MANUFACTURING DILEMMA OF FAST MOVING CONSUMER DURABLES IN INDIA: A CASE STUDY

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1 MANUFACTURING DILEMMA OF FAST MOVING CONSUMER DURABLES IN INDIA: A CASE STUDY *Dr Shaili Vadera, (Ph.D), Assistant Professor, Amity University, Lucknow, India. ABSTRACT The consumer durable segment is primarily driven by imports. The local and export demand for consumer durables is on a rise with reduced penetration of products vis-a-vis global levels, with rising disposable income and urbanization. There has been a rise in imports from low-cost regions such as China and SE Asia. The research focuses on the domestic market, growth drivers, supply ecosystem and challenges to local manufacturing. India can emerge as the future manufacturing hub of consumer durable industry provided there is adequate focus and support from the Government for this sector. India will have more than 47 per cent of Indians living in urban areas by This presents an attractive opportunity to local manufacturers due to technological improvements, falling prices due to competition, declining import tariffs, changing lifestyle, higher disposable income coupled with greater affordability. Key words: Consumer Durables, Growth rate, Demand, Manufacturing, Innovation, Challenges. INTRODUCTION The Indian consumer market has grown at a CAGR of 9.8% in 2015 and is expected to reach $20.7 billion by The consumer durable sector has become the fastest growing sectors in last five years. The Consumer market is dominated by international players, representing 67 percent of Indian market due to innovative technological advantage. Further, LG and Samsung together account for more than 43 percent of the consumer durables market in India. The sector is expected to double at 15 per cent compound annual growth rate (CAGR) to US$ 12.5 billion in FY 15 from US$ 6.3 billion in FY 10. Urban markets account for the major share (65 per cent) of total revenues in the consumer durables sector in the country. Demand in urban markets is expected to increase for nonessential products such as washing machines, refrigerators, LED TV, etc. 233

2 Figure 1. S H A R E I N C O N S U M E R D U R A B L E M A R K E T I N I N D I A URBAN RURAL Source: Consumer goods companies are themselves coming out with attractive financing schemes to consumers through their extensive dealer network. This has a direct bearing on future demand. Figure 2 Consumer durables products are divided into the three categories such as white goods, brown goods and consumer electronics with key products such as televisions, refrigerators, air conditioners and washing machines. 234

3 Consumer Durables White Goods Air conditioners Refrigerators Washing Machines Sewing Machines Watches & Clocks Cleaning Equipment Other domestic appliances Brown Goods Microwave Cooking Range Chimneys Mixer/Grinders Electronic fans Irons Consumer Electronics TV's Audio/Video PC's Mobile Phones Digital Cameras DVD's Camcorders Currently, rural consumers purchase their durables from the nearest towns, leading to increased expenses due to transportation. Purchase necessarily done only during the harvest, festive and wedding seasons. Rural India that accounts for nearly 70% of the total number of households, has a 2% penetration in case of refrigerators and 0.5% for washing machines, offers plenty of scope and opportunities for the white goods industry. SIZE OF CONSUMER DURABLE MARKET IN INDIA (US $ Billions) Figure 3 US $ Billions FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 15 Source: India is set to become the fifth largest consumer durables market in the world by The consumer electronics market is expected to increase to US$ 410 billion by The production is expected to reach US$ 104 billion by The Indian market for white 235

4 goods and televisions is poised for steady growth at ~18.5% annually. The demand for LED s, refrigerators, washing machines and air conditioners is on a rise with reduced penetration of products vis-a-vis global levels, rising disposable income and urbanization of consumers. Market for white goods and televisions has been growing at close to 14.5% p.a., and is expected to accelerate to close to 18.5% in the coming years. Major Indian and global consumer durables companies have announced investments of around US$2.2 billion over the coming years in India. Mr. Ashwini Rao, CEO met with his senior managers to create a strategy to ensure growth and sustainability for Regal Enterprise. At that time, Regal Enterprise was struggling to gain a respectable market share in the Indian fast moving consumer durable segment. The products were virtually in the decline stage of Product life cycle. Operating in the over-saturated market, it faced the same low profit margins as the other competitors. The FMCD industry was struggling at the behest of competition related to Product innovation, design and quality consideration. There has been a rise in imports from low-cost regions such as China and SE Asia due to various free trade agreements and availability of products at a lower cost as compared to costs incurred in local manufacturing. After conducting an external environmental analysis, Mr. Rao and his team together identified the key advantages for setting up manufacturing facility in India. Figure 4: Growth Divers of Indian Consumer Durable Markets Urbanization Market size Product Innovation Better standard of living Future growth outlook Locally manufactured volumes Skill Development Globalization Affordable product range for all segments Exports Untapped Rural Market Rise in organized Retail Integrated communication systems Increasing level of Income Regal Enterprises applied the The Mckinsey 7-S excellence in business model for improving the overall performance of a company. The goal of the model was to show how 7 elements of the company: Structure, Strategy, Skills, Staff, Style, Systems, and Shared values, can be aligned together to achieve effectiveness in a company. 236

