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1MicrowaveOvenMakerNeedsReheating:Galanz’sLowPricingStallsFebruary29,2008SamsungEconomicResearchInstitute,BeijingOffice2I.IntroductionAsChinabecametheworkshopoftheworldinthe1990s,costleadershipliftedmanymanufacturerstotheranksofthemostcompetitiveproducersinemergingmarkets.AttheforefrontwasGalanzGroupCo.Ltd.,whichtransformedfromaduckfeathertradertotheleadingmicrowaveovenmakerintheworld.Currently,Galanzhasabout80productionlinesmanufacturingmorethan15millionmicrowaveovensannuallyandpartnershipswithnearly200companies.Thecompany’sglobalmarketshareisnowabout40%.Galanz’sbuiltitssuccessonrelentlesslyloweringoperationalcostsandintensemarketingthatfeaturedtimelydiscountretailprices.From1993to2002,thefirmcutpricesfortheeightstraighttimesatanaveragereductionof20%.However,thepricingstrategyhasbeenunderpressureinrecentyears.RisingincomesinChinahavemadeconsumerslesspricesensitive.TheexperienceofGalanzdemonstrateshowchangingpurchasingpowerandconsumerdemandshavealteredmarketswithinashortperiodoftimeinChina.Businesseswhoestablishmarketleadershipthroughalowpricingstrategymustbepreparedtoshifttheiremphasistoothermarketingfeaturessuchasfunctionalityandimaging.ThispaperoffersabrieflookathowGalanzestablisheditselfastheglobalanddomesticleaderinmicrowaveovenproductionbutfounditselfunderpressurewhenitreliedonlowpricingtoolong.II.Microwaves&Galanz’sEntryChina’smarketformicrowaveovenswasvirginterritoryintheearly1990s.In1992,only200,000unitsweresoldwithsaleslargelyconfinedtomajorcities,whereonlythewealthiestcouldaffordamicrowaveoven.Theaveragecostoftheappliancewas3,000yuan,whichwasoutofreachfortheaverageChinesehousehold.Besidestheprice,usagewasabarriersincemicrowaveovenswerenotsuitabletocookingChinesefood.Mostpotentialbuyersconsideredthemaluxuryitemtoreheatfood.Onlyafewcompaniesledthemarketformicrowaveovens.In1992,China’smarketfor3microwaveovenswasdominatedbyShenhua(No.1athome),Panasonic(No.1inexports),FeiyueandShanghaiNaicissusElectricAppliancesIndustrialCo.Ltd.In1993,Shenhuagainedthecountry’slargestmarketshareof50%,butitsannualsalesonlyamountedto120,000units.MultinationalproducersexportedmostoftheChina-madeproduction.Unitssoldinthedomesticmarkettargetedwealthyurbanbuyers.Galanz,foundedin1978inGuangdongProvince,enteredthehomeappliancemarketin1992.OwingtoinadequateR&Dcapability,itwascapableofonlyproductionandassemblyandimportedallcoreparts,particularly,magnetronsandelectrictransformers.Still,by1995GalanzhadbecometheNo.1microwaveovenmakerinChinawith25percentmarketshare.Usingalow-coststrategy,theaverageretailpriceofGalanzunitswas1,536yuan.Salestotaled384millionyuan,thoughproductionwasonly250,000units,lessthandomesticrivalswhoalreadywereexportingmostoftheiroutput.Atthetime,thecompanywaspassiveaboutenteringforeignmarkets.ItdidnothaveanypartnertosupportitsoperationabroadandaccesstooverseasconsumerswasonlythroughtheHongKongTradeDevelopmentCouncil.Figure1.MicrowaveIndustryinChinain1990sMultinationalsMultinationalsGalanzMultinationalsIn1995,Chinahad31microwaveovenmakers,with12operatinginGuangdongProvince,includingGalanzandseveninShanghai.Ayearlater,theindustryhadswollentonearly100manufacturers,thoughthecapacityutilizationrateofmostofPositionHighPriceLowPriceOtherlocalfirmsDomesticForeignMarket4themwasbelow40percent,lowerthantheaveragehomeappliancemanufacturerinChina.Galanzrespondedtothecompetitionwithrelentlesscostcuttingandintensemarketing.III.OperatingCostLeadershipGalanzdevelopedasuccessfulpricereductionstrategythrougheconomiesofscale.Afterestablishingitselfasthesalesleaderin1995,itfocusedonrampingupproduction.Thefollowingyear,outputmorethandoubledto650,000,allowingthecompanytolowerpricesby40%to500-600yuanperoven.Then,in1997,itincreasedtheproductionto1.98million,farmorethanthe1.50million-unitoutputoftheWhirlpool-Shenhua,1itsbiggestdomesticcompetitor.Likeitslocalpeers,GalanzbenefitedfromChina’scheaplaborasitcaughtuptoKorean,JapaneseandWesternrivals.AccordingtotheUN’sTradeandDevelopmentReport2002,wagesintheUS,JapanandKoreain1998were47.8times,29.9timesand12.9timeshigherthanthoseinChina,respectively.Additionally,productivitywasmaximizedbylaborlawderegulation,whichallowedcompaniestoadopt24-houroperations;partialautomationofproduction;andincentiveandmerit-basedpayschemes,whichhelpedenhanceefficiency.Galanzalsoreducedcostsbyintroducing“knowledgemarketing”2inplaceofTVadvertisements,thecompany’schiefsalesmediumwhenitenteredthemicrowaveovenmarket.Thenewstrategyleanedtowardnewspapers,providingpotentialbuyerswithdetailsofnewmodels.Galanzalsousedonlinemarketingtointroduceitsproductsinexpensivelyandtoboostbrandimage.Ituploadedproductinformationandavideooftheproductionlinesonitshomepage,boostingtheimageofitsproductsandbrand.Theapproachreducedadvertisingcostsandenhancedbrandrecognition.Galanzslasheditsadspendingto10millionyuanwhilehomeappliancemakerswithsimilarsalesnumbersasGalanzspentmorethan100millionyuan.1Shenhuamade900,000microwaveovensin1995andjoinedhandswithWhirlpoolandhasproducedaround1.50millionunitsfrom1997.2“Knowledgemarketing”referstoamarketingm