Part 5: Alcohol
The following is part four of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3 and part 4). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's alcohol industry.
Reductions in the import tax on foreign-made alcohol from 65% to 14% in the wake of China's entry into the WTO, in combination with RMB appreciation have led to dramatic increase in imports of alcoholic beverages. Foreign drinks currently comprise 10% of the Chinese market from brands like Johnnie Walker (DEO). Wine for instance is becoming more popular a drink during business meetings even if there is still low understanding of how to drink wine. For example, many businessmen will order $1000 USD + bottles of red wine, put in ice cubes, and drink as shots.
As the alcohol market gets increasingly competitive at home, many Chinese liquor companies are looking to expand their own presence overseas.
In interviews with industry leaders, a full 100% of larger respondents had already developed operations overseas. 40% of smaller industry leaders interviewed had either begun the process of moving abroad or planned to begin within the next five years.
Motivations
In addition to seeking opportunities outside the increasingly competitive domestic market, Chinese alcohol companies are going abroad in order to build their brand image, from "simply a Chinese brand" to a "truly international brand". Many respondents are willing to sacrifice short term profits in order to build larger brand awareness and a profitable, international brand image. This is most true in the beer sector, as brands like Tsingtao and Snow compete with foreign makers like InBev (even though foreign firms like InBev (AHBIF.PK) hold stakes in some Chinese producers).
A majority of respondents going abroad also cited large overseas demand as a motivating factor, especially in overseas Chinese communities. Those companies making traditional Chinese alcoholic beverages such as baijiu (white wine) and huangjiu (yellow wine) in particular enjoy strong demand from Asian countries and can target overseas Chinese communities in particular without the investment in marketing and consumer education that would be needed elsewhere.
Methods of Expansion
The majority of companies going abroad have initialized or plan to begin their overseas development in Southeast Asia, where traditional Chinese alcohol already is very popular. Many also already export to the more developed markets of North America and Europe. The majority view gaining market share in developed markets as an important long term goal, as they consider presence there an opportunity to establish a very "premium" brand image and increase brand awareness worldwide.
All respondents plan to export branded products as their main means of developing their overseas presence. A minority of those companies already going abroad are also considering ODI and M&A. Tsingtao Beer, for example, is building a plant in Thailand in order to avoid import duties on beer.
Respondents also mention rising production costs at home due to RMB appreciation and inflation as a factor pushing them abroad; a minority of respondents have plans to establish production facilities in nearby low cost regions to avoid these issues. This shift awy from production facilities in China can explain to some degree why Guangdong's export sector has been hit hard in recent months -- the shift away from China was already occurring before the financial crisis hit due to rising costs and the push by the Chinese Government to transition from an export to a service oriented economy. It has accelerated because of the financial crisis but the trend was already obvious.
Challenges
While demand in nearby Asian countries is encouraging a majority of respondents to expand overseas, cultural differences pose a significant challenge to many respondents as they look to enter non-Asian markets, particularly those whose major products are traditional Chinese alcohols. Liquors such as baijiu and huangjiu are very different in taste and smell from beverages traditionally consumed in the West and other parts of the world. For many potential target markets, respondents feel that increasing sales beyond overseas Chinese communities will involve significant outlay of resources for marketing and consumer education.
Respondents also face the challenge of getting products past international rules and regulations and operating in a new business environment. Most markets, for example, require that all ingredients used in alcohol production be clearly listed on packaging. Many Chinese liquor companies prefer not to reveal all ingredients for the sake of preserving the company's individuality, and the "secrecy of key ingredients", as one respondent explained. Even if they do publish all ingredients, customs duties in markets with huge potential demand prevent respondents from growing as quickly as they might like overseas.
While demand for comparatively cheap Chinese alcohol is huge in Russia, for example, customs duties of 280% limit nearly all import to smuggling.
Going Forward
While baijiu and huangjiu may not fly off the shelves worldwide in the near future, demand for traditional Chinese alcohols in neighboring countries will provide respondents with the opportunity to overcome other challenges described above. We believe Chinese wine is still far away from being accepted by Western palates. The most promising international growth will come from beer companies like Tsingtao and Snow.
Ultimately, marketing and consumer education as well as the inroads provided by overseas Chinese communities will make sale of traditional liquors in markets of different cultural backgrounds a very real opportunity.
2009年1月20日
Chinese Companies Go Abroad (Part 6: The Pharmaceutical Sector)
Part 6: Pharmaceutical
The following is part six of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4 and part 5). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's pharmaceutical industry.
China's pharmaceutical market will likely become the world's fifth largest by 2010, up from its current rank as ninth, due to rising demand from China's large population and rapidly growing middle class. In light of the financial crisis, the Government has also outlined increased medical coverage and investment as a key priority so that older Chinese feel more comfortable about covering skyrocketing medical costs and start fueling domestic consumption, which should also provide a boost to the sector.
While the industry is still young—90% of China's pharmaceutical manufacturers are small or medium-sized enterprises, and the ten largest companies generate only 13% of the industry's overall revenue, versus 40-50% in developed markets from firms like Merck (MRK) and Pfizer (PFE) — many companies are already looking overseas for their next growth opportunities going forward. Of industry leaders interviewed, all large industry leaders have either already gone abroad or plan to go abroad within the next five years. Sixty percent of smaller industry leaders have also begun the push overseas.
Motivations
Nearly all respondents who have begun the process of moving overseas or plan to begin within the next five years cite building brand awareness and a trusted brand image domestically as their top priority in the move abroad. Trust is incredibly important as Chinese consumers do not trust many brands -- especially the quality of the ingredients. Most consumers we interviewed were not surprised that there was a dairy scandal here. They were surprised that it was melamine and that certain "trusted" brands like Mengniu and Yili got caught up in the mess.
Pharmaceutical company respondents understood that they operate in a low trust environment and hope that a strong brand image can be used for strategic purposes to increase market share. As one respondent explained, "we believe in winning by the brand. Once you develop a good brand image you can use it as a tool to open further opportunities and create a bigger market." Creating a strong brand image and building brand awareness is especially critical to China's pharmaceutical companies as they look to win consumers' trust in the quality, safety, and effectiveness of their products.
Current Operations
The vast majority of respondents who have begun to move overseas have currently established presence in emerging markets such as Russia, Central and Southeast Asia, and Africa. Emerging markets are a popular destination for Chinese pharmaceutical companies due to their less-strict product requirements and regulatory mechanisms, which often bar entry to more developed markets. Emerging markets are also attractive due to high demand for drugs treating illnesses specific to those areas.
For those respondents mainly producing traditional Chinese medicine (TCM), Asian countries with cultural background similar to China for TCM such as Japan, Korea, and Southeast Asia have been the main targets for overseas expansion due to their large existing demand.
Still, all respondents consider developing a profitable presence in the developed American and/ or European markets their ultimate goal in going abroad. Many have already begun to establish themselves in these markets. As one respondent explained, "the American and European markets together dominate over 70% of the global pharmaceutical industry. If you want to be a truly global brand, you must have presence there." In addition to sheer size of the markets, Chinese pharmaceuticals seek entry into these countries where product standards and regulations are higher as a way of proving the quality of their products and further strengthening brand image, which they hope to use to gain influence and credibility in other markets worldwide.
Methods of Expansion
While respondents are using a variety of different strategies to enter overseas markets, all those that have already established presence abroad have begun by pure export of branded products. One respondent's exports to Russia, Europe, Africa, and America totaled $100 million in 2007.
Going forward, many of the larger industry leaders plan to develop partnerships in their target markets, usually via joint venture or collaboration with research institutions or other MNCs, and/ or set up production and R&D centers abroad. Respondents value such partnerships as easier access routes to worldwide markets, allowing them to build their understanding of the local consumer product demand and the regulatory environment without having to start from scratch. Guangzhou Pharmaceutical Company Ltd., for example, recently established a joint venture with English pharmaceutical giant Alliance Boots. Among other things, their venture provides avenues for both companies' product distribution through wholesale and retail channels in their respective target markets.
