Abstract
The internationalization of dominant market leaders such as Haier (China), Tata Group (India) and CEMEX (Mexico) in emerging economies has attracted immense amounts of interest among academic researchers. A less-explored area is how non-dominant, second-movers venture into the international market. How do small players connect with foreign customers while operating in the shadows of the industry leader? What decisions are serendipitous and what actions are deliberate? What are the key environmental factors and internal decisions that propel a secondary player to place more chips in the international market? This case study addresses these questions using an example of a construction material manufacturer from Southeast Asia. It is suitable as a discussion starter in an international business class, especially for topics such as entry strategy, export marketing and the organization of international business.
Diamond Building Products
Diamond Building Products (DRTs) was established as a subsidiary of Thailand’s first, privately owned cement company, Siam City Cement. Founded by a Sino-Thai business tycoon in the late 1960s, Siam City Cement set out to challenge Siam Cement (SCG), the dominant incumbent that enjoyed a virtual monopoly of the domestic cement market for over half a century. DRT began manufacturing roof tiles and cement pipes for distribution in 1985.
Subsequent to the havoc of the1997 Asian Financial Crisis that saw a myriad of businesses in Thailand fail, DRT was sold to a group of domestic, private investors. It later became a public company and was listed on The Stock Exchange of Thailand in 2004. DRT’s product portfolio has grown to include fibre cement and concrete roof tiles, fibre cement boards and artificial wood (the production of cement pipes, once a major product of the company, was discontinued). Today, DRT serves approximately 15 per cent of the domestic construction materials market, making it the third largest player after SCG, which controls 46 per cent of the market, and Mahaphant Group (a private firm) with 23 per cent.
Construction Materials in Thailand
The cement and construction industry has played an important role in the economic development of Thailand. This section provides some background on key construction materials manufactured and distributed by DRT.
Fibre Cement
Fibre cement or fibre-reinforced cementitious products are made of cement, sand, water and cellulose fibres. It is used in roofing and wall products because of its strength and durability. Thailand’s fibre cement consumption of 35 kg per capita is one of the highest in the world. Fibre cement is a major ingredient in roof tiles, cement boards and artificial wood.
Fibre cement roof tiles, especially the corrugated sheets, are very popular in Thailand and neighbouring countries. Fibre cement boards are used for ceilings, interior walls, exterior walls, flooring and fencing. Wood replacement materials made of fibre cement are used in the products for siding, cladding, eave, lath, base trim and so on. Fibre cement siding can replace wooden façade because of its similar appearance and high-fire resistance.
Concrete Roof Tiles
Sand, water, cementitious materials and pigments are the main ingredients in concrete tiles. Pigments are added for colour and polymers are used as water-resistant coatings on the tile surface. Concrete roof tiles are being manufactured in Thailand since the 1970s and have remained popular among Thai homeowners. There are many producers of concrete tiles with various brands, sizes, colours and design.
Distribution Channels
The domestic market accounted for 85 per cent of DRT sales in 2014. In Thailand, the company delivers products through three main channels: construction agents (60%), modern trade (14%) and housing project sales (11%) and the remaining 15% is exported. Agents are mostly family-owned, building materials stores of various sizes. The company distributes through over 6,000 agents nationwide.
The modern trade channel targets small building contractors, project owners, retailers and home- owners. It is a one-stop shopping retailer for construction and building materials and home improvement products. The expansion of modern trade across Thailand accompanies the growing prosperity of the middle class not only in Bangkok but also in various provinces.
Project sales target large, private housing developers and governmental projects. The company aims to cooperate with companies providing engineering services as well as construction and the development of international civil and infrastructure projects.
Different distributional channels pose distinct challenges for DRT. While large, modern trade stores and giant property developers command considerable bargaining power due to their scale and influence over homeowners, building long-term and trusting relationships with numerous and geographically dispersed small and medium-sized agents can also be very costly. Each year, the company invests a significant amount of resources in enhancing its brand image and strengthening its relationship with distribution agents across the country.
