Danfoss' Business Strategy in China

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Case Details:

Case Code : BSTR220
Case Length : 15 Pages
Pages Period : 1994-2006
Organization : Danfoss
Pub Date : 2006
Teaching Note :Not Available
Countries : China, Denmark
Industry : Air-conditioning and refrigeration equipment

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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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...

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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...

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