy the raw materials when the prices were low and store them.
Haier’s expansion into developed markets
Haier entered the international markets in 1997 under the influence of Zhang who announced his three-third goals, one third being that of producing goods and selling in China, one third being producing goods in China and selling overseas, and the other third being producing and selling goods overseas. Haier started to export to the United Kingdom, Germany and then to France and Italy. It later became the first company in China engaging in foreign direct investment. Haier was able to establish a factory in South Carolina. In South Carolina, they managed to produce goods which only covered 2% of the market share and had to supplement these products with exports from China in order to capture the 10% target market. With the help of Jemal, Haier’s products got into the large retailers for example the Home depot, Best Buy, and Office Depot.
Haier’s decision to expand into these developed markets was a good idea since they were able to accomplish the three-third goals. They produced and sold goods in China and captured the largest market share. They were also able to sell their locally produced goods to other states such us Europe, India, Germany among others. Haier entered the U.S and established a factory in South Carolina where there were able to produce and sell niche products.
Haier focus on the niche products was so as to on the avoid rivalry with the GE, Whirlpool, Maytag, and Frigidaire who had already captured the biggest share of the market in U.S in the supply of full-sized refrigerators (Palepu, Khanna & Vargas, 26). These companies were large in size and thus had a competitive advantage over the Haier’s in the production of these refrigerators. For this reason, Haier’s company decided to specialize in niche products and was able to acquire a separate position in the market. If this is fully utilized, then the Haier Company can use the niche products to become a dominant global
Entry approach deployed by Haier during the international expansion brand
Haier entered the international market with the help of Michael Jemal who was a partner of an import company based in New York called Welbilt Appliances. Haier sold its products under the name of Welbilt which captured 10% of the U.S market. This success led to the formation of Haier America, a JV by Haier and Jemal which established the factory in South Carolina in the production of niche products.
Strength and limitations of the approach
The strengths of this approach are that they used an already established company (Welbilt appliances) to market their products in the international market and that the Haier‘s products were of high quality which attracted many customers.
Despite the success that Haier had achieved, they encountered some challenges. One of which was high labor costs. The other challenge was that even after trying to expand the factory in South Carolina they were not able to meet the 10% target market and had to rely on exports from China to supplement their production.
Anon. “Porter’s five forces: A model for industry analysis.” QuickMBA.com, 2007. Web.
Palepu, Krishna; Khanna, Tarun; and Vargas, Incrid. Haier: Taking a Chinese Company Global. New York: Harvard Business School, 2006