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Chinese firms aim big in India
Surajeet Das Gupta in New Delhi | April 29, 2006
If you ask a Haier dealer which country the brand belongs to, don't be taken aback if he replies with authority that it is "Made in Germany".
When the Chinese appliances major undertook a dipstick survey among consumers across the country on the origin of the "Haier" brand name, a whopping 90 per cent thought it was a European company. But that isn't rankling company executives at all.
Haier has consciously chosen a communication campaign, which is quiet about the company's parentage and simply plays upon its global positioning - as the world's second largest appliances company.
Admits T K Banerjee, president and CEO of the company in India: "We have adopted a strategy where the country of origin takes a backseat and we sell our global strength."
It's a predicament that has confronted Chinese companies trying to make a dent in the Indian market for years - the perception that Chinese companies manufacture cheaply priced products of low quality and durability. And it's a stigma, which has stuck, reinforced by the failures of Chinese companies that once flooded the Indian market with rock-bottom prices and quality.
In the late 90s, consumer electronics major Konka closed shop after struggling for a while, two-wheeler companies like Monto Motors announced grandiose plans without following through, and TCL (which is coming back with a vengeance) failed to impress customers despite its partnership with a local company.
But that image might be changing dramatically. The new Chinese bigwigs from Haier to telecom equipment major Huawei or Zte Corp, from PC maker Lenovo (which bought IBM's PC business globally) to China's number one mobile phone maker Ningbo Bird, from two-wheeler company Guang-zhou Motors to a host of steel majors like Bao and Capital (which want to source scarce iron ore and make steel), are all making a grim but determined effort to change the rules of the game.
Price is suddenly no longer the sole and overriding factor. Instead the buzzword is high-tech technology, investing in brand building and leveraging a strong R&D base, which helps them in churning out products that can match the offerings of US and European companies.
And of course, reinforcing their global power - for these are companies, which have already broken successfully into the markets of Europe and US with their products and services. Says Banerjee, "The earlier Chinese companies concentrated on the lower end, playing only on the price advantage. India was not a focus area and their experience in this market was very limited."
Technology, quality and delivery of high tech products are in. Understanding the Indian market - which is not only about price but is value sensitive - is the new buzzword in the boardrooms of Chinese companies.
Explaining the new thought process of Chinese companies, Wang Wei Jun, chairman of Huawei Telecommunications in India, says: "This will be a crucial year for us as large equipment orders will be placed on vendors by telcos. We will battle it out, leveraging our strong R&D base, product quality and price combination. But that doesn't mean we will be the lowest price bidders."
No doubt many Chinese companies are virtually overthrowing the low-price equation and are leveraging their technological edge in manufacturing to command premium pricing. Take PC maker Lenovo, which has identified India as a new focus area. That is reflected in the fact that this was the second country (outside China) where it launched its home PC models under the new Lenovo 3000 PC series.
Says Neeraj Sharma, managing director of Lenovo, South Asia: "The aim is to stress that we are offering a premium product and features that competitors don't have."
So, for instance, most of the PCs in this range are about 5-10 per cent higher in price than the competition. And the series was launched with a premium offering, which comes with a 20-inch TFT screen, is ideal for TV viewing and also has a jog dial that is unavailable in any competing PC. The price tag is equally steep: Rs 80,000.
Lenovo is simultaneously building its brand. Sharma says that unlike IBM, which followed a global brand building and communication strategy, Lenovo is looking at indigenising itself to attract the local consumers. So it has hired film actor Saif Ali Khan and sister Soha Khan as brand ambassadors to sell the 3000 series.
But even before the launch of its new PCs, in a master stroke Lenovo tied up with Kaun Banega Crorepati, where the high-visibility computer used on the show is a Lenovo.
But Lenovo is not the only company, which is trying to create a premium, top of the line image - even Haier is cashing in on its technological and global expertise to woo the consumers.
To reinforce the fact that its products are reliable, it offers a 5-year warranty on washing machines, compared to the industry average of one year.
Secondly, in most products - from fridges to washing machines and ACs - it charges a premium of around 5 per cent on price so it is seen as a top-of-the-line product in the category.
Thirdly, it has chosen only the top-class dealers in each city, who stack the best brands even if that means taking more time to build a network.
