Expert answer:Case study

Solved by verified expert:Provide a detailed analysis of the firm’s general environment in China. Highlight the economic segment, demographic segment, political/legal segment, and sociocultural segment.Research additional materials (e.g. Case 12 in the textbook). Perform an internal analysis to identify Home Depot’s strengths and weaknesses.Based on the materials available to you, identify Home Depot’s strategic options for entering the China market (focus on the available entry modes). Which mode of entry would you have recommended?3 pages in length single-spaced with one inch margins all around and 12 point time new roman font.
case_13_china_s_home_improvement_market.pdf

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Case 13
China’s Home Improvement Market: Should Home Depot Enter or Will it Have a
Late-Mover (Dis)advantage?
R. Muthu Kumar, Nagendra Chowdary
ICFAI University
© Don Hammond/Design Pics/Corbis
China, the fastest-growing economy in the world, is
witnessing rapid growth in the private housing market
after its introduction of housing reforms in 1998. As the
Chinese people’s income and purchasing power increases,
their property investment is also on the rise. In 2005, real
estate investment accounted for 8.65 percent of China’s
GDP and it is expected to rise to 9.3 percent in 2006.1 As
a result, the total value of property under construction in
2005 was RMB 5.1 trillion ($637.42 billion), contributing
to 28 percent of China’s GDP.2 Consequently, China’s home
improvement market also projected great potential for
growth. Many foreign home improvement retailers such
as B&Q and IKEA have established their strong presence
along with the domestic home improvement players.
“The home improvement market on the mainland
is the most promising in the world: $50 billion in sales
in 2005 and growing at 12% a year. Homeownership has
skyrocketed, from near zero two decades ago, when there
was virtually no private property, to 70% of all housing
today, ” BusinessWeek reported.3 However, China’s home
improvement market is not that easy to navigate although
the potential is highly tempting.
U.S.-based Home Depot has not yet started its operations in China and its “China Strategy” is in progress.
Some think it missed the bus by not being an early entrant and therefore will suffer from late mover disadvantage. Others think the delay will help shorten its learning
curve and it will rise rapidly.
China’s Economy and Real Estate
China is the second-largest economy in the world (see
Exhibit 1) when measured by Purchasing Power Parity,
with a GDP (PPP) of $9.412 trillion in 2005. When
measured in USD-exchange rate terms, it is the fourth
largest in 2005 (Exhibit 1) with $2.25 trillion. It is the
world’s fastest-growing major economy with a population of 1.3 billion (see Exhibit 2). Its per capita GDP was
$1,703 in 2005 and varied for each region in China (see
Exhibit 3, on page 167).
Economic Growth
China’s economic evolution happened over a period of
four generations (see Exhibit 4, on page 167). To speed up the
industrialization process, the central government invested
heavily in the 1960s and 1970s. A large share of the country’s economic output was controlled by the government,
which set production goals, controlled prices, and allocated
resources. As a result, by 1978 nearly three-fourths of industrial production was manufactured by state-owned
enterprises based on centrally planned output targets.
The central government’s major goal was to make China’s
economy self-sufficient. Foreign trade was restricted to
obtain only those goods that could not be manufactured
in China. Only countries that maintained diplomatic
relations with China could participate in foreign trade.
Though China’s real GDP grew at an average annual rate
of 5.3 percent from 1960 to 1978, the economy was almost
inactive due to the huge population base and lack of competition. In addition, the economy was inefficient because
of the few profit incentives for enterprises and workers.
Price and production controls also caused widespread
distortions in China’s economy.4
Since 1978, the government had been devising strategies to shift from a centrally planned economy to a more
market-oriented economy. China’s economic development
had occurred in two phases. The first phase began in 1979,
This case was written by R Muthu Kumar, under the direction of Nagendra Chowdary, ICFAI Business School Case Development Centre. It is intended to be
used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from
published sources. © 2006, ICFAI Center for Management Research (ICMR). No part of this publication may be copied, stored, transmitted, reproduced,
or distributed in any form or medium whatsoever without the permission of the copyright owner.
