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that it would not hold any equity. The application was rejected again in June 2007 by the Department of Industrial Policy & Promotion (DIPP), which suggested that Starbucks take the 51 % FDI route rather than the franchisee route.
W ith its application being rejected for the second time and amid speculations that the Indian government would further tighten franchisee regulations, Starbucks withdrew its application from the FIPB in July 2007, without giving any date for its Indian debut. A Starbuck, spokesperson said, "Starbucks Coffee International, a wholly-owned subsidiary of Starbucks Coffee Company, notified the ministry of commerce & industry and FIPS that we decided to postpone our entry into India and officially withdraw the application to operate single-brand retail stores in this country. Starbucks is reviewing all options and evaluating how we can proceed related to our entry into one of the fastest growing economies in the world. It is premature for us to announce any new dates.':" The company was also unsure about the involvement of Sharma and Biyani in its future plans. N WITHTHETATAS
In January 2011, Starbucks took a significant step and signed a non-binding m emorandum of understanding (MoU) with Tata Coffee (a subsidiary of Tata G lobal Beverages Limited) (Tata), one among of India's leading providers of premium Arabica coffee beans. Tata Global Beverages was a part of the global Tata Group and the world's second largest tea company. Its brands included Tata Tea, Tetley, Himalayan natural mineral water, and Eight 0' Clock Coffee. Tata Coffee, a subsidiary of Tata Global Beverages, was Asia's largest coffee plantation company and the third largest exporter of instant coffee in the country, which produced more than 10,000 Metric Tonnes (MT) of shade grown Arabica and Robusta coffees at its 19 estates in South India. Its two Instant Coffee manufacturing facilities had a combined installed capacity of 6000 MT. It exported green coffee to countries in Europe, Asia, the Middle East, and North America.
The MoV was signed for sourcing and roasting high-quality green coffee beans in Tara Coffee's facility in Coorg in south India. Both the parties also explored the development of Starbucks retail stores in India. Starbucks' Schultz said, "India is one of the most dynamic markets in the world with a diverse culture and tremendous potential. This MoV is the first step in our entry to India. We are focused on exploring local sourcing and roasting opportunities with the thousands of coffee farmers within the Tata ecosystem. We believe India can be an important source for coffee in the domestic market. as well as across the many regions globally where Starbucks has operanons.v'"
After a year of signing the MoU, Starbucks set up ajoint venture with Tata Global Beverages Ltd. in January 2012. The agreement paved the way for Starbucks to set up cafes in India and for Tata to sell Indian coffee globally. The 50/50 JV was named Tata Starbucks Limited and would own and operate Starbucks cafes branded as 'Starbucks Coffee - A Tata Alliance'. The company planned to open coffee retail stores across the country by the end of the year, starting with stores in Delhi and Mumbai. In a separate agreement, Tata Coffee Lim ited agreed to roast coffee and supply it to Tata Starbucks Limited. and to export to Starbucks Coffee Company. The agreement paved the way for Starbucks to reach consumers in India. The companies agreed to have an expanded range of beverage offerings for Indian consumers and jointly leverage assets and innovation to offer premium products. John Culver, president, Starbucks China and Asia Pacific, stated, "We're very pleased to have found the best partner for Starbucks in Tara - a company that shares so many of the same values for conducting business in a way that earns the trust and respect of our customers and partners (employees). We look forward to bringing the Starbucks Experience to customers in India by off~rin~,~igh ~uality ara?ica coffee, handcrafted beverag~s, locally relevant food, and legendary service. ~ Stating the business advantages of the partnership, Howard Schultz said, "What Tata brings is a unique perspective in terms of real estate acquisition capabilities. the opportunity to integrate Starbucks into Taj Hotels, the ability to brin? fo?d from the Taj into Starbucks stores and the capability that we Just could not do on our own Just tn terms of the infrastructure and distribution."n
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The companies opined that they shared common values of responsible business ethics and a commitment to community. Tata had been working to improve the li~es of c~ffee growing communities in the state of Kamataka. Starbucks, through an initial financial commitment, would support Tate's 'Swastha' _ a school for children with special needs (in partnership. wi~h the Coorg Foundation) and aim to increase its capacity and outreach into the rural communltle~ I.n.th,e cof~ee growing region of Karnataka, Starbucks and Tate also planned to work together on Intt,I8,tJves like promotion of responsible agronomy practices and training for local farmers, .technl~lans, and agronomists 10 improve their coffee-growing and milling skills and other cornmuruty projects,
The two companies started their venture with an investment of $80 million and proposed to start their stores in August or September of 2012, In September, the company announced that the opening of the Starbucks stores had been pushed back and their opening would coincide with the festive season, which started in October. While the company did not give any reasons for the delay, Saloni Nangia, president at Technopak, said, "The store rollouts of international chains usually take time because they involve a lot of groundwork in terms of sourcing ingredients, menu design, and choosing the furniture for the stores. A lot of effort goes into ensuring that stores are at par with international stendards.?" Analysts also opined that the delay might actually work in favor of Starbucks as consumer spending would be at its peak during the festive season.
Finally on October 19, 2012, Starbucks opened its first store in India, in Elphinstone Building, Horniman Circle, Mumbai. On January 24, 2013, it expanded its presence to Delhi by opening 2 outlets, one at Indira Gandhi International Airport and the other at Connaught Place. In January 2012, Culver along with Tata Global Beverages vice chairman, R.K. Krishnakumar, had announced their plans to open 50 cafes by the end of 20 12 with an investment of Rs. 4 billion, but had missed the target. Culver said: "From the Starbucks perspective, we are a publicly traded company. We do not release those figures publicly. We did not do those numbers specifically from a Starbucks perspecrive.?" As of March 2013, Starbucks operated five stores in Mumbai and four in New Delhi.
INITIALRESULTS
When the speculations of Starbucks entering India were on, Shoba Narayan, an Indian columnist, wrote.
" 'D~cent.' co.!!eelor a com.m.ittedsouth Indian coffee connoisseur such as me involves a long, very specific list: It has to be piping hot; theloam must be on top; it has to be bubbly and the bubbles have to be breaking down; it should be served in a stainless-steel tumbler and 'davara', which is the Indian version 01 a saucer,' the color of the drink should not be as dark as cocoa but not too milky either; and the amount 01 sugar should bejust enough to take out the bitternes; but without adding any sweetness to the taste. That's what I would call decent coffee. My dad drinks four cups 01coffee a day and pays 10 rupees per cup at his neighborhood, no~name cafe. I pay 35 rupees for a cup of espresso at Cafe Coffee Day. It still costs under a dollar for the I. -r .... . mos expensive cup OJ coffee In India. How ISStarbucks Somg to get price-conscious Indian consumers who think they are coffee experts to pay US$4/or a talt .Iatte? Lastly, it needs to figure Ollt what the Indian consumer means when they say, All! want IS a simple cup 01decent coffee '. ,,26
However, when Starbucks opened its first store in October 2012 India I . " ,gave awarm we com e to the brand. DUring the early days of Its openm g customers lined up to tak . f h b d d h . ' e a Sip 0 t e ran e ot beverage. The lines stretched so .Iong that a 'one-in one-out' policy . I · ,was Im p ernented After two m ont hS, t h eI mes were gone, but not the enthusiasm of the custome C' . rs. ustomers took hour long treks to reach the stores from different parts of the city Apart f ff . rom co lee and snacks customers alsob augh t S tar b lIC ks tumblers; others took pictures of the cups SI b k' I '., . •arucsogoandthe mtenors to post onF ace b00. k Th ey were also smitten by the taste ofth d. ' 'h e d I h e pro ucr, For many Starbucks becam e t e prererre p ace to ave coffee and hang out with fro ds: d hev di '. . len s, an t ey did not mind paying
8 STARBUCK5' FORAY INTO TEA-DRINKING INDIA ___+-..£.l~..1
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extra for the Starbucks experience. However, there were some who were disappointed. They felt that Starbucks had not priced its products competitively and that the products were very expensive. Nemat Kaur~ a student, said, "It feels like a reasonable amount, but if you're going to pay that every week, It would take a toll on you as a studem.''"
Analysts opined that the response to Starbucks' arrival in India marked the rising consumer wave that was infatuated with brands and the transformation of India from a frugal population to an economic world power that could afford branded products and shell out the extra bucks. India had thousands of coffee shops and small tea vendors known as ella; wallahs. However, with rising incomes, the Indian consumers supported both - they consumed cups of tea on the street during the day and hung out at coffee shops in the evenings. Commenting on the out-of-home consumption trend in India and a steady shift in consumer preferences like coffee becoming a beverage sipped nationwide, Avani Saglani Davda, chief executive of Tata Starbucks Ltd., said "The size of the Indian economy and the rate of growth of the cafe sector, combined with rising spending power and shift in consumer preferences present a tremendous opportunity for US."28Stating the preference of the country's youth, Roberio Oliveira Silva, head of the London-based International Coffee Organization, said "Young people are turning to places like Starbucks because they want a trendy place 10 socialize and can take their iPhones and connect to the free W i_Fi."29
COMPETITION IN THE I.NOIAN CAFE MARKET
In the Indian market, Srarbucks would have to withstand competition from established players like CCD and Barista (who had started almost one and a half decades earlier) and had now entered into newer territories with their cafes on highways and locations such as hospitals and college campuses by trying out new formats like kiosks and coffee carts. These competitors had strengthened their supply chains and refined their menus, and offered an improved experience to the Indian customers. Apart from these coffee chains, hundreds of western-influenced stand-alone coffee shops had mushroomed across the country (Refer to Exhibit rv for Key competitors of Starbucks in India). Starbucks was a late entrant into the market, where CCO had the first mover advantage and was a tough competitor in terms of market experience, number of stores, and thereby number of customers (Refer to Exhibit V for Cafe competition in India). There was also competition in terms of positioning. Starbucks positioned itself as a 'third place' - a place between office and home where people felt comfortable enough to spend their time with friends or relatives, or to have a business chat over a mug of steaming coffee and snacks. The competitors too positioned themselves on the same lines. Costa Coffee positioned itself as a 'fun place', Dunkin' Donuts positioned itself as a food cafe, and CCD's theme was 'sit down' - which implied that everything could be resolved once you sat down and made the cafe your hangout spot. Pricing too was a competing factor. While most of the cafes were premium brands with little price difference, CCO's regular cafe was promoted as an affordable brand. The cafes also competed through localization and personalization in terms of the look of the cafe and items served. Costa Coffee, for instance, used bright colors and lighting for its interiors and its menu contained more cold drinks than its menu in the UK, which was dominated by hot drinks. Barista Lavazza stores, on the other hand, retlected the Italian connection through all things Italian such as art, culture, fashion, etc. Starbucks, which followed personalization everywhere it went also introduced a few things that reflected Indianness. The store interiors were inspired by the culture of different parts of the country. In terms of foods and beverages, Starbucks retained its classic signature items suc.has ch.ocolate"mufflns ~r.cooki.es ~r cakes. Ho.wever, at the ~ame time, some Indian food items like Chicken Tikka Panini, EIRIChlMawa Croissant, Tamarind Peanut Chicken Calzone Murg Makhni Pie, Mutton Seekh in Roomali Roti, and Chai Tea Latte were introduced keeping the palate of the local customer in mind.