Challenges
Respondents identify cultural differences as the most challenging obstacle facing them in their move overseas. TCM manufacturers in particular fear difficulty finding demand for their drugs in Western markets, given that raw ingredients, and medicine characteristics such as taste and smell differ greatly from Western medicine's. Thus, while a full 80% of respondents produce TCM for the domestic market, only 20% of respondents are looking to take their TCM products abroad.
Chinese pharmaceutical companies also face challenges in obtaining official drug certifications especially in developed markets like Europe and the U.S., where they must go above and beyond what is necessary to meet standards of their own State Food and Drug Administration at home.
75% of respondents moving abroad also feel finding top talent with innovative ability and cutting edge technical knowledge to be a major challenge going forward.
Going Forward
While the Chinese pharmaceutical industry is still quite young and in many ways underdeveloped at home, many companies are already making meaningful inroads into overseas markets. This presence will increase going forward as respect for intellectual property grows and China's innovative capabilities improve in turn, and Chinese who have spent years training abroad return to take advantage of opportunities at home. Together with the Chinese government's dedication to improving R&D capabilities of Chinese universities and research institutions, China is poised to become a leader of innovation in the not so distant future. In the meantime, continued partnerships with MNCs and leading research institutions will offer Chinese pharma companies insight into the workings of international pharmaceutical markets, and access to advanced technology and resources that will further strengthen their abilities as innovators and leaders of the global pharmaceutical industry.
The following is part six of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4 and part 5). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's pharmaceutical industry.
China's pharmaceutical market will likely become the world's fifth largest by 2010, up from its current rank as ninth, due to rising demand from China's large population and rapidly growing middle class. In light of the financial crisis, the Government has also outlined increased medical coverage and investment as a key priority so that older Chinese feel more comfortable about covering skyrocketing medical costs and start fueling domestic consumption, which should also provide a boost to the sector.
While the industry is still young—90% of China's pharmaceutical manufacturers are small or medium-sized enterprises, and the ten largest companies generate only 13% of the industry's overall revenue, versus 40-50% in developed markets from firms like Merck (MRK) and Pfizer (PFE) — many companies are already looking overseas for their next growth opportunities going forward. Of industry leaders interviewed, all large industry leaders have either already gone abroad or plan to go abroad within the next five years. Sixty percent of smaller industry leaders have also begun the push overseas.
Motivations
Nearly all respondents who have begun the process of moving overseas or plan to begin within the next five years cite building brand awareness and a trusted brand image domestically as their top priority in the move abroad. Trust is incredibly important as Chinese consumers do not trust many brands -- especially the quality of the ingredients. Most consumers we interviewed were not surprised that there was a dairy scandal here. They were surprised that it was melamine and that certain "trusted" brands like Mengniu and Yili got caught up in the mess.
Pharmaceutical company respondents understood that they operate in a low trust environment and hope that a strong brand image can be used for strategic purposes to increase market share. As one respondent explained, "we believe in winning by the brand. Once you develop a good brand image you can use it as a tool to open further opportunities and create a bigger market." Creating a strong brand image and building brand awareness is especially critical to China's pharmaceutical companies as they look to win consumers' trust in the quality, safety, and effectiveness of their products.
Current Operations
The vast majority of respondents who have begun to move overseas have currently established presence in emerging markets such as Russia, Central and Southeast Asia, and Africa. Emerging markets are a popular destination for Chinese pharmaceutical companies due to their less-strict product requirements and regulatory mechanisms, which often bar entry to more developed markets. Emerging markets are also attractive due to high demand for drugs treating illnesses specific to those areas.
For those respondents mainly producing traditional Chinese medicine (TCM), Asian countries with cultural background similar to China for TCM such as Japan, Korea, and Southeast Asia have been the main targets for overseas expansion due to their large existing demand.
Still, all respondents consider developing a profitable presence in the developed American and/ or European markets their ultimate goal in going abroad. Many have already begun to establish themselves in these markets. As one respondent explained, "the American and European markets together dominate over 70% of the global pharmaceutical industry. If you want to be a truly global brand, you must have presence there." In addition to sheer size of the markets, Chinese pharmaceuticals seek entry into these countries where product standards and regulations are higher as a way of proving the quality of their products and further strengthening brand image, which they hope to use to gain influence and credibility in other markets worldwide.
Methods of Expansion
While respondents are using a variety of different strategies to enter overseas markets, all those that have already established presence abroad have begun by pure export of branded products. One respondent's exports to Russia, Europe, Africa, and America totaled $100 million in 2007.
Going forward, many of the larger industry leaders plan to develop partnerships in their target markets, usually via joint venture or collaboration with research institutions or other MNCs, and/ or set up production and R&D centers abroad. Respondents value such partnerships as easier access routes to worldwide markets, allowing them to build their understanding of the local consumer product demand and the regulatory environment without having to start from scratch. Guangzhou Pharmaceutical Company Ltd., for example, recently established a joint venture with English pharmaceutical giant Alliance Boots. Among other things, their venture provides avenues for both companies' product distribution through wholesale and retail channels in their respective target markets.
Challenges
Respondents identify cultural differences as the most challenging obstacle facing them in their move overseas. TCM manufacturers in particular fear difficulty finding demand for their drugs in Western markets, given that raw ingredients, and medicine characteristics such as taste and smell differ greatly from Western medicine's. Thus, while a full 80% of respondents produce TCM for the domestic market, only 20% of respondents are looking to take their TCM products abroad.
Chinese pharmaceutical companies also face challenges in obtaining official drug certifications especially in developed markets like Europe and the U.S., where they must go above and beyond what is necessary to meet standards of their own State Food and Drug Administration at home.
75% of respondents moving abroad also feel finding top talent with innovative ability and cutting edge technical knowledge to be a major challenge going forward.
Going Forward
While the Chinese pharmaceutical industry is still quite young and in many ways underdeveloped at home, many companies are already making meaningful inroads into overseas markets. This presence will increase going forward as respect for intellectual property grows and China's innovative capabilities improve in turn, and Chinese who have spent years training abroad return to take advantage of opportunities at home. Together with the Chinese government's dedication to improving R&D capabilities of Chinese universities and research institutions, China is poised to become a leader of innovation in the not so distant future. In the meantime, continued partnerships with MNCs and leading research institutions will offer Chinese pharma companies insight into the workings of international pharmaceutical markets, and access to advanced technology and resources that will further strengthen their abilities as innovators and leaders of the global pharmaceutical industry.
Chinese Companies Go Abroad (Part 6: The Pharmaceutical Sector)
Part 6: Pharmaceutical
The following is part six of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4 and part 5). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's pharmaceutical industry.
China's pharmaceutical market will likely become the world's fifth largest by 2010, up from its current rank as ninth, due to rising demand from China's large population and rapidly growing middle class. In light of the financial crisis, the Government has also outlined increased medical coverage and investment as a key priority so that older Chinese feel more comfortable about covering skyrocketing medical costs and start fueling domestic consumption, which should also provide a boost to the sector.
While the industry is still young—90% of China's pharmaceutical manufacturers are small or medium-sized enterprises, and the ten largest companies generate only 13% of the industry's overall revenue, versus 40-50% in developed markets from firms like Merck (MRK) and Pfizer (PFE) — many companies are already looking overseas for their next growth opportunities going forward. Of industry leaders interviewed, all large industry leaders have either already gone abroad or plan to go abroad within the next five years. Sixty percent of smaller industry leaders have also begun the push overseas.