Internationally, the DRT exports products through agents, importers, distributors and modern trade stores. The company exports goods not only to its ASEAN neighbours (Cambodia, Laos, Myanmar, Vietnam, Malaysia, the Philippines, Brunei and Indonesia) but also to China, India, the Middle East and Oceania.
Country Background
Located at the centre of the emerging ASEAN economic bloc, Thailand was the rising star of the region during the miraculous growth decade that began in the mid-1980s. Spurred by Japanese foreign direct investment and a subsequent export boom, Thailand successfully cultivated many internationally competitive industries including electronics, computer parts and automobiles.
Despite successfully emerging from the Asian Financial Crisis at the end of the previous millennium, prolonged political conflict and a faltering democracy have recently dented the country’s development prospects. Growing doubts about Thailand’s ability to escape the ‘Middle Income Trap’ are reflected in the World Bank’s pessimistic forecast, projecting the country to be the slowest-growing economy in Southeast Asia between 2016 and 2018 (Le Fevre, 2016).
With a stagnant domestic market, the need to leverage growth abroad becomes increasingly imminent. SCG, Thailand’s premier industrial conglomerate and undisputed leader in the domestic cement and construction material industry was among the country’s pioneering multinational enterprises (MNEs). Backed by Thailand’s biggest capitalist group, the Crown Property Bureau, SCG began venturing overseas in the early 1990s. The successes and follies of SCG’s internationalization process and the evolution of its overseas expansion strategy are well documented (refer to Pananond, 2007).
Trade Liberalization in Southeast Asia
The ASEAN Economic Community (AEC) has its origins in the ASEAN Free Trade Area (AFTA), a trade bloc agreement signed in the early 1990s among Southeast nations. The original commitment to reduce tariffs among member countries led to increasing economic integration over the years. Today, import tariffs among the ten member countries—Brunei, Cambodia, Indonesia, Malaysia, Myanmar, Laos, the Philippines, Singapore, Thailand and Vietnam—have been reduced to very low levels—mostly below 5 per cent.
ASEAN members include a dizzying variety in terms of size and development. Indonesia, the largest economy, is home to a quarter of a billion people and generates a GDP of over a trillion dollars (purchasing power parity (PPP)). Laos, one of the smaller members, has a population of just over six million people and a GDP of under US$20 billion. The city-state of Singapore, one of the richest countries in the world, boasts a per capita GDP of over US$60,00 per person per year, more than forty times greater than that of Myanmar (in PPP terms). Refer to Table 1 for more details.
Many large Thai multinational corporations have a significant presence in ASEAN. SCG, Thailand’s leading industrial conglomerate, has expanded its various lines of business into neighbouring ASEAN economies. In 2012, it embarked on an expansion in Indonesia, making several investments including a cement plant, a ready-mixed concrete business and a light-weight concrete plant. In Cambodia, SCG moved ahead with an additional cement manufacturing facility to add a capacity of another 900,000 tonnes per year from the earlier 1 million tonnes. Likewise, SCG expanded its operations in the The Philippines, increasing its stake in Mariwasa-Siam Ceramics Inc., a leading ceramic tile company, from 46 per cent to 83 per cent. Towards the end of 2012, SCG entered into an agreement to purchase an 85 per cent stake in Prime Group Joint Stock Company, Vietnam’s largest ceramic tile manufacturer. Revenue from the company’s sales in the ASEAN region (excluding Thailand) in 2012 was approximately USD 1 billion, accounting for 8 per cent of total revenue, an increase of 39 per cent from the previous year. SCG’s assets in ASEAN stood at around USD 1.8 billion or 14 per cent of Group’s total assets.
SCG’s focus on regional expansion followed its disastrous first wave of internationalization that ventured as far away as the USA and pushed the company to the brink of bankruptcy following the outbreak of the 1997 Asian Financial Crisis. At the peak of the crisis, the Thai currency lost more than half its value, thus doubling the company’s dollar-denominated debt, about half of it being short-term debt. By 1998, the company was faced with over USD 5 billion worth of debt. The company survived the crisis, thanks to the incredible and unprecedented support from the Thai government and other powerful institutions (Pananond, 2007). Seeking opportunity outside of one’s home country has its hazards.
