AchievingleadershipinChinadetergentmarket

–Projectproposal–

Henkel(China)InvestmentCo.Ltd.

,RolandBerger&Partners–InternationalManagementConsultantsBarcelona–Beijing–Berlin–Brussels–Bucharest–Budapest–BuenosAires–Delhi–Detroit–Düsseldorf–Frankfurt–Hamburg–Kiev–KualaLumpur–LisbonLondon–Madrid–Milan–Moscow–Munich–NewYork–Paris–Prague–Riga–Rome–S?oPaulo–Shanghai–Stuttgart–Tokyo–Vienna–ZurichNirma\interim-rptContents PageA. Fiercecompetitionfrominternationalanddomesticplayershasimposed 3greatchallengeonHenkel B. Toachieveturnaround,Henkelshouldadoptanaggressiveexpansionstrategy 10C. RolandBergerwillhelpdeveloptheappropriatestrategy:projectoutline 12D. Projectorganizationandtimeframe 22E.Valueoftheproject 12F.RolandBergerisabestpartnerofHenkeltoexploitChinadetergentmarket: 12selectedreferenceAnnexA:Casestudy-Qiqiang 32AnnexB:Casestudy-P&G 42Nirma\interim-rptA.Fiercecompetitionfrominternationalanddomesticplayershasimposed

greatchallengeonHenkel Nirma\interim-rptAfterfastincreaseinearlier1990th,annualgrowthofChinadetergentmarkethassloweddownintheseyearsNationalmarketvolumeoflaundrydetergent

[inMio.tons]199319941995199619972000**EstimationSource:ChineselightIndustryYearbook(1999),RolandBerger&Partners’analysis1.92.22.82.62.72.9~3.0+8.2%p.a.2~3%p.a.Nirma\interim-rptGrossprofitabilityofWhitecatregularpowderOvercapcityindetergentindustryPricereductionofMajorbrand(RMB/Kg)OvercapacityindetergentindudstryleadstopricereductionandthusreducestheproductprofitabilityAtpresent,thereareabout150manufacturesindetergentindustrywithcapacityof3.8milliontons,buttotalmarketvolumeisabout2.7milliontons,sotheutilizationrateofcapacityisabout70%Marektentryofdetergentindustryisprettylowandthereliesalotofunregisteredfactories,Iftakingtheircapacityintoaccount,theutilizaitionratewillbefurthurreducedtoabout50%-60%11%1998年1999年3%TideOMO18.016.518.817.35.54.8Whitecat(regularpowder)1998年1999年Averagepricereductionofthewholeindustryis10%Nirma\interim-rptAfterhavingestablishedprominentpositioninhighendmarket,P&GandUnileverbegintopenetratemiddleandlowendmarketMarketstructureofhighend(Price：>10RMB/Kg)Marketstuctureofmiddleend(Price：7~10RMB/Kg)Marketstructureoflowend(Price：<7RMB/Kg)Proportionofhighendmarketis11.9%Proportionofmiddleendmarketis31.8%Proportionoflowendmarketis56.3%P&GOthersBenckiserUnileverP&GBenckiserOthersHenkelHenkelUnileverOthersResource:ACNielsonretailingaudit1999-2000Nirma\interim-rptBrandShareCompanyTide6.0%P&GAriel2.2%P&GOMO2.4%UnileverPower281.1%BenckiserPersil0.1%HenkelMarketshareofinternationalplayers’brandsindifferentsegmentBrandShareCompanyGFL2.2%P&GPanda1.9%P&GWIPP1.0%HenkelTianjin1.8%HenkelDosia1.0%BenckiserBack-upMarketstuctureofmiddleend(Price：7~10RMB/Kg)Marketstructureoflowend(Price：<7RMB/Kg)

BrandShareCompanyFangcao 2.5%UnileverYunquan0.8%UnileverSunlight0.2%UnileverSeagull2.9%HenkelTiantian1.5%HenkelGuilin1.2%Henkel