Motivations
Nearly all respondents who have begun the process of moving overseas or plan to begin within the next five years cite building brand awareness and a trusted brand image domestically as their top priority in the move abroad. Trust is incredibly important as Chinese consumers do not trust many brands -- especially the quality of the ingredients. Most consumers we interviewed were not surprised that there was a dairy scandal here. They were surprised that it was melamine and that certain "trusted" brands like Mengniu and Yili got caught up in the mess.
Pharmaceutical company respondents understood that they operate in a low trust environment and hope that a strong brand image can be used for strategic purposes to increase market share. As one respondent explained, "we believe in winning by the brand. Once you develop a good brand image you can use it as a tool to open further opportunities and create a bigger market." Creating a strong brand image and building brand awareness is especially critical to China's pharmaceutical companies as they look to win consumers' trust in the quality, safety, and effectiveness of their products.
Current Operations
The vast majority of respondents who have begun to move overseas have currently established presence in emerging markets such as Russia, Central and Southeast Asia, and Africa. Emerging markets are a popular destination for Chinese pharmaceutical companies due to their less-strict product requirements and regulatory mechanisms, which often bar entry to more developed markets. Emerging markets are also attractive due to high demand for drugs treating illnesses specific to those areas.
For those respondents mainly producing traditional Chinese medicine (TCM), Asian countries with cultural background similar to China for TCM such as Japan, Korea, and Southeast Asia have been the main targets for overseas expansion due to their large existing demand.
Still, all respondents consider developing a profitable presence in the developed American and/ or European markets their ultimate goal in going abroad. Many have already begun to establish themselves in these markets. As one respondent explained, "the American and European markets together dominate over 70% of the global pharmaceutical industry. If you want to be a truly global brand, you must have presence there." In addition to sheer size of the markets, Chinese pharmaceuticals seek entry into these countries where product standards and regulations are higher as a way of proving the quality of their products and further strengthening brand image, which they hope to use to gain influence and credibility in other markets worldwide.
Methods of Expansion
While respondents are using a variety of different strategies to enter overseas markets, all those that have already established presence abroad have begun by pure export of branded products. One respondent's exports to Russia, Europe, Africa, and America totaled $100 million in 2007.
Going forward, many of the larger industry leaders plan to develop partnerships in their target markets, usually via joint venture or collaboration with research institutions or other MNCs, and/ or set up production and R&D centers abroad. Respondents value such partnerships as easier access routes to worldwide markets, allowing them to build their understanding of the local consumer product demand and the regulatory environment without having to start from scratch. Guangzhou Pharmaceutical Company Ltd., for example, recently established a joint venture with English pharmaceutical giant Alliance Boots. Among other things, their venture provides avenues for both companies' product distribution through wholesale and retail channels in their respective target markets.
Challenges
Respondents identify cultural differences as the most challenging obstacle facing them in their move overseas. TCM manufacturers in particular fear difficulty finding demand for their drugs in Western markets, given that raw ingredients, and medicine characteristics such as taste and smell differ greatly from Western medicine's. Thus, while a full 80% of respondents produce TCM for the domestic market, only 20% of respondents are looking to take their TCM products abroad.
Chinese pharmaceutical companies also face challenges in obtaining official drug certifications especially in developed markets like Europe and the U.S., where they must go above and beyond what is necessary to meet standards of their own State Food and Drug Administration at home.
75% of respondents moving abroad also feel finding top talent with innovative ability and cutting edge technical knowledge to be a major challenge going forward.
Going Forward
While the Chinese pharmaceutical industry is still quite young and in many ways underdeveloped at home, many companies are already making meaningful inroads into overseas markets. This presence will increase going forward as respect for intellectual property grows and China's innovative capabilities improve in turn, and Chinese who have spent years training abroad return to take advantage of opportunities at home. Together with the Chinese government's dedication to improving R&D capabilities of Chinese universities and research institutions, China is poised to become a leader of innovation in the not so distant future. In the meantime, continued partnerships with MNCs and leading research institutions will offer Chinese pharma companies insight into the workings of international pharmaceutical markets, and access to advanced technology and resources that will further strengthen their abilities as innovators and leaders of the global pharmaceutical industry.
The following is part six of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4 and part 5). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's pharmaceutical industry.
China's pharmaceutical market will likely become the world's fifth largest by 2010, up from its current rank as ninth, due to rising demand from China's large population and rapidly growing middle class. In light of the financial crisis, the Government has also outlined increased medical coverage and investment as a key priority so that older Chinese feel more comfortable about covering skyrocketing medical costs and start fueling domestic consumption, which should also provide a boost to the sector.
While the industry is still young—90% of China's pharmaceutical manufacturers are small or medium-sized enterprises, and the ten largest companies generate only 13% of the industry's overall revenue, versus 40-50% in developed markets from firms like Merck (MRK) and Pfizer (PFE) — many companies are already looking overseas for their next growth opportunities going forward. Of industry leaders interviewed, all large industry leaders have either already gone abroad or plan to go abroad within the next five years. Sixty percent of smaller industry leaders have also begun the push overseas.
Motivations
Nearly all respondents who have begun the process of moving overseas or plan to begin within the next five years cite building brand awareness and a trusted brand image domestically as their top priority in the move abroad. Trust is incredibly important as Chinese consumers do not trust many brands -- especially the quality of the ingredients. Most consumers we interviewed were not surprised that there was a dairy scandal here. They were surprised that it was melamine and that certain "trusted" brands like Mengniu and Yili got caught up in the mess.
Pharmaceutical company respondents understood that they operate in a low trust environment and hope that a strong brand image can be used for strategic purposes to increase market share. As one respondent explained, "we believe in winning by the brand. Once you develop a good brand image you can use it as a tool to open further opportunities and create a bigger market." Creating a strong brand image and building brand awareness is especially critical to China's pharmaceutical companies as they look to win consumers' trust in the quality, safety, and effectiveness of their products.
Current Operations
The vast majority of respondents who have begun to move overseas have currently established presence in emerging markets such as Russia, Central and Southeast Asia, and Africa. Emerging markets are a popular destination for Chinese pharmaceutical companies due to their less-strict product requirements and regulatory mechanisms, which often bar entry to more developed markets. Emerging markets are also attractive due to high demand for drugs treating illnesses specific to those areas.
For those respondents mainly producing traditional Chinese medicine (TCM), Asian countries with cultural background similar to China for TCM such as Japan, Korea, and Southeast Asia have been the main targets for overseas expansion due to their large existing demand.
Still, all respondents consider developing a profitable presence in the developed American and/ or European markets their ultimate goal in going abroad. Many have already begun to establish themselves in these markets. As one respondent explained, "the American and European markets together dominate over 70% of the global pharmaceutical industry. If you want to be a truly global brand, you must have presence there." In addition to sheer size of the markets, Chinese pharmaceuticals seek entry into these countries where product standards and regulations are higher as a way of proving the quality of their products and further strengthening brand image, which they hope to use to gain influence and credibility in other markets worldwide.
Methods of Expansion
While respondents are using a variety of different strategies to enter overseas markets, all those that have already established presence abroad have begun by pure export of branded products. One respondent's exports to Russia, Europe, Africa, and America totaled $100 million in 2007.
Going forward, many of the larger industry leaders plan to develop partnerships in their target markets, usually via joint venture or collaboration with research institutions or other MNCs, and/ or set up production and R&D centers abroad. Respondents value such partnerships as easier access routes to worldwide markets, allowing them to build their understanding of the local consumer product demand and the regulatory environment without having to start from scratch. Guangzhou Pharmaceutical Company Ltd., for example, recently established a joint venture with English pharmaceutical giant Alliance Boots. Among other things, their venture provides avenues for both companies' product distribution through wholesale and retail channels in their respective target markets.
