2. Introduction: International Marketing
An understanding and an in depth knowledge of the markets in which organizations operate is important for all organizations’ activities. In foreign markets due to geographical distances and the difficulties of operating in those contrasting markets where the risks are high and there are also high levels of uncertainties, market knowledge and understating is of vital importance as indicated by Doole and Lowe [1].
Globally there is recognition in enterprises to develop skills to effectively compete in international markets. The world economy is opening and there is an increase in consumer product globalisation, nations are connecting and depending on each other. Nations cannot afford to operate in isolation; this fuels the importance of International marketing. Failure to partake in the foreign marketplace guarantees a decline in the nation’s economic capability and the decline of its people’s living standards. The promise of a peaceful world, better society, more efficient business transactions and an improved quality of life for all is encapsulated in a thriving international marketing sphere [1] [2] [3].
The emerging economies are becoming the catalysts for global economic growth. BRIC countries India, China, Brazil are transforming economically the same way that Japan, South Korea and other European nations were transforming post World War II economic boom. Economic growth in developing markets is increasing at a rapid pace due technology advancement, economic policy and social reforms, and education [4].
South Africa-based Jeffrey’s Industrial Air Filters has set a target of 25 percent annual growth over the next five years. This will be achieved by marketing their game changing large industrial modular air filter for very dirty, abrasive environments internationally. This industrial air filter can be used in cement, food, metals, power, pharmaceuticals and other manufacturing plants. This product was introduced in South Africa in year 2010 and has already captured 79% of the domestic market.
3. The Company
Jeffrey’s Industrial Air Filters was founded in 1990 and is a South African supplier of industrial filtration systems and components. Satisfying customer needs with innovative industrial filtration systems is the company’s key objective.
The company supplies customers with air purification, dust collecting and fume extracting products for industrial purposes. The company products are mainly used in the mining, petrochemical cement manufacturing, large industrial plants with particle emissions and similar industries. The company’s core competency includes the continual innovation of industrial filtration technology, supported by over 40 engineers among more than 1000 employees, included is this number are product design and air filtration specialists in the Durban and Johannesburg production facilities. The company pride itself with low cost world class products manufactured locally. The company hold more than 10 patents and this is an indication of the calibre of personnel in our research and development division.
4. The Product
Figure 1: Modular Industrial Air Filter (Source: www.directindustry.com)
4.1 Product Description
Our product (figure 1) is an innovative modular air filter which enables plants to reduce energy and operating costs while conforming to highest industry quality standards. The product has low maintenance benefits, with almost no wear and tear due to a unique and internationally patented surface treatment process. As compared to other products, our product is environmentally friendly in terms of particle pollution. Due to less maintenance, the product life cycle is reduced by 35% over a 10 year period. The product is versatile as it can be used in different industries such as petrochemical, mining, pharmaceuticals and similar high pollution industries.
4.2 The Chasm
Figure 2: The Technology Adoption Life Cycle (Source: Crossing the chasm) [5]
Moore [5] defines a market as a group of potential or definite customers for a specified group of products or services who have a mutual set of needs, and who refer to each other when making a decision to buy the products or services.
The technology adoption life cycle is the basis for most business plans, a bell curve (figure 2) representing high tech customers, starting from Innovators, Early Adopters, Early Majority, Late Majority, and lastly Laggards. The technology marketing model finds its foundation in this model, working the curve from left to right to win each group. The captured group becomes the reference for the next group on the bell curve [5] [6] [3].
Moore [5] suggests that there are visible gaps in the curve, between each stage of the cycle, demonstrating a disconnection between any two groups. The largest gap, considered a chasm, is between the Early Adopters and the Early Majority. A majority of technology ventures fails to cross the chasm. Our Product will appeal more to early adopters
Early Adopters are visionaries who look at an emerging technology to match a strategic opportunity. They don’t have a fear of working with less known vendors [5] [6].
The strategy for a new entrant is to target a niche market as a point of focus. Invest all energies and resources in dominating that market [5] [6].
5. The Current Industrial Air Filtration Market
Government regulations relating to emissions standards are driving the growth of industrial air filtration market. There is an increase in a number of countries that are enforcing occupational health and safety guidelines and this is also fuelling the market demand. There is also a growing demand for efficient and high performance air filtration products and the expectations are a growth in the industrial air filtration market. This market is also expected to experience growth due to industrialization, demographics changes, urbanization, increased environmental cognizance, and the scarce resources [7] [8].
