Just Think ahead

It is estimated that Chinese people consume tea of 0.36kg per person a year, which is a huge market, considering the 1.3 billion Chinese population and 3% annual growth rate.

Lipton, a brand under Unilever UK, is No.1 market share in China. In 2008, Lipton’s production in China is about 23 billion RMB, which is almost equivalent to Chinese total local tea production of 30 billion RMB. It’s a wonder that one brand could be placed on the par of Chinese whole tea industry!

When we track Lipton’s operation in China, something of his business secrets and key success factors could be smelled out.

Unique brand positioning

Basically, Lipton positions himself in fashionable young office workers. By 5 years, Lipton has successfully established an international brand image of fashion, urbanization, and easy life by marketing in high-end consumer places and medias of film, TV, fashion magazine, web novel, etc. which attracted great number of young white collars.

Lipton’s great breakthrough exists in applying modern distribution channels in adequate like hypermarket, 24-hour convenient chain store, with Unilever strong finance supports, which is quite different from Chinese traditional tea distribution of professional wholesale marketplace and retail brand shop. Thus, Lipton wins the market far head through rapid access to consumers.

Lipton’s package is another selling point. When Lipton taps Chinese market in 1992, its unique package of disposable little bag, seldom seen in local market, is healthy, convenient, simple and fast to use, which closely meets fast-pace office life. By comparison, Chinese local tea in bare and bulk package is most often consumed on slow-pace family leisure time.

Continuous product development and innovation   

Lipton makes market research every year with annual budget of about 0.7% of his world sales of 1.5 billion GBP (2.8 billion USD or so). These commercial research cover tea trend, consumers’ usage and habit, preferences of color, taste, package, etc. and key drive factors for consumer’s tea consumption.

Lipton engages in R&D all the time in China and has rich product line. As the black tea being accepted widely in China, Lipton launches his green tea and Jasmine tea to meet Chinese consumers’ special tastes. In 2004, Lipton introduced instant tea series like milk tea and lemon tea. In 2005, herbal tea series are also been put on market with great Chinese characteristics.   

Localization of the procurement and production

The raw material of Lipton tea is sourced from all over the world, and processed and manufactured in local factory. Lipton Chinese factory is located in Hefei city, the middle of China. This factory buys semi-finished tea in China, and then makes processing. The  production could reach 20,000 tons by 2010, both for Chinese local market and for overseas like US, Canada, Singapore, Japan, Australia, etc.

By localization, the cost of production is reduced greatly.

A brand with unique positioning and operation of localization are threshold to open Chinese market.

China has been world’s largest building material market both in production and in sales. It is estimated that the production of China building material industry would surpass 1,000 billion RMB with the increasing rate of 3%~4% higher than GDP’s growth.

The enormous market and the rapid growth have attracted lots of world-famous building material retailers to flock in China since 1990’s. JyS analysis these tycoons’ gain and loss in China based on the facts.     

B&Q

As European No.1 building material retail giant, B&Q set up its first chain store in Shanghai China in 1999. After buying OBI China, the number of B&Q shops is expanding rapidly with over 60 in 26 cities.

However, as the world financial crisis and Chinese real estate market downturn, especially for excessive expansion for his own, B&Q suffered a great loss in China of over 500 million RMB by Jan. 2009.  B&Q has to cut off most of ex-OBI’s store in middle-sized cities which are not profitable all the time.

B&Q president of Asian-pacific area said that they had never lost confidence in the Chinese market and would never retreat because of temporary loss. In fact, a restructuring strategy with 40 million US$ investment for 2009~2010 years has been made that covers upgrading the remain 41 chain stores, improving single store’s profit by reducing 17 store’s business area, and also training his own promoters and employees.

Although the speed of store development is slowdown, B&Q is still the largest retailer in Chinese building material market. With its internal restructuring and operation improvement, B&Q would probably be the largest winner in China in future.         

OBI

As world’s earliest and No. 4 largest building material retailer, OBI came into China in the late 1990’s. Unfortunately, OBI has had to leave China with a heavy heart after paying a high tuition fee for its wrong operation strategy in China.