165
Case 13 • China’s Home Improvement Market: Should Home Depot Enter or Will it Have a Late-Mover (Dis)advantage?
166
Exhibit 1 World Economies GDP Rankings
List of Countries by GDP (PPP)
List of Countries by GDP (Nominal)
Country
1
United States
12277.583
2
China
9412.361
2
Japan
4571.314
GDP (PPP) Ranking
2
3
Japan
3910.728
3
Germany
2797.343
GDP (Nominal)
$2.22 trillion
4
India
3633.441
4
China
2224.811
GDP (PPP)
$9.412 trillion
5
Germany
2521.699
5
United Kingdom
2201.473
GDP per capita
$1,703
6
United Kingdom
1832.792
6
France
2105.864
GDP per capita (PPP)
$6,200
7
France
1830.11
7
Italy
1766.16
GDP growth rate
9.90%
8
Italy
1668.151
8
Canada
1130.208
9
Brazil
1576.728
9
Spain
1126.565
10
Russia
1575.561
10
Korea
793.07
Rank
Rank
1
Country
GDP
(in $ billion)
United States
12485.725
Economy of China: 2005 Statistics
GDP
(in $ billion)
GDP (Nominal) Ranking
4
Source: Compiled from “International Monetary Fund, World Economic Outlook Database,” http://www.imf.org/external/pubs/ft/weo/2006/01/data/dbcoutm.cfm?
April 2006.
Exhibit 2 Population of China (2000–2004)
Male
Female
Total (million)
% change, year on year
Urban (million)
% of total
Rural (million)
% of total
2000
2001
2002
2003
2004
654.4
656.7
661.1
665.6
669.8
613.1
619.6
623.4
626.7
630.1
1,267.4
1,276.3
1,284.5
1,292.3
1,299.9
0.8
0.7
0.6
0.6
0.6
459.1
480.6
502.1
532.8
542.8
36.2
37.7
39.1
40.5
41.7
808.4
795.6
782.4
768.5
757.1
63.8
62.3
60.9
59.5
58.2
Source: “Country Profile 2006,” http://www.eiu.com.
when the then Chairman Deng Xiaoping launched a series
of reforms, including decollectivization of agriculture and
a return to household farming.
In the 1980s, China tried to combine central planning
with market-oriented reforms to increase productivity,
living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits.
The country pursued agricultural reforms, dismantling the
commune system and introducing household farming that
authorized peasants with greater decision-making powers
in agricultural activities. The government also encouraged
non-agricultural activities, such as setting up of village enterprises in rural areas, promoting more self-management
of state-owned enterprises, and increasing competition in
the marketplace.
These reforms led to average annual rates of growth of
10 percent in agricultural and industrial output. Rural per
capita real income doubled. Industry posted major gains
especially in coastal areas, where foreign investment helped
drive output of both domestic and export goods. However,
beginning in 1985, agricultural output witnessed a steady
decline due to subsidy cuts and rising costs of inputs.
From the 1990s, during the second phase of China’s
growth, as the country further opened up, many foreign companies began entering China. China’s economy
boomed in the early 1990s. During 1993, output and
prices were accelerating, and economic expansion was fueled by the introduction of more than 2,000 special economic zones (SEZs) and the influx of foreign capital that
the SEZs facilitated. But the economy slowed down in the
late 1990s, influenced in part by the Asian Financial Crisis
of 1998–1999. Economic growth fell from 13.6 percent in
1992 to 7.1 percent in 1999 (see Exhibit 5, on page 168).
From 1995 to 1999 inflation dropped sharply, reflecting
the tighter monetary policy of central banks and stronger
measures to control food prices.
However, the average annual growth rate of China’s
GDP through 2001 had been 8.9 percent since its economic
167
Source: “Coming out,” http://www.economist.com/surveys/displaystory.cfm?story_id=5623226, March 23, 2006.
Exhibit 4 Four Generations of China’s Economic Growth
Mao Era, 1949–1976
After the Communist victory in 1949, China had a strong central government for the first time since the fall of the Qing dynasty
in 1911. But a succession of political campaigns, including the Great Leap Forward and the Cultural Revolution, brought famine
and upheaval. Agriculture was collectivized and industry nationalized. Economic growth suffered. China largely cut itself off from
the world, and relations with the United States were hostile until President Richard Nixon’s 1972 visit.
