2008 will be a reshuffling and competitive year for the Chinese building materials industry, characterised by soaring raw material prices, distributors entering manufacturing …
2008 will be a reshuffling and competitive year for the Chinese building materials industry, characterised by soaring raw material prices, distributors entering manufacturing sectors, resources concentrating towards strong players, improved awareness of patent protection and reduced export assistance. But the flip side is that, for strong companies, it will be an opportunity for them to develop internal capabilities and achieve better results in the years after.
High raw material prices
Soaring raw material prices have become one of the major headaches for building materials manufacturers in China. But due to the shortage of supply, prices are set to go still higher this year. The ever increasing timber, steel and metals prices have even led to production breakdowns for some manufacturers.
Shortage of raw materials will cause more competition among small and medium enterprises (SME) in the building materials industry. While large companies may still have some bargaining power or cooperate with raw material suppliers, many SMEs can barely survive. To solve the “feedstock” issues, many building material manufacturers in China are starting to work on the sources, by mergers and acquisitions with or equity investments into raw material suppliers, so that the costs can be reduced.
Channel intervention from distributors
Traditionally, building material channels and customers in China have long been owned by wholesale distributors. But as manufacturers’ brand awareness is improving and consumers’ attitudes are changing, multi-brand distributors are having harder and harder days. As a result, many distributors have chosen to exit the industry, or go upstream to become branded manufacturers themselves.
Resources concentrating towards strong hands
When the home decoration and property market was still booming, building materials shops were everywhere, so were the brands. But after two years’ consolidation, there are only a handful of brands that can still be recognised by consumers today.
More attention from investors
Venture capital (VC) investment was one of the major topics in the building materials sector in 2007, as many VC investors had fulfilled their earlier agreements and gradually delivered the funds. Due to the vast market potential, private equity and VC investors, both domestically and internationally, are now showing high interests in the Chinese building materials sector. Home Depot, the world’s largest home decoration retailer, has invested US$ 100 million into China’s Home World Group to gain access to the Chinese market. And Carlyle Group, one of the largest private equity companies in the world, also invested US$ 27.5 million into Shanghai A&W Floors. The premium product manufacturer Boloni has attracted interests from Hony Capital of China, Lenovo and Morgan Stanley.
Less export protection
After announcing several export rebate reductions for floor and steel products last year, the Ministry of Commerce of China and Customs of China have announced another set of restricted processed goods trading catalogue, which is due to be implemented on 23rd August. So many companies in the furniture processing and trading sector will face added pressure from paying the bank guarantee deposit, a new system introduced by the regulator to ensure the authenticity of export processing contracts.
As a result of reduced export rebates and paying bank guarantee deposits, some SMEs in building materials sector will face the inevitable consequence of closure and business restructuring.
Recruiting professional talents from other industries
The building materials industry in China is not yet a fully competitive one. Although scales, equipment and staffing quality have improved significantly in recent years, many companies are still having legacies of handcrafting and family-operated enterprises. Therefore recruiting professional talents from related industries has become an important element for sustainable developments of the building materials industry.
Improved awareness of patent protection
While tariff barriers have been lifted, more and more technological and non-tariff barriers are still hindering Chinese building materials companies from reaching overseas markets. Intellectual property protection has always been Chinese building material companies’ weakness, and some even survive predominantly on being copycats.
But as the industry is developing, we can see that there are more and more companies paying attention to Intellectual properties, as well as increased number of patent applications. Apart from investing in R&D, many building materials companies are now lodging Intellectual property-related lawsuits in China, in order to protect their original design works.
More attention on brand building
Advertisements from building material manufacturers were rarely seen in China five years ago, but now most mediums, such as television, street posters, public transports, newspaper and the internet, have plenty of building material advertisements. An industry insider commented that in the past, many building material manufacturers were only concentrating on hard working, showing no “feeling” towards brand building. But due to increased level of competition, many are now realising that products will need brands, which in turn will need development efforts. Therefore from now on, apart from advertising for sales, many Chinese building materials companies will also advertise for brand communications and corporate image promotion.
Home decorative sector at a turning point
The looming Olympic Games will have significant impact on home renovation companies. Beijing’s property transaction volume had already declined 30% in 2006, and it is expected that the number of transactions will be even lower for 2007. And the recently increase in the number of smaller units, rather than the more profitable larger units, should further reduce profitability of the home renovation sector as a whole. Some industry insiders are now predicting a reduced gap between large and small home renovation companies, which means a turning point for more fierce competition. Due to the government’s macro control on the once overheated property sector, medium and small home renovation companies may find it even harder to win contracts. It is expected to see an increased level of home renovation company closures and failure.
Challenges always come with opportunities. If large and strong home renovation companies can seize this market turning point opportunity, by recruiting talents and increasing investments, the years after 2008 we may see better prospects for development.
Posted under Trade News
This post was written by admin on April 23, 2008