Challenges
Respondents identify cultural differences as the most challenging obstacle facing them in their move overseas. TCM manufacturers in particular fear difficulty finding demand for their drugs in Western markets, given that raw ingredients, and medicine characteristics such as taste and smell differ greatly from Western medicine's. Thus, while a full 80% of respondents produce TCM for the domestic market, only 20% of respondents are looking to take their TCM products abroad.
Chinese pharmaceutical companies also face challenges in obtaining official drug certifications especially in developed markets like Europe and the U.S., where they must go above and beyond what is necessary to meet standards of their own State Food and Drug Administration at home.
75% of respondents moving abroad also feel finding top talent with innovative ability and cutting edge technical knowledge to be a major challenge going forward.
Going Forward
While the Chinese pharmaceutical industry is still quite young and in many ways underdeveloped at home, many companies are already making meaningful inroads into overseas markets. This presence will increase going forward as respect for intellectual property grows and China's innovative capabilities improve in turn, and Chinese who have spent years training abroad return to take advantage of opportunities at home. Together with the Chinese government's dedication to improving R&D capabilities of Chinese universities and research institutions, China is poised to become a leader of innovation in the not so distant future. In the meantime, continued partnerships with MNCs and leading research institutions will offer Chinese pharma companies insight into the workings of international pharmaceutical markets, and access to advanced technology and resources that will further strengthen their abilities as innovators and leaders of the global pharmaceutical industry.
Chinese Companies Go Abroad (Part 7: The Fast Moving Consumer Goods Sector)
Part 7: Fast Moving Consumer Goods (FMCG)
The following is part seven of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5 and part 6). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's FMCG industry.
The Chinese FMCG industry has grown dramatically over the past decade in step with rapidly increasing disposable incomes and improving economic conditions. Not only are China's 250 million strong middle class buying more products from companies like Estee Lauder (EL) and Johnson & Johnson (JNJ), but China's 800 million new consumer, formerly peasants, are now just becoming part of the global ecosystem and buying products from P&G (PG) and Clorox (CLX). Chinese FMCG companies are increasingly looking to go abroad in search of profit and growth opportunities. A full 100% of large industry leaders interviewed by CMR have already started moving overseas, and nearly half of smaller industry leaders plan to start moving overseas within the next five years.
Motivations
Of those companies who have already started to move overseas, the majority are doing so in response to large demand for their products, particularly from emerging markets. Given increasing competition at home from both domestic and international rivals, these markets are an attractive place for companies to grow, increase competitiveness and profits.
Respondents also hope establishing overseas presence will help them build brand awareness and improve brand image by adding cache to their brand, allowing them to market themselves as a true international brand, both abroad and at home. "We need to enhance our brand's image and build up brand loyalty among consumers, which is a key for FMCG company to grow big and stay alive," explained one large industry leader.
Current Situation
The majority of respondents have started their move overseas by targeting emerging markets, where regulations and quality standards for imported goods are more lenient and consumers seek cheaper but "good enough" products. Respondents can easily undersell the competition in emerging markets and win market share, helping to generate revenues and brand awareness. Neighboring areas such as Russia and Mongolia, and Southeast Asian countries are particularly attractive due to the comparatively low cost of transport and the desire for consumers to buy on price rather than brand.
Still, respondents consider establishing brand image and winning market share in developed markets their ultimate goal. Most respondents have already begun to target North American, European, and Japanese markets; the remainder of those respondents who have started to move abroad plan to target these markets within the next five years.
Most respondents are relying on pure export strategy to grow their presence overseas, of branded products or a combination of branded and OEM products. Two respondents have also set up R&D centers abroad to build the technological capabilities and consumer insights that will allow them to better serve local markets and build a profitable brand image.
Future Expansion
Respondents plan to enter developed markets via export and establishment of R&D centers, production facilities, partnerships and/ or joint ventures for product marketing and distribution, and local insight. As one respondent company stated, "establishing a joint venture with the right contracted partner would be extremely helpful for us because they will provide the necessary network and expertise for local success."
Challenges
Respondents feel passing international rules and regulations will pose the biggest challenge in moving overseas, and into developed markets in particular. For instance, exported cosmetics must be approved by the FDA if meant for sale in the U.S. market. Some interviewees have also mentioned that the fees for obtaining product certifications, especially in the U.S. and Europe, are high enough to pose a barrier to entry in and of themselves. As one respondent explained, "if we want to enter American or European market, we need to pay several hundred thousand dollars or Euros to get the right certification. The issue is the money, not the technology." Respondents also reported understanding local culture and business environment, as well as finding the right talent to lead their companies overseas to be considerable challenges.
Many respondents complained about the rising costs of raw materials at home, and RMB appreciation, factors that are motivating some companies to develop production facilities abroad.
The other critical challenge for many Chinese FMCG companies is creating a brand image that is not just about price. Many companies compete in China on price, essentially commoditizing themselves, or by positioning themselves as the best Chinese brand so patriotic Chinese should consumer their products. While a low-pricing strategy might trigger short-term sales, it is not a long-term strategy in markets where consumers are gettting wealthier and will not create brand loyalty. Clearly, the patriotic card won't work outside of China.
Going Forward
Chinese FMCG companies have already made significant progress in establishing overseas presence. Going forward, they should continue to establish partnerships and/ or joint ventures in their target markets in order to better understand local conditions and overcome the challenges of cultural differences, new business environment, and how to pass international regulations and laws. Partnering with third party experts such as law firms and marketing agencies can also help provide necessary insight into how best to operate in the target market and reach its consumers.
Most importantly, they need to learn how to compete on more than just price and learn how to connect emotionally with Western consumers. This starts with analying their brand positioning at home and creating a global brand image.
The following is part seven of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5 and part 6). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's FMCG industry.
The Chinese FMCG industry has grown dramatically over the past decade in step with rapidly increasing disposable incomes and improving economic conditions. Not only are China's 250 million strong middle class buying more products from companies like Estee Lauder (EL) and Johnson & Johnson (JNJ), but China's 800 million new consumer, formerly peasants, are now just becoming part of the global ecosystem and buying products from P&G (PG) and Clorox (CLX). Chinese FMCG companies are increasingly looking to go abroad in search of profit and growth opportunities. A full 100% of large industry leaders interviewed by CMR have already started moving overseas, and nearly half of smaller industry leaders plan to start moving overseas within the next five years.
Motivations
Of those companies who have already started to move overseas, the majority are doing so in response to large demand for their products, particularly from emerging markets. Given increasing competition at home from both domestic and international rivals, these markets are an attractive place for companies to grow, increase competitiveness and profits.
Respondents also hope establishing overseas presence will help them build brand awareness and improve brand image by adding cache to their brand, allowing them to market themselves as a true international brand, both abroad and at home. "We need to enhance our brand's image and build up brand loyalty among consumers, which is a key for FMCG company to grow big and stay alive," explained one large industry leader.
Current Situation
The majority of respondents have started their move overseas by targeting emerging markets, where regulations and quality standards for imported goods are more lenient and consumers seek cheaper but "good enough" products. Respondents can easily undersell the competition in emerging markets and win market share, helping to generate revenues and brand awareness. Neighboring areas such as Russia and Mongolia, and Southeast Asian countries are particularly attractive due to the comparatively low cost of transport and the desire for consumers to buy on price rather than brand.
Still, respondents consider establishing brand image and winning market share in developed markets their ultimate goal. Most respondents have already begun to target North American, European, and Japanese markets; the remainder of those respondents who have started to move abroad plan to target these markets within the next five years.
Most respondents are relying on pure export strategy to grow their presence overseas, of branded products or a combination of branded and OEM products. Two respondents have also set up R&D centers abroad to build the technological capabilities and consumer insights that will allow them to better serve local markets and build a profitable brand image.
Future Expansion
Respondents plan to enter developed markets via export and establishment of R&D centers, production facilities, partnerships and/ or joint ventures for product marketing and distribution, and local insight. As one respondent company stated, "establishing a joint venture with the right contracted partner would be extremely helpful for us because they will provide the necessary network and expertise for local success."