Marketstructureofhighend(Price：>10RMB/Kg)Resource:ACNielsonretailingaudit1999-2000Nirma\interim-rptNirma\interim-rptAlthoughalatecomer,BenckiserhassuccessfulpenetratednorthmarketwithDosiathroughwell-designedentrystrategyThroughacquiringdistributorsfromP&G,DosiachoseLiaoningprovinceasitsinitialentryareaInHeilongjiangandJilinprovince,competitorsarenotsostrongasthatinotherpartsofChina.localbrands,suchasTiantian,areindominantpositions,soDosiachosethesetwoprovinceassubsequentpenetrationareasCompetitionisinchoasinShandong,anddistributionnetworkisnotwellregulatedwithlotsofsmalldistributors/wholesalerscompetingwitheachother,soitiseasyforDosiatopenetratethemarketandcultivateitsqualifieddisbitionchannelInordertoguaranteethesuccess,channelpenetrationisalsobackedupbystrongadvertisementchampaignMarektshareofDosiainnorthChinaMarketentrydesignJan1999Mar1999May1999Jul1999Sep1999Nov1999Jan2000Resource:ACNielsonretailingaudit1999-2000Nirma\interim-rptSomedomesticplayersarealsomakingeffortstoachievefastgrowthandnationalpresenceMarketshareofQiqiangMarketshareofLibaiResource:ACNielsonretailingaudit1999-2000Nirma\interim-rptFastgrowthsofdomesticplayersaresupportedbytheirruralfocusstrategy,nationwidemanufacturingnetworkanddirectsalesmodelMarketpenetrationstrategytakenbyfastgrowingdomesticplayersRuralfocusstrategyNationwidemanufacturingnetworkDirectsalesmodelRuralmarketislargebutisdominantedbyweakregionalbrandsInternationalplayershaveweakperformanceinruralareaLogisticcostishighindetergentindustryaccoutingforover10%intotalvalueLongdistancetransportationinChinaisnotoonvientForanewcomer,itisnoteasytogetqualifiedlocaldistirbutorsReasonMethodResultFirstpenetrateruralmarketandtownAfterachievingstrongperfromanceinruralarea,thenpenetratecityandlargecountyAcquiringlocalplayersindifferentareas(Qiqiang)SigningOEMcontractswithlocalplayersindifferentareas(GuangdongLibai)DirectlysellingproductstolowleveldealersorretailingoutletstrongchannelpromotionAvoidingcompetingwithstrongsplayersGainingmarketsharewithcomparativelylowmarketinginvestmentAvoidingcompetingwithlocalplayersReductioninlogisticcostFastmarketpenetrationButthesalesexpenseishighandthesalesforceshouldbeverydiligentNirma\interim-rptInordertoachieveturnaround,HenkelshouldadoptanaggressiveexpansionstrategySixregionalbrandswithcomparativeweakmarketperformanceDeteriorationofmarketshareforeachbrand,defeatedbystronginternationalordomesticbrandsonebyoneAggressiveexpansionstrategyNochangeTurnaroundpointLeadershipindetergentmarketNirma\interim-rptStrategyformulationshouldbebasedonfullunderstandingofChinadetergentmarketandfullconsiderationofthreestrategicissuesStrategyformulationChoiceoffocusbrandandstrategicexpansionrouteEstablishingreliableandlowcostlogisticnetworkDevelopingruralentrymodelFullunderstandingofChinadetergentmarketNirma\interim-rptPercapitaconsumptiongraduallydecreasesfromsouthtonorthandfromeasttowestConsumptionoflaundrydetergentinChina

[kg,percapita]Source:RolandBerger&Partners’interview1.882~3kgpercapita1.7~2kgpercapita<1.7kgpercapita??????????????????>3kgpercapita1.881.881.9521.821.953.351.951.952.352.353.351.6821.681.68?2.35MuchlowareaNirma\interim-rpt2512(Shanghai)ThehighpopulationdensityislocatedintheNorthChinaplainSource:RolandBerger&Partners’interview146(Jilin)343(Hebei)586(Shandong)578(Henan)715(Jiangsu)273(Fujian)308(Hunan)392(Guangdong)108(Yuannan)362(Chongqing)471(Anhui)BackupMunicipalitypopulationdensity

(includeingsuburbarea)Shanghai 2512Beijing 738Tianjin 866Chongqing 362over500capitaper

squarekilogram276(Liaoning)866(Tianjin)738(Beijing)209(Shanxi)443(Zhejiang)201(Guangxi)326(Hubei)188(Sanxi)177(Sichuan)400~500capitaper

squarekilogram300~400capitaper

squarekilogram200~300capitaper

squarekilogram100~200capitaper

squarekilogramless100capitaper

squarekilogramNirma\interim-rptFordifferentregion,marketsegmentstructureisalsodifferentbecauseofvariousincomelevelandconsumptionhabitSegmentstructurebyregionCommentsNorthWestEastSouthLowendmarketaccountforover50%oftotalmarketandisespeciallylargeinthelowdevelopingNorthandWestofChinaMiddle-endproducttakeahighershareinEastandSouthofChinaHighendmarketiscomparativelyhigherinsouthmarketbecauseofitshighincomelevelandaccptanceofconcentratepowder50.9%56.7%57.3%40.9%45.9%30.6%31.8%39.9%9.2%11.5%12.1%13.2%Total

