Case Study On Indian Brands In China

MUMBAI & DELHI: It's perhaps the most unscientific way of determining a shift in phone fortunes. But after over a decade of hearing this happen, I believe I've found the first sign of coming mobile dominance (or decline): the ringtones you hear on public transport, the first class compartments of Mumbai locals, for instance. Long before data confirmed the ebb in its fortunes, Micromax's distinct sitar soaked caller tune was ceding ground to the ebullient chiming of a tune Xiaomi simply calls Mi. Just as Nokia's ringtone gave way to Samsung over half a decade ago, and Samsung shifted to accommodate Micromax over the last couple of years.

It's no secret that Chinese smartphone handset makers, as a collective grouping, have a dominant share of the Indian market - the Korean Samsung still maintains its lead. According to an IDC report, the Chinese vendors have grown by a staggering 142.6% which translates into a 51.4% share of smartphone shipments in India. The share of homegrown vendors has fallen to 13.5% in the first quarter of 2017 from 40.5% in Q1 2016. News reports quoting CyberMedia Research believe the dominance could extend in the quarter through June.

It seems like only yesterday that Micromax topped the leaderboard after years of snapping at the heels of Samsung - it was actually in 2014-2015 - before settling down as a strong No 2. Intex frequently made it to the Top 5. So, what happened?

After making history, the Indian brands didn't learn from it
The decline brings with it a heady whiff of déjà vu. Indian smartphone makers fell to ruses from the same playbook they'd used to dislodge the likes of BlackBerry and Nokia; brands that were big, complacent and unable to see the future or react in time. In Nokia's case it was dual-SIM phones. With BlackBerry, it was smartphones. With the Indian players, it was their relatively sluggish adoption of 4G. An industry insider who wishes to remain anonymous says, "The single biggest shift last year was Reliance Jio. The market moved faster than anticipated. Some players read the market wrong and their folio was overwhelmingly skewed towards 3G." As a result, Indian brands went quiet, realising it was pointless spending to promote a feature set that was lacking. A void that the Chinese manufacturers were only too happy to fill.

Indian phone makers exhibited 'unenlightened selfie interest': ignoring the sheer power that staking a claim to the 'selfie', conferred on a brand. India currently leads the world in selfie-related deaths, if some media reports are to be believed. Even disregarding that dire statistic, the rise of Instagram, Snapchat and burgeoning popularity of apps like musical.ly, shows a heavy skew towards the use of front-facing cameras. It was ripe for the taking, but the people doing the taking were the Chinese brands. As Gionee, Vivo and Oppo (the last two are owned by the same firm, BBK, which also counts OnePlus as a wholly owned subsidiary) squabbled for the mantle of selfie expert, the Indian brands were entirely out of the frame.

The Indian brands were out of touch with how much the customer was willing to pay
These brands began as traders and price warriors. And while that mindset helped them get this far, it's been hobbling their growth ever since, believe the experts. Their initial offer was often a spec sheet similar to a leading brand but priced below the Rs 10,000 mark. What the Chinese brands did was explode the Rs 10,000 plus market, allowing them the leeway to go in for a more premium feature set. As marketing consultant Jagdeep Kapoor of Samsika puts it, "The Indian players should have made their brand count instead of making it discount! The Chinese moved up the ladder from product to brand as the Indians moved down from brand to commodity. They didn't realise the smartphone is something consumers don't just use, but show off."

They lost track of who and what consumers found cool
Over the last few years, the Chinese smartphone makers have commandeered every Indian celebrity that matters. Deepika Padukone is endorsing Oppo, Ranveer Singh is peddling Vivo, Alia Bhatt and Virat Kohli are mouthpieces for Gionee and even the Big B has been harnessed to flog OnePlus.

But perhaps the biggest coup was by Vivo, joined at the hip to India's most viewed sporting league. Says Vivek Zhang, CMO, Vivo, "Our association with IPL starting 2016 proved to be a major milestone." Encouraged, Vivo has tied up with the Pro Kabbadi league for five years. Says Zhang, "Going forward, we are focusing significantly on our strategic associations across genres to reach our customer base."

Contrast that to Micromax which, pursuing global ambitions, went in for Hugh Jackman, a star that the hinterlands didn't recognise or care much about. And then last year, it did an ad in English with a starcast whiter than a Ku Klux Klan rally. And yet another with a 'desier than thou' vibe starring comedian Kapil Sharma ranting against English. It left consumers confused about who or what the brand really stood for. Intex relied on the dubious star appeal of Farhan Akhtar and bet big on the Gujarat Lions who finished second last in the IPL. Celebrities of course can't rescue a brand, but if the communication strategy involves a billboard and TV blitzkrieg, it helps having the most popular faces on your side.

The desi brands squandered their opportunity to lead
All the experts conclude Indian brands could have used the time they'd pulled ahead a lot better. Says Nilesh Gupta, managing partner, Vijay Sales, a Mumbai-based durables retail chain, "Had they setup R&D and manufacturing, the game would have been different. If your source starts to sell directly, they will outsmart you." Xiaomi succeeded, relying on an online first model and extraordinary levels of brand loyalty - fans promoting phones and other products to friends, colleagues and fellow netizens, according to Manu Jain, MD for Xiaomi India. If Indian brands were thinking on these lines, there's precious little to show for it.

