Danfoss' Business Strategy in China
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Case Code: BSTR220 Case Length: 15 Pages Period: 1994-2006 Pub Date: 2006 Teaching Note: Not Available |
Price: Rs.400 Organization: Danfoss Industry: Consumer Electronics Countries: China, Denmark Themes: International Business, Globalization Business |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Danfoss Enters China
Danfoss had been exporting its products to China since 1991 and it had a small share in the Chinese radiator thermostat market. In the early 1990s, the Japanese economy suffered from a severe economic crisis. This made many manufacturers including Danfoss's customers like air-conditioning and refrigeration manufacturers shift their focus to China. The Danfoss board learned that the air conditioning and refrigeration markets in China were poised for huge growth. Further, China offered huge cost advantages in the form of cheap availability of labor and land. Moreover, the European customers of Danfoss were putting pressure on the company to decrease the prices of expansion valves. All these factors led the company to seriously think of establishing a production facility in China. Danfoss's initial plan was to produce radiator thermostats and expansion valves by shifting the production of expansion valves from Denmark to China, and to develop China as its global sourcing hub...
The Initial Years
Danfoss had a tough start in China. Though its own manufacturing facility was inaugurated in July 1997, the company had to continue its operations in the leased plant until 2001. It had problems with its suppliers and its employees and therefore had to focus entirely on its daily operations. Initially, Danfoss could not find suitable suppliers in China and had to procure most of the raw materials required from suppliers in Europe. Language acted as a major barrier, and its many technical specifications often led to confusion among the Chinese suppliers. This resulted in the rejection of many products during testing. Danfoss also found it difficult to deal with Chinese employees. The management followed the western style of openness and cooperation, which was new to the Chinese employees. They were used to a system which gave importance to individual performance and were not accustomed to working in a group. Hence, they were reluctant to discuss things and did the work as they were ordered to even if they had the knowledge to do it better...
The China Strategy
During the early 2000s, Danfoss was registering about 35% annual growth in revenues in China, but was yet to become profitable. The company was still importing a number of products from other countries to cater to the local market and sold them through its Hong Kong division (as imported goods were not allowed to be sold in China). However, things changed dramatically after 2001. Toennesen, who was appointed as the General Manager of Danfoss (Tianjiin) Limited in October 2001, managed to convince the company's top management and to get permission to move the company's manufacturing operations from the leased premises to its own manufacturing facility. The new factory began production in December 2002. In addition, the factory was also equipped to produce refrigeration and air conditioning products. Danfoss also started work on expanding the factory to include the production of scroll compressors for air conditioning units. This facility became operational in mid 2004...
The Road Ahead
By mid 2006, though Danfoss had established itself in China, counterfeit products formed a big obstacle to its future growth. A number of local manufacturers copied Danfoss products and sold under the same name with similar packing. In one such instance, Danfoss was informed of its counterfeit products being sold at very low prices. Danfoss discovered the company which was doing this and reported the matter to the police. The company also started working closely with the local police and government officials to deal with the copycats. However, the company believed that while the problem could be mitigated, it would be difficult to eradicate it completely. Another problem for Danfoss was that the air-conditioner market in China had become extremely competitive. By 2005, 33 out of 66 brands had exited the market, and according to analysts, around 10 more brands could go out of business in 2006...
Exhibits
Exhibit I: Danfoss Organization
Exhibit II: Air Conditioning and Refrigeration Industry in China
Exhibit III: Danfoss in China
Exhibit IV: Danfoss - Product Categories in China
Exhibit V: Cold Food Chain in China
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