Basic Information About ASEAN Members
Opportunity Comes Knocking: Opportunity and the Country-of-origin Effect
DRT’s internationalization began serendipitously. At the turn of the millennium, the company received requests for its fibre cement products from Myanmar and Sri Lanka, countries lacking an adequate supply of cement. Early exports were managed in a make-shift manner, purely based on availability (after domestic orders had been filled) and coordinated by a single officer whose main job was handling paperwork. Nonetheless, additional orders began arriving from other neighbouring countries such as Laos and Cambodia.
The company’s passive attitude towards the international market follows a behavioural pattern of small players that is observed in other countries around the world. Lacking self-confidence and strong institutional support from the government (e.g., Japan’s famous Ministry of International Trade and Industry, MITI) and private organizations (e.g., industrial associations or chambers of commerce), companies that do not dominate their home markets in emerging economies often passively wait for the international market to come and find them.
Budding foreign demand is perhaps not unexpected under the trend of trade liberalization. Regional tariff barriers have in fact been falling monotonously since the AFTA commenced in the 1990s. What turned out to be a pleasant surprise was the premium price Thai construction material brands commanded in neighbouring markets, even when compared to imports from Malaysian competitors. This country-of-origin effect is a clue to one possible benefit of being a second-mover, enjoying a positive image/reputation created by the compatriot, leader firm. SCG, the pioneer Thai multinational, established a reputation of quality and reliability for its cement and building products in neighbouring markets. Because SCG carries such a distinct Thai identity (‘Siam’ is Thailand’s pre-WWII name), its positive image appears to have rubbed off on other Thai brands as well. When DRT began exporting to Cambodia, customers insisted that there should be Thai letter fonts on the products as a symbol of authenticity.
Building materials are good examples of experience goods. A buyer only learns the true quality of roof tiles once the house has endured a few monsoons. A leaky roof is a major headache and getting a new roof installed is both inconvenient and expensive. It is, thus, no surprise that these buyers place such a strong emphasis on brands and the product’s country of origin while exhibiting only moderate sensitivity to price. In 2013, a curious phenomenon was observed in Cambodia when the same branded roof tile—CPAC belonging to SCG—retailed at two different prices, the tiles manufactured in Thailand commanding a 20 per cent price premium over the same branded tiles made in Cambodia.
SCG’s pioneering international activities are not the only causes behind the country-of-origin effect. Thailand’s economic and cultural influences may also help explain the positive image the country’s products enjoy regionally. Millions of labourers from Myanmar, Cambodia and Laos have crossed the border seeking better employment opportunities in Thailand (The Economist, 2014). When they return home after their stint as agricultural labourers, factory workers or domestic helpers, they ostensibly become envoys of Thai culture, products and brands.
Finally, although Thailand is neither the largest (by population) nor the most prosperous (by per capita GDP) country in ASEAN, it enjoys a strong reputation among its neighbours, owing to its outstanding performance in international sports competitions. Thailand won the highest number of gold medals in four out of the last five Southeast Asian (SEA) Games, the biennial, regional multi-sport competition, and ranked the highest (sixth) in overall medal count ahead of all other ASEAN members in the 2014 Asian Games in South Korea. Past studies have identified a relationship between successful sports teams and the country-of-origin image (refer to, e.g., White & Absher, 2013).
Commitment, Internal Reorganization and the Turning Point
From the beginning, the export market was considered a second priority to domestic sales. Continuing to treat exports as an afterthought, however, would not have been a shrewd strategy for DRT. The turning point for the company came in 2007 when exports reached 10 per cent of total sales (refer to Table 2). At this stage, company leaders committed to hiring a dedicated export manager and gradually increased full-time staff in the export office to ten people. These major commitments resulted in some radical changes.