Challenges
Respondents feel passing international rules and regulations will pose the biggest challenge in moving overseas, and into developed markets in particular. For instance, exported cosmetics must be approved by the FDA if meant for sale in the U.S. market. Some interviewees have also mentioned that the fees for obtaining product certifications, especially in the U.S. and Europe, are high enough to pose a barrier to entry in and of themselves. As one respondent explained, "if we want to enter American or European market, we need to pay several hundred thousand dollars or Euros to get the right certification. The issue is the money, not the technology." Respondents also reported understanding local culture and business environment, as well as finding the right talent to lead their companies overseas to be considerable challenges.
Many respondents complained about the rising costs of raw materials at home, and RMB appreciation, factors that are motivating some companies to develop production facilities abroad.
The other critical challenge for many Chinese FMCG companies is creating a brand image that is not just about price. Many companies compete in China on price, essentially commoditizing themselves, or by positioning themselves as the best Chinese brand so patriotic Chinese should consumer their products. While a low-pricing strategy might trigger short-term sales, it is not a long-term strategy in markets where consumers are gettting wealthier and will not create brand loyalty. Clearly, the patriotic card won't work outside of China.
Going Forward
Chinese FMCG companies have already made significant progress in establishing overseas presence. Going forward, they should continue to establish partnerships and/ or joint ventures in their target markets in order to better understand local conditions and overcome the challenges of cultural differences, new business environment, and how to pass international regulations and laws. Partnering with third party experts such as law firms and marketing agencies can also help provide necessary insight into how best to operate in the target market and reach its consumers.
Most importantly, they need to learn how to compete on more than just price and learn how to connect emotionally with Western consumers. This starts with analying their brand positioning at home and creating a global brand image.
Chinese Companies Go Abroad (Part 8: The Apparel Sector)
Part 8: Apparel
The following is part eight of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5, part 6 and part 7). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's apparel industry.
CMR interviews with leading Chinese clothing companies found that all large industry leaders have either started moving overseas or plan to begin the move within the next five years. Smaller industry leaders are also moving abroad – 40% have already established an overseas presence.
Motivations
In order to fully take advantage of overseas growth opportunities, respondent companies are focusing now on building brand awareness and a profitable brand image worldwide; five out of seven respondents with plans to move abroad consider brand building their number one priority in the process. Respondents are willing to forego short term revenue growth in order to gain overseas brand awareness.
Respondents are also moving overseas to escape fierce domestic competition, and capitalize on demand for their products in overseas markets. The apparel market is growing quickly in China with retail sales growing around 20% in 2008. While we expect sales will drop due to the financial crisis, the apparel sector remains relatively robust. Brands like Zara, H&M (HMRZF.PK) , C&A, and Uniqlo are capturing considerable market share while luxury brands like Zegna and Louis Vuitton still expect positive growth in 2009.
Current Situation
All respondents that have already started moving overseas have established presence in North American markets, mainly the United States. 80% have operations in Europe, and 80% have operations in emerging markets.
In addition to the sheer size of the markets, Chinese textile companies are targeting Europe and America to add prestige to their brands and prove to consumers worldwide that their products are of top quality and style. As one respondent explained, "if you want to be successful, you cannot miss out on the European and American markets. For one, the markets are huge, but also being able to sell in the US and Europe is good for brand image."
Nearly all respondents are also targeting emerging markets, hoping to tap into rapidly growing demand for good quality products at slightly lower prices. Most respondents believe that the "Made in China" label will not hurt their chances for moving abroad as most foeign brands, even high-end ones, manufacture all or part of their apparel in China.
The vast majority of respondent companies started their expansion overseas via OEM exports, as a way to not only tap into overseas demand but to learn about market characteristics and gain experience operating in a new business environment. Respondents have gradually been switching to export of their own branded products, as well as establishing joint ventures with international organizations and corporations to ensure a more sustainable overseas growth path.
All respondents consider American and European markets their highest priority target markets for the next five years, for reasons described above. Roughly half of respondents are also prioritizing emerging markets for their rapid economic growth, such as Russia, Vietnam, and South Korea.
The majority of respondents intend to continue pursuing an export-focused plan for growth abroad. Half of respondents are also choosing partnership as a means of expansion, either through establishment of joint venture companies or less formal cooperation. One respondent, for example, is collaborating with Italian and German designers in order to better cater its products to the taste of the local target market. A minority of respondents are actively pursing M&A as a means of gaining market access and further insight into local tastes and effective marketing strategies. Li-Ning (02331) has chosen to raise brand awareness overseas and compete against Nike (NKE) and Reebok (RBK) through sponsorship of NBA athletes Shaquille O'Neal, Damon Jones, and Chuck Hayes. Company founder and Olympic gold medalist Li Ning also drew significant attention to the company when he lit the torch during the opening ceremony of the 2008 Beijing Olympics.
Challenges
A majority of respondents consider overcoming cultural differences one of the largest challenges they face in moving abroad, since taste in style and fashion vary greatly between markets. Thus companies that tout the "Chinese" appearance of their products as a selling point at home may have a harder time selling abroad in markets with different style preferences.
Over half of respondents consider finding employees with the appropriate skill set a big problem in expanding overseas. Many respondents are looking abroad to hire employees with knowledge of local taste in products and fashion trends, experience in innovation and design, as well as the managerial skills needed to lead company development.
Over half of respondents going abroad also consider getting past international regulations and laws to be a significant challenge. Quotas and other import restrictions, for example, seriously limit the amount of goods respondents can sell in many of their target markets. The fear of trade protectionism is rising with the financial crisis as local constituents push Governments to preserves jobs and implement quotas.
Respondents also mentioned other important challenges including learning how to operate in a new business environment and setting up the appropriate organization structure to ensure smooth coordination between home and overseas offices, rising wages and raw materials costs, and appreciation of the RMB.
Going Forward
Still, respondents are optimistic in their abilities to overcome these challenges going forward. Those that have already gone abroad or plan to begin the move within the next five years consider overseas expansion very important to their companies' development, and are willing to sacrifice where need be in order to realize their goals. To be successful, companies will need to determine the right brand image and marketing communication strategy and cater the designs for local tastes.
The following is part eight of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5, part 6 and part 7). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's apparel industry.
CMR interviews with leading Chinese clothing companies found that all large industry leaders have either started moving overseas or plan to begin the move within the next five years. Smaller industry leaders are also moving abroad – 40% have already established an overseas presence.
Motivations
In order to fully take advantage of overseas growth opportunities, respondent companies are focusing now on building brand awareness and a profitable brand image worldwide; five out of seven respondents with plans to move abroad consider brand building their number one priority in the process. Respondents are willing to forego short term revenue growth in order to gain overseas brand awareness.
Respondents are also moving overseas to escape fierce domestic competition, and capitalize on demand for their products in overseas markets. The apparel market is growing quickly in China with retail sales growing around 20% in 2008. While we expect sales will drop due to the financial crisis, the apparel sector remains relatively robust. Brands like Zara, H&M (HMRZF.PK) , C&A, and Uniqlo are capturing considerable market share while luxury brands like Zegna and Louis Vuitton still expect positive growth in 2009.
Current Situation
All respondents that have already started moving overseas have established presence in North American markets, mainly the United States. 80% have operations in Europe, and 80% have operations in emerging markets.
In addition to the sheer size of the markets, Chinese textile companies are targeting Europe and America to add prestige to their brands and prove to consumers worldwide that their products are of top quality and style. As one respondent explained, "if you want to be successful, you cannot miss out on the European and American markets. For one, the markets are huge, but also being able to sell in the US and Europe is good for brand image."