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Though Starbucks was a late entrant, it made its presence felt even wit~ .o~ly a few stores. According to Ankur Bisen, vice president of retail and consumer products division at Technop~k. "Foreign brands such as a Costa Coffee or a Starbucks have a huge pull and ther~fore can ~sily milk the market based on their clear-cut positioning. But, as of now, the retailers aren t too worried.?" Competitors in the Indian market were, however, feeling the ~eat of the nC\,l/ entrant and were making moves like positioning themselves better, expanding their menu. openmg more stores, increasing their investments, etc.
LOOKINGAHEAD
India was predominantly a tea drinking nation, with coffee ~oder~tely ~opular .only in so~e southern states. Pamela Boykoff at CNN said, "Most Indians still begin their day with a stearmng cup of milky, sweet chai, and it's unclear whether their taste for coffee will grow. Plus S~bucks' profit margins in India are smaller: It's selling its products at a significant discount so pnces are more in line with Indian standards. III I But Schultz, retorted, "Not any more. Walk the streets of India. There arc so many coffee players doing pretty well. That gives us a lot of confidence that the winds are going to be at our back."n Some analysts like Arvind Singhal at CNN too were optimistic about Starbucks' chances of success in India and said, "Indian coffee market could double in the next five years, hauling in more than $500 million. And Indian consumers - hungry for clean, safe places to get together with friends - may view Starbucks more as a hangout spot than a purveyor of coffee. You could be selling lemonade in Starbucks in india and people would still come.?"
The home grown brands like CCD and Barista pioneered the cafe concept in India in the 1990s and paved the way for foreign coffee chains to join the bandwagon. They redefined the whole coffee drinking experience for the Indian consumer with innovative products and entered newer territories. Consumers too were becoming more open to experimenting with their choice of beverages and foods. Cafe retailing was not just growing but evolving as well. India's urbanization, growing youth segment, and their rising disposal incomes and their aspiration to be part of a global lifestyle and culture were driving this change. Likewise, industry experts believed that with the entry of global heavyweights like Starbucks and Dunkin' Donuts, the segment would mature over lime. However, they opined that it would strengthen the market with heavy investments, new offerings, and formats and help in the broadening of the cafe market. As the coffee shop industry was growing at a rate of 25% in India (adding 100 million coffee drinkers in future) and with the encouraging response that Starbucks stores had gal in the country, the company planned to expand to more locations to tap the vast potential of the Indian market. John Culver, President, Starbucks Coffee China and Asia Pacific, said, "We are excited about the great opportunities that India presents to Starbucks.v" However, in addition to tough competition, the comp.any also had to ~vercome other pote~t roadblocks. A major challenge faced by Starbucks was findmg. a good location at r.easonabl~pnce. With every player targeting a similar customer profile, having the store at the right location was crucial for the company. And the rent-to-sales ratio in India \~as among the highest when compared across global markets. Higher rent costs and lower menu pnces ~u~stremendous. pressure on the company. Moreover, there was an investment of around Rs. 6-8 million that went into each outlet along with a nine year leas Ad" ." - e. wrong eCISlon tn t~rms of real estat~ could mean huge losses for the company over the Ion term and hence it decided to team up WithTate. g term and nence,
The next challenge was employing the talent pool and training them h ' , E'" 1 as per t e company s requirements. extensive tratrung lad to be imparted to the employeesto . .... ensure supenor customer expertence. With every player claiming to offer a unique customerexpe' d S k . nence an taste, tarbuc s needed the best team at each of Its outlets. Coffee chains like CCD a d GI . J nona ean's had set up
10 .._-~------STARBUCKS' FORAY INTO TEA-ORINKING INOlA 221
313-186-1 their own training schools, but it was rough and a riskier proposition for Starbucks as it had just made its entry into the country. Di Bella Coffee India, on the other hand, brought its own baristas and technicians from Australia to Mumbai to train its staff in-house on a weekly basis.
Cost management was yet another challenge faced by Starbucks, amidst a scenario where it had to deliver a cafe experience of the best international standards. In India, every customer looked for value-fer-money offerings. Value-for-money pricing was one of the three success factors - product quality, value-for-money pricing, and customer engagement - which Starbucks could not ignore if it wanted to attract the Indian consumer. In order to satisfy this need of the Indian consumer, Starbucks had to have a competitively priced list of items on its menu (Refer to Exhibit VI for the prices at Starbucks).
Summarizing the market response and Starbucks' plans, Avani Davda, chief executive of Tata Starbucks said, "Till now, we have had a tremendous response to all our outlets in Mumbai and Delhi. We will go where we find customer demand. We see a lot of potential. It's a country of over a billion people. You cannot gauge how much demand there is and will be.,,)3 However, the company did not reveal the destinations or the numbers of the stores that it intended to open in future. But Davda said, "Surely, the southern Indian market is a very important region and is known for its coffee consumption (and production). We'll look at all the opportunities which come our way.?"
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Exhibit I
Starbucks Presence Across the Globe
Asia Europe North America
• Bahrain (14) • Austria (12) • Aruba (3) • China (851) • Belgium (9) • Canada (1,324) • Hong Kong (129) • Bulgaria (4) • Curacao (I) • India (8) • Cyprus (9) • EISalvador (4) • Indonesia (145) • Czech Republic (14) • Guatemala (2) • Japan (989) • Denmark(4) • CostaRica(2) • Jordan (9) • Finland (2) • Mexico (377) • Kuwait (79) • France (82) • Puerto Rico (20) • Lebanon (18) • Germany (167) • The Bahamas (8) • M acau (9) • Greece (36) • United States (13,279) • Malaysia (141) • Hungary (7) • Oman (6) • Ireland (30) Oceania • Philippines (206) • Netherlands (28) • Qatar (12) • Norway (I) • Australia (25) • Saudi Arabi. (73) • Poland (33) • New Zealand (32) • Singapore (87) • Portugal (7) South America • South Korea (556) • Romani. (9) • Argentina (64) • Taiwan (291) • Spain (80) • Brazil (78) • Thailand(171) • Sweden (3) • Chile (43) • Vietnam (I) • Switzerland (52) • Peru (55) • United Arab Emirates (III) • United Kingdom (806)
Transcontinental Africa , ., (Europe and Asia) .-~ ~.~.... • Turkey (179) • Egypt (27) 4,. ~ • Russia (63) ? • Morocco(4)
"Data as oif 2013
Source: "How Many Starbucks are There? ",1'WlVW,loxcel,co m lsbu.x{aq,hlm l
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Starbuck. Financial Information
As of and For the Fiscal Year S ep 3 0 , O ct 2 , O ct 3 , Sep 27, S ep 2 8 , E n d ed 2 0 t2 2 0 1 1 2 0 1 0 2 0 0 9 2 0 0 8
Results of Operations In millions except per share data
Net revenues:
Company-operated stores $ 1 0 ,5 3 4 .5 $ 9 ,6 3 2 .4 $ 8 ,9 6 3 .5 $ 8,180.1 $8,771.9
Licensed stores 1 ,2 1 0 .3 1,007.5 875.2 7 9 5 .0 7 7 9 .0
CPG. foodserv ice and other 1 ,5 5 4 .7 1,060.5 868.7 7 9 9 .5 8 3 2 . I
Total net revenues $ 1 3 ,2 9 9 .5 $ 1 1 ,7 0 0 .4 $ 1 0 ,7 0 7 .4 $ 9 ,7 7 4 .6 $ 1 0 ,3 8 3 .0
Operating income $ 1 ,9 9 7 .4 $ 1,728.5 $ 1,419.4 $5620 $503.9
Net earnings including 0 0 0 - 1 ,3 8 4 .7 1,248.0 9483 3 9 1 .5 3 1 1 .7 controlling interests
Net earnings (loss) attributable 0 .9 2 .3 2 .7 0 .7 (3 .8 ) to non-controlling interests
Net earnings attributable to 1,383.8 1,245.7 945.6 3 9 0 .8 3 1 5 .5 S tarb u ck .
EPS - diluted I.7 9 1 .6 2 1 .2 4 0 .5 2 0 .4 3
Cashdividends declaredper 0.72 0.56 0.36 - ~ sh are
Net cash provided b y o p eratin g 1,750.3 1,612.4 1.704.9 1,389.0 1,258.7 activ ities
Capital expenditures (additions 8 5 6 .2 5 3 1 .9 4 4 0 .7 4 4 5 .6 9 8 4 .5 to property, plant and eq u ip m en t)
Balance Sheet
Total assets $ 8 ,2 1 9 .2 $ 7 ,3 6 0 .4 $ 6 ,3 8 5 .9 $ 5 ,5 7 6 .8 $ 5 ,6 7 2 .6
Short-term borrowings - - - - 7 1 3 .0
Long-term debt (Including 5 4 9 .6 549.5 549.4 549.5 5 5 0 .3 current portion)
Shareholders' equity 5 ,1 0 9 .0 4,384.9 3,674.7 3,045.7 2,490.9
Note: Starbucks fiscal year ends on the Sunday closest to September 30. Thejiscal year elided 0" O ctober 3, 2010 included 5 3 weeks with the 53rd week/ailing in the fourth fiscal quarter. Source: "Starbucks Corporation Fiscal 2012 Annual Report", hltp:llinvestor.starbucks.com, 2012
1 3 •
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E x h i b i t I I I
R'IVIe t a I a ue 0f Coffee in China (in billions of Yuan)
0 INSTANTCOFFEE FRESHCOFFEE • /II 8 /III ""' 6 .. .. ~I 4 .. < t ,.. - '~i- .... II~
2 ~I
0 '06 '0 8 '1 0 '1 2 '1 4
10 billion yuan =$1.60 billion "Data courtesy Euromonttor International
Adapted from Laurie Burkitt, "Starbucks Plays to Local Chinese Tastes", hrrp:l/online,wsj.com. November 26,20/2
1 4
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E xhibit IV
Key Competitors of Starbuck' in India Cafe Coffee Day
Cafe Coffee Day (CCD), a division of the Amalgamated Bean Coffee Trading Company Ltd. (ABCTCL), opened its first store in Bangalore in 1996. By 2013, it had grown to become India's largest coffee retailer, with exports to Europe and the Middle East. Ithad over 1.319 outlets in 140 cities across 28 states." ceo offered everything related to coffee including take-home products and equipment. To attract customers, CCD had also revamped its m enu, C e D stores on National Highways served Indian staples like idlis (rice cakes), dosas (rice crepes), pararuhas (flat bread), and biryani (vegetable rice) to travelers. CCD Lounge customers were allowed to cook up their ow n treats w it h a do-it-yourself menu. CCD functioned in three formats -- lo u n g e s . cafes, and kiosks. The company had plans to expand its chain to 2000 stores by 2014.38 Barista Lavazza Batista, the second largest Indian coffee chain, was established in 2000. It was acquired by Italian coffee products manufacturer Lavazza in 2008 and came to be known as Barista Lavazza. Barista Lavazza, by 2013. operated more than 318 39 outlets and offered menu items like espresso, lattes, cappuccino, and various pastries, in addition to basic coffee. Costa Coffee Costa Coffee was a British coffee retailer which entered into India in 2005, franchised by Devyani International RJ Corp. in India. I t was the first international coffee chain to start operations in India. As of 20 13, it was predominantly operating in the north, east, and western parts of India with 95 stores of which 12 40 were located in Bangalore (South India). In spite of its late entry, Costa Coffee claimed the highest average realization per customer. The retailer was aiming to become a mass market player. I t planned to open new channels such as outlets in airports, multiplexes, etc., in order to maximize its consumer touch points to penetrate deeper into the market. I t was also opening stores with an increased average area of 1300 sq f t to accommodate more customer footfall. Besides, it was adopting location-specific branding strategies to drive footfall and was allowing local store managers to design their own brand strategies. The average age of its customer was 25-28 years, but Costa Coffee aimed to reduce it further by building strong propositions for a younger audience. It had also launched a Facebook page at the beginning of 20II. Dunkin' Donuts In February, 2011, Dunkin' Donuts entered into a franchise agreement with north India-based Jubilant Foodworks, (which also managed the Domino's pizza chain in India) and opened its first store in May 2012 in New Delhi. Dunkin' Donuts earned a unique position globally for pairing coffee with donuts and bagels. It banked on food to capture a share in the Indian coffee market. Ajay Kaul (Kaul), Jubilant's CEO, opined [hat Dunkin' would gradually expand its westernized menu to include indian fare and had plans to look at all formats for the new stores, including 100 to 150 square-foot kiosks. The target was to open 30 outlets in three years and increase to 100 in the next five years."