Firstly, OBI loses to its competitors in strategic location. As we all know, site selection and layout is essential to chain-store retail industry. OBI’s principle of locating middle-sized city makes Wuxi (Tier 2 city) of Jiangsu province the location site for his first store. By the time of acquisition, 70% of OBI stores are located in tier 2 cities (middle-sized), while more than 60% of B&Q stores in tier 1 cities (like Shanghai, Beijing, Guangzhou, etc.) Remember, in Chinese tier 2 cities, 90% of building material sales are from irregular marketplaces, for local consumers prefer to lower price.

There are also problems in OBI’s product layout. OBI displays lots of barbecue appliances in store which are actually not popular in China because most Chinese people do not have gardens in living house as Westerners do. Many fitting tools are showed near the exits. But Chinese consumer seldom makes a DIY in house. The German pattern of horticulture is also unrealistic in China.  

It is not strange for OBI’s failure in China since he does not adjust his Chinese market strategy and operation in accordance with local characteristics.

Home Depot

Home Depot, the world’s largest building material giant and US No.1 retailer, seems to have been a little slow in the pace of entering Chinese market. To speed up, Home Depot adopts the strategy of merger and acquisition (M&A) which could be a short cut.

However, after B&Q buying OBI China, Home Depot faces more difficulties in finding a fine M&A target. After long exploration and negotiation for several years, Home Depot finally purchased 12 chain stores from HomeWay, a Chinese local retailer in the late of 2006, most of which locate in north China.

Home Depot started his China business formally in August 2007 after a series of integration and reconstruction of the chain stores. Comparing with B&Q’s fine layout in China with 41 stores, Home Depot has been left far behind. On generally, the quantity of Home Depot stores has to be triple to profit. M&A is still a way for fast growth in China.

Who is the next?  

Leroy Merlin

This famous French building material retailer started its sourcing business in China as far as 1990. Not until late 2004, Leroy Merlin opened his first store in Beijing. Leroy Merlin implants his French business model into China directly, only leading to confusion. And then he copies B&Q’s operation in China in every aspect but the pace of expansion. Till now, Leroy Merlin opens only 2 chain stores in China. Almost no one knows Leroy Merlin, let alone shopping there!

No size no competitiveness as far as the development of chain stores is concerned. Leroy Merlin is in an embarrass position in China, and finally recognizes his serious situation and gives up the philosophy of focusing on the quality of single store rather than the speed of expansion.

It is said that an acceleration plan is put on the agenda. This company is rushing to Shanghai and other city for site visiting, and M&A is also in consideration.   

Despite the huge market, Chinese building material market is far from mature at present. Actually, more than 80% sales in China happen in simple and humble marketplaces or hardware stores on roadside, often scattered in temporary construction with little supervision. But in the next 3~5 years, the sales from modern chain stores is estimated to clime to 50%~80% in tier 1 cities like Shanghai, Beijing, Guangzhou, etc.

Professional chain stores with fine guarantee of quality, return, exchange, and after-sale service will become the most popular distribution in the near tomorrow in China. After the magnates complete their layout in China, they may enjoy a rich harvest for their devotion.

Generally speaking, there are three types of corporations for any foreign investor to establish in China, namely, WFOE, EJV, and CJV. To know which one is more appropriate for you, you should have a profound understanding of the strong and weak points among them. Here JyS presents you the article for this topic. Any discussion or doubt when you plan to invest in China, please feel free to contact us.

Wholly Foreign Owned Enterprise (WFOE)

WFOE is a Limited liability company wholly owned by the foreign investor(s). The amount of registered capital, which is subscribed and contributed solely by foreign investor(s), is dependent upon such factors as Business Scope and Location. For instances, the minimum registered capital in Beijing, Shanghai, Guangzhou, and Shenzhen, for various industries are given below:

It is worth mentioning that USD$140,000 is an ideal registered capital for all kinds of WFOE. With USD$ 140,000 investment, it’s easy to get approved from local Chinese government. Initial Paid-up would be 20% of the registered capital; the balance should be remitted within 2 years.