DRT’s Exports from 2003 to 2014
First, marketing and other related costs for exports were tracked separately. While the export division (refer to Figure 1) with separate sales figures has been in place since 2003 (when the export share of the total sales represented a mere 2%), exporting costs and expenses were bundled with the domestic budget. It was thus previously impossible to measure how profitable exporting actually was. When marketing costs were separated, the company finally realized that exporting, with its strong demand and premium pricing, is significantly more profitable than competing in the cut-throat domestic market.
The key strength of the multidivisional organization structure is its effectiveness following the well-known management tenet, What Gets Measured Gets Done. With the realization of past success and future potential of exporting, promotion and marketing activities in foreign markets increased markedly. Given greater resources, DRT’s exports have grown in double digits every year since 2011 (exports in 2009 and 2010 were dampened due to the Global Financial Crisis).
Benefits of a separate export division lie not only in information transparency but also in adaptability and shortened response time to the changing market conditions, as detailed in the next section.
Adapting Products and Services for Foreign Customers
The focus on exports has stimulated DRT to refine numerous marketing levers. Production plans now explicitly account for the export market, allowing foreign orders to be filled in less than 30 days (down from the previous average of 45 days). Filling foreign orders is no longer a second priority behind domestic orders. New product introduction often has foreign customers in mind. For example, a new roof tile with four undulations emerged as a big hit in Laos. Unlike in Thailand, where either two or six small undulations is the standard, Laotian homeowners prefer their roof tiles with four undulations in bright colourful gradients.
Measurements for products destined for Myanmar, India and the Philippines are quoted in feet/inches (the English system, a relic of the colonial era) instead of in meters/centimetres (the metric system commonly used in Thailand).
In terms of distribution, more attractive reward incentives were offered to local distributors. The company provides for more flexibility in the breakage allowance for its distributors in countries with generally poor road conditions. Training sessions to educate distributors about product features and selling techniques have been initiated in Laos along with programmes that introduce proper roof tile installations to home builders.
The importance of personal selling in the emerging markets of Southeast Asia cannot be overemphasized. Personal relationships still serve as the foundations of smooth and trusting business operations in pre-industrial societies. Ever since a full-time export manager was hired, the company has stepped up its efforts to create deeper bonds with its foreign customers and distributors. Regular gifts and performance rewards have proven to be effective tools to create goodwill and loyalty. A 2009 New Year party featuring a popular Thai actor was a big hit among Laotian customers because Thai television programmes are a fixture in this neighbouring country. Finally, treating top-performing agents to luxury tours abroad helps build camaraderie.
Speed and flexibility were greatly enhanced for pricing and promotional decisions in the export market. Because the export manager reports directly to the deputy managing director for sales and marketing (refer to Figure 1), prices are adjusted quickly in response to market conditions and competition. Since the export division possesses its own budget, promotional programmes are routinely approved within a day or two, a massive improvement from the previous system that could take up to 7 days.
Finally, communication skills in English are receiving priority in the recruiting and selection of new employees. The emphasis on language reflects the heightened need for after-sales services and relationship cultivation with foreign customers. Hiring and retaining employees with adequate language skills is a challenge, given Thailand’s educational system’s failings. The 2015 Education First English Proficiency Index classifies Thailand’s English proficiency as very poor, ranking the country’s average English skills 62 out of the 70 countries surveyed and the third lowest in Asia ahead of Cambodia and Mongolia (Frederickson, 2015).
Key Findings and Lessons
DRT has come a long way in exploring markets abroad and developing capabilities to serve foreign customers. From around the turn of the millennium when the company was a small player entirely focused on the domestic market, the share of exports to the company’s total sales grew to almost 15 per cent by 2014. In addition to seeing double-digit growth in exports in almost every year for over a decade, the profitability of exports regularly surpasses that of domestic sales. What are the key takeaways from DRT’s early internationalization experience?
First, small, second-movers can enjoy reputational benefits in foreign markets from the successful prior performance of the dominant, leading firm. These country-of-origin effects are likely to be more prominent in regions where national identity is salient—in Southeast Asia, for example, Thai television programmes are popular in Laos, Cambodia and Vietnam.
