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The low-price trap

STR Team 

Consumers buy based on perceived value. By underpricing their products or services, emerging market multinationals face the spectre of instantly lowering the perceived value

Our research suggests that starting in the low price tiers is a double-edged sword. While it allows to leverage their strengths, the firms that started in the lowest price tier with their own brand, like Ned from Arcelik or Dopod from HTC, found it very difficult to generate margins or loyal customer bases. Such low prices and margins naturally do not create the resources to reinvest in the business (for R&D or brand building) and thus work against long-term viability: there is no takeoff to the “virtuous cycle” of higher prices, higher margins, higher quality, and stronger, sustainable brands. In fact, without such eventual building of a consumer franchise, even a “push,” channel-oriented strategy is vulnerable to failure. Unless there eventually is adequate consumer “pull” for the brand, the trade too will wither in its willingness to carry and promote it.

As Arcelik’s Subasi noted in the Introduction, the combination of a lack of a distinct and differentiated value proposition and highly price-sensitive consumers makes it difficult for most players in this segment to make any margin. These low-end entries, in the experience of the companies we talked to, face consumer resistance at significantly higher price points. Thus, a new brand has to be launched to capture the mass segment in the middle price tier, as Arcelik did with its Beko brand. LG’s experience is much the same. Having entered with the in the low price tier, LG was unable to move this brand up, leading to the 1995 decision to globally withdraw the in a phased manner and launch the LG brand later in the premium segment — using the brand it had acquired as a price brand.

Compared with margins of 5 percent or less in the low price tier, in the premium segment (with innovative products) LG was able to obtain much higher margins of around 2.5 percent in highly competitive categories like washing machines and refrigerators. Likewise, went from being an original design manufacturer (ODM) in the smartphone industry (supplying the leading smartphone brand owners), to acquiring and (unsuccessfully) trying to leverage the low-end Dopod brand across Asia, to launching its own HTC-branded smartphones targeted at the premium global segment in 2006. The brand has now established itself in the premium segment, having garnered an 11 percent global market share in smartphones, and recent reports put its margins at a fairly high 15 percent.

The challenges of climbing price tiers
Moving to the premium segment is difficult for emerging-market firms, as they suffer from poor country-of-origin impressions that need to be overcome. These firms also often lack branding capability and, importantly, the brand-building mindset. Additionally, emerging market firms may lack the capabilities to create products with high and consistent quality, as well as the latest features, and can suffer in terms of creating better fit-and-finish, industrial, and user-interface design and exterior styling. These capabilities do not come easily to companies whose core skills are often in low-cost, high-volume manufacturing.

The firms we talked to fill this gap in three ways. One is by leveraging the learning and capability developed while selling low-priced brands. A case in point is Much of its learning came over a 3o-year period, starting with its entry into the United States in 1972, during which it struggled to build the and extend it upward. LG leveraged these learnings to successfully launch the LG brand later as a premium brand in the white goods (durables) space globally.

A second approach is to leverage learnings from being a supplier to being a successful branded player (see the discussion above). An excellent example is Taiwan’s learned a great deal about designing, developing, and manufacturing high- and consistent-quality products by being a global supplier to leading mobile phone makers. As an ODM supplier, it also built up its innovation capability, enabling HTC to successfully burst upon the premium smartphone segment globally. LG Electronics’ contract manufacturing agreement with GE similarly helped it in its journey to build a global brand in the premium segment. Its relationship with GE helped it to learn about the best materials to use to create the level of fit, feel, and finish that are a must for a premium brand of durable goods in the developed world, as well as helped it to learn about how to fine-tune its manufacturing processes to consistently churn out high-quality products.

A third and final strategy, and one that is quite common, is to fill the knowledge gaps that emerging-market firms suffer from through acquisitions and joint ventures. We saw a large number of acquisitions by the firms we talked to, with the more visible ones being Tata Tea’s acquisition of Tetley, Tata Motors’ acquisition of Jaguar and Land Rover, Mahindra & Mahindra’s acquisition of Ssangyong Motors, Lenovo’s acquisition of Thinkpad, Ulker’s acquisition of Godiva, and Vitra’s acquisition of the Villeroy & Boch’s tile business. Chapter 3 discussed in detail the use of such acquisitions by to build global branded businesses. And below, we discuss the case of Tata Tea’s acquisition of Tetley, one of the earliest acquisitions by an EMNC of a well-known developed-world brand-owning firm, to highlight the potential of acquisitions and joint ventures in closing the capability gaps noted above.

The Tetley acquisition provided Tata Tea with the Tetley brand, which enabled the company not only to sidestep issues related to its country of origin, India, but also to obtain capabilities in branding, global management, R&D capability in tea-bag and packaging design, knowledge of the beverage market (beyond tea), and the like. The result has been that in the decade since its acquisition, Tata Tea has transformed itself from a tea garden-focused company that sold some of its teas in a branded format in India to a global-branded beverage player, with significantly higher margins, that no longer owns any tea gardens!

One consequence of moving up price tiers using acquisitions is the creation of a portfolio of brands, as the Tata Tea example also highlights. This raises important questions for how to manage the portfolio and create a manageable and yet meaningful brand architecture.

AUTHOR: Amitava Chattopadhyay, Rajeev Batra and Aysegul Ozsomer

PUBLISHER: Tata McGraw-Hill
PRICE: Rs 595
ISBN: 9781259029226

Reprinted by permission of Tata McGraw Hill Education Private Limited. Excerpted from Chattopadhyay, Batra, Ozsomer : The New Emerging Market Multinationals. Copyright © 2012 by Amitava Chattopadhyay, Rajeev Batra, and Aysegul Ozsomer. All rights reserved.

First Published: Mon, November 12 2012. 00:57 IST