Deng Era, 1978–1990s
Deng Xiaoping launched his famous economic reforms in 1978, which led to the flourishing of private enterprise in the 1980s.
U.S.-China ties blossomed following the normalization of relations in 1979 and amid mutual distrust of the Soviet Union. Killings
of pro-democracy Tiananmen protesters in 1989 tarnished Deng’s legacy, bruised ties with the United States, and slowed
reform. But Deng’s 1992 call for faster reforms reignited economic growth.
Jiang Era, 1990s–2002
Catapulted from relative obscurity, Jiang consolidated his power as Deng’s influence waned in the years before his death in
1997. Jiang jettisoned Marxist ideology and fostered the shift to a market-oriented economy. He expanded social freedoms for
the urban elite and curbed military clout. His attempts to make the state sector more competitive and clean up the financial
sector were less successful. In 2002, he oversaw China’s entry into the World Trade Organization.
Fourth Generation, 2003–
Lacking revolutionary experience, this generation is the best-educated to date. Hu Jintao may be president, but no one leader
will dominate, and consensus will be the rule. On the economic front, the leadership will likely focus on reforming agriculture,
state-owned enterprises, and the financial sector. There is disagreement between those who favor maintaining an authoritarian
approach and those who insist economic reform must be accompanied by limited democracy.
Source: Roberts Dexter and Clifford Mark L., “China’s Power Shift,” http://www.businessweek.com/magazine/content/02_08/b3771018.htm, February 25, 2002.
Case 13 • China’s Home Improvement Market: Should Home Depot Enter or Will it Have a Late-Mover (Dis)advantage?
Exhibit 3 China GDP per Person by Province, 2005
Exhibit 5 China’s GDP Percentage
0
7.9
8
7.8
13.6
13.4
7.1
5
3.9
8
8.8
9.7
10
11.8
13.4
13.6
15
5.3
Case 13 • China’s Home Improvement Market: Should Home Depot Enter or Will it Have a Late-Mover (Dis)advantage?
168
60–78 79–89 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: Ye Xiannian, “China Real Estate Market—Economic Development,” http://www.china-window.com/china_market/china_real_estate/china-real-estatemarket-2.shtml, August 20, 2004.
Exhibit 6 China’s GDP and the Percentage Share of GDP in Total GDP for the Three Areas (1978–2001)
Eastern Area
National GDP
(million yuan)
GDP
(million yuan)
Central Area
%
GDP
(million yuan)
Western Area
%
GDP
(million yuan)
%
1978
346,354
181,832
52.5
106,466
30.7
58,056
16.8
1979
394,275
203,873
51.7
123,687
31.4
66,715
16.9
1980
439,596
229,585
52.2
136,908
31.1
73,103
16.6
1981
479,347
250,961
52.4
151,041
31.5
77,345
16.1
1982
533,108
279,868
52.5
166,131
31.2
87,109
16.3
1983
595,085
311,019
52.0
189,495
31.7
97,571
16.3
1984
712,537
373,412
52.4
223,875
31.4
115,250
16.2
1985
862,066
455,246
52.8
267,538
31.0
139,282
16.2
1986
965,648
511,314
53.0
300,087
31.1
154,247
16.0
1987
1,144,177
612,845
53.6
352,365
30.8
178,967
15.6
1988
1,445,266
786,501
54.4
434,060
30.0
224,705
15.5
1989
1,635,691
895,790
54.8
489,251
29.9
250,650
15.3
1990
1,833,023
989,966
54.0
547,920
29.9
295,137
16.1
1991
2,110,312
1,164,293
55.2
605,130
28.7
340,889
16.2
1992
2,584,738
1,459,328
56.5
725,345
28.1
400,065
15.5
1993
3,422,001
1,981,049
57.9
931,780
27.2
509,172
14.9
1994
4,521,683
2,652,547
58.7
1,212,823
26.8
656,313
14.5
1995
5,763,278
3,361,540
58.3
1,586,764
27.5
814,974
14.1
1996
6,730,552
3,970,377
59.0
1,916,757
28.5
843,418
12.5
1997
7,547,520
4,445,350
58.9
2,164,300
28.7
937,870
12.4
1998
8,106,540
4,807,090
59.3
2,287,150
28.2
1,012,300
12.5
1999
8,619,170
5,156,430
59.8
2,397,450
27.8
1,065,290
12.4
2000
9,527,990
5,752,720
60.4
2,625,020
27.6
1,150,250
12.1
2001
10,501,650
6,362,436
60.6
2,867,045
27.3
1,272,169
12.1
Source: Zhang Wei, “Can the Strategy of Western Development Narrow Down China’s Regional Disparity,” Asia Economic Paper, 2005, 3.