Nearly all respondents are also targeting emerging markets, hoping to tap into rapidly growing demand for good quality products at slightly lower prices. Most respondents believe that the "Made in China" label will not hurt their chances for moving abroad as most foeign brands, even high-end ones, manufacture all or part of their apparel in China.
The vast majority of respondent companies started their expansion overseas via OEM exports, as a way to not only tap into overseas demand but to learn about market characteristics and gain experience operating in a new business environment. Respondents have gradually been switching to export of their own branded products, as well as establishing joint ventures with international organizations and corporations to ensure a more sustainable overseas growth path.
All respondents consider American and European markets their highest priority target markets for the next five years, for reasons described above. Roughly half of respondents are also prioritizing emerging markets for their rapid economic growth, such as Russia, Vietnam, and South Korea.
The majority of respondents intend to continue pursuing an export-focused plan for growth abroad. Half of respondents are also choosing partnership as a means of expansion, either through establishment of joint venture companies or less formal cooperation. One respondent, for example, is collaborating with Italian and German designers in order to better cater its products to the taste of the local target market. A minority of respondents are actively pursing M&A as a means of gaining market access and further insight into local tastes and effective marketing strategies. Li-Ning (02331) has chosen to raise brand awareness overseas and compete against Nike (NKE) and Reebok (RBK) through sponsorship of NBA athletes Shaquille O'Neal, Damon Jones, and Chuck Hayes. Company founder and Olympic gold medalist Li Ning also drew significant attention to the company when he lit the torch during the opening ceremony of the 2008 Beijing Olympics.
Challenges
A majority of respondents consider overcoming cultural differences one of the largest challenges they face in moving abroad, since taste in style and fashion vary greatly between markets. Thus companies that tout the "Chinese" appearance of their products as a selling point at home may have a harder time selling abroad in markets with different style preferences.
Over half of respondents consider finding employees with the appropriate skill set a big problem in expanding overseas. Many respondents are looking abroad to hire employees with knowledge of local taste in products and fashion trends, experience in innovation and design, as well as the managerial skills needed to lead company development.
Over half of respondents going abroad also consider getting past international regulations and laws to be a significant challenge. Quotas and other import restrictions, for example, seriously limit the amount of goods respondents can sell in many of their target markets. The fear of trade protectionism is rising with the financial crisis as local constituents push Governments to preserves jobs and implement quotas.
Respondents also mentioned other important challenges including learning how to operate in a new business environment and setting up the appropriate organization structure to ensure smooth coordination between home and overseas offices, rising wages and raw materials costs, and appreciation of the RMB.
Going Forward
Still, respondents are optimistic in their abilities to overcome these challenges going forward. Those that have already gone abroad or plan to begin the move within the next five years consider overseas expansion very important to their companies' development, and are willing to sacrifice where need be in order to realize their goals. To be successful, companies will need to determine the right brand image and marketing communication strategy and cater the designs for local tastes.
Chinese Companies Go Abroad (Part 9: The Food and Beverage Sector)
Part 9: Food and Beverage
The following is part nine of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5, part 6, part 7 and part 8). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's food and beverage industry.
The food and beverage industry is another Chinese industry in which the vast majority of large industry leaders—80% in this case— have already taken meaningful steps in the move to expand overseas.
Motivations
Even after transport, Chinese-produced food and beverage products have a considerable price advantage in overseas markets. All respondent companies who had begun the move cited large demand for such cheaper but comparable quality products as the main reason for their push abroad. Some respondents are using high demand in overseas Chinese communities in particular to make inroads into foreign markets. Beverage company Wahaha, for example, has gotten onto shelves in the US by selling their children's protein and vitamin drinks in Asian specialty stores despite getting embroiled in a nasty and debilitating legal fight with its partner Danone.
In addition to tapping overseas demand, 75% of respondents moving overseas considered building brand reputation a top motivating factor in the move abroad. Passing the strict tests required for entry into overseas markets and being able to label themselves "international" lends a certain amount of status and cache they then hope to use for marketing and further brand building, both abroad and at home. Building trust within the domestic home market is critically important for these brands and Chinese consumers are as worried as American and European consumers about the safety of the products they ingest.
The majority of respondent companies without plans to move abroad in the near future cited the potential of the domestic Chinese market as the main factor keeping their attention at home. Many regional leaders, for example, see a higher return on investment from expansion into other profitable regions within China than from moving into another country as China's 800 million new consumers, formerly peasants, have more disposable incomes and start to drive sales in 4th and 5th tier cities. Smart multinational firms like P&G (PG), Coke (KO), and Cadbury (CBY) are already moving into these areas and targeting these new consumers.
Current Operations
All respondent companies interviewed are taking an export-based approach to going overseas, using distributors to help them identify retailers and establish sales networks in their target markets. Often these companies will choose to partner with overseas Chinese distributors to help bridge cultural gaps and other communication challenges. Distributors often also fill a more general, all-purpose advisor role, advising companies on how to best to move forward given local laws and market conditions.
In addition to exporting under their own brand, 50% of respondents going abroad are selling generic products to local retailers. While this does not directly help build brand reputation, it helps companies gain experience in an international business environment. Furthermore, working with a major retail partner like Wal-Mart (WMT) provides an opportunity to learn from a market leader. In general, these sort of partnerships are a good opportunity to learn about foreign regulations, market conditions, and consumer preferences without having to cough up for marketing or worry about finding the right sales channels.
Currently the most popular destination for Chinese food and beverage exports is emerging markets. 100% of respondent companies moving abroad export to countries and regions such as Southeast Asia, Eastern Europe, Russia, and Africa. The majority also export to developed markets in Europe and North America, and all plan to increase their focus there going forward.
While these companies plan to continue to use export as their main method of overseas expansion for near future, they are exploring ways other ways of pushing their overseas development. One respondent, for example, is currently considering developing a factory abroad to help reduce transportation costs and the trouble of import/export rules and tariffs.
Challenges
Maintaining a top quality product is the highest concern for companies going abroad. Especially in light of recent negative incidents involving China food exports, these companies want to ensure their clients and customers are consistently 100% satisfied with their product, and are exceeding the requirements of regulatory bodies like the FDA to ensure quality consistency.
For many respondents that have not yet started moving abroad, meeting international regulations and laws is a considerable challenge. Some companies might want to export products containing meat, for example, but are constrained by complex regulations in the target market on how meat can be imported, and from where. As one frozen dumpling company explained, "we'd really like to export our dumplings abroad, but our best-selling dumplings contain meat, and many of our target markets ban the import of meat in this form." Many respondent companies have invested in R&D and hired experts from abroad to help them overcome the challenges these rules and regulations present.
Learning the ropes and business ground rules in their target markets is another significant challenge facing these companies, and a main reason most respondents have chosen to move abroad via export, at least initially. Closely related is the problem of cultural differences, both in business and in adapting product taste to local markets. As mentioned previously, many respondents hire overseas Chinese as their distributors to help bridge gaps in business culture. Many companies are also investing in R&D to help better tailor their products to local consumer preferences.
Going Forward
CMR also encourages companies not to stop at OEM as their main way of tapping overseas markets. Though establishing the correct brand image abroad can be time consuming and costly, CMR research has found that Chinese brands are very competitive in certain overseas markets where they can capitalize on their price advantages. However, more than other industries, Chinese food producers must be careful to "get it right" the first time when building their brand image in overseas markets. Given widespread fear of imports from China due to the recent tainted milk scandal which has hurt the reputations of even leading producers Mengniu and Yili, these companies must be extra certain they get nothing but good press. Companies should not be overly reliant on distributors as they develop their entry strategies; it is worth the investment in a larger on-the-ground advisory team than distributor alone.
The following is part nine of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5, part 6, part 7 and part 8). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's food and beverage industry.
The food and beverage industry is another Chinese industry in which the vast majority of large industry leaders—80% in this case— have already taken meaningful steps in the move to expand overseas.