[,000t]778668537745High

(>10RMB/kg)Middle-end

(7~10RMB/kg)Low-end

(<7RMB/kg)Resource:ACNielsonretailingaudit1999-2000Nirma\interim-rptEastChinaisinintensecompetitionandmajorplayersareallnationalbrandsmarketvolumebyprovince

[’000ton]Briefanalysis115.7Jiangsu307.570.3224.1HenanZhejiangShanghaiAnhui60.4JiangsuandHenanhavethelargestmarketvolumeineastChinaJiamei,Whitecat,GiGEandFangcaoaretraditionalbrandswithstrongregionalmarketbasesdistributionnetworkiscomparativelymaturewithsomelargedistributorsindominanceQiqianghassuccessfullypenetrateeastChinaandestablishedleadershipwithstrongsalescampaignLibaiisplaningtopenetrateeastChinaDiaopaiisalsomakingeffortstoenlargeitsmarketsharebyofferinghighmarginincentivetodistributorsTotal:778,000tonsEastNirma\interim-rptLow-endmarketsizeinSouthChina

[’000Ton]SouthInSouth,werecommendHunanandHubeiaretargetmarketformarketentrybecauseLibaialmostcontrolthewholelow-endmarketinGuangdongCompetitivelandscape170Hunan190118179HubeiJiangxiGuangdongFujian84Libaialmostcontrolthewholelow-endmarketinGuangdongResunasaregionalbrandholdshalfofHunan’slow-endmarketOneflowerandQuanlihas30%and20%oflow-endsegmentrespectivelyinHubeiHunanandHubeiarethetargetmarketduetotheirlargemarketsizeandweakcompetitorsTotal:745,000tonsNirma\interim-rptWestregioncanonlybeNirma’spotentialmarketinthesecondstagebecauseofitslimitedmarketsizeandstrongcompetitorLow-endmarketsize

[’000ton]77Sichuan15469102GuangxiYunnanShanxiGuizhou69Qiqiangtakes44%oflow-endmarketwiththreemanufacturingsites(Sichuan,GuizhouandSanxi)P&Gtakeoveronemajorlocalbrand(Nanfeng)inchongdutoexpandlow-endmarketWhitecathassetupamanufacturingsitewith80,000toncapacityinChongqingLowpopulationdensityandpercapitaconsumptionWestregioncanonlybeNirma’spotentialmarketinthesecondstageTotal:537,000tonsWestAnalysisofopportunityChongqin65Nirma\interim-rptRegionalandlocalbrandsplaythemajorrolesintheNorthernmarketLow-endmarketsizeinNorth1andNorth2

[’000ton]Competition[volumeshare]North228%22%3%North130%37%TiantianOthers2%14%30%QiqiangYunquanMulanJialiQiqiangDeerJialiJianlongSeagullOthersSource:byHenkel(Tiantian)andUnilever(Yunquan)ExceptQiqiangfourlocalbrandsarethemajorplayersinNorth1andNorth2North1:Liaoning,Jiling,Heilongjiang458210North2:Shandong,Hebei,Shanxi,BeijingTianjing14%North16%Nirma\interim-rptShandongandHebeiaresuggestedasstrategicfocusinearlyentryperiodmarketsizeinNorth2sub-region

[’000ton]Competition68Shandong18141.5132HebeiShanxiTianjingBeijing35.6InShandong,DeerandJialiholds30%and25%ofthelow-endmarketrespectively.ButweakfinancialsrengthandlesssophisticatedmarketingskillunderminetheircompetitivenessInHebeithedetergentmarketishighlyfragmentedwithQiqiangwinninglessthan20%marketshare,therestareinsignificantInShandongandHebeiastronganddominantbrandisnon-existentyetTotal:458,000tonsNorthNirma\interim-rptConsumeracceptanceProfileofmajorproductformTrendProductfeatureAverageprice[RMB/kg]MarketshareMajor