169
into absolute economic losers. Meanwhile, the inflow
of foreign direct investment and the rise of industrial joint
ventures had increased the urban-rural disparity. China’s
levels of inequality surpassed that of Eastern European
transition economies, Western European industrialized
nations, and other Asian developing nations such as India,
Pakistan, and Indonesia. Since the inception of reforms
in 1978, the disparities had witnessed a cyclical pattern
(Appendixes I(a) and I(b)) that was attributed to urbanbiased industrial development strategy over agricultural
development. Since the reforms, the politically powerful
urban population had pressured the government for fast
income growth. As a result, the government followed
an urban bias in order to preserve regime stability and
political legitimacy.
The people’s response to such urban-based policies has
been rural social unrest and mass migration to cities in
Exhibit 7 China’s GDP per Capita and the Ratio of GDP per Capita to National GDP per Capita for the Three Areas, 1978–2001
Eastern Area
Central Area
National GDP
per Capita
(yuan)
GDP per
Capita
(yuan)
GDP per
Capita
(yuan)
R*
1978
361.4
462.2
1979
406.0
511.3
1.28
1.26
1980
447.4
1981
481.1
569.0
1.27
389.2
612.6
1.27
423.8
1982
1983
527.1
672.4
1.28
585.0
739.0
1.26
1984
1985
689.6
877.4
824.9
1,058.0
1986
911.3
1987
1988
Western Area
R*
GDP per
Capita
(yuan)
R*
311.0
0.86
260.7
0.72
356.1
0.88
296.3
0.73
0.87
321.5
0.72
0.88
335.8
0.70
459.3
0.87
373.1
0.71
517.9
0.89
414.1
0.71
1.27
604.8
0.88
485.1
0.70
1.28
714.2
0.87
580.1
0.70
1,172.0
1.29
790.2
0.87
633.1
0.69
1,063.5
1,383.3
1.30
913.9
0.86
723.8
0.68
1,322.7
1,750.1
1.32
1,107.2
0.84
894.4
0.68
1989
1,474.8
1,965.8
1.33
1,227.4
0.83
983.8
0.67
1990
1,611.0
2,104.0
1.31
1,345.7
0.84
1,134.6
0.70
1991
1,835.2
2,451.8
1.34
1,468.4
0.80
1,296.5
0.71
1992
2,225.2
3,042.4
1.37
1,741.7
0.78
1,507.3
0.68
1993
2,918.3
4,093.2
1.40
2,215.2
0.76
1,899.9
0.65
1994
3,819.3
5,436.9
1.42
2,854.0
0.75
2,421.3
0.63
1995
4,816.3
6,812.0
1.41
3,698.7
0.77
2,972.9
0.62
1996
5,548.9
7,946.8
1.43
4,421.2
0.80
3,014.5
0.54
1997
6,327.6
8,821.9
1.39
4,952.2
0.78
3,723.8
0.59
1998
6,743.0
9,474.2
1.41
5,194.2
0.77
3,977.6
0.59
1999
7,114.8
10,089.5
1.42
5,406.8
0.76
4,145.7
0.58
2000
7,737.7
10,728.3
1.39
5,974.1
0.77
4,497.4
0.58
2001
8,490.6
12,070.6
1.42
6,400.9
0.75
4,858.4
0.57
*R is the ratio of the GDP per capita for a given area to the national GDP per capita.
