GINO SA: DISTRIBUTION CHANNEL MANAGEMENT

HARVARD BUSINESS SCHOOL CASE

WHAT ISGINO SA?

WHO IS DAVID ZHOU?

WHAT PROBLEM IS GINO FACING IN MAKING FIEMA A ORIGINAL EQUIPMENT MANUFACTURER

WHY IS JINGHUA UNSATISFIED WITH THIS DECISION? WHAT DIFFICULTIES IS IT POSING FOR GINO?

WHO ARE THE PLAYERS?

DAVID ZHOU CHINA MARKETING DIRECTOR OF GINO SA

JEAN PIRRE ASIA PACIFIC AREA MANAGER OF GINO SA

What is the presentSituation?

• A BURNER MANUFACTURING COMPANY GINO SA• Manufactures 50 different types of burners.• Best known for domestic burners.• It wants to expand its market in China• The major consumer of China wants GINO to make it an OEM and in

return it will purchase 50% of its burner requirements from GINO.• The major distributor of GINO, Jinhua, is very unsatisfied with this

demand.

SOME INSIGHTS

BURNERS

Appliances that provide ‘controlled flame’ for combustion appliances such as boilers and furnaces.

MARKET SEGMENTATION

DOMESTIC BOILERS AND WATER HEATERS

Boiler capacity upto 0.5 tons. Volume of factories ranged from 50 to 1500 tons per

annum. Average price of RMB 2,500 per unit. Market size of the segment roughly RMB 194 million.

COMMERCIAL BOILERS AND OTHER INDUSTRIAL APPLICATIONS

They fire boilers with capacity from 0.5 tons to 2 tons.

Roughly 22,000 units in 1999.

The average price of RMB 9,000.

Market size was approximately RMB 198 million.

INDUSTRIAL BOILERS

Average price of RMB 65,000. Size of segment about RMB 221 million. Weishaupt was the leading brand in this segment by

a wide margin in all parts of China, especially in the south.

Europe was the single largest burner market in the world, followed by the united states.

SEARCH FOR NEW MARKETS

In recent years, however, the traditional markets (applications such as domestic and commercial heating and sanitary water) had become saturated.

In emerging markets such as Asia, the Middle East and parts of Africa, however, the market was growing rapidly.

There was a rising demand for all ranges of burners, especially the domestic and commercial products.

COMPANY BACKGROUND

Wide product line, covering the domestic, commercial and industrial ranges.

In total, Gino manufactured over 50 models of burners.

Traditionally known in the market as providing the products of ‘Best Value’.

3 competitive edges of GINO

1) In-House production capability.

2) A well established channel network

3) International exposure

Variation of Profit Margins with market

Type of Burner Profit MarginDomestic <20%Commercial 25%Industrial 30%

Gino Beijing Office

Set up in 1995

David Zhou in charge of overall marketing issues.

Technical manager, peter Wing, was in charge of overall technical support to customers and distributors.

FINANCIAL INCENTIVES

Typically in form of bonus for achieving a unit sales quota.

A bonus equivalent to 2 months of salary ( RMB 8000-10,00) per month for an experienced sales or service engineer if the annual sales budget was met.

Total compensation and expenses for a GINO engineer in China was easily around 3 times the comparable figures for an Engineer in a Chinese company.

THE BURNER MARKET IN CHINA

Before 1990

China rich in coal resources and heavily dependent on coal as its major source of energy.

Boilers used in this period were mostly coal-combustion boilers, which had no need for burners.

1990-1995

Chinese Government put more emphasis on pollution control.

Coal combustion boilers began to be replaced by oil-combustion boilers.

Some of the world’s major burner manufacturers began to enter the Chinese market .

1995-1998

Several New Applications of burners emerged-

Absorption Chillers

Car Painting Booths

Ovens

Furnaces

Position of Gino in the Chinese MarketGino in the Chinese Market

Gino became the price leader in domestic range market.

Its market share surged to nearly 14% from less than 1%

Growth in commercial range was impressive As well.

Weishaupt dominated the market

Performance in Industrial Range disappointing

It claimed a market share of Less than 3%

Movement of Burners through channels to end users

Heavy Reliance on Distributors

• True for most burner manufacturers

Distributors are verysensitive to any signal of a manufacturer’s moving to sell directto OEM customers.

ISSUES IN DIRECT SELLING TO OEM CUSTOMERS

• Providing service and spare parts.

• Pricing issues

Much tougher screening process in buying was adopted by OEM customers compared to end users

FACTORS THAT INFLUNCE BUYING OF BURNERS

• In burners of large output capacity price is less important.• Brand Image and reputation play a more significant role.• The reverse is true for burners of low output capacity

• In commercial range, greater attention to technical compatibility and reliability is paid than to price.

• Supply of spares, price and after-sales service were also considered important.

•For industrial burners, reliability (as indicated by reputation and service) was more important than price.

•Availibility of stock was another important consideration in this segment.

•Design institutes played important roles.

Gino’s Distribution network in China

3 Distributors in China

Wayip Trading Co.- (Guangzhou)

FUNG’s Co.-( Shanghai)

Jinghua Mechanical Engineering Company –(Beijing)

Background of

the Distributors

JINGHUA

• Besides handling Gino’s burner business, Jinghua also made and sold boilers.

• Although the profit margin on boilers was far less than that on burners, both products produced about the same revenue.

FUNG

• The main product line of FUNG’s was still textile machinery, which accounted for over 90% of annual turnover.

• The company placed great emphasis on burners, however, because the textile industry was widely regarded as a ‘sunset industry’.

