Marketing 514 – Dr. Masaaki Kotabe Fall 2002
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Motorola: China ExperienceMOTOROLA:
CHINA EXPERIENCE[*]
Group #3:
Eric Berken
Yanhua Dai
Dec 12, 2002
Table of Contents
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PART - I
Introduction……….……………………………….…………..3
Company Background…………………………….…………..3
Market Structure Analysis……………………………………7
Competitor Analysis…………………………………………..9
Consumer Analysis…………………………………………….13
Marketing Strategy……………………………………………16
PART – II
Moving Forward (Case Review)……………………………….19
Discussion Questions…………………………………………..23
Recommended Strategy………………………………….……23
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PART - I
Introduction
This news was unsettling but expected for Brian Lu, the General Manager of Motorola China's Personal Communication Sector. He had just received a report on about the most updated market analysis. The report was on the intensifying of market competition in the Chinese cellular phone industry and stressed the emerging Chinese brands, among which TCL is the current leader. TCL is They are eating shares from all of the international brands including Motorola. He knew the Chinese government's policy of promoting local companies over their international counterparts, and this report confirmed a fear that he had had since he was promoted to his current position.
Brian understood that Motorola, as the number one foreign import/export company in China, was in a unique situation. Through the creation of complete locally sourced production and development, Motorola had established a strong infrastructure and developed powerful relationships within China. He now wondered, what was Motorola's best strategy to take advantage of their company's previous development? The company needed a plan of action and he decided to arrange a meeting to discuss how Motorola should react to these local brands and overall market competitive pressures.
Company Background
Motorola Company Background: Motorola was founded by Paul V. Galvin in Chicago, Illinois, in 1928. Under the leadership of Robert W. Galvin, Paul’s son, Motorola expanded into international markets in the 1960’s and began to switch its focus from the previously dominant consumer electronics market it had targeted. The company sold its color television receiver business, which then allowed it to concentrate energies on high-technology endeavors in commercial, industrial, and government fields. By the end to the 1980s, Motorola had become the leading worldwide supplier of cellular phones. Following a merger with General Instrument Corporation, Motorola became a leader in cable modems and set-top terminals. This allowed the company to become a leader in chip system level technology, harnessing the power of wireless, broadband, and the Internet. Motorola is the first company to offer wireless always-on access to the Internet through its use of General Packet Radio Service (GPRS) protocol technology. As an industry leader Motorola has continued to grow and in 2001 the company had worldwide sales of $US 30 billion.
Motorola China
Overview:[1] Motorola Motorola entered China in 1987 when it opened its first office in Beijing under the name of Motorola China Electronics Ltd. In 1992, it set up the Motorola (China) Electronics Ltd. in Tianjin and began to produce beep-pager, mobile phone, two-way radio, wireless communications facilities, semiconductor, automobile electronics etc. The products not only are sold in China but also are distributed to world markets. Through its early production of beep-pager, mobile phones, and two-way radios, wireless communications, semiconductors, and automobile electronics, the company has become the biggest foreign-import export company in China (according the Chinese edition of Fortune), now Motorola is the biggest foreign electronic company, the biggest American company and the most successful foreign company in China.
Motorola China utilizes local sourcing in a “win-win or two + three + three” development strategy to make China its local home and development base in Asia. Motorola's China operations consist of one wholly owned factory, one holding company, eight joint ventures, 18 R&D facilities and 26 sales offices. Motorola China employs a total of 13,000 people. The company’s integration and sales goals are being driven by R&D centers, management training, and joint venture partner assistance that have established the company’s ability to develop, enhance, and distribute products to local consumers. The overall goodwill created by Motorola’s efforts to produce completely within China have insured the companies continued development within China’s complex consumer and business markets.
Motorola China’s specific “two + three + three"”[2] is is the company’s clearly defined approach for the future. The "Two" means to turn China into both a global production base and a research and development base of Motorola. Now, the production base of Motorola in Tianjin has two consisting parts: semiconductor production center and Asian communications production base. Motorola has also decided to build up a research and development base in China taking Beijing as the center. In the coming 5 years, Motorola will increase US$1 billion R &D fees and recruit 4,000 research fellows. By that time, Motorola's total R&D investment in China will reach US$1.3 billion. The 1st "Three" means three US$10 billion: by the end of 2006, an annual output value of US$10 billion in China; by the end of 2006, a total investment of US$10 billion in China, including investment from strategic business partners like joint venture partners and suppliers; an accumulated US$10 billion purchasing of accessories and services from China in the coming 5 years. The other "Three" means laying great emphasis on the development of digital trunking and iDEN, semiconductors and broad brand besides wireless communications, and making the 3 operations the new profit increase points of Motorola.
Motorola has taken various measures to implement the "two + three + three" strategy, which include adjustment of the company's worldwide manufacturing capacity, the decision to increase R&D investment in China, the establishment of a software center in Chengdu, and plans of the Energy Systems Group to establish its Asian design and procurement headquarters in Shanghai.