G loria Jean Gloria Jean's Coffees, was an Australian-owned global specially coffee company. In 2008, it collaborated with a Dubai-based retail group, the Landmark Group, and opened its first cafe in India. By 2013, the chain was operating 15 outlets across New Delhi, Mumbai, Bangalore, Hyderabad, Chennai, and Pune. However, Gloria Jean's regional general .manager: T~ny While, planned to increase that number to 25 by the end of th~ year, and t~en increase It eightfold to 200 by 2014. For the first time, the company was sourcing and roasting coffee beans outside of Sydney; in this case, in India itself.
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Javagreen Javagreen, an Indian chain with a mix of store in store formats ~d indepe~ldenl outlets, w~s started by the Reliance Group in 2003 as just an add-on service ~t.Reh~l1ce Infoc?mm, S WebWorld stores.", As of2013, Javagreen was operational across 10 cities with 90 loca~lons In in Lucknow, New Delhi, Chennai, Bangalore, Hyderabad, Kochi, Ahmedabad, Murnbai, Pu~e. and Kojkara." It opened stores in locales like colleges and office campuses that had a captive audience. In exchange for free space and electricity, the i~stitutions dem~nded a 10% to 20% discount on all of Java Green's offerings. The company aimed at generanng volumes for Java Green and also to bring in subscribers for Reliance Telecom. The Chocolate Room Two Indian Techles as master franchisees brought Australia's The Chocolate Room (TeR), to the Indian coffee market in 2007. TCR had 40 outlets by 20II and aimed to add 10 more by 44 2012 , comprising standalone shops and kiosks in malls. Cafe M ocha Cafe Mocha opened its first store in Mumbai in December 200I. With 19 operational outlets across the country and its own central kitchen, Mocha has developed a reputation for providing a unique menu along with a Mediterranean look catering to the younger generation. Others
There were other coffee chains that operated in the Indian market like Brewberrys Cafe , which opened in 2008 in Vadodara, Gujarat, and had 27 stores across India by 2013. Blue Foods, the master franchisee of the US-based coffee chain Coffee Bean & Tea Leaf, launched 16 stores in India. Cafe Pascucci was an Italian coffee brand which entered India with the launch of its outlet in Bangalore. Madhura Beverages was the exclusive master franchisee for this brand in India and planned to set up 60 outlets across the country. Di Bella Coffee India was an Australian coffee manufacturing company, which opened a chain of coffee shops in Mumbai and Hyderabad. The chain operated 12outlets across the two cities. Coffee N U was a chain that was started in 2008 in Bangalore and by 2013 had a presence in 35 locations across India. Hindustan Unilever also extended its only coffee brand BRU to a cafe chain, the BRU World Cafe and had six outlets across Mumbai. Another coffee chain named Cuppa Joe, was an independent cafe launched by Umbrella Hospitality in April 2012 in Mumbai. All these smaller coffee chains were exploring the possibility of expanding to other areas in India. Compiledfrom vanous sources.
16
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Car. Competition in India
(afe(offet Day (In d lil) 1•••••••••••••••••••••••••••••
1 ,3 5 0 B,M'ltt,I,1 J••••••• n s
(o~taCOflet' IUKI _ 100
Mochallndl3) lB
C o ffee B ean &. T ea l~ af 1 7 (Callfomia) r------..., Note: Number of Stores asof September 2012; hcept starbucks GloriaJean'.IAuSlralial 1 7 w h ic h w ere opened in the beginnins in OCtober 2012
Dunkin Donuts 5 lMas5athu$tUsj
S tarb u ck . ,
Adapted from: Mellisa Allison, "Starbucks brews following in India where tea is supreme", http://seattlelimes.com, January 2 7 , 20/3
E x h ib it V I
Comparison of Star bucks' Prices in US and India
Average Income (in U5$)
In ~ : f 1 ,4 9 0 4 8 ,4 2 9
Starbucks Prices
Murg (chicken) tikka panint 2 .• • · chicken sausage, egg white wrap 3 .2 5 ~ 'C 2 ,4 2 c Char-grilled potato and pepper ~• vegSie,egg and Monterey Jack 3 .4 5
t: E, 1 .6 7 ::; B lu e b e rry 1 .9 5
• 3 .3 5 E ~ Caramel Frappucdno 4 .2 5 , 1 .9 5 c Brewed Coffee • 1 .9 5 ::; 2 .5 1 C a p p u c c in o 3 .3 5
N o te : Average Income is a mean, computed b y dividing GOP b y p o p u la tio n All drinks 16 ounces; and all prices before taxes (in U5$)
Adapted from: Mellisa Allison, "Starbucks brews following in India where tea is supreme", http://seatt/etimes.com, January 2 7 , 2013
1 7 228 International Business Strategy
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E nd N otes:
Anushree Bhattacharya, "Pour out the coffee", www.flnancialexpress.com, March 5, 2013 Megha Bahree, "Starbucks Will Open Cafes in India", http://online.wsj.com, January 31, 2012 "India's coffee market competition is ferocious: Howard Schultz, Starbucks", hnp:l/anicJes.economictimes.indistimes,com, October 25, 2012 "How Many Starbucks are There?", http://www.loxceLcom/sbux-faq.hlml "Starbucks Corporation Fiscal 2012 Annual Report", http://investor.slorbucks.com, 2012 "The Globalization of Star bucks and lts Effect On the World", hnp:/Isiulaw.typepad.com, September 28, 2011 Laurie Burkitt, "Starbucks Plays to Local Chinese Tastes", hltpJlonline.wsj.com, November 26,2012 Ibid.
"ColTee output in 2013-14 likely to be same as last year's", hup:llanicles,economictimes.indiatimes.com, May 30, 2013. 10 Neena Rai and Debi Nayak, "India's Teste lor Coffee to Affect Bean Prices", hllpJlonline .w'Sj.com,March 17,2013 " "Capturing India's Percolating Coffee Market", hup:/lknowledge.whanon.upenn.edu, July 1,2011 u A Basu Majumdar, et al., "Tea Statistics- Global Scenario", www.teaboard.gov.in,January2012 II varun Jain, "Tea Time", www.waghbakritea.com.March-ApriI2012
u" "Starbucks to open outlets in more Indian cities", http://timesofindia.indiatimes.com, April 7, 2013 "Capturing India's Percolating Coffee Market", httpJlknowledge.whllnon.upenn.edu,July 1,2011 " [bid. " Diwash Gaherre], "The Business of Coffee Chains in India", http://zeenews.india.com,2013 " Neena Raj and Debi Nayak, "Coffee Culture Catches on in India", www.business ....'itboutbcrders.corn, March 27, 2013 Ibid. zo" "Unsure Starbucks defers India entry", http://anicles,economictimes.indiatimes.com,July21, 2007 " "Starbucks, Teta Coffee sign pact for collaboration", www.thehtnducom.January 13,2011 " "Tala Global Beverages and Srarbucks Form Joint Venture to Open Starbucks Cares across India", http://news.starbucks.com,January30,2012
" "India's coffee market competition is ferocious: Howard Schultz, Starbucks", http://articles.economictimes.indiatimes,com,October 25, 2012
" Rumman Ahmed, "Starbucks Delays India Entry", http://blogs.wsj,com,September 13, 2012 " Sujey Medhe, "Srarbucks Opens Store in Delhi", www.lhehindu.com.February6.2013
" Shobe Narayan, "Srarbucks Has to Wake Up and Smell the Coffee in India", www.thenational.ae. February 5, 2012 " Ankush Arora, "S tarbucks in India: Taste Trumps Price as Fans Rush In", http://blogs.reutcrs.com,ApriI4,2013 " N eena R ai and Debi Nayak, "Coffee Culture Catches on in India", wv.w.businesSwithoutborders.com, March 27, 2013 " Ibid, 30 Anushree Bhattacharya, "Pour out the coffee", www.financialexpress.com. March 5, 2013 "Can Starbucks make it in lndia?", http://theweek.com,OctoberI9,2012 ra "India's cofTee market competition is ferocious: Howard Schultz, Starbucks'' n hltp;//articles.economictimes.indiatimes.com, October 25,2012 ' " "Can Starbucks make it in India?", http://theweek.com, October 19,2012 " Anu Barana, "Indeed, A Lot Can Happen Over Coffee!", www.indiahospilalityreview.com. February 12,2012 as "Coffee giant Starbucks 10open outlets in more Indian cities", http://indiatoday.intoday.in, April 7, 2013 Ibid.
" Diwash Gahatraj, "The Business of Coffee Chains in India", http://zeenews.india.com,2013 " Ibid.