WAYIP

• Wayip was the only company whose business was 100% Gino burners.• However, it had been looking for other HVAC products for a long time.

Each of the distributors was assigned exclusive rights to some provinces and signed a contract with Gino stating that selling burners in other distributor’s territory was prohibited.

DISTRIBUTORS’ FUNCTIONS

1) CREDIT FUNCTION

• Once an order was placed, Gino opened a pro-forma invoice to confirm it.

• The Distributor then opened a letter of credit (L/C) through its bank (the opening bank) to Gino’s bank( the negotiation bank).

• The purpose of the L/C was to eliminate the credit risk for the manufacture, because payment was made by the distributor’s bank as soon as the goods were shipped.

STOCK FUNCTION

• The distributors were ordered to make a 3 months order forecast to Gino.

• Final actual order amount was supposed to vary by no more than 10% of the forecast.

• The typical order cycle time was 40 to 45 days for domestic and commercial burners and 60 days for industrial burners.

• Once the burners arrived in China, distributors made the arrangements for local transportation and warehouse stock.

• The distributors needed to anticipate the volume of backlog and the time of delivery carefully, in order to avoid either stock-outs or over-stocking.

GINO WAREHOUSE IN SHANGHAI??

• Zhou had been asked by Pierre about the possibility of setting up a Gino warehouse in Shanghai.

• Estimated investment=RMB 200,000• Monthly operation cost=RMB 30,000• Capacity-1200 units• Inventory value=RMB 5 million

SALES AND SERVICE FUNCTION

• Distributors performed customer interface interaction.

EMERGING ISSUES

• TO BECOME A LEADER IN THE INDUSTRIAL MARKET.

Goals for Gino China for the upcoming 3 years

1) Achieve annual combined sales volume of 15000 units.

2) Achieve annual sales of industrial burners of over 200 units.

3)Optimise the distribution channels, including developing more distributors to cover the areas currently not serviced and giving distributors more marketing and technical support.

4) Develop a minimum of 2 OEM accounts and 2 end user key accounts within 2 years.

5) Improve service and spare supply.

6) Build the

IMAGE

DISTRIBUTOR BEHAVIOUR

RECENT PROBLEMS

DEMAND FOR BETTER TERMS

Distributors began to bargain more and more fiercely for better prices and lower quotas.

STOLEN SALES

• There were more complaints from distributors that other Gino distributers were “poaching” sales from them

• The price discounts in these cases were usually much higher than the agreed maximum level of 25%.

RELUCTANCE TO STOCK INDUSTRIAL BURNERS

• Due to high cost of industrial burners and the difficulty in forecasting demand accurately.

• Zhou estimated that sales of at least 50 units were lost every year.

CURRENT PROBLEM

FEIMA- A leading boiler factory in Northern China

• The company made over 1200 sets of 1,200 sets of boilers in various sizes in 1999.

• In 1999, Feima bought from Jinghua 350 sets of domestic burners, 50 sets of commercial burners and 3 sets of industrial burners.

• The rest were purchased from Gino’s competitors, such as Weishaupt (its main supplier) and Baltur.

FEIMA’S PROPOSAL

• FEIMA approached Gino and asked to make it an OEM.• The aim was better prices- It wanted at least 10% greater discount

than from Jinghua.• In return, it promised to purchase at least 50% of its commercial and

industrial burners and all its domestic burners from Gino.

Zhou liked the idea because-

BUT….

Jinghua was adamantly opposed for 2 reasons• It strongly believed that Gino should not develop distributors’ Existing customers as OEM accounts.• The practice would set a very bad example, which could destroy their

confidence in co-operating with Gino.

Jinghua was also lobbying Gino’s other 2 distributors to back up its stand!!

Extra profit that can be generated-

• Initial revenue-

Type of Burner Price (Per Piece) in RND

Quantity Discount Amount (In RND)

Domestic 2500 350 20% 700000

Commercial 9000 50 25% 337500

Industrial 65000 3 30% 136500

1174000

Final revenue (as per the offer)-

Type of Burner

Type of Burner Price (Per Piece) in RND

Quantity Discount Amount (In RND)

Domestic 2500 1055 (20+10)% 1846250

Commercial 9000 81 (25+10)% 473850

Industrial 65000 35 (30+10)% 136500

3685100

EXTRA REVENUE THAT COULD BE GENERATED= 2511100 RND

Total turnover of Gino in China

Type of Burner Price (Per Piece) in RND

Quantity Discount Amount (In RND)

Domestic 2500 10,887 20% 21774000

Commercial 9000 1877 25% 12669750

Industrial 65000 137 30% 6233500

40677250

The increase in revenue is 6% of the general turnover of Gino China.

Revenue Generated by Ginghua-

Type of Burner Price (Per Piece) in RND

Quantity Discount Amount (In RND)

Domestic 2500 4354 20% 8708000

Commercial 9000 876 25% 5913000

Industrial 65000 37 30% 1683500

16304500

Fraction of revenue generated by Ginghua=40.08%

CONCLUSIONS

• So, If Gino makes Fiema an OEM, turnover may increase by an amount which is 6% of the present turnover.

• But Ginghua is highly unsatisfied with this decision.• Ginghua accounts for 40% for the revenue of GINO in the China

region.

Certainly, there is scope of profit in the bargain, but, there is also a risk of a much greater loss. Hence, it is advisable not to indulge in this deal.

TAKE AWAY FROM THE CASE

DISCLAIMER

Created by Ankur Agrawal, IIT Kanpur, during an internship by Prof. Sameer Mathur, IIM Lucknow.www.IIMInternship.com