A major factor in Motorola’s expansion is its utilization of joint venture partners to implement the infrastructure to develop outlets for its products. Joint contracts with China Mobile and companies like Cisco[3] and Nortel Networks[4] have allowed Motorola to expand into the vast Chinese markets. These contracts have given Motorola access to 21 Chinese provinces of which 14 have contracts to deploy Motorola's systems and municipalities including Beijing, Tianjin, Zhejiang, Sichuan, Hunan, Jiangxi and Liaoning. These ventures allow the company to focus on its expertise in developing and distributing cell phone technology and products, while the network infrastructures are handled by other companies with expertise.
Motorola is currently the industry leader within China based on its first mover status. Motorola entered China at a prime time when mobile communications was still a novel idea and no one was selling it. As a result, the company enjoyed ten years of success in selling its pagers as tens of millions of Chinese, at that time, wanted to carry one for convenience and a symbol of social status (don't laugh, this was China a few years ago). Riding on that momentum and a strong emphasis on design and marketing, Motorola's handsets hold the largest market share in China (estimated at 28.9%) as its brand is often associated with best in quality, features and form factor. China is arguably the most important market in the world for Motorola[5], as Motorola has been less optimistic about its future in the rest of the world. For these reasons, Motorola has announced[6] plans to increase investment in China to $10 billion (cumulative) by 2006.
Market Structure Analysis
The Chinese government regulates and implements its national telecommunications infrastructure through China Telecom and the China United Telecommunications Corporation (UNICOM), both state-owned corporations. This duopoly market is still closed to foreign wireless service providers, such as AT&T. Since the government-controlled China Telecom and UNICOM do no’t have big motivation to explore the market, they either charge new subscribers high initial fees or provide prepaid wireless service to consumers. This strategy makes cell phone usage somewhat less attractive to consumers, even though the initial fee has been dropping from as high as US$1000 ten years ago to the current rate of US$50. This has caused cell phone manufacturers to usually promote their products independently rather than bundle the cell phones with wireless services.
The cellular phone industry in China is going through the growth stage of the industry life cycle. As the countries market continues to grow rapidly, barriers to entry are being lessened, as the government and its people want to assure the advancement of the industry. Overall the market is currently at around 180 million subscribers, number one in the world, with expectations of 300 million subscribers by 2003[7]. This is currently only a 13.986% penetration rate, which is lower than average, as compared with all other major cell phone markets. This early industry life cycle stage’s strong growth potential is what makes China such an attractive market for expansion.
The geography and buyer power of the market, although initially centered in the east is expanding throughout China. Wealth plays a key role in the current distribution of sales, as the Eastern region accounts for 53.8% of China’s current sales. However, the Central region at 22.5% and the West region at 23.75% are fast expanding, giving distributors opportunities to enter fresh markets over the next decade[8].
Distributors: These are the sources for companies to deliver their products throughout the market. The primary distributors are the state funded network and the larger distributor networks throughout the Asian Pacific. A key government network, sponsored by China Mobile, is a key network as it sells and distributes other brands. Another strong channel is companies like CellStar and Bright Point which are the world's leading global providers of innovative, value-enhancing logistics services to the wireless communications industry. Another channel outlet is the smaller private exclusive distributorship agreements, which Motorola does not depend heavily on. These partner combinations are important for companies who depend on them to get their products to the ever-expanding market regions.
Wireless Service Providers: There are two service providers for wireless access in the Chinese market: China Mobile, which provides 69% of service; China Unicom, which provides the remaining 31% of service. China United Telecommunications Co., Ltd. was formed in 1994 under a government directive to break up the monopoly held by China Mobile. In May 2002, the old China Mobile was ordered by the government to break into two operating entities, where China mobile will retain the original corporate identity and operate in 21 provinces and municipalities in south China[9]. Despite this apparent attempt by the government to strengthen competition within the market, both have strong government ties. These ties, and the duopoly created by this situation has caused for a lack of competition to lead to severe price imbalances for consumers. Because of their dominant positions it is imperative that cell phone distributors form alliance with these providers to enhance the distribution of their products.
Retailer’s Power: The retail distribution for the cell phone is severely fragmented, but consolidating with industry growth and expansion. As mentioned previously, because of its their dominant position, China Mobile serves as a major distributor for cell phone technology producers. Major department stores and retail outlets (ex. Tristar) provide another key outlets for distribution. There is no one way to get products to consumers, as no one company has access to all of the markets within the nation, so providers must develop relationships with many types of outlets to gain market advantage. This is changing as the larger outlets and suppliers are buying up smaller retailers to consolidate their retail capabilities.