The filtration market is expected to reach $12.83 billion (US) by 2020. Strict enviro
nmental guidelines concerning the air quality deterioration coupled with the requirement to conserve energy, and the increase of air borne diseases are the key driving dynamics for the global air filtration market. Fast paced industrialization in the developing BRICS market is also driving this sector over the forecasted period of up to year 2020. In 2013 Asia Pacific arose as the regional market leader and accounting for 42.7% of total market [8] [7]. Figure 3 shows the breakdown of the industrial air filtration market.
Figure 3: Industrial Air Filtration Market (Source: Grand View Research: [7])
6. Geographical Scope
6.1 Market attractiveness: BRICS Factor
The developed countries markets are reaching a point of saturation and slow growth. Trade globally was dominated by countries such as United States of America, Japan, United Kingdom and Germany, now the focus has shifted to emerging markets. The BRICS countries (Brazil, Russia, India, China and South Africa) are showing signs of growth economically. These countries are in a position to economically produce commodities which were previously produced in developed countries [6].
Maxwell [4] suggests that, from 1996 to 2010, the economies of emerging market nations grew at double the rate of developed nations.
There is an expectant growth in Asia-Pacific and South America regions due to rapid industrialization over the forecasted period up to 2020 and beyond. The entrance of pharmaceutical companies in the Asia-Pacific region to meet the region’s export and import demands is also a major driver for the air filtration market growth [7].
The CNBC report submits that, the Chinese air pollution is becoming a huge problem. It is reported that air pollution kills 4000 people daily. However, this is becoming a business opportunity for air filtration enterprises [9] .
Due to the vastness of China and its cement market growth, six out of top ten global cement companies are from China. According to official statistics China consumes 55% of the global cement produced, which is 25 times of what the USA consumes. China, India and Brazil are in the top 10 of cement producing countries, with China at position one and India occupying the second position [10]
Due to the abovementioned factors, air filtration industry players are moving their manufacturing plants to emerging economies such as China due to low-cost labour and availability of material resources [7].
Jeffrey’s Industrial Air Filters has made a decision to take advantage of the boom in the Asia Pacific and Latin American Regions with China, Brazil and India as the countries of interest. We also plan to leverage on the existing BRICS trade agreements. The plan is to expand our business regionally from the three base countries.
6.2 Multi D Matrix
There are a number of factors to consider when venturing into a new market. With hundreds of countries to choose from, companies need to carefully analyse on which countries to focus at. Here are some of the factors to consider [11] [6] [3];
• Market choice: Growth potential of each market is the key driver, the market desire for the products and services on offer; and the organizations’ expansion strategy.
• Venture Finance: A well structured financing model is critical to succeed in foreign markets.
• Products and services: There is a need for a gap analysis; an assessment of whether the expansion is worth the try. Market attractiveness versus the cost of adapting products to local markets should be assessed.
• Operating model: International venture may alter a company’s structure and how it’s managed. The distribution and supply chain elements are critical in most industries.
• Sales and marketing: Organizations will need to decide how their products are sold in international markets.
• People: A specialist skilled and unskilled staffing requirements and availability thereof should be one of the considerations when venturing into foreign markets. The correct mix of local and expatriate staff is vital.
• Tax and Legislation: The foreign country’s legal system may also be a thorny issue. Businesses will want to know how robust are local intellectual property laws?
• Future expansions: More often than not, companies venture into a new territory, somewhat for a single country market. This market may work best as a doorway to further regional expansions.
It’s from these factors that a multi-dimensional matrix is formulated. The matrix below shows China as a preferred country for our international expansion.
FACTORS: Market Choice Product Finance Operating model Sales and marketing People Tax and regulation Future expansion Total
WEIGHTS: 20 10 15 10 15 10 10 10 100
China 15 8 14 8 10 10 7 10 82
India 10 7 10 7 12 8 8 8 70
Brazil 10 6 10 8 12 7 8 8 69
Table 1: Multi-D-Matrix
6.3 Mode of market entry
What makes a company enter a market depends on the countries regulations, economic environment, the available resources, appetite for risk and expertise within the organization. A decision the company needs to make is to whether they “Build”, “Buy” or “Buy” [11] [3].
The three options have advantages and disadvantages
Build ― this option requires a substantial cash injection. The advantage is that the company retains control of the business. This many not work in countries where a local partner is required [2] [11] [3].
Buy ― this option gives a company access to an existing business brand. However, mergers and acquisitions are very difficult, requiring far-reaching due diligence is required and organizational integration required a strong management involvement [11] [6] [3].
Partner – this allows the business to share risk with an established local partner. The advantage is the access to a local player’s infrastructure and a low capital injection is also required. The decision making process can be difficult in this arrangement [1] [11] [3].