Second, while early dabbling in international markets may be unplanned, management commitment and internal reorganization eventually become essential for small players who strive to internationalize. A key lesson from the case of DRT is the critical importance of making the export division a profit centre with its own marketing budget and sales record. Internal transparency on the performance of different divisions allows the company to better allocate resources.
Finally, once internationalization has been adopted as the central strategy of the firm, marketing levers that will likely need tuning include designing and launching new products, building speed and flexibility into pricing, the distribution system and promotion. Cultural awareness and language capabilities, not surprisingly, also enter the fray.
The Next Step
Investing in its own production and distribution facilities in Cambodia is in the plans for DRT. The obvious benefits of such expansion include savings in transportation and logistics costs, Cambodian roads are notorious for cumbersome checkpoints and potholes resulting in the high breakage of merchandise. Yet the plan, as of now, has been shelved mainly for the high levels of investment required.
Initiating a new operation in a foreign country appears to be much more daunting than exporting. The level of commitment and dedicated resources in building the necessary knowledge and relationships will be much higher if DRT is to successfully set up a factory in Cambodia. However, the longer it waits, the more difficult the task. As Cambodia and other emerging ASEAN markets grow more prosperous, their construction material markets are likely to become increasingly crowded. Mahaphant, the number two player in the building material industry in Thailand, already sells its products in every ASEAN market to which DRT exports. The question facing DRT in its internationalization process is most likely not whether it should take the next step but rather when and how.
A Brief Overview of Neighbouring Market Conditions
In Cambodia, the majority of fibre cement and concrete roof tiles are Thai branded and locally made. Similar products from other countries are basically non-existent. SCG has established a joint venture with a local partner to produce CPAC-branded concrete roof tiles. In 2013, the retail price of imported CPAC tiles from Thailand was USD 0.54, while the same branded, but locally produced, tile retailed for USD 0.44. Apparently, the place of manufacturing is a more critical factor for the average Cambodian consumer than the location of a company’s headquarter. DRT’s branded tile was priced at USD 0.58.
In Laos, most of the fibre cement roof tiles are imported from Thailand. Since 2012, local factories have begun supplying the domestic market albeit at a heavy discount compared to imports from Thailand. Construction agents frequently recommend Thai products due to their superior quality. Locally made roof tiles have a reputation of being excessively brittle, resulting in high rates of damage during transportation. Building products from other countries are rarely found in the Laos market.
Burmese homeowners prefer metal sheet roofing for its low price and fast installation. There are no locally manufactured fibre cement products due to the insufficient domestic supply of cement. Most construction projects require imported cement. This lack of a key raw material gives fibre cement imports a decisive advantage in the Myanmar market. In the last decade, imported fibre cement sheets from Thailand have gained a foothold in Myanmar. Malaysian products have recently attempted to make some inroads but with very limited success.
Vietnamese building material importers purchase fibre cement boards from various countries in the region including the Philippines, Indonesia, Malaysia and Thailand. Imports from Thailand command the highest share in the Vietnamese market. Importers and distributors request manufacturers to clearly print ‘Made in Thailand’ on all products because the labelling induces acceptance and trust among Vietnamese buyers.
In Indonesia, local manufacturers produce various kinds of building materials including concrete tiles, ceramic roof tiles, fibre cement boards and wood replacements. The local market is rather stagnant, and domestic manufacturers are faced with overcapacity problems. Yet Thai fibre cement producers (such as SCG) have successfully gained a foothold in the Indonesian market and have established a good reputation for quality and reliability.
Singapore and Brunei, the two smallest and wealthiest countries in Southeast Asia, import fibre cement products from Thai manufacturers such as SCG and Mahaphant.
The two domestic fibre cement manufacturers in Malaysia are UAC and Hume Cemboard. In the past decade, Thai fibre cement products have increasingly gained acceptance and recognition despite the broad availability and competitive prices of local products. As a consequence, the Malaysian Ministry of International Trade and Industry imposed a 31 per cent anti-dumping duty on Thai fibre cement imports in 2014. Exports of fibre cement from Thailand to Malaysia have since declined precipitously.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this case.
Funding
The authors received no financial support for the research, authorship and/or publication of this case.