Advantages of WFOE

1.        Independence and freedom to implement your own strategies without having to consider the involvement of the Chinese partner

2.        Greater efficiency in operations, management and future development

3.        Better protection of intellectual property and technology

4.        Full control of human resources

Disadvantages of WFOE

1.        Lack of Chinese partner and local contacts (A Chinese partner may have the necessary relationship (“Guan Xi”) to secure authorization of certain projects, or have particular know-how, technology, assets or resources which would not otherwise be available)

2.        More time and effort would be taken to hire high-caliber professionals or to build sale’s distribution in China.

3.        Unable to obtain cheaper alternatives of land acquisition (for joint ventures)

4.        Huge investment involved implies higher risks.

5.        More tougher to obtain Chinese government support

Joint Venture (JV)

A joint venture is a business arrangement in which the participants create a new business entity or contractual relationship and share investment and operation expenses, management responsibilities, and profits and losses.

The Chinese authorities encourage foreign investors to use JV in order to obtain advanced technology and management skills. In return, foreign investors can enjoy low labor costs, low production costs and a potentially large Chinese market share.

Advantages of joint venture:

1.        Compared to Wholly Foreign Owned Enterprise (WFOE), joint venture reduces capital expenditure as well as manpower, so lowers your business risk.

2.        With joint venture, it’s easier to obtain capital, technology as well as local society and government support.

3.        Joint venture allows the firm to enjoy a higher degree of marketing control which would shorten the time to access local market.

Disadvantages of joint venture

1.        Compared to OEM, joint venture requires the foreign investor to pump in more funds which results in higher risks

2.        Negotiation on cooperation may take a long time before an agreement is settled.

3.        Due to culture differences, misunderstandings and conflicts between two parties might happen from time to time. Therefore, communication and coordination are important.

4.        Both parties involved do not have the autonomy of a sole proprietorship in the decision making process.

There are two types of Joint venture, Equity Joint Venture (EJV) and Contractual Joint Venture (CJV). 

Equity Joint Venture (EJV)

Equity joint ventures are the second most common way of investment in China and also the preferred manner as Chinese government is concerned. Joint ventures are usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner.

An equity joint venture is a partnership between an overseas and a Chinese individual, company or enterprise. Companies in an equity joint venture share both mutual rewards and risks. In general, profit and risk sharing in a joint venture are proportionate to the equity of each partner in the joint venture.

There are specific requirements for the management structure of a joint venture but either party can hold the position as chairman of the board of directors. Investors are restricted from withdrawing registered capital during the duration of the joint venture contract.

PRC laws governing joint ventures require that the foreign party contribute no less than 25% of the registered capital. There is no minimum investment for the Chinese partner(s).

Contractual Joint Venture (CJV)

In a Contractual Joint Venture (CJV), the parties involved may operate as separate legal entities and bear liabilities independently rather than as a single entity. A CJV may also be registered as a limited liability entity resembling an EJV in organization and operation.

There is no minimum foreign contribution required to initiate a CJV, allowing a foreign company to take part in an enterprise where they preferred to remain a minor shareholder. The contributions made by the investors are not required to be expressed in a monetary value and can be in form of labor, resources, and services, which are excluded in the EJV.

Profits in a CJV are divided according to the terms of the CJV contract rather than by investment share, allowing a more flexible schedule for return on investment.

To summarize, CJV enjoys greater flexibility in registered capital, cooperation, organization, management, and profit sharing, etc.  

Differences between EJV and CJV

 For an EJV:

1.        Each party must make cash or permitted contributions in proportion to its subscribed percentage of the EJV’s registered capital.

2.        Profit must be distributed strictly in accordance with the parties’ respective percentage shareholding of the registered capital of the EJV.

3.        Upon dissolution of the EJV at the expiry of the term of operation, the EJV’s net assets are to be distributed to each party in accordance with its respective shareholding of the EJV’s registered capital.

For a CJV:

1.        A party (typically but not always, the Chinese party) may contribute non-cash intangibles as “cooperative conditions”. Such “cooperative conditions” may consist of market access rights, plant or office owned or leased by the party that are not subject to clear valuation, etc.

2.        Profit sharing in a CJV need not be made strictly in accordance with the parties’ respective percentage shareholding of the registered capital of the CJV, but can be made in accordance with the agreement of the parties.

3.        Upon dissolution of the CJV at the expiry of the term of operation, the CJV’s net assets may be transferred to the Chinese party without compensation