" Anushree Bhattacharya, "Pour out the coffee", www.financialexpress.com. March 5, 2013 '" "India - Coffee Annual 2013", http://gain.fas,usdrl,gov, M ay 16,2013
" "Jubilant FoodWorks to open 100 Dunkin' Donuts outlets in Ind',. hup:l/articles.economictimes.indiatimes,corn, July 25, 2012 in 5 years",
" Anuj Byotra, "Coffee with Reliance: Java Green," BII~iness World, December 200l ~" www.java-green.comlabout.htm "Capturing India's Percolating Coffee Market", hltp:llknowledge.wharton.upenn.edu, July 1,201 I
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INSEAD IN S 3 2 2 --~ y ~ --
The Business School for the World~
The Takeover of Arcelor by Mittal Steel:
Change in a Mature Global Industry (B)
Industrial Strategy
04/2014-5412
The case was written by Martin flash, Managing Director of Mega Associates, w ith the help of Professor Jonathan Story, Emeritus Professor of International Political Econ omy, INSEAD, Fontainebleau, France; and Professor James Burnham, Murrin Professor in Global Competitiveness, Donahue Graduate School of Business, Duquesne University, Pittsburgh, Pennsylvania, USA.The case used published sou rces. It is intended to be used as a basis for class discussion rather than to illustrate either effective or in effective handling of an administrative situation.
Additional material about INSEAD case studies (e.g., video s, spreadsheets, links) can be accessed at cases.insead.edu.
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ICMR las Center 1G/Management J!elGCIrch wW -wJCrl'iilndlo o -rg
ISSCenter tor Management Research
China's Pearl River Piano - Tuning into the Global Market
This case was written by Namratha V Prasad, u n d e r the direction o f G V Muralldhoro, ISS Hyderabad. It was compiled from published sources, and is intended to b e used a s a basis for class discussion rather than to illustrate either effective or ineffective handling o f a management situation.
© 2014, IBSCenter for Management Research
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ICMR lIS ClUtter lor Manogamllnt RIU'Olch Wi" Iciilifn(llo o,g
China's Pearl River Piano - Tuning into the Global M arket
"Our success in Western markets, the cradle a/the piano's history, is the only true testimony 10 the high quality of our products. ,,/
- Tong Zhi Cheng, Former CEO of Guangzhou Pearl River Piano Group Ltd., in 2009. "In the history 0/ mankind there probably 1I0S11 't been fS good an entry-level
plano. (Pearl River} ... doesn 'Iplan on being second-best. lJ.
- Robert Witmeyer, Owner of San Jose Piano Company'\ in 2002.
INTRODUCTION
In January 2013, China-based Ouangzhou Pearl River Piano Oroup Ltd. (PROP), the world's largest piano manufacturer, introduced the 'Kayserburg Artist' brand of pianos at the National Association of Music Merchants (NAMMt convention in Los Angeles, US. After the launch, the pianos were distributed across the US through PROP's dealer network, the largest network for a piano company in the US. PROP was the market leader in the American mass market for pianos (See Exhibit Ifor an Overview of the Global Piano Market). W ith the Kayserburg brand, PR O P intended to create a place for itself in the higher end of the m arket, thereby having a presence across the entire US piano market.
PROP, a Chinese state-owned enterprise, was founded in 1956. In its early days. the company used a m ix of German production methods and indigenollsly developed techniques to produce pianos using imported components. The Chinese Economic R eform s' in the late 1970s gave a major boost to piano sales in China. This enabled PROP to build up its production capability to cater to the growing demand for pianos in the domestic market.
Under the leadership of Tong Zhi Cheng (Tong), who became the CEO of PROP in 1992, the company began focusing on international markets. In order to create an impact in the foreign markets, Tong undertook measures to enhance the quality of the pianos. Over the years, PROP invested heavily in the implementation of automation technologies and new production methods. Tong also brought in several international piano consultants to advise PROP on methods to improve its production processes.
I Ding Weniei, "TIle Return of the King," ww\v.bjreview.com.cn, May 15,2009.
2 K erry A . Dolan and Quentin Hardy, "The Challenge from China," www.forbes.com. May l3, 2002.
J San Jose Piano Company is a privately held piano rental and leasing company in San Jose C A . It w as established in 1975 and had annual revenues of around U S$ 500,000, asof20 12. •
4 The National Associati.on of Music Merchants (NAMM) started in 1901 is the world's largest music products trade Show. It IS held annually In the month of January in California. US. s 'Chinese Economic Reform' began in 1978after refo~mistsw ithin the CommunistPartyof China (CPC), led by Den~ X180Plng, opened. up the eoul1tr~ to foreign Investment and brought in privatization of state- run enterprises, From 1978 until 2013, the Chinese economy grew almost 9.5% each year.
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In 1995, in a bid to gain management ti '. d '. " . . exper Ise In producing pianos of global quality, the company subsidi In t? a jomt venture with Yamaha Corporation'' (Yamaha). In 1999 PROP set up a sales SU 51 lary In the US In2000 with h", I .',I t e mtenuon of adding brand value and creating a foothold in the European plano markets, it acquired Germany based 'Ritmuller Piano Company' (RitmuIJer).
By 2000, PROP was a market leader in the Chinese piano market with a market share of more than 60% ~nd a 50% l~arket share in the Chinese export market. Moreover, it h e ld 5% of the market
share In l.he US plano market. By 2002, PROP became the leading manufacturer of pianos in the w~rld, with an output of 71,000 units per annum. In 2002, global piano production was 700 000 unl~. t
However, by the mid-2000s the global market for pianos had shrunk due to a fall in interest in learnin.g and ~wning pianos. The company then refocused its efforts on creating a place for itself in the Chmese plano market that still had room for growth, especially in the higher end of the market. In 2007, the company introduced the Kayserburg brand of pianos, targeted at professional piano players. Over a period of time, the success of the Kayserburg brand in China contributed to all increase in the company's sales and profits.
A s oflOl3, PROP held 28% of the market share in the Chinese piano market, 18% of the market share in the American piano market, and 15% of the market share in the European market." The company sought to further increase production of pianos through capital investment.
BACKGROUNDNOTE
In the 18905, a few Germany-based piano manufacturers constructed factories in China to produce European pianos for the locals. In the 1950s, the Chinese government nationalized these factories that had still been producing pianos using German production methods.
In 1956, six small piano repair shops merged together to form 'Pearl River Piano Company' (PRPC) in Guangzhou, China (See Exhibit I! lor Timeline 0/ the Company), The combined entity was made a state-owned enterprise, accountable to the G u a n g z h o u municipal government. Located in the northern region of the Pearl River delta, Guangzhou was an important trading center, key port, and capital city of the Guandong province.
The company primarily undertook repair and re b u ild in g work on pianos for a small market. The company's technicians then tried producing a piano. After they successfully developed a piano model which was purchased by a customer in Hong Kong, the company took up piano production
in earnest. The pianos were sold under the brand I Pearl River'.
In the first year of operations, the company's 100 employees produced around 13 pi.anos. This was quite a noteworthy achievement considering that there was hardly .an~ ot~er Chll1~se ~ompany producing pianos at that lime. In its early years, the company built U s p ia n o s usmg Impor~ed components that included plates, actions, ke~boards, and olh~r hardw,are. from overseas compon.les However, the company's inexperience in plano manufactur~ng and Its Improper .wood.seasom~g
practices meant that the early piano models ~eve~o~ed by It were flawed both J I1 design and In quality. The company produced about four upright pianos a month.
6 Y ah C' f n d e d in 1887 is a Japan-based multinational corporationoffering a wide range am a orporanon, Oll '.. I' I d ' vhich in c lu d e smusical Instruments, e ectroucs, mororcyc es, an power sports o f pro du c ts an d servrces;v J equipment.
7 www.pearlriverpiano.cn ...,,.• e ' I '01' configurations namely the Upright Plano andthe Grand Plano. T h e Modern pianos lavetwomej ' , '. fr d rri , 1 . , 'I II d'VerticalPiano'iscompactand Its a m e a n s n n g s are v e rtrc a i. 'Upright Plano asoca e
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During the 19605 and 19705, Mao Zedong'i's Cultural Revolution" left the Chinese wary of either owning a piano or learning to play it, as this was believed to be a symbol of the ext~ava~ant Western lifestyle. This scenario adversely affected the prospects of the company, causing It to maintain low production levels. Up till the mid-1970s, the company produced .Iess than 1,000 pianos each year. Speaking about that era, Tong said, "We didn't have ~ostop m~klllg them but we can't have sold more than a hundred or so a year back then. Learning the plano w as frow ned upon.':" I After China brought in economic reforms in the late 19705, the compa~y experienced 8 spike, in sales. The Chinese government's large scale planning programs along with a relaxed export policy resulted in rising incomes that dispelled poverty and improved the standard of living of the people.
The one-child policy" that was brought in as a part of the reforms, encouraged parents in China to invest significant resources in the academic, cultural, and personality development of their only child. Speaking on this issue, Tong said, "It's not just in developed areas. People like to spend money on their children to improve their educational level. It's a cultural investment.':" A large number of parents believed that piano lessons were a good way to raise a cultivated and disciplined child and they went in for the purchase of a piano. The total annual sales of pianos in China grew from 20,000 in the early 19805 to 60,000 by 1992.
In 1987, the company was granted permission to export its products, and it began hunting for partners and markets abroad. The same year, the company began operations at its new five-storied factory in Guangdong which was spread over a total space of one million square feet. The company was renamed 'Pearl River Piano Industrial Corporation' (PRPIC). In 1988, the company implemented 'Total Quality Management'!" (TQM). Between 1985 and 1995, the production capacity of the company increased by almost five times, reaching 4,000 units a month.
In 1992, Tong became the Chief Executive Officer (CEO) of PRPIC. He had joined the company in 1959 as a piano tuner. Over the years, he had risen through the ranks having held various manufacturing and sales positions.
Tong was disappointed that 'Pearl River' pianos were perceived to be of low quality and that this was the reason for the very low exports. Moreover, even in the Chinese domestic market, the I company was not earning much when compared to foreign piano m akers, as its pianos were priced I low. At international events, where the company showcased its pianos, people would come and play the pianos but leave without buying them. Speaking about the issue, Tong later said. "Fifteen years ago, dealers would come to the NAMM (National Association of Music Merchants) show, sit down and play our pianos, and then leave. Rather than continue in our ways, we took these criticisms to heart and set out to build a piano that could com pete with other fine pianos of the w orld.':" He specified a clear goal for the company: To produce high quality pianos that could compete effectively in the global space.
9 Mao Zedong, born in 1945,was a communist who later founded the People's Republic of China. He formulated the political theory of Maoism, wherein emphasis was placed on the uplift of the peasant class.
10 The Cultural Revolut!olllasted.from 1966 t.il!Mao Zedong's death in 1976,During this period, people who showed bourgeois tendencies were punished by groups of young people, who called themselves the 'Red Guards'. China plunged into a period ofchaos,which resulted in the deathsof millions of people.
II "Piano MakerTunes into China's GrO\..'ing MiddleClass," www.chinadaily.com.cn.JUly2, 2004.
12 The One-child policy introduced in 1979 allowed a couple to have only one child. The policy was implemented to alleviate the social, economic,and environmentalproblemsthat were plaguing China.