Based on the above our organisation has decided on a two pronged international business expansion approach. Firstly, to go into an equity joint venture with Camair Group which is China’s largest designer and manufacturer of air filters for power plants with 10 production facilities around the world; and research and development centres in Brazil, India, China. Camair Group has a representation in 35 countries and in all continents. The air filtration manufacturing will be done in China, utilising the existing Camair Group production infrastructure and skilled human resources. There is an added advantage that Camair Group’s has established distribution channels in China, India, Brazil and other 32 countries.
Secondly, Jeffrey’s Industrial Air Filters is already a supplier of air filtration systems and components to locally based pharmaceutical companies AstraZeneca, Norvatis, Johnson & Johnson, GlaxoSmithKline and Pfizer, and to the following cement producing companies, Lafarge, Afrisam and Holcim. All these companies are establishing production plants in China, India and Brazil due to the current boom in those regions.
7. The environmental analysis
7.1 PESTLE analysis
The vital difference between domestic and international markets is the complex environment a company may operate in. An organization needs to be aware and know the complexities and the effects they have on international marketing [1].
The Chinese market as our main target is attracting direct foreign investments due
it its vast size and the potential in the market. The most critical factor is market entry barriers. When venturing internationally companies are encountering a number of challenging factors such political, economic, social/cultural, technological, legal and environmental (PESTLE) in Figure 4 [1] [6] .
Figure 4: The Environmental influences on International marketing (Source: Doole & Lowe [1])
7.3.1 Political analysis
The political atmosphere of international markets contains any national political element that can have an effect on the organization’s decisions in operating in that country. Politics are a major factor in companies making international investments and market development decisions. Politics are inherently linked to a government’s outlook towards business and the liberty within which it permits companies to operate in that country [1].
Generally, China investment legislation lacks transparency. The government policies and regulations linked to investments are not clear. The policies are not applied consistently through different provinces. There three main investment policies used in China namely; contract joint venture, wholly owned foreign investment, and the equity joint venture. Most investment ventures are structured under the equity joint venture model [1] [2].
7.3.2 Economic analysis
An understanding of economic developments and how they impact the international marketing strategy is vital for companies to succeed in international markets. The understanding of the global trading set-up such as; global or regional institutions and various trade agreements is of utmost importance. The South African Companies can benefit from the BRICS trade agreements. Companies need to familiarize themselves with the host countries’ economic policies and how those specific markets are developing economically to make an informed investment decision [6] [1].
Below are the basic economic indicators for China, Brazil and India;
Factors China Brazil India
Population 1.368 billion 203 million 1.239 billion
GDP $10360 billion $2346 billion $2067 billion
GDP Growth 7% 3.90% 2.06%
GDP per capita $3866 $5970 $1263
Unemployment 4.04% 7.60% 4.90%
Inflation 2% 9.53% 3.66%
FDI Inflow $85.34 billion $5.246 billion $1.943 billion
Table 2: Economic Indicators: (Source- www.tradingeconomics.com)
7.3.3 Social/Cultural analysis
Chinese culture has a huge influence on the marketing sphere. The Chinese social and cultural values are based on social interactions and interpersonal relationships. Chinese nationals are relying on personal relationship “Guanxi”. The word “Guanxi” is translated “special relationship” or “special connections”. “Guanxi” is key success factor in the early stages of entering the Chinese market. International companies cannot succeed unless in China unless they apply ‘Guanxi” [12].
“Guanxi” is established by gift-giving, meetings in restaurants, overseas trips or even sponsoring the children of Chinese officials to attend college abroad. The dynamics of this practice can become beneficial to companies investing in China [1] [12].
7.3.4 Technological analysis
Technology is a key driver of international marketing towards a global market environment. The effect of advances in technology is seen in all spheres of the marketing practice. Data gathering, control and management mechanisms of markets and conducting international business functions have been revolutionized by the advances in Information Communication Technology (ICT) sector [2] [6] [1].
Like any other country that considerably leverage on information technology, there is a need for China look into information security factors. The country is faced with an increase in cyber-attacks and threats from other countries. Another key technological issue in China is that the banking industry does not have stable and safe online payment system. There are uncertainties and avoidance with Chinese buyers. The Chinese credit card penetration is very low due to buyer avoidance. Online payments are vital for effective business transactions. This should one of the key considerations when investing in China [1].