Source: Zhang Wei, “Can the Strategy of Western Development Narrow Down China’s Regional Disparity,” Asia Economic Paper, 2005, 4.
Case 13 • China’s Home Improvement Market: Should Home Depot Enter or Will it Have a Late-Mover (Dis)advantage?
reforms. The pace of GDP growth in different regions was
uneven due to variation in their incomes. Based on geographical location and government regulations, China can
be divided into three areas—eastern coastal, central and
western. The average growth rate of GDP in these areas
during 1978–2001 were 10.2 percent, 9.08 percent, and
8.19 percent, respectively. The GDP share of eastern area
in the total national GDP increased from 52 percent to
60 percent, while the other two areas’ share decreased (see
Exhibit 6).
Between 1978 and 2001, the ratio of GDP per capita in
the eastern area to the average GDP per capita nationwide
increased from 1.28 to 1.42, while for the other areas it decreased (see Exhibit 7).
In addition, economic inequalities between rural and
urban regions were high in China. From 1994, a steep
rise in unemployment had turned many rural farmers
Case 13 • China’s Home Improvement Market: Should Home Depot Enter or Will it Have a Late-Mover (Dis)advantage?
170
search of jobs. Many other countries including the United
States had faced similar dilemmas of human displacement
in the course of their development. The significant urbanrural income disparity led to massive rural-to-urban migration. Numbers of migrants peaked during the planting
and harvesting seasons, desperate for jobs.
As China joined the WTO in 2001, the import quotas, subsidies, and tariffs that had traditionally protected
Chinese agriculture disappeared. Some experts commented that entry into WTO would further exacerbate
the issues of unemployment and inequality. But the
Chinese government hoped that the WTO membership would induce more foreign investment and muchneeded technology that would sustain long-term growth
and would reduce the income disparity and unemployment rates. GDP growth accelerated again in early 2000s,
reaching 9.3 percent in 2003, 9.4 percent in 2004, and
9.8 percent in 2005 (see Exhibits 8 (a) and 8 (b)).
In 2005, China’s GDP grew by 9.8 percent. China’s economy is expected to grow further with an increase in trade
and the expected huge investment for the 2008 Olympics.
Industry observers said that high GDP growth is coming at the expense of a gaping chasm between the rich and
the poor.5 Joe O’Mara, partner in-charge of KPMG’s North
America’s China practice said, “It’s one of the fastestgrowing economies with 1.3 billion people. There is a
growing middle class—over the last 20 years, per capita
income has ballooned more than 700 percent.”6
Real Estate
After the founding of People’s Republic of China in 1949,
the first Chairman Mao Zedong (Mao) seized land from
private landowners (killing thousands of them in the
process) and redistributed it to peasants.7 To facilitate
the mobilization of agricultural resources, improve the
efficiency of farming, and increase government access to
agricultural products in the 1950s, private land ownership was eliminated. Mao took the land away from them
and put it under the “collective” ownership of communes.
Peasants had become property-less members of “People’s
Communes.”8 Private ownership of housing in the urban
areas was nearly extinguished.
The communes were dismantled in the early 1980s, a
few years after Mao’s death. Peasants were allocated land for
farming, but ownership remained collective. Under Deng
Xiaoping, agricultural production soared for the first time
as peasants were allocated (but not given full ownership of)
plots of land to farm independently, and marked the start
of the economic transformation in the rural areas.
Since the 1990s, leases of 30 years had been granted
for these tiny plots, but the peasants were not allowed to
use the land as collateral for loans or to sell it. They could
rent it out, but this arrangement often involved paying a
fee to the village administration.
So whereas trade in land and property had become
an important engine of growth in urban China (where
residential leases run for 70 years and others for 40 or
50), farmers had been far removed from the effects of this
boom. When land was seized, peasants were compensated
for its agricultural value, which averaged about one-tenth
of its market value. Out of that village administration took
a cut, and so the amount received by the peasants was far
less. …
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