CompetitionCompetitor Analysis
Role of Competition: Due to the large size of the Chinese cell phone market and it’s potential for long-term continual growth, competition for access to China’s consumer markets is intense. Competitive threats from Nokia, Siemens, Samsung, and local producers like TCL are a cause for concern within Motorola. However, eighty-four percent of Chinese consumers prefer foreign mobile phones to local models, with Motorola, Nokia and Ericsson being their favorite makers, according to a nation-wide survey conducted by the China Telecommunications Association and Eaglewings Public Relations[10]. For this reason, Motorola’s biggest competition for cell phone supremacy would likely appear to come from foreign companies outside of China.
China’s aforementioned government structure plays an interesting role in the assumption that foreign companies will maintain dominance. As is traditional, the socialist government hierarchy prefers for a majority of any industry to have local majority control. The government, which controls the operations of the service provider sector and is a dominant player within distribution channels as well, has the means to make this goal a reality – quickly. For this reason, Motorola must not only utilize shorter-term strategies to find a way to grow market share, but long-term change strategies to find a way to compete with government powered locally owned firms.
Figure 1: Market share of Chinese cell phone market, as of Q3 2002 (CCID Consulting).
Nokia: Nokia of Finland opened its first office in Beijing in 1985. By the end of 2001, Nokia invested a total of 2.3 billion eEuro (nearly $2 billion) in China and established itself as a leading supplier in handset market. The company has 22 local offices, eight joint ventures and a research center, with 5,500 employees. Nokia is the second largest handset supplier in China after Motorola, with 25.7%[11] in market share. Nokia has definite strengths in designing and R&D with major economies of scale benefits, due to its world market leadership. It has used this leadership to quickly develop relationship with major distributors within China. A major drawback appears to be that the standardization benefits it enjoys does not reflect the interest in new differentiated products that consumers want out of new growth products.
Samsung:[12] In 1997 Samsung was selected to supply test CDMA systems in Shanghai. Since then, the Korean company they hasve begun its their expansion into the telecommunications market. Samsung's core competence is in three areas: research and development (R&D), manufacturing, and sales and marketing. Product leadership is established through vertical integration and strategic alliances. Samsung wireless products enjoy a unique synergy through vertical integration within Samsung Group. This synergy results from leading-edge components available from Samsung Group's sister companies, including Samsung Electro-Mechanics and Samsung SDI. In addition, synergy is enhanced by sharing internal resources with Samsung Semiconductor, Samsung Multimedia Division, Samsung Telecommunication Systems Division and others. Samsung is an extremely diversified company and does not maintain a clear focus on cellular phone products in particular.
Siemens: Siemens began selling telecom product to the Chinese as early as 1872 (a manual telegraph receiver). In 1994, this Germane company began its formal China operations with products and services in communications, automation and control, medical equipment, energy, power transmission, transportation and lighting. Siemens China provides sales, human resources, purchase, financing and strategy development for its diverse businesses, which include telecom products and related services. Together, Siemens China has more than 40 manufacturing facilities and 28 local offices; it has invested more than $500 million in China (total) and employs 21,000. Total sales for the 2001 fiscal year was 3.5 billion Eeuros ($3.2 billion), up 49% from a year ago, in which revenue from mobile communications equipment was 13.5 billion yuan ($1.6 billion), according to the latest information. Recently the company announced to invested $250 million in 2002-03 to expand R&D centers in Beijing, Shanghai and Singapore.
Ericsson: Ericsson of Sweden began selling in China as early as 1892. It returned to China in 1985, and formed limited China holdings in 1994. To date, Ericsson has ten joint ventures, four wholly owned subsidiaries and 26 sales offices in China, employing some 4,500. According to the company, its investment in China has exceeded $600 million, one of the largest among foreign telecom companies. Since 1998, China has become Ericsson's single largest market in the world, annual sales (including export) are estimated at $1.7 billion. Ericsson has become deeply involved in China, as the telecom market in the world is slowing down and competition fierce in sectors such as cell phone handsets while China market is still growing fast. Ericsson's handset sales in China, used to be a flagship for the company, has been in sharp decline since 1999 due to strong competition and more selective customers. In August 2001, Ericsson and Sony form a joint venture for handset manufacturing which would ill fill the void Ericsson left in handset manufacturing in China. Ericsson has positioned itself to attain new sells by focusing its advertising toward the young female demographic and distributing products with more advanced specialized features. Ericsson appears to be focusing on niche marketing for cell phones, because of its overall lack of company specialized focus for the cell phone market. The small sales force that Ericsson employs in China seems to be comfortable with its smaller niche positioning, for now.
Locals & Others: Here is where competitive pressure coming from smaller local firms that the government may champion exists. With over 33% of the market coming from these firms, with local medium size players like TLC at 6.8%, competition is fierce and severely fragmented. Motorola had kept an eye on these producers in the past, as threat of competitor buyouts and consolidation had always been a concern. Now, Motorola was faced with the more imposing threat that, with government support, the smaller local brands could take away the company’s dominant market position.