13 "Piano Maker's Key to Success," hLtp:/lapp1.chinadaily.com.cn,July 8,2004.
I~ Total Quality Management a:QM) is an .organization·~de approach to management that seeks to Improve the products and services by conlUlLJouslyrefining the production process after receiving the right feedback. I'
IS "Inside Pearl River PiW lO ," \\lww.highbeam.com,February I, 200I.
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ENHANCINGTECHNOLOGY
Toimprovethequalityofitspi I'RPIC . . . . ianos, Invested heavily In technology and Invited piano experts from around the world to guide it in its production processes. Over the next several years 1 6 the company spent RMS 500 million to modernize its production equipment and techn o lo g y : One of th~ first ,experts to be brought in for consultation was Bud Correy (Correy). A manu:ac~unng engmeer, ~orrey had been involved previously in designing the piano plants at America ~ Rudolph Wurhtzer Company", He had been actively in volved in quality control and was considered to be the foremost expert in that field. He worked almost 10 years w ith P R P IC to help streamline its production processes.
At that time, PRPIC was producing pianos through a hand machined manufacturing process that w as lab o r intensive. Correy advised the company to invest in automation, He reasoned that th e new t.echno~ogy would improve the company's finished produ ct, enabling it to compete more effectively 1 1 1 Western markets, The low labor rates in China were the main reason Chinese companies did not take up automated production processes. H owever, with Tong specifying that his main goal was to improve the quality of the company's pian os and not cost savings, the company did not hesitate to make the required investments. S peaking about the technology implementation at PRPIC over the years, Tong said, "We are no t lo o k in g fo r th e m o st co st- effective solution as we improve our piano operations. Rath er, we are always lookin~ for the best solution. And, in many cases that requires a very large investment in new machinery." 8
Consequently, PRPIC invested in CNC I9 machines from Germany, Italy, a n d the US. These machines were utilized in cutting keys, hammers, an d other important components. The company also air-conditioned its key and action department to facilitate control of humidity levels and prevent warping of the wood parts, Correy was credited with revamping and automating the final assembly line, soundboard an d back departments too, Speaking about Correy, Tong said, "He systematically looked at every area of production and figured out how to make them b etter.':"
In 1 9 9 3 , two German experts were brought in to help refurbish the quality of the tuning process. The resultant changes helped enhance the quality of the pian os and enabled the company to raise the price of its pianos by 1 0 % , Later, Tong invited seven expatriates from Germany and the U S as consultants and advisors to guide PRPIC's technicians and w orkers on the piano manufacturing process, On the advice o ~ th~ experts, the company a,cquired a ~e\V cabinet finishin fl process. Th2~ Italian-built polyester finishing system not only applied the finish, but also sanded and buffed the piano to give it a smooth, glossy shine. PRPIC shelled out large amounts of money for these foreign experts, each of whom charged almost US$ 3,000 per day - more than double the then annual income of the average Chinese staff. However, the company did not completely eschew manual processes: Tong believed that there ~as a need for manual work in certain production processes to hav e a finished product of beuer quality. Even though the company had two computerized labs to test the final products, Tong trained up to
1 6 The Renminbi (RMB) is th e officialcurrency of tile People's Republic o f C h in a, lt is also known as th e
Y u an . IRMB = O. t 6 (USD)(Average rate lo r 2 0 1 3 ).
1 7 Rudolph Wurlitzer Company founded in 1 8 5 3 w a s a US~b~sedcom~any rnat.produced V ~ riO liS strin g ed instruments, electric pianosandJukeboxes, lt w a s later acq u ired by GIbson GUitarCorporation.
1 9 'S I' th D·str,·hutionChannel at S tein w ay & S o n s," http://digitalstrategies,lUck.darl1110uth.edu, , trengtlenmg . e I February 15,2007. 1 9 CNC or Computer NumericalControl is u sed in machine tools to au to m ate the process through computer
co n tro l. ') 2 0 ., til "R ig h t Methods"" \V\.vw.englandpiano.com,December _ 0 0 6 . "ln v esn n g 1 1 1 e I, . 2 1 .. 1 I olishingorsmoothing w ith sandpaperor a mechanicalsander, S an d in g IS u ie p ro cess 0 P" 2 2 Buffing isthe process of polishingor shining with a pieceof soft material.
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100 skilled technicians to test and adjust the product. He also believed that manual sanding was better for giving a brilliant finish to the pianos. He therefore ensured that workers used hand tools and sandpaper to eliminate imperfections from the rough casting.
Even though PRPIC paid a fraction of what its counterparts in the US and Japan paid, it ";85 considered to be a good employer. It provided several benefits to its emp~oyees, apart: from paying w ages of U S$ 1 per hour for a 45-hour week. It provided free transportation through Its flee~ of 40 buses and free lunch, offered medical compensation, and deposited. a fixed a!nount mt? a government supervised pension plan. Moreover, employees had the option of paying a nom inal amount to stay in company provided housing.
While pianos were a common household item in the US and Europe, they had always been considered a luxury in China. Tong believed that understanding the piano culture would enable the company to build world class pianos. He encouraged PRPIC's m anagers to learn the piano, while he him self' was an outstanding pianist. He added, "You must remember that the piano was truly a foreign object to the Chinese people. It was not a situation like you had in Europe where people had been making pianos since 1700." 23
PRPIC also benefited from the wide availability of raw materials for piano making in China. This gave the company a competitive advantage over Korean and Japanese piano manufacturers. For all the components, except for the soundboard, China had domestic sources for the wood. However, PRPIC, like the rest of the world was dependant on Sitka spruce" from North America for its soundboards,
In collaboration with 'Guangzhou Energy Research Institute' of the 'Chinese Academy of Sciences', PRPIC launched a project to better understand the science involved in drying timber. This knowledge was needed to enhance timber processing that ultimately determined the quality of a piano. Eventually, the company developed a proprietary technology that was used to develop computer controlled kilns, which improved the timber quality. In the company's own lumber yards, spruce, pine, maple, and Chinese walnut wood were carefully processed and then dried in computer controlled kilns. In order to ensure consistent conditions, PRPIC introduced climate control for its entire production process.
JOINTVENTUREWITHYAMAHA
In 1995, PRPIC entered into a U S$ 10 million, 20-year joint venture agreement with Yamaha. The lV was called 'Guangzhou Yamaha Pearl River Piano Inc.' A 200,000 square foot facility was established in Guangzhou as part of the Jv. The facility was actually an assembly unit that built three models of upright pianos using a combination of parts from both Yamaha and PR PIC . The facility employed 250 people and had the capacity to build 9,000 upright pianos in a year. While PRPIC would get 40% of the output, the rest was for Yamaha.
Through this Jv, PRPIC lear~t management techniques, manufacturing expertise, and knowledge fro~ an ~xpeflenced competlto~ .. On the other hand, Yamaha achieved access to the growing C hinese plano market and the ability to manufacture export-quality pianos at competitive prices.
From 1996, Tong initiated several steps to promote the 'Pearl River' brand as a Chinese national brand. The company built a wide sales and distribution network in China and was the first Chinese company to have a nationwide distribution network. Tong strove to build alliances with distributors and musical schools and colleges in a bid to promote pianos. He built up close relationships with famous pianists and request~d them to play on 'Pearl River' pianos at their concerts. The company also sponsored several piano concerts and competitions.
23 "Investing in the "Right Methods"," \\IWW.englandpiano.com, December2006.
24 ~ilk? spruce, a .nativeof.Nort~ America, is ~ I~ge coniferous evergreen tree growing almost 100m tall. It IS W Idelyused III producing pianos, harps, violIDS, and guitars, due to its high strength-to-weight ratio and the presence of regular, knot-free rings that make it an excellent conductor of sound.
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In late 1997, the Chinese governm t k d PRP icat : en as e r e to take over several smaller loss-making state- ow ned musrca instrument manufa t T h ' , • <:: • .' curers. e new entity consisting of a guitar factory a percussion rectory and a violin facto bIId' ' L t d R G P " . . ry~ameto ec.a e the Guangzhou Pearl River Piano Group : . ( p ) . Over a period of ume, Investment I n organization and productivity helped these ennues to returnto profits Sp k' he i , f ili . . ea log on t e Issue, Tong later said "Most of these companies were the t r ig badly I n the mid-90s and losing a lot of money. In late 1997, the government decided that y sh~~ld become part of the Pearl River Group since we had such a strong record of profitability. We are pr~u? that the workers in these factories are making almost three limes as much as when they first jo in e d the Pearl River O r o u p . ? " In 1998" PRPG became the first Chinese piano company to obtain the ISO 9001" quality cert~ficat~on. In a scenar~o that was rare for even a US-based company, PRPG received the certification not only for Its complete line of grand and upright pianos but also for its parts and components. Tong added, "Like a certified financial audit that verifies the assets and liabilities of a corporation, an ISO 9001 certification verifies that a company maintains and documents the highest quality standards.?"
MAKINGINTERNATIONALFORAYS
The Chinese piano market had become overcrowded by the late 1990s. The entry of hundreds of private companies offering low priced and low quality products drastically increased the competitive pressure on PRPG. Tong then trained his sights on international markets, especially the US. Tong said, "As [foreign companies] come to China, we not only need the domestic market, we also need the international merket.?" In the late I980s, PRPG had relied on US-based importers to sell its pianos. However, the company failed to find a market for its pianos in the US, mainly due to the perception that Chinese products were of low quality. Moreover, it had tried to find a US-based piano builder as a partner, but was unsuccessful ill finding a partner who would not look upon it as a competitor. Tong then decided to directly sell 'Pearl River' pianos in the US market and target the mass market. In 1999, the company set up its US~based sales subsidiary, 'PRPG America, Ltd.' (commonly referred to as 'Pearl River USA') in Ontario, California. The Ontario center had a showroom and a distribution center.
Tong was confident that direct selling would enable PRPG to carve a niche for itself in the mature piano market of the US. He believed that the low labor cost involved in making' Pearl River' pianos would prove to be a strong competitive advantage. Making pianos in the US was a costly affair. The cost was six or seven times more than that of manufacturing in China due to the high labor costs involved in some of the manual processes inherent in piano production. Tong believed that he could take advantage of the low labor cost inChina to produce high quality pianos at lower prices and offer them in the US market. PRPG sold its pianos from US$ 2,000-4,000, with an extremely thin profit margin. Tong was also attracted to the U~ piano .mark~tbecause it was the world'.s biggest ~arket and American customers displayed an Interest m trymg out ~ew brands that prOVide?value fo~money. Moreover, there were no import restrictions in the US plano market because or Its small size when compared to other industries.