Next is What?
The old Samsung tagline is probably giving CMOs at the desi phone brands sleepless nights. As the industry insider puts it, "A good analogy is a lion charging a herd of buffalos. Your strategy individually is to be only faster than the slowest buffalo. For each player, there are other more vulnerable brands you can steal share from." He recommends not taking the Chinese head on but finding a space or a price range where a brand can be a Top 3 player. The other choice is to hold out until the Chinese blitzkrieg subsides. Market sources claim the cost of acquisition is up from `500 to close to Rs 7,000 or Rs 8,000. Maybe if one or more of these do a LeEco and spend themselves out of the market, they'll leave behind a more level playing field.

In a previous interview Keshav Bansal, director, Intex was optimistic that a return was imminent: "It's 100% possible for Indians to come back. Our trump cards are credibility, trust and knowledge of local market." The last, perhaps most difficult option, is to fight these brands by finding the next big opportunity in the mobile space. Something that these players will hopefully be too big or complacent to acknowledge. And then to do unto them, what they did unto the Indian handset makers.

Executive Summary: IKEA is known globally for its low prices and innovatively designed furniture. In China, however, it faced peculiar problems. Its low-price strategy created confusion among aspirational Chinese consumers while local competitors copied its designs. This case study analyses how IKEA adapted its strategies to expand and become profitable in China. It also assesses some lessons the company learnt in China that might be useful in India, where it plans to open its first store by 2014 and 25 stores in 10 to 15 years.

Swedish furniture giant IKEA was founded by entrepreneur Ingvar Kamprad in 1943. He began by selling pens, wallets and watches by going door to door to his customers. When he started selling his low-priced furniture, his rivals did everything to stop him. Local suppliers were banned from providing raw material and furniture to IKEA, and the company was not allowed to showcase its furniture in industry exhibitions. What did IKEA do? It innovated to stay in business. It learnt how to design its own furniture, bought raw material from suppliers in Poland, and created its own exhibitions. Today, IKEA is the world's largest furniture retail chain and has more than 300 stores globally.

In 1998, IKEA started its retail operations in China. To meet local laws, it formed a joint venture. The venture served as a good platform to test the market, understand local needs, and adapt its strategies accordingly. It understood early on that Chinese apartments were small and customers required functional, modular solutions. The company made slight modifications to its furniture to meet local needs. The store layouts reflected the typical sizes of apartments and also included a balcony.

IKEA had faced similar problems previously when it entered the United States. The company initially tried to replicate its existing business model and products in the US. But it had to customize its products based on local needs. American customers, for instance, demanded bigger beds and bigger closets. IKEA had to make a number of changes to its marketing strategy in the US. The challenges it faced in China, however, were far bigger than the ones in the US.

As the company opened more stores from Beijing to Shanghai, the company's revenue grew rapidly. In 2004, for instance, its China revenue jumped 40 per cent from the year before. But there was a problem - its local stores were not profitable.

IKEA identified the strategic challenges and made attempts to overcome them. One of the main problems for IKEA was that its prices, considered low in Europe and North America, were higher than the average in China. Prices of furniture made by local stores were lower as they had access to cheaper labour and raw materials, and because their design costs were usually nil.

IKEA built a number of factories in China and increased local sourcing of materials. While globally 30 per cent of IKEA's range comes from China, about 65 per cent of the volume sales in the country come from local sourcing. These local factories resolved the problem of high import taxes in China. The company also started performing local quality inspections closer to manufacturing to save on repair costs.

Since 2000, IKEA has cut its prices by more than 60 per cent. For instance, the price of its "Lack" table has dropped to 39 yuan (less than five euros at current exchange rates) from 120 yuan when IKEA first came to the Chinese market. The company plans to reduce prices further, helped by mass production and trimming supply chain costs.

High prices were one of the biggest barriers in China for people to purchase IKEA products. IKEA's global branding that promises low prices did not work in China also because western products are seen as aspirational in Asian markets. In this regard, IKEA's low-price strategy seemed to create confusion among Chinese consumers.

The main problem for IKEA was that its prices, considered low in Europe and the US, were higher than the average in China

The company realised this and started targeting the young middle-class population. This category of customers has relatively higher incomes, is better educated and is more aware of western styles. Targeting this segment helped IKEA project itself as an aspirational western brand. This was a massive change in strategy, as IKEA was targeting the mass market in other parts of the world.

IKEA also had to tweak its marketing strategy. In most markets, the company uses its product catalogue as a major marketing tool. In China, however, the catalogue provided opportunities for competitors to imitate the company's products. Indeed, local competitors copied IKEA's designs and then offered similar products at lower prices. IKEA decided not to react, as it realised Chinese laws were not strong enough to deter such activities. Instead, the company is using Chinese social media and micro-blogging website Weibo to target the urban youth.

