Home Depot in China
1. Home Depot’s decision to defer its entry into the China home improvement market may come as a surprise to many people, considering that most industry players are grabbing shares of the market there, with B&Q claiming top spot. The economic boom in China which brought about the rapid rise of the home construction industry may seem to be the right signal for Home Depot to enter the market immediately, or risk encountering tougher entry barriers.
However, I would agree with Home Depot’s decision to defer its entry because of two factors. The first factor is cultural- that the home improvement market for China is not what one expects it to be. The reason for this is that labor costs are cheap, thus instead of adopting the Do-It-Yourself concept, Chinese home owners would rather have cheap labor make their cabinets and other furniture than make it their own. Thus, it would be very difficult tio penetrate this unique cultural barrier
The second factor is political. It is quite common in China to establish government connections first, before a foreign company can foray into the local market and establish branches or offices. The choice of location of store is dependent on how good the connections are of one company. This presents a tough challenge for Home Depot’s entry also since they will be considered as late market entrants and thus be elbowed out of the prime locations for establishing their store branches.
2. In my mind, the three most important challenges that Home Depot needs to address regarding its entry into the Chinese home improvement market are first, the unique characteristics of the target market (consumer behavior) which sets it apart from the Western markets; second, the supply chain difficulty, considering the sheer geographical size and climatic conditions; and third is the political bias foreign-owned companies get from the Chinese government.
The first challenge can be seen as unique since consumer behavior of the Chinese market is relatively different from their Western counterparts. As mentioned earlier, the low cost of labor does not support a DIY attitude, but a BIY (Buy-It-Yourself) attitude. Hence, Home Depot will have a hard time going through this cultural entry barrier.
The second challenge is the supply chain difficulty considering the huge geographical size of China and the different climatic conditions which have an effect on home improvement products. Supply chain costs in China are very high compared to other countries because of the aforementioned factors.
The third challenge is political, considering the fact that foreign-owned companies are generally taxed higher than locally-owned ones. They are also offered the poorest sites in locating their store. This is also one challenge that Home Depot needs to consider.
3. I would suggest licensing as the best entry mode in entering the Chinese market. This is because of many advantages, considering also the barriers to entry that will be encountered by Home Depot. Licensing means that Home Depot authorizes a local firm to manufacture and sell its products.
One distinct advantage to licensing is that it is less risky for Home Depot. The licensee (local company) assumes the risks involved in manufacturing the product. Aside from that Home Depot is paid a royalty on each unit produced and sold by the local firm.
There are also advantages to this entry mode, but considering Home Depot as a late entrant into the Chinese home improvement market, the benefits outweigh the risks involved.