Motivations
Even after transport, Chinese-produced food and beverage products have a considerable price advantage in overseas markets. All respondent companies who had begun the move cited large demand for such cheaper but comparable quality products as the main reason for their push abroad. Some respondents are using high demand in overseas Chinese communities in particular to make inroads into foreign markets. Beverage company Wahaha, for example, has gotten onto shelves in the US by selling their children's protein and vitamin drinks in Asian specialty stores despite getting embroiled in a nasty and debilitating legal fight with its partner Danone.
In addition to tapping overseas demand, 75% of respondents moving overseas considered building brand reputation a top motivating factor in the move abroad. Passing the strict tests required for entry into overseas markets and being able to label themselves "international" lends a certain amount of status and cache they then hope to use for marketing and further brand building, both abroad and at home. Building trust within the domestic home market is critically important for these brands and Chinese consumers are as worried as American and European consumers about the safety of the products they ingest.
The majority of respondent companies without plans to move abroad in the near future cited the potential of the domestic Chinese market as the main factor keeping their attention at home. Many regional leaders, for example, see a higher return on investment from expansion into other profitable regions within China than from moving into another country as China's 800 million new consumers, formerly peasants, have more disposable incomes and start to drive sales in 4th and 5th tier cities. Smart multinational firms like P&G (PG), Coke (KO), and Cadbury (CBY) are already moving into these areas and targeting these new consumers.
Current Operations
All respondent companies interviewed are taking an export-based approach to going overseas, using distributors to help them identify retailers and establish sales networks in their target markets. Often these companies will choose to partner with overseas Chinese distributors to help bridge cultural gaps and other communication challenges. Distributors often also fill a more general, all-purpose advisor role, advising companies on how to best to move forward given local laws and market conditions.
In addition to exporting under their own brand, 50% of respondents going abroad are selling generic products to local retailers. While this does not directly help build brand reputation, it helps companies gain experience in an international business environment. Furthermore, working with a major retail partner like Wal-Mart (WMT) provides an opportunity to learn from a market leader. In general, these sort of partnerships are a good opportunity to learn about foreign regulations, market conditions, and consumer preferences without having to cough up for marketing or worry about finding the right sales channels.
Currently the most popular destination for Chinese food and beverage exports is emerging markets. 100% of respondent companies moving abroad export to countries and regions such as Southeast Asia, Eastern Europe, Russia, and Africa. The majority also export to developed markets in Europe and North America, and all plan to increase their focus there going forward.
While these companies plan to continue to use export as their main method of overseas expansion for near future, they are exploring ways other ways of pushing their overseas development. One respondent, for example, is currently considering developing a factory abroad to help reduce transportation costs and the trouble of import/export rules and tariffs.
Challenges
Maintaining a top quality product is the highest concern for companies going abroad. Especially in light of recent negative incidents involving China food exports, these companies want to ensure their clients and customers are consistently 100% satisfied with their product, and are exceeding the requirements of regulatory bodies like the FDA to ensure quality consistency.
For many respondents that have not yet started moving abroad, meeting international regulations and laws is a considerable challenge. Some companies might want to export products containing meat, for example, but are constrained by complex regulations in the target market on how meat can be imported, and from where. As one frozen dumpling company explained, "we'd really like to export our dumplings abroad, but our best-selling dumplings contain meat, and many of our target markets ban the import of meat in this form." Many respondent companies have invested in R&D and hired experts from abroad to help them overcome the challenges these rules and regulations present.
Learning the ropes and business ground rules in their target markets is another significant challenge facing these companies, and a main reason most respondents have chosen to move abroad via export, at least initially. Closely related is the problem of cultural differences, both in business and in adapting product taste to local markets. As mentioned previously, many respondents hire overseas Chinese as their distributors to help bridge gaps in business culture. Many companies are also investing in R&D to help better tailor their products to local consumer preferences.
Going Forward
CMR also encourages companies not to stop at OEM as their main way of tapping overseas markets. Though establishing the correct brand image abroad can be time consuming and costly, CMR research has found that Chinese brands are very competitive in certain overseas markets where they can capitalize on their price advantages. However, more than other industries, Chinese food producers must be careful to "get it right" the first time when building their brand image in overseas markets. Given widespread fear of imports from China due to the recent tainted milk scandal which has hurt the reputations of even leading producers Mengniu and Yili, these companies must be extra certain they get nothing but good press. Companies should not be overly reliant on distributors as they develop their entry strategies; it is worth the investment in a larger on-the-ground advisory team than distributor alone.
Chinese Companies Go Abroad (Part 10: The Retail Sector)
Part 10: Retail
The following is part ten of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5, part 6, part 7, part 8 and part 9). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's retail industry.
China's retail industry has been changing rapidly since the institution of China's economic reform policies in the early eighties. "Retail" was fundamentally different prior, when demand consistently outstripped supply and retailers merely sold whatever factories produced without concern for consumer preferences or competition from other retailers. Before the 1990s, consumers went to department and mom & pop stores for any/ all of their shopping needs. Only in the early 1990s did other types of retail stores such as supermarkets, convenience stores, and specialty stores come into being. Retail revenue growth has substantially outpaced China's rapid annual GDP growth since. In 2007 retail revenues totaled 8,921 billion RMB, a 16.8% year on year increase. We expect 2009 to see 16-18% retail sales growth, even in the face of a global recession as Chinese consumers continue to spend and remain relatively optimistic.
Even compared to other mainland Chinese industries, the retail industry is quite young, and farther behind in the move abroad. However, while only one of ten respondents had made a meaningful push into overseas markets, expansion abroad is on the minds of many respondents, and many are already developing plans as to how to best realize this goal.
Reasons for Staying Home
Of those companies who do not plan to move overseas within the next five years, most companies' main reason is that they are prioritizing opportunities at home. As one company told us, "the domestic market itself is still large for us. Our current market share is only about 10%. We want to gain more market share at home before we make any plans to go abroad." Given the young status of the domestic Chinese retail industry, many companies feel there is much more work to be done at home in terms of building capital and resources before they can begin to consider moving overseas.
Currently the majority of Chinese retailers are still regional. Given the tremendous diversity between regions in China in terms of disposable income, consumer sophistication and product needs, competition, local government policy and a host of other factors, expanding domestically can be a big enough challenge in and of itself. Many companies have had enough trouble managing their supply chains as they expand throughout China to discourage them from making the move overseas in the near future. Even Bailian Group, China's largest retail company, is still working to establish itself as a truly national chain, currently focusing on strengthening operations in Shanghai and the surrounding Yangtze delta area. As competition increases at home especially due to market entry of foreign chains such as Wal-Mart (WMT), Home Depot (HD), and BestBuy (BBY), companies like Hualian, Lianhua, Suning and Gome have their hands full operating at home, let alone going abroad.
Furthermore, many of these companies feel development across China is a crucial step that must be taken before any meaningful attempt can be made to move overseas. Unlike in other industries where companies can rely on OEM or pure export at first, retail companies must start straightaway with the more challenging steps of localizing management, developing and managing local supply chains, managing logistics, and a wide range of company-specific issues to begin the process of moving overseas. The initial investment too is enormous and has to fit local tastes right away as it is hard to resurrect a failing retail outlet. Many respondents figure that developing first into other regions of China will help them gain experience in managing cross-regional operations and develop skills crucial to expanding abroad.
Retail Pioneers
The difficulties China's young retail industry faces at home have limited Chinese retail companies' expansion abroad to date. Still, the majority of large industry leaders consider expansion abroad an important future goal. One pioneering company, the Beijing Hualian Group (SHA:600361), is already succeeding overseas, and China's largest appliance retailers, Gome and Suning, are taking steps to prepare for their own move. However, Gome's development plans might be curtailed as its founder, Huang Guangyou, has just been arrested for reputed financial improprieties.