2' "Investing in the "Right Methods"," www.englandpiano.com. Dece~lber2006.. . . . 26 ISO 900 I is part of tile series of standardspublished bythe Internatl~nalOrdganl~tlO.n drorS~andardlZatlOn I f ctive qualityassurancesystem formanufacturing an service III usmes. (1SO ) to ensure an e e 27 "I in a in th "Right Methods"," www.englandpiano.com.December2006. n v e s t m g m e ' " I d Q tin Hardy "TheChallengefromChina," www.forbes.com,May 13,2002. Kerry A. Do an an uen I,
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Takingcognizanceof the limitedinternati,onalma~~~e(~~~)~~C~~~I~C~h~fs~:s~~~~~~ a;:s t ~ ~ importance of the US market, Tong rec~ulted .AI lC ' . d stry Rich recruited local staff American who had long years of experience I n theUS plano I n u', .' . . ti f . n d American salespeople Speaking about the Issue of hiring local staff, c c n s r s t n g 0 e x p e n e c e '., d i t l b u t i h Rich said, "Any company that's come from Asia and tried to manage Its own IS n unon as failed.,,29
The strategy to use people with knowledge of the American piano ~arket coupled. with ~n offering
of low cost but high quality pianos paid off. Withi,n two years, R i c h succe~ded I J l g:ttl~,ga,lmost
one-third of the specialized retail piano dealers I n the US to carry the ~eQ1:1~lveJ pla~os.
Speaking about the long term goals of PROP, Tong said, "Our biggest mO,t,vat,on I n the United
States (US) right now is to allow customers [Q know us and bring home our pianos. The money can be made gradually. ,,)0
BUlLDING BRAND POWER
In 2000, PRPG acquired Rirmuller with its brand license and piano manufactu~ing technologr-
Founded in 1795 by Wilhehm RitmulJer, the company was one of the first p,lanos ~aker.s m Germany and the world. Ritmuller had the reputation of being o.neof th~ most mnovauve 'plano
makers in the world, having developed the double soundboard 10 the plano thal resulted I n the "Euro Sound" a distinctively warm and rich lone.
However, RitmuJler had ceased production in 1977. Ritmuller's style of small-scale handcraft- based piano making could not continue in a world where pianos were produced on a mass scale at
low costs. A piano consisted of 8,000 components, its production process involved 300 steps, and it took 200 man hours of skilled labor to produce. Before PRPG and others came into the picture with their mass production methods, 60% of pianos and almost 80% of high end pianos were produced completely by hand. Automation cut down on the time and effort involved in production. The acquisition of Ritmuller was undertaken by PRPG to boost its international image and get a foothold in the European piano market. PRPG planned to produce new Ritmuller pianos in a special division at its Guangzhou factory. The pianos were to be based on the scale designs of
Ritmuller pianos that had been successful in the past. I n a bid to maintain the unique brand image of the Ritmuller, PRPO used only the finest materials in their production. PRPG later marketed the Ritmuller across the world, including in the US.
Soon after, PROP acquired the research & development center of another Germany-based piano manufacturing company, Rudisbeimer. This acquisition not only provided it with advanced piano production teehnology, but ~Iso helped it garner 40% of the US uprijjht piano market. PRGP also tied up with US·based furniture manufacturer, Herman Miller, Inc. in order to develop pianos that would complement the interiors of modern homes.
As of 2000, PROP had more than 200 sales units in China. I t was a market leader in the Chinese Piano market with a market share of more than 60% and a 50% market share in the Chinese export market. Though the company produced various kinds of musical instruments the piano remained its key product. '
By 2?01, PRP,O's market sha~e in the US, th.oughonly 5%, was growing fast. The vast portion of
l~e pianos which PROP sol~ In both domestic as well as international markets was uprights, In a
bid. ~ o I.ncrease the pro~uctlon of g r a n d pian.o~,PROP constructed a 500,000 square foot new
facility I n Guangdong WItha production capablluy of30,000 grand pianos per year.
29 Russell Flannery, "Piano Man," ww\v.forbes,com, May 13,2002.
30 Russell Flannery, "Piano Man," www.forbes.com. May 13,2002.
31 Herman Miller, Inc. founded in 1905 is a US-based producer ofhome furni hi d f f i fumit II h . f d . . furni I'IS tngs an 0 ce rru ore. as a reputation 0 esrgntng rruture considered to be modernist and has d d I fumit pieces that arc considered icons of industrialdesign. pro uce severe lure
8 _------'C:':H~IN~A'::'S:.':P:':EA~RLRIVER PIANO: TUNING INTO THEGLOBALMARKET 259
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In 2001, PROP brought in David R. Campbell (Campbell), a veteran piano manufacturer with deca?es of expefJ~nce at several leading piano-producing companies as 'Director of Technical Services'.Tongsaid"DaveCa bII Id ibl '. . . . ' . m p e c o u POSSI y have more experience and understanding of the p~ano manufacturing process than any other person in the world today. He has been hired to help m~rease OUf quality standards, improve OUf production methods, and help with the orderly eXpanSl?" of grand plano capacity.v? Campbell suggested 22 points of improvement in the production process of PROP's grand pianos, which the company implemented in six months.
By 2002, P~GP had cornered 10% of the US piano market and by 2003; it had managed 10 cut prices b y IOYo. In 2002, PRPG overtook Yamaha to become the world's largest piano maker with an annual output of 71,000 pianos. In 2003, the company attained the production capability of 100,000 pianos. In 2003, Music Trades rnagazine" named Tong its music equipment manufacturing "Person of the Year".
In 2004, the company opened its first European office in Munich, where it undertook design, research, and development activities. In April 2005, PRPG was contracted to produce the lower- priced 'Essex' line of pianos for the world's most renowned piano making company, Steinway & Sons" (Steinway). PRPG considered this to be an endorsement of the quality of its pianos.
REV AMPlNG THE OFFERING
Over the next few years, there was a gradual fall in demand for low-end pianos. The key reasons were market saturation and a decline in interest in piano playing among young people. By 2005, global piano production fell from 700,000 in 2002 to 400,000, In 2007, Huang Weilin (Weilin) succeeded Tong to become the CEO of PRPG. Considering the changed market conditions, he shifted the focus of the company to expanding Chinese domestic sales and increasing the company's presence in emerging markets. Speaking about the Chinese market, Weilin said, "Compared with major developed countries where about 20 to 30 alit of every 100 households already have a piano, China has a huge market potential, especially when factors such as urbanization and increasing family investment in education are taken into consideration.":" The company's market share had fallen in the Chinese piano market and in 2007. it was just aroUl~d 25%. The low end of the Chinese piano market, where PRPG earned wafer thin profits was still highly competitive with the presence of almost 140 competitors. Moreover, the profits were being further squeezed by rising labor costs.
Weilin then decided to target the h ig h - e n d segment in China, wherein there was greater brand recognition and the possibility of higher returns. In 2007, Weilin recruited. Lothar T~omma (a famous Swiss piano designer), as headofPRPG's design team. He al~o appointed a SWISS ma~ter pro duct!u c u o n engIneer . Stephen Mohler (Mohler) . Both of them were grven the task of developing and crafting a new line of pianos.
J2 'H'V t Campbell to Raise Quality Standards," www.higbbeam.com, September I, "Pearl River Ires eeran
2001. , d I in th 'I d 33 Music Trades magazine foundedin 1890 is an American magazine t~rgelt.e at peop e 10 e musrca rra e , d ' 1 'I s d,'stributors and manufacturers of music a mstruments. who include music re al er " .'. 34 . d d i 1 8 5 3 is 8 handmade piano manufacturing company W ith a global reputation Steinway & SOliS foun ~,~ tions in pianos 11 has offices and factories in the US and Germany. Its for high qualit~ and vancod11~venI. old throu~ dealers a n d showrooms across the world. The price of annual production of 3,0 pianoso ISS its pianos ranges from US! 60,000-100,000. 3j. . "Th n of the King" www.bjreview.com.cn. May 15, 2009. Dmg Wenlei, e kemrn ,
9 260 ------
II 314-093-1
Later, "a factory within a factory" was created by Mohler at PROP's Guangzhou :acili,ty ~o prouceenewpianos.ad th ' M hler also personally selected the . craftsmen who would . assist him 10 building the pianos, which were made in the European guild system (where each Instrument was built by a team of individuals from start to finish).
In 2007, the 'Kayserburg' brand targeted at professional piano players (the high end of the market), was launched. The 'Kayserburg' pianos had the same production lm ~ as that 0; Steinway's Essex brand and were built using imported components. Moreover, the K~serbllrg applied certain technologies that had been developed in China, which included chord disharmony coefficient design theory, soundboard vibration mode analysis technology, and maple-rosewood bending structure bridge design.
In China, the 'Kayserburg' pianos were priced between 20,000 and 60,000 Yuan (US$ 2,000 - US$ 8,000), Speaking about the 'Kayserburg' brand, L iu Bo, a tuner at Beijing-based retailer Jiangjie Piano City Co. Ltd. said, "Pearl River Piano's Kayserburg brand has done a good job as a toddler at the high end. But the brand has to catch up with the w orld's eminent high-end brands such as S teinw ay in order to be a select choice in the concert piano m arket.':"
In July 2007, PROP was awarded the ISO 14001 for environmcntal compliance, In 2008, thc company sold about 3,000 pianos under the' Kayserburg' prim arily to customers in China, apart from customers in Singapore, Hong Kong, and Macau. Its sales from emerging markets rose by 25%, mainly due to the new brand.
In 2008, at the peak of the global financial crisis, while China's piano exports fell by more than 70%, PRGP's sales revenues rose by 9% and profits grew by 18%. An independent research report published in 2008, mentioned that PROP was the lone Chinese piano manufacturer that had i adopted the strategy of self-branding in western piano markets, apart from exporting as an OEM supplier using its own name.
By 2009, thanks to Weilin's marketing expertise, PRPG posted an impressive increase in sales and profits, As of 2009, the Chinese people purchased half of the pianos produced in the w orld, T he company sold almost 83% of its pianos in China. By 2009, PRPG w as the undisputed market leader in the lower end market of the upright piano segment in the US. Its market share in the US piano market was 15%, while its share ?f the US upright piano m arket was 40%.
: OUTLOOK
As of 20 13, P R O P was the largest producer of pianos in the world, It had the capacity to produce 100,000 pranos at Its factory that occupied 1.3 million square feet and stood seven stories tall. Almost 80% of the company's pianos were sold in China. As of 2013, China w as not only the largest market for new pianos, but w as also the one that had a healthy growth rate. Apart from pianos, the company produced violins, guitars, and drums. It was also one of the w orld's largest guitar and violin manufacturers.
PRGP managed a l~rge workf~rce at a single location. It had over 3,500 skilled technicians within a netw ork of factories, foundries, lumber yards, and saw mills. Of its 106 technicians, m any had
advanced degrees In ~reas such as adhesives, metallurgy, or chemistry and the w orked in its 90,000 square foot testing and engineering lab. Y
PRGP exported its pianos to more than 100 countries and regions It h d dornesti d "". . a a strong ornesuc an international sales organization and a Wideproduct service network Ith d h 200 d I in C hi d b idl . . . a m ore t an ea ers 1I1 1I1a,an su sr Jary com parues In the US, Europe, and Macau.