IKEA also adjusted its store location strategy. In Europe and the US, where most customers use personal vehicles, IKEA stores are usually located in the suburbs. In China, however, most customers use public transportation. So the company set up its outlets on the outskirts of cities which are connected by rail and metro networks.

The China expansion came at a cost. Since 1999, IKEA has been working on becoming more eco-friendly. It has been charging for plastic bags, asking suppliers for green products, and increasing the use of renewable energy in its stores. All this proved difficult to implement in China. Price-sensitive Chinese consumers seem to be annoyed when asked to pay extra for plastic bags and they did not want to bring their own shopping bags. Also, a majority of suppliers in China did not have the necessary technologies to provide green products that met IKEA's standards. Helping them adopt new technologies meant higher cost, which would hurt business. IKEA decided to stick with low prices to remain in business.

As IKEA prepares to enter India, its China experiences will come in handy. It understood that in emerging markets, global brands may not replicate their success using a low-price strategy. There always will be local manufacturers who will have a lower cost structure.

Chinese competitors copied IKEA's designs from its catalogue and then offered similar products at lower prices

It is more important what customers think about the company rather than the other way around.

IKEA wanted to be known as a low-price provider of durable furniture, while Chinese consumers looked at IKEA as an aspirational brand. It is likely that Indian consumers will also look at IKEA in a similar way.

The company also learnt that emerging economies are not ready for environment-friendly practices, especially if they result in higher prices.

IKEA, famous for its flat-pack furniture which consumers have to assemble themselves, realised that understanding the local culture is important - Chinese people hate the do-it-yourself concept and Indians likely do so even more.

IKEA may face some India-specific challenges such as varying laws in different states ruled by different political parties. This could make its operations, especially distribution and logistics, a bit challenging. IKEA already has had to wait a long time to get permission to open stores in India. The delay in policy-making at the state level could be even longer.

Indian customer preferences and economic environment are similar to the Chinese market.

IKEA will likely have hopes of attracting India's urban middle-class buyers who are keen on decorating their homes with stylish international brands. The company has learnt that doing business in emerging markets is a different ball game for a multinational company. IKEA did well to adapt in China, although it took numerous changes to its strategies and more than 12 years for the company to become profitable in the Asian nation.

FDI in retail in India has been a non-starter, hopelessly mired in special-interest politics:Prof Nirmalya Kumar

Ikea's India rollout will be slow: Prof Nirmalya Kumar

The success of IKEA in China is an interesting adaptation example by a global retailer. Yet, it may not be much of a predictor of IKEA's fortunes in India. This may have less to do with IKEA and more to do with the economic policies of India.

A well-designed foreign direct investment (FDI) policy should have resulted in a rush of much-needed foreign investment to India, upgrading of the supply chain, modernisation of the retail sector, as well as more choices for consumers with lower prices. Instead, FDI in retail, like in higher education, has been a non-starter, hopelessly mired in special-interest politics. The rules are so onerous that a mass retailer such as IKEA will find it hard to meet them without penalising customers with higher prices and lower choice.

Also, it will be difficult for IKEA to find the type of location (size, off a highway, with great links to a major metropolis) that is crucial to the success of its business model. This will mean the first store will take much longer to open than Indians expect and the rollout will be painfully slow. Fortunately, as a privately held company with a longterm orientation, IKEA will persevere where more impatient publicly held firms may have given up.

For India to kick its economy back to the growth rates necessary for meeting the aspirations of its citizens, we need to roll out the red carpet for foreign investors instead of red tape. Competition law and trade policies are supposed to ensure that a free competitive marketplace exists, with easy entry and exit, not protect existing competitors from new entrants.

Capitalism without failure is like religion without sin.

Prof Nirmalya Kumar, Professor of Marketing and Director of the Aditya Birla India Centre at London Business School


It's essential for successful marketing campaigns to take into consideration the local approach: Yelena Zubareva

The main challenge is to adapt: Yelena Zubareva

There is no formula for success that fits all marketing strategies when a global brand decides to try a new market, except perhaps unconditional acceptance and responsiveness to changes. The greatest challenge is to adapt constantly. It's essential for successful marketing campaigns to take into consideration the local approach versus the global/regional desire for standardisation. A onesize-fits-all approach is a rare reality. A consistent global brand promise is a desirable asset but what makes a real difference is to be brave and ready to change the target audience and build a differentiating promise.

IKEA made all necessary adjustments to make sure there was no mismatch in its growth ambitions and brand promise. Becoming an aspirational brand which is blogging with the Chinese middle-class youth is an unexpected twist in its brand proposition. IKEA demonstrated courage to get the most relevant changes. By courage I mean all big corporations are ready to shift production, work with local sources, overcome legal requirements but not too many of them are ready to adapt a brand proposition that suits the level of development the market and consumer perception require.

IKEA is a strong brand that understands that growing globally requires sacrifices and innovation from global teams, and they are ready to listen, respect and learn from the local environment. The European headquarters' excitement to enter new markets with proven best practices is something of the past, proving that the real shift in the global mindset is to recognise that local versus global can bring optimum results.

Yelena Zubareva, Regional Marketing Manager, FWS/OEM SHELL

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