brandProductiontechnologyRegularConcen-

trateUltra-

concen-

trateSpraydryDrymixAgglomera-

tionTideWhitecatQiqiangArielWhitcatOMOGaochao

(whitecat)90%8%2%7.911.418.0HollowLowdensityFoamingHighwater

solubilitySolidHighdensityNon-foamingExcellentstain

removingefficacyHighfluidityExcellentstain

removingefficacy

Wellaccepted

inruralHighpriceunderminesaffordabilityandconsumeracceptableNewproductSpray-drytechnologydominatethelaundrypowderindustrysectorSource:RolandBerger&PartnerinterviewsNirma\interim-rptRuralconsumerpreferencePriceandmoneyvaluearetwomostimportantfactorsinfluencingruralconsumers’purchasingdecisionFoamingFragrantWatersolubilityBigpackagesize(400g,750g)ProductPrimarilythroughgroceryinvillage/townMarket/fairespeciallyweeklymarketPlaceEffectivetooltoinducetrialduringintroductionperiodUsingdailynecessitiesasprizeiswellacceptedPromotionPopularacceptablepriceinruralmarket:6.0RMB/kgPricerangeSource:RolandBerger&Partners’interviewNirma\interim-rptQiqiang’slowpricestrategyprovestobesuccessfulinthelow-endsegmentRelativepricecomparisoninlowendsegment(<7RMB/KG)

[Totallowendsegment=100%]012345675.25.46.06.26.36.4TiantianResunYueyuehongFangcaoSeagullQiqiangQuanliMianghuaPrice(RMB/kg)Volumeshare3%3%30%6%5%3%3%3%Nirma\interim-rptRuralconsumerbehaviorImportanceKeyfactorPriceisthefirstdecisionfactorforruralconsumertobuydetergentpowerPriceStainremovingEfficacyFoamingFragranceWatersolubilityWhiteningEnzymatic++++++++0--PriceisthemostimportantfactortoaffectconsumerbehaviorinruralmarketTheconsumeralsopayconsiderableattentiontothestainremovingefficacyofdetergentpowderTheruralconsumeroftenevaluatethestainremovingabilitythroughthefoamingeffectofthedetergentpowderMostoftheruralconsumeralsolikethefraqrancebroughtbydeterrentpowderBecauseingeneralfakeproductcan’tsolubilizedinwater,thefeaturecanhelpconsumerdistinguishrealproductwithfakeproductTheruralconsumerseldomcareforthewhiteningandenzymaticabilityofdetergentproductExample:DecisionfactorsofruralconsumerThecustomerbehaviorisfitwithNirma’slowpricestrategySource:RolandBerger&Partners’interviewBack-upNirma\interim-rptLocationofmanufacturingsiteofQiqiangMarketsharebyregionInordertoreducethetransportationcost,QiqiangsetupsevenmainfacturingsitenationalwideSource:RolandBerger&Partners’interviewEastSouthWestNorth?Guizhou?Benxi?Sichuan?Neimeng

Shanxi?Anhui?Xi’anNomanufac-

turesiteExample:Qiqiang’smanufacturingsitevs.Marketperformance

Qiqiang’sheadquarterBackupNirma\interim-rptFocusononeregionalmarketandconcentratethemarketingresourcesatthebeginningUsingaccumulatedexperiencetoexpandnewmarket3AsystematicexpansionstrategyshouldbeappliedDescriptionSource:RolandBerger&Partners’interviewandanalysisARegionalpenetrationBLowpriceCFrontattackDMotivateddealerEBenefitedcustomerRecommendedretailpriceisabout5.5~6.0RMB/kgHigherpriceinthebeginningtobuildupbrandimageAllocatingstrongsalesteamtoanewmarketbyintensivemarketingandpromotionDelegatethebuiltupmarkettoaqualifieddistributortomanageDevelopmentaincentivesalespolicytomotivatethedealersalongthedistributionchannelAdoptingwell-acceptableapproachtopromoteintheruralmarketNirma\interim-rptRetailpriceofmajorbrandinChongqing[RMB/kg]BThetargetretailpriceforNirmashouldbelessthan6RMB/kg6.25Libai7.15.36.5WhitecatQiqiangNirmaSource:RolandBerger&Partners’surveyandanalysisResun2)5.5~6.01)Libai’sheadquaterisinGuangzhouanditismostlyproduced

byResuninHunan2)LocalbrandinHunanprovince6.0RMB(0.72USD)/kgisthemostpopularacceptedpriceforruralmarketThesuggestedretailpriceforNirmais5.5~6.0RMB/kgThewholesellingpriceisabout80%ofretailpriceTheinitialretailpriceshouldbehigherforsettingupbrandimagePricepositioningNirma\interim-rptSuccessfactorsforQiqiangMarketshareofQiqiangBQiqiangfastexpansionstemsfromitsappropriatemarketingstrategyand

manufacturingstrategy12.6%Aug.-Sep.977.2%13.2%8.3%Dec.-Jan.98Apr.-May.98Aug.-Spt.98Lowcost&lowprice