36 Ding Wcnlei, ''The Return or the K ing," www.bjreview.com.cn.May 15,2009.
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In the US and Canada, PROP was the fastest growing piano company with over 300 dealers. It w as one of the small numbers of foreign manufacturers who provid ed a IO-year part and labor factory limited warranty, apart from offering a US-based technical support team. The company's low price p o in t was considered its main competitive advantage in western markets. Speaking about China- made pianos, Roberta Caradine, a British piano builder, said, "In the late eighties, the first Chinese pianos that we saw in the West were really bad. But now, for what they cost, they're not a bad product. The trade price is only about £600 - it's impossible to compete with lh at.,,3 7
Despite the strides made b y PRGP in the global piano market, it had y el to match the quality of leading global players. Speaking on this issue, an analyst said, "But despite the 66 years of technical knowledge and the continuous efforts to improve added value, the company's (PROP) products still cannot match the world's top piano brands, su ch as Steinway & Sons of the US and B lu th n er" from Germany, in quality,':"
The main reason for the inability of Chinese manufacturers to match the quality of globally eminent players was said to be the lack of personnel to do prop er 'tuning' - the final but critical stage in the manufacturing process. Fang Yang, Chief Executive Officer of Bluthner Plano (C h in a) G m b h ", added, "If the pianos we produce in Guangzhou are handled by th e G erm an s during the last procedure, our quality can also match up to German standards. However, one generation is not enough for us to catch up with Germans in piano tuning."?'
PROP brought in a fresh infusion of capital to further fund its producti,on expansion plans, On May 30,2012, PRGP w en t public on the Shenzhen Stock Exchange, China. B y 2 0 1 4 , It ex p ected to increase its output to 160,000 units per annum.
3 1 "F d Sil "wwwenforbusiness.com, 2009. -a e to 1 ence,. .. Pianofortefabrik GmbH founded in 1853 is a Germany -based piano 3 8 B lu th n er o r Ju lIU S BlOthner . Iighl eg ard ed in th e piano market an d is a preferred brand of manufacturing company. g lu th n er IS 1 1 Y r composers and artists. "1 M h 3 0 2 0 1 2 ."CI' Tunes" hnp:llusa,chmadal y,com.cn, arc , . 3 9 YY g an d C h en Y m g q u n , ian g tn g , . 2 ad an g an . b idi of Bluthner set up in G uangzhou m early 2 0 1 ,It p r u ces l 4 0 Bluthner Piano (China) Gmbh ,IS ~ ~ ~ t l~i Its annual output w as ex p ected to be 20,000 upright pianos the lrmler brand, the company s tur a~ge , booming Chinese domestic market. targeted atthe . "Chan in Tunes," http://usa.chinadaily.com.cn,March30,2012. 4 1 Y an g Y an g andChenYingqun, g g
II 1 > tI
262 International Business Strategy i
I:
3 1 4 -0 9 3 -1
Exhibit I
Over 'View of Global Piano Industry
For a long time, the US and Europe had been the 'largest consumers' of pianos in the \~orl? However, from the early 2000s, f 'ailing birth rates and the rise of the Internet led to a decline in the demand for pianos in these re gions. Global demand then shifted to emerging markets such as China, India, Brazil, Russia, and others. As of 2013, China was the world's largest piano c o n s u m e r. European (especially German) and American piano producers ruled the world piano market, up until the 1960s. During the 1970s and 19805, Japanese and Korean piano manufacturers emerged as the strong players in the global piano market. However, the rising wages in Japan and Korea caused them to lose their cost advantage. This prompted piano production to shift to low cost countries such as China and Indonesia. As of 2012, 493,000 pianos were made worldwide, out of which nearly four-fifths were manufactured in China.
The piano market consisted of the three segments:
• Low end: At the Jow end 0 f the piano market, wherein pianos were priced between US$ 2,000-8,000, Chinese piano producers were dominant. • Mid Market: The mid-price was dominated by players from Japan (Yamaha and Kawai) and South Korea (Young Chang and Samick). There were also several European I I manufacturers in this segment : · High End: At the high end of the market, wherein pianos were priced over US$ 100,000, I the market was dominated b Y American and European piano producers, mainly, Steinway, i Grotrian, Bosendorfer, Schim mel, Bechstein, Seiler, and Bluthner. From the late 2000s, there was a move by most piano companies to offer pianos in almost every market segment. High-end piano companies took steps to diversify their product lines to include low- and mid-priced pianos to su rvive in a global economy. In parts of the world where labor was cheaper, they
• Set up factories or • Formed alliances with campa nies.
On the other hand, makers of Iow- and mid-priced pianos were using parts and expertise associated with the high-end com panies to create higher-priced models. America" Piano Market I • Before 1850, Americans most Iy imported their pianos from European manufacturers. The Gilded Age (1850-1890) • , mar~ed by high economic growth, gave a boost to the US piano industry. By 1890, US constituted half the world market for pianos. Between 1890 and 1928, salesranged from I72,000 to 364,000 per year. • The American piano industry then b:c~me the biggest in the world. The leading American piano producers were Hallet a nd DaVISIn Boston, J. and C. Fischer in New York, Strich and Ziedler, Hazelton, William KI iabe, Baldwin, Weber, Mason and Hamlin, Decker and Sons, Wurlizer, Steck, Kimball in Chicago, and, finally, Steinway.
The year 1930 was the last g r eat year for th A m ' . · by the 'Great Depression' cau e encan plano. The tough times brought in sed closure of several American piano companies and pianos began to be imported from cv erseas.
Con/d."
1 2
L. I CHINA'S PEARL RIVER PIANO, TUNING INTO THE GLOBAL MARKET 261 ~-1---=--'"
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Contd.:
• The Japanese "invasion" of the American piano market from the 1960s onward was follow ed by a wave o~pianos fr~m Korea in the 19805and '90s. Together, these imports put most low- and mid-priced American makers out of business.
Westerners' interest ,in. playing the piano declined over the years mainly due to the popularity of electronic Instruments, the Internet, and a range of other leisure activities.
As of 2012, around 40,000 new pianos were sold in the US annually under 70 different brand names, made by more than 30 companies in a dozen countries.
The sales of Grand pianos fell from 35,000 in 2005 to 12,000 in 2012, a massive decline.
As of 20 13, China-made pianos dominated the mass market in the US and conslituted more than a third of all new pianos sold.
a According to analysts, even a decade ago, m ost China-made pianos were just barely acceptable technically, and musically undesirable.
a Over the years, however, both the technical and musical qualities were found to have improved significantly. Analysts observed that while some rem ained at the entry level, others rivaled the performance of more expensive pianos from other parts of the world.
• A s of 2013, there were only three US-based piano producers. Stcinway and B aldw in produced luxury instruments that few could afford. Mason & Hamilin made a comeback in the high-end market
Peter Stumpf, a US-based registered piano technician, felt that the biggest competitors for the high-end pianos were the luxury pianos manufactured in the 1950s and 1960s that were still in good condition and were flooding the used piano market. European Piano Market The European piano market suffered from the same macro economic conditions as the American market, thereby leading to a shrinking market for pianos.
Western Europe, especially Germany, was home to most of the w orld's most respected piano builders such as G rotrian, Bechstein, Hamburg Steinw ay, Fazioli, Bosendorfer, and Sauter. • In recent times, newer brands like Borgato and Fazioli emerged as part of a wave of boutique, high-ticket pianos. • Analysts agreed that German piano building was the 'best'. H owever, the purchase price of German pianos was steep, making them unaffordable to most buyers. i • Since the 1990s, a dozen or more high-end European piano makers were aggressively marketing their pianos in the US. However, the disadvantageous European exchange rate !, prevented them from making major inroads in the American market. II Pianos from Eastern European, which were earlier competitively priced, seemed to have lost out to Chinese pianos, which offered better quality. There w ere only two significant players left in Eastern Europe, namely, Estonia and Petrof
Japanese Piano Market Japan was primarily a piano producing county and was home to the tw o or the largest piano companies in the world, namely, Kawai and Yamaha. Contd.;
13 " 264 International Business Strategy
! 314-093-1
Contd ... I • As of 20 13, Kawai produced more than 75% of its pianos i~Japa~. This nU,mber wa~ much closer to 25-50% for Yamaha, which produced most of its pianos In Indonesia and China,
Chinese Piano Market • Inthe 1990s, rising wages in Korea and Japan caused much of the piano production in those countries to move to Indonesia and China. I The economic emergence of China during the 2000s enabled it to produce low-priced but low-quality pianos that were introduced globally. In 2006, China overtook Japan and Korean to become the largest piano producing country in the world. Large piano makers for the North American market were Baldwin, Pearl River, the government-owned factories in China, Parsons Music (Hong Kong), Yamaha (Japan), Young Chang (Korea), and, for the Canadian market, Kawai (Japan). Other foreign-owned companies that owned factories in China or had contracts with Chinese manufacturers to make pianos for the US market included AXL (Palatine brand), Bechstein (W. Hoffmann Vision brand), BlUthner (IrmJer Studio brand), Brodmann, Cunningham, Feurich, Heintzman, Perzina, Schulze Pollmann, Wilh. Steinberg and Steinway & Sons. From 2000 onward, sales of pianos continued to be robust in China, increasing 20% year on year. There was a rising demand for pianos produced in Germany and Japan. The rising popularity of the piano in China was attributed to the improvement in the financial situation of many Chinese in the past 30 years.
As of 2013, China had about 5 million children and youth learning the piano, and about 80% of the pianos sold in China each year were for them. Compiled/rom Various Sources I,
14 --. CHINA'S PEARL RIVER PIANO: TUNING INTO THE GLOBAL MARKET .------265
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Exhibit II
Timeline ofGuangzhou Pearl River Piano Group Ltd. (PRGP)
Y e a r Particulars
1956 PROP. a Chinese state-ow ned enterprise, founded
1987 Granted permission to exp art its products
1987 Began operations at its new five-storied factory having a total space of one million square feet.
1988 Implemented 'Total Quali ty Management'
1992 Tong became the Chief Ex ecutive Officer (CEO)
1995 Entered intoaUS$IO million, 20-year joint venture agreement with Yamaha
1997 Took over several sm alter loss-making state-owned m u s ic a l in s tru m e n t manufacturers
1998 Became the first Chinese p lane company to obtain ISO 9001 q u a lity certification
1999 Set up itsUS-based sales subsidiary, 'PRPG America, Ltd.'
2000 Acqu~ed Ritmuller, with its brand license and piano manufacturing technology
2000 Became a market leader i n the Chinese Piano market with a market share of more than 60% and a 50% market s h a re in the Chinese export market
2002 Overtook Yamaha to beco me the world's largest piano maker
2004 Company opened its first European office in Munich, where it undertook design and research and developn lent activities.