5 Figure 5: Market Penetration - India vs. Global Perspective CHART TITLE India Global Washing Machines Air Conditioners Refrigerator Television Source JP Morgan estimates. After studying the Market penetration data of India viz-a-viz Global perspective, Mr. Rao along with his team identified the opportunities related to the consumer durable segment while exploring the option of expanding its products line in International markets. India as a manufacturing hub offers the following advantages: Low labor costs Large potential consumer market Advanced capabilities in plastics and metal fabrication, and electrical equipment manufacturing. To meet the rising local demand and export demand to neighboring regions, companies are planning to expand their local manufacturing in India and make the country an export hub. As Rao would put it, We are great at in Product design and pricing considerations. What we need is to enter the consumer durable segment in the selected markets and learn to understand the need of consumers and the cross-cultural issues involved in going abroad. Regal Enterprises gathered Industry data through marketing intelligence and predicted that there is an untapped segment as far as consumer durable segment is concerned. In China, manufacturing costs are going up. This is a great time to move production from China to India, said Mr. Rao. The following factors are majorly responsible for China s loss in competitive advantage- Increase in labor costs, real estate, electricity and taxes, Intellectual property protection remains a risk in China, Single country sourcing risk, Strong yen appreciation making products uncompetitive, localization of products and shift in local government s focus from exports to increasing local consumption India. 237

6 Figure 6: Mr Ashwini Rao identified the following marketing objectives for Regal Enterprises: increasing sales Diversification economies of scale Marketing Objectives customer relationship strategies exploring international markets creating brand loyalty In order to achieve the organizational set objectives, Mr. Rao considered exploring existing and new products within existing and/or new markets and the levels of risk associated with each. Regal Enterprises adopted Market penetration strategy which was the safest of the four options. Here, the focus lies on expanding sales of existing products in the existing markets. It also ventured into Product development through reverse innovation, which was slightly more risky. As Rao would put it, his company had two options: We harvest the product once it becomes obsolete. Or We launch our products in International markets as first mover advantage. Rao chose the second option and set out to make Regal Enterprises a worldwide company. They aimed much higher than simply marketing products around the globe. For decades, Regal Enterprises, had sold some appliances to consumers in other countries. Rao wanted to expand this reach by establishing a vision of a long-term competitive advantage. In his words, this effort meant, using reverse innovation for designing, manufacturing, selling, and servicing your products at lowest possible costs. Our vision at Regal Enterprises is to integrate the affordable business solutions and leverage them in all the operations world-wide. A common marketing objective is to achieve growth. There are a number of ways in which organisations can grow. Regal Enterprises adopted both organic and inorganic growth strategies for expanding its business. One positive benefit of growth is that it helps a 238