Fourthly, it is pushing in new features which the competition lacks, to leverage its technology plank - for instance, a washing machine which does not need detergents, or a new AC which saves 50 per cent more power than competing products.
Of course, it has also assiduously avoided getting into the direct-cool refrigerator market for the time being - which, Banerjee says, has become a commodity market with no margins. "Our strength is in our superior technology which is reflected in fridges in the upper and middle end of the market. In direct-cool, technology is not crucial at all, only price is," points out Banerjee.
That might sound unusual for a Chinese company. But that does not mean all Chinese companies are eschewing their pricing advantage. What they are doing is combining it with technological power. And a closer understanding of the market.
As latecomers in the telecom market, Huawei was aware that it had to do something different to sell its equipment in a market already crowded with European and US vendors. So it hit upon an innovative concept - it offered equipment customised to the need of the telco, unlike European companies which prefer to push standardised equipment in India.
Says a Huawei executive: "This ensures lower failure rate, and of course better integration within the network. What we do is listen to the customer's need and then tailor-make the equipment."
Of course, they are also playing the pricing game. Industry experts say they offer prices which are 20 to 30 per cent cheaper than European companies. But that is based on their cheaper cost of R&D.
Points out Wang: "Forty-eight per cent of our workforce (18,000 worldwide) globally is in R&D, which is unmatched. We have 1,200 R&D staff in our Indian development centre and we supply equipment in over 100 countries, including top companies like Vodafone, British Telcom and Telefonica. We are cheaper as our R&D personnel cost half that of a European company, and we manufacture in large volumes."
The Chinese company is also looking at virgin markets in the telecom space. It is among the top three global equipment suppliers for 3G (with 18 contracts) and that is the market where they hope to give the Europeans a run for their money in India. Says a senior executive of the company: "It's a new market where we will not be second fiddle to Europeans or the Amercians."
The ability to deliver cutting-edge mobikes with a pricing advantage has also attracted the Kolkata-based Xenitis group (which makes PCs) to tie up with Guangzhou Motors. So how will an unknown player manage to sell in a market with an unknown Chinese two-wheeler company, which is dominated by big daddies like Bajaj and Hero Honda? Especially when most other Chinese two-wheeler collaborations have failed.
Ambar Mukherji, president of the Xenitis group, offers some answers. "Unlike the earlier players, which were very small, our partners are among the top five two-wheeler manufacturers in China and produce large volumes. Plus, it has a collaboration with Honda to make the engines which will be bought in India. Thirdly, Guangzhou is already present in Bangladesh in the last two years and has demonstrated that it can make rigged bikes which we require in India."
The goal, of course, is to sell the mobikes at 30 per cent lower price than the competitors and sell 5,000 bikes a month initially in east India - Xenitis's home-grown market.
Of course, every Chinese company is not like a Haier or Lenovo or even Huawei, which has cash to build a brand from scratch. Especially in areas like the mobile handset, which is dominated by the Nokias of the world.
Mobile maker Ningbo Bird has found an interim solution - sell their entry-level phones directly to the telcos who would then bundle them with an offering to their customers. So the company has tied up with Airtel, which offers a Bird branded phone with a connection in north and east India for an attractive Rs 1,399.
Says Adarsh Shastri, director-marketing, in Ningbo Bird Sales in India: "The alignment will create confidence among customers about the Bird brand. It will give us a platform to increase our direct distribution channel through which we can bring in higher-end models."
Of course, even while 70 per cent of the company's mobile phones are sold through operators, Bird is not ignoring direct retail sales. It is creating its own distribution system, albeit slowly. But even here it is passing on 5-7 per cent higher margins to retailers than competition to stack and push their products.
So, have the new crop of Chinese companies learnt the ropes in India? If competitors are to be believed, they are a long way off. The Koreans who hit India from nowhere took over 4-5 years before their brands (Samsung, LG, Hyundai) were established in a market which only considered the Japanese for quality products. But unlike the Chinese they made heavy investments upfront in putting up factories, and spent much more cash in promoting their brands aggressively in India.
That is why the Chinese presence is still not reverberating across the country. Competitors say that despite Haier's claims, its market share in most segments is less than 2 per cent (Haier argues it has 3 per cent in refrigerators and 8 per cent in ACs), and is in fact falling.