Leading retailer Beijing Hualian Group took its first step overseas in 2005, when it purchased Seiyu-Wing On, a Singapore department store chain, for S$4 million SGD ($2.36 million USD). Hualian chose to make Singapore its first stop overseas due to lack of language barrier and cultural similarities with China, especially in retailing culture. In order to learn more about the local market and guarantee stability in terms of procurement, sales, and marketing, Beijing Hualian kept Seiyu's local executives and employees and only changed the store name in 2007 from Seiyu to BHG ("Be Here for Good Things", and Beijing Hualian Group). BHG smartly hired a PR company to help with its re-branding campaign. In addition to orchestrating events and promotions in-house, BHG tasked its PR partner with communicating its growth and success to consumers by publicizing its corporate strength, excellent service, and innovations in retail.
Since 2005, BHG has opened another store in Singapore and brought the international brand name back to China to help boost sales in a struggling Hualian, as the mainland locations are called, in Guangzhou. BHG hopes to move into other markets in Southeast Asia such as Thailand and Malaysia when the timing is right.
BHG's success should be inspiring to companies like Gome and Suning. China's largest appliance retailer, Gome opened its first store in Hong Kong in 2003, where it now has fourteen locations including one flagship, and over 30% of total market share. It entered Macao in 2006, where it currently has three locations. Suning, China's second largest appliance retailer, plans to open locations in Hong Kong in 2010. While neither of these respondents expressed specific plans to begin the move outside China within the next five years, both retailers plan to use their experience in the Hong Kong and Macao markets as a tool to prepare themselves for such expansion.
Going Forward
While the challenges facing China's retail industry are not insignificant, CMR is optimistic for these companies in their move abroad long-term, once international consumer spending picks up again. Many international chains like Sears (SHLD) or Macy's (M) will have difficulties in the recession which will give Chinese firms the opening to move abroad. Going forward, Chinese retailers should learn from what companies like BHG have done well. In particular, BHG was smart in the careful and deliberate way it established itself in Singapore. Like BHG, retail companies going abroad should consider M&A or partnerships with an existing local retailer, keeping the local executives and management team for at least two years after entering the market, waiting to change the store name until new operations are running smoothly, and hiring third party advisors such as a PR team on the ground to help win the hearts of local consumers and team members.
The following is part ten of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5, part 6, part 7, part 8 and part 9). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's retail industry.
China's retail industry has been changing rapidly since the institution of China's economic reform policies in the early eighties. "Retail" was fundamentally different prior, when demand consistently outstripped supply and retailers merely sold whatever factories produced without concern for consumer preferences or competition from other retailers. Before the 1990s, consumers went to department and mom & pop stores for any/ all of their shopping needs. Only in the early 1990s did other types of retail stores such as supermarkets, convenience stores, and specialty stores come into being. Retail revenue growth has substantially outpaced China's rapid annual GDP growth since. In 2007 retail revenues totaled 8,921 billion RMB, a 16.8% year on year increase. We expect 2009 to see 16-18% retail sales growth, even in the face of a global recession as Chinese consumers continue to spend and remain relatively optimistic.
Even compared to other mainland Chinese industries, the retail industry is quite young, and farther behind in the move abroad. However, while only one of ten respondents had made a meaningful push into overseas markets, expansion abroad is on the minds of many respondents, and many are already developing plans as to how to best realize this goal.
Reasons for Staying Home
Of those companies who do not plan to move overseas within the next five years, most companies' main reason is that they are prioritizing opportunities at home. As one company told us, "the domestic market itself is still large for us. Our current market share is only about 10%. We want to gain more market share at home before we make any plans to go abroad." Given the young status of the domestic Chinese retail industry, many companies feel there is much more work to be done at home in terms of building capital and resources before they can begin to consider moving overseas.
Currently the majority of Chinese retailers are still regional. Given the tremendous diversity between regions in China in terms of disposable income, consumer sophistication and product needs, competition, local government policy and a host of other factors, expanding domestically can be a big enough challenge in and of itself. Many companies have had enough trouble managing their supply chains as they expand throughout China to discourage them from making the move overseas in the near future. Even Bailian Group, China's largest retail company, is still working to establish itself as a truly national chain, currently focusing on strengthening operations in Shanghai and the surrounding Yangtze delta area. As competition increases at home especially due to market entry of foreign chains such as Wal-Mart (WMT), Home Depot (HD), and BestBuy (BBY), companies like Hualian, Lianhua, Suning and Gome have their hands full operating at home, let alone going abroad.
Furthermore, many of these companies feel development across China is a crucial step that must be taken before any meaningful attempt can be made to move overseas. Unlike in other industries where companies can rely on OEM or pure export at first, retail companies must start straightaway with the more challenging steps of localizing management, developing and managing local supply chains, managing logistics, and a wide range of company-specific issues to begin the process of moving overseas. The initial investment too is enormous and has to fit local tastes right away as it is hard to resurrect a failing retail outlet. Many respondents figure that developing first into other regions of China will help them gain experience in managing cross-regional operations and develop skills crucial to expanding abroad.
Retail Pioneers
The difficulties China's young retail industry faces at home have limited Chinese retail companies' expansion abroad to date. Still, the majority of large industry leaders consider expansion abroad an important future goal. One pioneering company, the Beijing Hualian Group (SHA:600361), is already succeeding overseas, and China's largest appliance retailers, Gome and Suning, are taking steps to prepare for their own move. However, Gome's development plans might be curtailed as its founder, Huang Guangyou, has just been arrested for reputed financial improprieties.
Leading retailer Beijing Hualian Group took its first step overseas in 2005, when it purchased Seiyu-Wing On, a Singapore department store chain, for S$4 million SGD ($2.36 million USD). Hualian chose to make Singapore its first stop overseas due to lack of language barrier and cultural similarities with China, especially in retailing culture. In order to learn more about the local market and guarantee stability in terms of procurement, sales, and marketing, Beijing Hualian kept Seiyu's local executives and employees and only changed the store name in 2007 from Seiyu to BHG ("Be Here for Good Things", and Beijing Hualian Group). BHG smartly hired a PR company to help with its re-branding campaign. In addition to orchestrating events and promotions in-house, BHG tasked its PR partner with communicating its growth and success to consumers by publicizing its corporate strength, excellent service, and innovations in retail.
Since 2005, BHG has opened another store in Singapore and brought the international brand name back to China to help boost sales in a struggling Hualian, as the mainland locations are called, in Guangzhou. BHG hopes to move into other markets in Southeast Asia such as Thailand and Malaysia when the timing is right.
BHG's success should be inspiring to companies like Gome and Suning. China's largest appliance retailer, Gome opened its first store in Hong Kong in 2003, where it now has fourteen locations including one flagship, and over 30% of total market share. It entered Macao in 2006, where it currently has three locations. Suning, China's second largest appliance retailer, plans to open locations in Hong Kong in 2010. While neither of these respondents expressed specific plans to begin the move outside China within the next five years, both retailers plan to use their experience in the Hong Kong and Macao markets as a tool to prepare themselves for such expansion.
Going Forward
While the challenges facing China's retail industry are not insignificant, CMR is optimistic for these companies in their move abroad long-term, once international consumer spending picks up again. Many international chains like Sears (SHLD) or Macy's (M) will have difficulties in the recession which will give Chinese firms the opening to move abroad. Going forward, Chinese retailers should learn from what companies like BHG have done well. In particular, BHG was smart in the careful and deliberate way it established itself in Singapore. Like BHG, retail companies going abroad should consider M&A or partnerships with an existing local retailer, keeping the local executives and management team for at least two years after entering the market, waiting to change the store name until new operations are running smoothly, and hiring third party advisors such as a PR team on the ground to help win the hearts of local consumers and team members.
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