-ThesalarylevelinShanxiisabouthalfof

whitecastinShanghai

-raw-materialadvantageitsNa2So4

has35%marketshareinChina

Retailprice:6RMB/kg

-Drreetapproachlow-levelwholsaler

-Usestrongpromotiontopushproduct

Localmanufacture&localsales

-Sevenmanufacturingsitesnationalwidewithheadquaterinshanxi

Wellfinanced

-390millionRMB(47mioUSD)wasfinancedin

stockmarketinApril199780%p.a.Example:SuccessfactorsforQiqiangBackupNirma\interim-rptExampleDescriptionofapproachDevelopcustomersandbuildupsalesnetworkDelegateareliabledistributortomanagethenetworkTheteamisassignedtoanothernewmarketBuildupalong-termagentrelationshipwiththedistributorExample:NewmarketentryapproachinChongqingFront

attackUseseveralqualifiedagentstosellproductwithlong-termcreditterm(3months)Sendasalesteamtosupportagenttopromoteaswellasbuildupownknow-howTakeoverthesalesnetworkanddirectlyselltowholesellersJoint

attackDiaopaiYuxiuPower28(benckiser)Weibai(Henkel)EstablishownsalesbranchlocallyDirectlysellproducttowholesalersandlargeretailerDirectattack(sell)Tide(P&G)OMO(OMO)QiqiangSource:RolandBerger&Partners?interviewCFrontattackstrategyisrecommendedforNirmatopenetratenewmarketNirma\interim-rptEmploydistributoranditsownsalesforce(about2000)toexploremarketinthemeantimeDistributorfocusonexistingchannelsandareasWhitecatsalesforcefocusonunexplorednewmarketsBeflexibletodifferentmarketsituationLowrelianceondistributorsPossibleconflictbetweendistributorsanditsownsalesforceTherefore,distributorsmayloseinteresttoworkwithWhitecatSlowresponsetochangingmarketwithhieratialmanagement,e.g.theapprovalforapromotionplanwilllast3monthsCWhitecatusesdistributoraswellasitsownsalesforcetojointlyexplore

marketsDistributorWholesalerDescriptionWhitecat’sdistributionchannelmappingStrategyCONSSecondarydistributorRetailerEndconsumerWhitecatregionalsalesofficeEndconsumersRetailerBackupWholesalerDistributorWhitecatSource:RolandBerger&Partners?interviewPROSIncapabletoresponsetochanging

marketandconsumersNirma\interim-rptDescriptionQiqing’sdistributionchannelmappingDispatchhugesalesforcetodirectlyapproachwholesalersandretailersSalesRep.regularlyvisitwholesalersandretailersProvideefficientlogisticssupportandserviceRapidpenetrationintoruralareaBuildfist-handmarketanconsumerknowledgeQuicklearningDifficulttomanagehugesalesforce(about2000)Delayofmoneycollectionandpoorcredit-termmanagementHighsellingexpensesChannelconflictCQiqiang’sdistributionsystemgreatlyfacilitatesitsmarketexpansion

despiteofunprofessionalmanagementRegularmarket/Fair*EndconsumersWholesalerSecondary

wholesalerRetailer*Qiqiang’ssalesforcepromoteandsellproductinweeklymarket

activityinruralareaStrategyPROSCONSHighriskinthematurephaseQiqiangSource:RolandBerger&Partners?interviewBackupNirma\interim-rptCAfterpenetratingthenewmarketbyfrontattack,Nirmashouldshiftthe

distributiontoaqualifieddistributorPhase:GrowthperiodProvincePhaseI:EntryperiodPrefecturemunicipalCountryTownRuralWholesalerSecondary*

wholesalerRetailerEndconsumersRegionalsalesoffice/teamRegionalsalesofficeFirst-tierdistributionSecond-tierdistributionWholesalerSecondary

wholesalerRetailerEndconsumers*Onlypartlyexistincoastalmarket,E.g.ShandongSource:RolandBerger&Partners?interviewLeveragedistributortomultiplesalesandcoverageShiftcreditriskNirma\interim-rptDAttractiveincentivepackageshouldbedevelopedtomotivatedealerto

promoteNirmaKeysuccessfactorsKeepchannelmembersmotivatedwithsufficientincentiveAvoidchannelconflictProvideefficie