7.3.5 Legal analysis
Different countries’ Legal systems differ by interpretation and content. A company venturing into international markets is not only bound by its home and host country laws and but also by a number of international legislations. How a product is accepted in a country can be impacted by regulations on things such as packaging and by legislation changes. The legal setting in global marketing is complex than in local markets since it is three dimensional: (1) local domestic law in host country; (2) international law; (3) domestic law in the company’s home country. In the past China earned a bad reputation for allowing breaches of copyright and flagrant piracy. However, this has since change, though there is still an element of this practice [1] [2] [12].
7.2 SWOT analysis
SWOT Analysis (figure 5) is a strategic planning tool utilised to assess the Strengths, Weaknesses, Opportunities, and Threats that can be encountered in any business undertaking. It details the objectives of the business undertaking and it identifies the internal and external aspects that are positive and negative in achieving the objective [6] [1].
SWOT Analysis sets key elements into two main groups:
1. Internal Factors – Strengths and weaknesses internal to the company.
2. External Factors – Opportunities and threats from the external environment to the company.
Figure 5: SWOT Analysis Matrix
7.3 Porter’s five force model
Figure 6: Porter’s five force model (Source: Du Plessis, et al [6])
Porter’s Five Forces model in Figure 6 was introduced in 1979 and it has become the important framework for analyzing market competitiveness in different industries. The five forces are a measure of competitiveness from which market attractiveness is derived. The five forces are (1) Threat of New Entrants, (2) Threat of Substitute Products or Services, (3) Bargaining Power of Buyers, (4) Bargaining Power of Suppliers, (5) Competitive Rivalry Among Existing Firms [6].
Threat of New Entrants: Medium Threat
• Entry barriers are medium for the Air Filtration industry: There are costs linked to winning new clients switching.
• Camair Group is a huge brand in China. It has a sizeable market share and customers that are loyal to the brand; a plus factor is partnering this organization.
Threat of Substitute Products: Low Threat
• There are many cheap, substandard air filtration products in the Chinese market. The SMME’s do not necessarily go for quality product; it’s these players who will not differentiate between quality and sub-quality products.
The Bargaining Power of Buyers: Low Impact
• The small standalone users have no effect on our company
• Large companies have bargaining power because the buy in bulks, the advantage on our side is the existing relationships with huge cement and pharmaceutical companies venturing in this region. These companies are loyal to our brand.
The Bargaining Power of Suppliers: Low Impact
• The majority of materials used to manufacture the products are similar with what Camair Group is using in manufact
uring. The suppliers are in abundance and the buyers determine the pricing as the supply is higher than the demand.
• Camair Group is a large organization; buying in bulks and the prices are reduced.
Rivalry among Existing Firms: Medium Impact
• The main competitor is Zinshu Air Filters which has a wide portfolio of air filtration products under its brand. However, their individual products cannot compare to Jeffrey’s and Camair’s products.
• There are other brands in the market who have failed to make any dent in the market.
8. Marketing Objectives and Strategy
8.1 Marketing Objectives
Setting marketing objectives is important. A company focuses on specific goals over a period of time. An acronym for setting objectives is called SMART objectives. Objectives should be specific, measurable, achievable, and realistic and over a period of time [6].
Our international marketing objectives:
Forecasted Sales 1-5
Increase overall sales for Jeffrey’s Industrial Air Filters by 15% through the existing relationships with the pharmaceuticals and cement companies, and the additional 25% through new business.
Forecasted Profit year 1-5
Increase profit by 25%
Market Coverage and Penetration
Jeffrey’s Industrial Air Filters currently controls 79% of the total market share in South Africa. The plan is to capture 15 % of the Chinese, Indian and Brazilian markets in the next 5 years.
Market penetration
• Initially distribute in China, Brazil and India
• Throughout Asia Pacific, South America and the Middle East from year 4 onwards.
8.2 Competition
8.2.1 Competition insights
Air Filtration players are putting more emphasis on innovation in product development to achieve cost effective and energy efficient filters. More focus is on restructuring the international manufacturing space, by introducing low-cost off-shore manufacturing which is expected to be a key growth factor. It is against this backdrop that industry players are moving their manufacturing facilities to emerging economies such as China due to low-cost labour availability [7].
Thus the reason Jeffrey’s Industrial Air Filters is moving the manufacturing to China in equity joint venture agreement with Camair Group.
8.2.2 Competitive strategy through cost leadership, differentiation and focus
Mauborgne and Kim [13] have indicated that the only way to win against competition is stop focusing on beating the competition. They are recommending what they call “Blue Ocean Strategy” where a focus is unchartered markets, creating demand, and high growth in profits. The strategy is based on value innovation, making competition irrelevant by creating value for consumers and in turn creating a market that is not contested.
