Both cases illustrate the typical challenges facing western retailers success in China. The big-box retailers not only need to face the challenges from their local competitors and the different practices in Chinese retail industry, but also to adapt to Chinese consumption culture. Facing the complex operating environment, both companies need a long-term vision and commitment to strengthen their brand image and create values for their customers.
Brownfield Entry in Emerging Markets
Author(s): Klaus E. Meyer and Saul Estrin
Source: Journal of International Business Studies, Vol. 32, No. 3 (3rd Qtr., 2001), pp. 575-584
Greenfield: A Greenfield project gives the investor the opportunity to create an entirely new organization specified to its own requirements, but usually implies a graduate market entry. It is a start-up investment.
Acquisition: An acquisition facilitates quick entry and immediate access to local resources, but the acquired company may require deep restructuring to overcome a lack of fit between the two organizations.
Brownfield: A Brownfield is a foreign acquisition undertaken as part of the establishment of a local operation. From the outset, its resources and capabilities are primarily provided by the investor, replacing most resources and capabilities of the acquitted firm. It is a hybrid mode of entry.
Two frameworks establish determinants of entry mode choice
Resource requirement based on transaction and integration costs
Managerial applications: Decide the entry mode based on transaction and integration costs and resources
1. The relationship between institutional variation across countries and emergence of brown strategy.
2. Incorporate brownfield into analyses of both determinants of entry mode choice and the impact of entry modes on subsidiary performance
In May, I took a trip to Shanghai, China, for a project to establish a partnership between a Chinese horticultural company and a Holland breeding company. It was a win-win collaboration for both, not only helping the Holland company to break into the Chinese market with minimal resource, but also upgrading the Chinese company with new product varieties without adding R&D investment. During the meeting, there was only one concern from the Holland company: the price for the new products in Chinese market were set lower than the Holland company expected. The Holland representative could not accept the recommendation from the Chinese company. After all, the same types of flowers are sold at a premium in other global markets! In order to understand this pricing recommendation, we visited the horticulture supply chain in that region, from flower growers, to flower market, to flower retailers. After examining the entire supply chain, the representative agreed with the lower pricing strategy today for future long term growth.
Production – Flower growers
When the Holland representative saw the greenhouses in the region, he commented: What a low cost production! The farmers enjoy the benefits from local natural geographic condition. All things being equal, such as the amount of fertilizer used for every square meter of land or type of greenhouse equipment invested, it costs the U.S. growers five times more than the Chinese growers in labor, not just because of cheaper labor in China. The underground water system in the Eastern China region provides the Chinese growers a natural watering system. Therefore there are much less labor required to water and grow the plants. On top of it, the government subsidizes the greenhouse facility investment, which lowers the production cost even more.
In the different areas of the same region, there are significant differences among greenhouse business models. We visited the greenhouses managed by the young generation of growers, who are connected using the internet and smartphone like an iPhone or Android phones. They are educated and ambitious. They want to grow the best plants and dominate the market. Due to the economy of scale, they can not only achieve lower cost from higher production efficiency but also receive a volume discount for plants and farming materials. From them, I see the picture of tomorrow’s Chinese agricultural industry.
The traditional farming model co-exists with the modern farming management. Many individual farmers manage only two or three small greenhouses in their backyard. All farming work is done by the family members. Those individual families unite together to form an organization. The organizer of the group sells their harvest together and also combines their purchasing of raw materials to lower the purchasing cost. The organizer benefits from the commissions of sales.
With the advantages from Mother Earth and the effective business model in the local market, the production of flowers is efficient and lean, and thus minimizes the production cost.
Distribution – Flower Market
A visit to the local flower market explains why premium pricing will not work even though the growers grow high quality flowers. The local market consists of the first level wholesalers and the second level distributors. Wholesalers ship the flowers by truck from their fields to the market. Distributors will buy from several wholesalers for different varieties and then deliver them to retailers.
During the consolidation and distribution process, there are two major factors contributing to damage of flowers:
1) Packaging. There is minimum packaging for the flowers. In other global markets, the flowers are carefully packed in paper cartons or in buckets for best protection and petals expansion. In China, the growers only use a single layer of plastic cone to cover the petals. This kind of packaging method does not provide much protection for flowers during transportation.
2) Shipping. From the growers to the market and from the market to the retailers, the flowers are firmly stacked inside trucks or cardboard boxes without any space to breathe. In the same size of truck, the Chinese farmers can ship almost 20 times more than the U.S. farmers can. I joked that the extreme loadability was such an effective way to minimize their supply chain “carbon footprint”!
The ruthless transportation minimizes the transportation cost for flowers, damages flowers during transportation, and causes a much lower price for flowers without perfect presentation.
Customers – Retailers
Retailers and the final sales of flowers determine the brutal transportation in some way. The majority of customers of retailers are not individual consumers like you and me, but businesses! It may be a phenomenon only in China that businesses buy a lot of flower baskets for business openings or events. So, flowers are not sold for a long vase life but a very short exhibit life of a few hours. Under these kinds of circumstances, flower quality is really not a selling point unless those flowers are used for a wedding ceremony. Unfortunately, unlike luxury products, such as a purse, flowers are not a product defining a consumer’s social status. Therefore, consumers pay less attention to flower quality so retailers will not push upstream distributors to improve flower quality by minimizing damage from transportation.
For any global company breaking into a new market, it is extremely important to evaluate the local supply chain in its entirety from upstream to downstream. By understanding the local supply chain, the company can define its marketing and pricing strategy without disconnecting from the local market. The Holland company would price itself out of the market without understanding the entire process from growing to transportation. Through a complete investigation into each component of the supply chain for these flowers could we fully grasp the individual dynamics of the Chinese market. Any international company needs to fully assess the specifics, find the local expert who understands the unique market characteristics in order to implement the correct marketing strategy. This article is a case of horticultural product going into a new market. However, the learnings from this case can apply to many other products and industries who are seeking opportunities in the international market.