2005 W on contract to produce the lower-priced 'Essex' line of pianos for the world's most renowned piano mak ing company, Steinway & Sons
2007 Huang Weilin succeeded T ong as CEO
2007 The 'Kayserburg' brand, largeted at professional piano players (the high end of the market), was launched
2009 Emerged as the undisputed market leader in the lower end of the US piano market
2012 Went public onthe Shenzh en Stock Exchange, China
20I3 Introduced the 'Kayserbur g Artist' brand of pianos in the US
Compiled/rom Various Sources
15
1 !.....iI 266 International Business Strategy ::------
314· 093· 1
Suggested Readings and References:
I. "Make No Mistake, They're Coming for Our Jobs," http://the-m ound-of- sound.blogspot.in, January 13, 20i4. 2. Wieland Wagner, "Brand Expansion: China's Race to Conquer W orld Markets," www.spiegel.de, January 08, 2014. 3 Nirmalya Kumar, "Brand Invasion," www.rhemarketer.co.uk Zrlld. 4. "Major Challenges, Minor Successes," www.econcmist.com, December 7, 2013. 5 Ni Tao, "How Chinese Brands Overcome Obstacles and Become Global;' www.shanghaidaily.com, October 21, 2013. 6. Sun Ye,"Piano Man Always in Tune," http://usa.chinadaily.com.cn, September 10,2013. 7. "Hare Vs Tortoise: How Chinese Brands Are Trying to Go Global," www.fox.temple.edu,July21,20Il
8. "Schum peter: The Emerging-Brand Battle," https:llglobalconnections.hsbc.com, June 25,2013. .
9. "Global and China Piano Industry 2013," www.prweb.corn, Juiy 21, 2013. 10. Nirmalya Kumar, "Can You Name a Chinese Brand?" www.hufflngtonpost.com, June 20,2013.
II. N irrnalya K um ar, "Can the Next Samsung Come from China," hrtp.Zbsr.londcn.edu, June 10, 2013.
12. Antonia Oprita, "The World Will Be Manufacturing for China," www.emergingmarkets.org, M ay 30, 20 Il
13. "China's Piano Manufacturing Technology Reaches European (International) Level," www.redorbil.eom,July n, 2012.
14. "Guide to the Piano World: Part Two by Kendall Ross Bean," www.pianofinders.com, May 29, 2012.
15. "Pearl River Piano: Building a Chinese Brand for the Global M arket," http://knowiedge.ckgsb.edu.en, August 28,2010.
16. Claire Zhong and Enrico Lanzavecchia, "Key Drivers and Success Factors for Chinese Companies Going Abroad," www.valuepartners.com. 2009. 17. "Country Of Origin, Branding Strategy And Internationalization: The Case Of Chinese Piano Companies," www.academia.edu, August 3, 2008.
i8. Petroc Trelawny, "China's Piano Fever," www.spectator.co.uk, June 4,2008. 19. Govindraj Ethiraj, "Merger on the Orient-Express," www.business.standard.com. December 25, 2007. 20. Jan-Benedict E.M. Steenkamp, "The New Competition: Brands from Emerging M arkets," www.world.financialreview.com. 2007. 21. Kunal Kumar Kundu, "Move Over, Fortune 500," http://atimcs.com, August 5, 2006. 22. T.K.Maloy, "From Pearl River to You," www.upi.com. Septem ber 3D , 2003. 23. "Made In China: Can China Build An Apple Or Ikea?" w w w .cnbc com August 19 2003. ..,,
24. www.pearlriverusa.com 25. www.ritrnullerusa.com 26. www.pianoworld.com 27. www.pearlriver-europe.de 28. www.namm.org
16 ~
_ ALEOFTHREECOMPANIES'T _ ------.:.A~T . HESURVI~L STRATEGIESOF SONY, HITACHI AND CANON 167 ------
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I
A Tale of Three Compa nies: The Survival Strategies of Sony, Hitachi, and Canon
A History of the Japanes e Electronics Industry
C ase study
r~ppo!ini, und~r the ~irectjon of Prof. Parissa Haghirian, Sophia University. It This case was written by DavidT SIS for class diSCUSSIonrather than to Illustrate either effective or ineffective Is intended to be used as the ba tion. The case was compiled from published sources. handling of a management situa
e 2013, Sophia University. be copied, stored, transmitted. reproduced or distributed in any form or No part of this publication may permission of the copyright owner. medium whatsoever without the
North Am.rlo IloInofth._,1d D lm lbut.d b y K
.... -=2~6:::8:.....+~ln:::ternationafBusiness Strategy I ------~-- I,
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A Tale of Three Companies: The Survival Strategies of Sony, Hitachi, and Canon
A History of the Japanese Electronics Industry
After World War II, Japan was still developing economically and nobody could Iii have predicted the economic success that the country would go on to achieve. A major player in this process of development was Japan's electronics industry. After the war, many firms were created in the field of technology, and they started to develop consumer electronics products. They quickly became large exporters, beating their foreign competitors with hardware breakthroughs and high-quality products. They have been responsible for huge advances concerning such things as lasers, diodes, screens, and semiconductors. By driving down their manufacturing costs thanks to cheap labor, and copying the designs of Western products, these companies overpowered the US consumer electronics industry.
I By 1985, Japan was exporting more color televisions than the US. The Japanese companies pushed the limits of technological development by creating the most advanced products while moving the manufacture of basic components to developing countries. In the late 1990s, the demand for electronic gadgets was very high. The Internet and personal computer use were exploding allover the world. This trend, combined with a depreciating yen, saw Japanese firms earning fortunes. Thus, Japan became the world hub of high-tech electronics.
The Japanese Management System
The success of these electronics companies was based on traditional Japanese , management practices, which differ greatly from Western business approaches. The main objectives of Japanese firms are stability and cooperation. Japanese corporations also have a strong focus on processes and procedures, which should be performed as carefully as possible. This idea is based on the traditional samurai code of Bushido, in which performing one's task at the highest level is considered a virtue.
The principle that processes must be performed with great care and patience was very useful for Japanese firms during the period of rapid economic development. Since many Japanese firms were only just starting out in manufacturing, they had the opportunity to improve and perfect operation and production processes.
In Japanese, the term "manufacturing" translates as monozukuri, literally "making things." Many Japanese corporations, for example Toyota, have become world leaders in cost-effective and high-quality production. This dedication to process
2 ______------:A~T~AlE Of THREECOM PANIES:THESURVIVALSTRATEGIESOf SONY,HITACH IAN D C A N O N_-!-.....lIlML....1
3 1 3 -1 3 4 -1
has also helped Japan's elec t ro rn . c s fitrrn s to create outstanding products that are often the world's thinnest and smallest.
Monozukuri is a source of national pride and the spirit of craftsmanship is h e ld responsible for the post-war success of large Japanese firm s such as Panasonic and Sony (Wakabayashi, 2010). However, many Japanese corpo ra tio n s a re thought to focus too much on producing the best quality, and a re criticized for losing track of consumers' wishes as regards newer designs a nd innovative p ro d u c ts .
Another aspect of Japanese human resource management is life tim e employment. Japanese people employed under this system ente r a life o f dedicated service to one company, and job transfers are neither socially acceptable nor desirable. Many Japanese believe that this a pproach is also responsible for the impressive rise of Japanese firms as world-class competitors (Kambayashi and Kato, 2008). For example, all workers start b y s o lv in g problems at a grass-roots level, which provides them with us e fu l b a s ic knowledge, and the involvement of employees in the company is subsequently boosted via specific training. This philosophy also encourages information- sharing between different generations and hierarchical le vels; but lifetime employment is by no means an unmixed blessing for firms (Tabu s h i, 2 0 0 9 ).
Lifetime employment has also resulted in another aspect of J apanese corporate culture: seniority-based wages. As the name suggests, the s alary of workers increases on the basis of age and not merit. Unfortunately, h owever, this system does not reward employees who perform better, and in a world w here emerging countries are becoming very aggressive, this is a competitive disadvantage. Reform here could enhance the competitiveness of Japanese firm s (E n d o ,
2 0 0 6 ).
A central pillar of the Japanese economy and perhaps its most d e fin in g characteristic is the keiretsu structure of many manufacturing firms. Keiretsu is the term for a conglomerate or financial group. Traditionally , keiretsu a re vertically organized, consisting of many small and medium-sized businesses that come together to form one unified company. The firms are ofte n centered around
a large bank.
Keiretsu have been a key element of Japan's rapid industrial developm e n t a n d transformation since the early 1950s (Calder, 1993). A keiretsu consists of a set of companies with interlocking business relationships and share holdings. The companies each own a small portion of the shares. The result ISthe creation of a j' h e conglomerate that grows slowly, and by taking few risks. Its structure protects the members from foreign takeover and market fluctuation; s in c e th e y have tied their fates together, when stocks for one company In the group grow, they will all grow, and when losses are incurred, they can be s pilt between all the
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members. However, such structures are very static and are slow to react in a crisis (Howard, 2002).
Another important factor in the rapid economic development of Japan and its electronic firms is the Japanese work ethic and focus on achievement. One of the highest virtues is that of doing one's best, persisting, and w.orking hard. . Ganbaru is an active process wherein one works hard in pursuit of a goa l, strive s to overcome difficulties that might arise, and takes on difficult tasks even though they might be arduous. It also embodies the philosophy of transforming one's future and status by one's own efforts, regardless of person al background.
The Present Japanese Electronics Industry
Since the start of the 21" century, many Japanese electronics companies have struggled with financial problems. Foreign companies from South Korea and Taiwan are capable of improving their products more quickly and are able to manufacture more user-friendly goods. Thanks to a more effe ctive marketing strategy, they now lead in many sectors, including Japan's former fiefdoms of TVs and computers. In 2009, after the financial crisis, Samsung Electronics had an operating profit twice as large as the combined profit of n ine of Japan's largest consumer electronics companies.
Sharp is a good example of this decline. The company that inve n te d L C D technology announced record losses for 2012, and the chairm an expressed severe doubts about the survival of the company. Similarly R e n e sa s, th e Japanese manufacturer of semiconductors, will have to be ba iled out by the Japanese government to avoid bankruptcy. Finally Nintendo , the legendary videogames company, announced the first loss in its history in 2 0 1 2 .
Much ink has been spilled in the attempt to explain this decline. Japanese managers are inclined to blame the strong yen, which makes it more difficult to export goods. This is a problem that does not affect Korean firms, which have fewer problems with a strong currency. They can manufacture products almost as well as their Japanese counterparts, but at a much lower price. Other factors such as the FUkushima disaster, and the flood in Thailand, wh e re m a n y Japanese factories are located, are also considered factors in the decline. More recently, territorial tensions with China led to a boycott o f Japanese products that affected the turnover of many electronics firms.
Despite this deterioration, in 2013 Japan is still a pillar in the field of technology. Japanese companies no longer dominate the sector as they did before, but some remain significant players in the electronics industry. Th ese inolude Hitachi Sony, Nikon, Canon, NEC, Nintendo, Panasonic, Olympus, Sha rp , Toshiba, a n d many others. It would be too simplistic to say that these comp anies, with their
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