7 business to reduce costs through economies of scale. As its first step in transforming a largely domestic operations into global firm, Regal Enterprises purchased German consumer goods appliance, LM Electronics. LM Electronics has been losing market share for years, running its German operations as regional companies that made different appliances for global markets. The Regal Enterprises called for reversing the decline in German market share and improving profitability by changing product designs and manufacturing processes. The change reorganized the national design and research staffs inherited from LM Enterprises. Re-designed models shared more parts and inventory costs fell when Regal Enterprises consolidated warehouses from 20 to 8. The transformation trimmed LM Electronics list of 1,200 suppliers by 40% and it converted the national operations to regional companies. Rao believed that the drive to become one company worldwide required making Regal Enterprises a global brand. The company rebranded the Regal Electronics product lines, supported by INR 320 million advertising campaign that initially presented both the Regal Enterprises and LM electronics names and eventually converted to Regal Enterprises. Challenges faced while expanding the local manufacturing base: Tax & Duty Structure increasing competition from Chinese and South East Asian ManufacturersCapital Capital Intensive nature of business Infrastructure bottlenecks Another important component of the Regal Enterprises global strategy was related to Product innovation for developing superior and high quality products for global markets. We have to provide a compelling reason other than price for consumers to buy Regal-built products, says Rao. We can do that only by understanding the needs and preferences of global consumers and translating our understanding into clearly superior product designs, features, and after-sales service for maximizing customer satisfaction. Our goal is for consumers to prefer the Regal Enterprises because it offers greater overall value than competing products. One successful product innovation led to the Regal Enterprises oven. Extensive research of consumer needs revealed a desire for microwave that could perform bakery functions as well. In response, Regal Enterprises designed Bakewave. The new microwave proved successful in the global market. Regal Enterprises global strategy includes a goal to become the market leader in Asia, which will be the world s largest home appliance market by In 1988, it began setting up sales and distribution systems in Asia to help it serve Asian markets and to make the firm more familiar with those markets and potential customers. They studied existing trade channels and assessed the relative strengths and weakness of competitors in Asian markets. The company set up joint ventures with three Asian manufacturers for four appliance lines including refrigerators, air conditioners and microwave ovens. With a controlling interest in each of the joint ventures, the newly global company confidently expects to excel in the world s fastest growing market. Regal Enterprises has come a long way since The revenue has been doubled to more than INR 15 billion. The company now reaches markets in more than 170 countries, leading the markets in both South America and Africa. Regal enterprises has become the largest appliance company in Asia. The HR Strategies of Regal Enterprises were further improved to with regular and improved communication between management and employees, investment in skill building of workforce and providing career opportunities, more inclusiveness in interactions with employees, active engagement with unions and focus on maturity of IR practices internally as well as for partners in the ecosystem. From global perspective, there are two success factors that affect all of the different geographic regions. The first key success factor on a global scale is successful branding. Each of the large global manufacturers has been very successful in developing a branding strategy. Most of these players sell a variety of brands where each is targeted to certain quality and price levels. In addition the strong brand reputation has been necessary for the major manufacturers either to expand operations into new regions or to launch new product lines. The second key success factor on a global scale is price sensitivity. Given the large cost of these goods, large scale manufacturers have been able to lower prices to meet the demand of affordable customers. With razor thin margins across each segments only manufacturers that have the size to realize economies of scale have been able to remain competitive and lower prices to meet the demand of middle-class segment. This price sensitivity and the and the needs to continually lower prices made up one of the major forces driving the consolidation within the industry. 239

8 Aside from the global key success factors two key success factors within China and Asia are very important. First, appliance manufacturers must have access to distribution channels and therefore the ability to provide the products across several different Chinese regions. The access to Chinese distribution can be very limited for international corporations, whereas China-based companies such as Haier have a definite competitive advantage. Second large appliance manufacturers must have a large scope of products for success. Specifically it is the number of different segments in which a company sells products that will lead to success in South Africa, not the scope of products within a given segment. The South American market has a different criteria for success. Innovation with regards to product size is very important. Japanese customers are looking for product innovations that will fit into smaller spaces while providing maximum use of the cabinet. Also Japanese customers are very demanding in regard to product quality. Recommendations to push manufacturing in India: The Government has taken a series of actions to support Make in India. India s rank in the World Bank s Ease of Doing Business index has improved from 142 in 2015 to 130 in Export and import taxes on small volumes of goods have been abolished, and incentives have been introduced for export-oriented units and export processing zones. These include a single-window labor compliance process for companies, simpler Provident Fund (compulsory employee insurance and pension) procedures and a new inspection scheme. These include a single-window labor compliance process for companies, simpler Provident Fund (compulsory employee insurance and pension) procedures and a new inspection scheme. The Government is taking steps to ensure that resources are used such as coal blocks to companies through auctions while encouraging solar and wind power generation projects. We have seen a sharp turnaround in FDI in After declining for two successive years, investment in India has bounced back with 32% growth. This was driven by an improvement in India s macroeconomic indicators in part, helped by declining oil prices- and ongoing government efforts to revitalize growth and improve the business environment. Figure: 7 Factors promoting manufacturing ecosystem in India Ease of doing business Incentivi ze Exports Global Integration Reduce excise duty tax Incubatio n R&D and Innovati on Enhancing supply competitivenes s Enabling Regulator y Environm ent Foreign Direct Investment Skill Development Incentivize and support local component manufacturing and domestic value addition. Setup duty-free component trading and warehousing zone (component FTWZ) to facilitate ease of raw material supply. Encourage top global OEM and Component makers to manufacture in India, announce policy measures to attract top global suppliers of key components like compressors, motors and LCD panels. Reduce borrowing interest rates in order to reduce high financing costs so that small manufacturers can thrive. 240

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