Says a senior executive of a Korean consumer electronics giant: "They are nowhere, they have delayed their plans to invest in a manufacturing unit despite announcements. If you want to be a long-term player you need to invest money in India like the Koreans did, otherwise you will fail. Consumers are chary of Chinese brands, and they are being impelled to cut prices to sell."
In the two-wheeler segment too, Indian competitors don't see much leeway for the Chinese - they have, it seems, missed the bus. Says R L Ravichandran, CEO of Enfield India, the two-wheeler division in Eicher: "Indian manufacturers are offering Japanese-quality bikes at Chinese prices. India's two-wheeler market is very evolved - so I don't think they can make a dent."
In mobile phones too the pricing advantage of Chinese players has been neutralised by the fact that all the global majors have set up a manufacturing facility in that country.
Adds a leading mobile phone manufacturer, "The market will be divided among the big four, so the Chinese companies will be peripheral players. More importantly, they are losing their price advantage to European and US companies who also manufacture in China but give the assurance of a brand name."
Yet there are some other areas where the jury is divided - like in telecom equipment or in the PC space where the impact of Chinese companies is being felt globally.
Argues Samir Kochar of Skoch Consultancy, which studies IT trends: "Lenovo has a price advantage, but to sell in the enterprise space you need domain expertise on verticals. I don't see that verticalisation and domain expertise being built in Lenovo yet." But with the entire IBM staff in the Lenovo fold, the transition for the company to a global player might be much easier.
In the telecom equipment space, however, many see Huawei as tough competition. But the chief impediment that they face is suspicion on security concerns from the Indian government as a result of which their application to set up a fully owned manufacturing facility in India has been hanging fire for over a year. Huawei executives lament that without permission for trading it has to depend on Indian partners to bid for government contracts - and that has put them at a disadvantage.
But their competitors are watching them carefully because of their price warrior status combined with reasonable quality.
Says a top executive of a US based telecom equipment company: "Sure they are making a dent, and as they are not legacy telco companies their cost structures are lower. And their pricing strategy will keep all of us on our toes." But warns a CEO of a leading European vendor: "Their pricing is non-transparent and they will fail to deliver as they have done earlier. That could jeopardise the clients' plans of a roll out."
It has not been a roller coaster ride for Chinese companies grappling with the realities of a market beyond China - and as complex as India. The suspicions still remain. So do issues on quality. But bit by bit, the perceptions are changing - led by determined Chinese companies who are looking at India as a long-term destination. The question is whether they can repeat the Korean magic and break open the Chinese wall forever.
The Dragon's Footsoldiers
With sales of over Rs 350 crore (Rs 3.5 billion) from India, Haier has only 5 per cent of the turnover of Korean giant Samsung. But the company claims it has already sold 0.5 million products in the first year of its operation in India. And though its competitors say it has less than 2 per cent market share in most of the areas it operates, Haier claims it has a 4 per cent share of washing machines, 8 per cent in air-conditioners and 3 per cent in refrigerators. However, most of its refrigerators are in the over-400 litre category.
The $8.2 billion vendor is already the number one new generation network as well as access network supplier globally. And in India it has over 70 per cent share of the broadband equipment bought by BSNL as well as 100 per cent share of MTNL's CDMA core network. It will now bid with a local partner for the 60 million lines GSM equipment order from BSNL - breaking into a bastion dominated by US and European companies. Hopes to get contract to sell soft switches to Reliance.
One of China's largest mobile brands, the company is facing rough financial weather with mounting losses and loss of market share to international mobile giants like Nokia and Motorola in its domestic market. In India, however, the company claims it sells over one lakh phones a month - but competitors say that's a myth.
The $13 billion PC giant has transformed from being the largest PC maker in China to a global player with the acquisition of IBM's PC business globally. It is already the number two brand in terms of value in India with over 10 per cent of the market. And it is headquartered in New York.
Guangzhou MotorsAmongt the top five mobike companies in China, Guangzhou Motors hopes that by 2010 it will have an annual production of 15,00,000 mobikes in collaboration with Honda. Xenitis group is investing Rs 300 crore (Rs 3 billion) to set up a mobile plant with a capacity of churning out 3.5 lakh bikes in collaboration with the Chinese giant to make mobikes in categories ranging from 100 cc to 150 cc.