The “Value innovation” concept puts more emphasis on both value and innovation. The two concepts when pursued individually cannot make an organisation stand out in the marketplace. “Value innovation” will materialize only when innovation is aligned with value, price, cost leadership and focus. Traditional strategies are structured to choose between low cost and differentiation. However, to break away from competition, low cost and differentiation are to be pursued simultaneously [6] [13].
Our strategy is through three approaches:
• Cost Leadership – This is an aggressive tight cost control. The strategy is to partner; share risk and equity with an established Chinese partner. The advantage is the access to a local player’s infrastructure, distribution channels and a low capital injection is also required.
• Differentiation – This is about creating a product that is unique in the industry. Our product is unique as it can be customised for any air filtration requirement. It enables plants to reduce energy and operating costs while conforming to highest industry quality standards. The product has low maintenance benefits. Due to less maintenance, the product life cycle is reduced by 35% over a 10 year period.
• Focus – This is about focussing on a specific buyer group and a particular market. The entry barriers will be lower as the existing pharmaceuticals and cement manufacturing clients are moving with us to their Chinese, Brazilian and Indian ventures.
9. Marketing Mix: The 4Ps
China has just come out of a strict isolationist policy era. New product adoption can still be a challenge [1]. There are key considerations in positioning new products in the Chinese market.
• Product: The product must be adapted to the Chinese demands and clients. The Chinese distributors should be encompassed into the whole process. Chinese consumers still prefers the China branded commodities [1] [2].
• Price: The approach is keeping in the middle range pricing structure. The Chinese regards anything priced two low as inferior quality and anything above the maximum price as too expensive [2] [1].
• Place: A long term strategy to be implemented as most distributors in China are moving slowly. Focus is the key in the initial stages of entering China. Targeting specific buyers is the key to make inroads into this market as already stipulated in Section 8 [6] [1].
• Promotion: The Key is using the existing channels used by the Chinese partner. As the locals understand the message the organization is trying to disseminate [2] [1].
10. Human and financial resource requirements
10.1 Human resource requirements
In year 2012 China spent $164 billion on research and development, which is just 2% under its gross domestic product (GDP). The United States of America (U.S) spent around $447 billion. The economy of China is growing rapidly and so does its spending on research; and development and the forecast is that it will surpass the U.S by 2022. In 2011, technological and scientific developments added 51.7% to China’s economic growth. There are challenges growing inequality and air pollution which can be addressed by the scientific and technological advances. In 2014 around 7 million Chinese graduated from university, up from 1.1 million in 2001. China is raked second position on the global ranking behind the US in a number of academics publishing engineering and science papers [14].
It’s against this backdrop that a huge number of human resources required for production in this venture will be sourced from China in streamlining the overhead costs. Below in Figure 7 is a joint venture management structure as agreed by the two organizations.
Figure 7: Joint Venture Management Structure
10.2 Financial projections
Jeffrey’s Industrial Air Filters is entering into a joint venture partnership with Camair Group. The initial investment is R150m, of which Camair Group would contribute 40% and the expected turnover is 40%.The Camair Group facilities will require a upgrades in 2016 at once off cost of R5m.The aim is to start full scale production at the beginning of 2016. The current estimates for operations are as follow per year:
• The facility is expected to produce 5 000 units annually at total income of R40000/unit, at a cost of R10000/unit escalated 6 % yearly.
• The total salaries component for the operation is R10m escalated 5% yearly – Due to a few additional heads added.
• The marketing and sales costs are R7m escalated 4% yearly.
• Minimum acceptable rate of return (MARR) for Camair Group i
s 8%
• Minimum acceptable rate of return (MARR) for Jeffrey’s Industrial Air Filters is 12%
• Tax rate is 20%
Table 3: Financial projections
The cash flows for both organizations to turn positive at the end of financial year 2 as shown in Table 3.
11. Conclusions
In deciding to go international, organizations needs to define what their marketing strategy, objectives and policies are. What market share and sales volumes they are targeting. The most cost effective and efficient mode of entry into international markets for small and medium sized companies is by way of international joint venture (IJV). This allows the partnering organizations to share risks and feat synergies. This type of strategic alliance generally provides access to opportunities and geographic markets that are not easily accessible to small or medium size enterprises. However, there are risks and limitations associated with IJV’s. As much as huge opportunities are presented by these partnerships; it is vital to be vigilant, thoughtful in planning and be ready to be flexible when required during this partnership period, so as to increase the chances of succeeding.