SKF in Vietnam : Business Management
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Until now, SKF has been the only international bearing company in Vietnam. Mr Schwindling Mr Dong, however, are keenly aware that their international competitors are testing the ma and visiting state-owned enterprises. 'We need to be fully established before the others sel their representative office', says Mr Dong.
A Joint Action Programme is in place to strengthen the SKF Vietnam DID network This continual process of providing support, visiting distributors' areas, helping them to ide customers, and improving stock turnover. More distributors would be added in the futur improve country coverage, but this would require rapid growth in the business. Financial sup would have to increase commensurately. Mr Schwindling and his team also want to s broader dealer network, but this would be the responsibility of the distributors. S distributors such as Nguyen Xuong have ambitions to reach further down the distribution to lower levels of retail customer in the provinces, but this would probably require F discounts that SKF Vietnam would have to finance.
The main thrust of the D/D network is currently towards the afterrnarket, but there are grc signs of activity from Japanese competitors in the OEM market What more can SKF do, . the existing rules of operation in Vietnam, to improve service to customers and raise m share? How best can it block the competition from capturing a share of the market in Vietnam?
clusive dealerships and close customer relationships have been the preferred method of 0peration so far; but competitors (especially the Japanese) are likely to follow Japanese OEM business from Honda, Toyota and others.
Mr Schwindling also needed to consider what would happen if the rules of the game changed. If the government were to change its regulations to allow non-manut companies to set up importing operations, should SKF Vietnam set up a warehouse in Ho Chi Minh City from which to manage its own stock? What if it were to be allowed to distribute as well as import?
finally there was another competitor-related issue to address: would the government maintain a zero rating on import duties for bearings if an international producer proposed to establish a anuf operation in Vietnam? Should SKF Vietnam make a counter-proposal in these circumstances? And if it did decide to manufacture, should it form a joint venture to do so, even though the SKF preference overall is for wholly owned operations?
We never discuss the price first, we talk about the customer's problems', says Mr Dong. SKE Vietnam believes it has several strengths that help justify its prices which are higher than those of international competitors:
• Product quality. 80% of all bearings made and used are standard items, which generally makes product differentiation difficult Some SKF bearings are of higher quality than equivalent competitors' bearings thanks to continuously improved design as well as the quality of steel used. Further, SKF has only one quality of bearing which it supplies worldwide. Some competitors have different quality levels which are inconsistently supplied to Vietnam, and customers have noted the quality variation.
• Reliability of service and availability of supply. Stocks held within the DID network ensure that major items are always available. Afthough there is no computer system linking the individual distributors with the SKF Vietnam office, telephone calls can rapidly track down in-country supply. In Ho Chi Minh City, for example it may be possible for a customer to collect the required bearing from an aftemative location in as little as an hour.
• Broad range of bearings. SKF Vietnam can satisfy 80 - 90% of customers' needs immediately, whereas a competitor would be able to meet perhaps only 50% of their requirements. Customers do not have to spend all day completing their list of purchases.
• Forward planning of supply. Regular customers are assured of supply even if they need only a single bearing once a year. In an emergency SKF Vietnam can try to source the item first from the Singapore warehouse, second from an SKF factory, and finally from a competitor. Over the last two to three years, SKF Vietnam has learned the critical needs of its main customers. If it can persuade them to buy an extra unit of the critical bearing, SKF Vietnam will supply a replacement as soon as the standby is used.
• Competence. SKF Vietnam engineers are thoroughly trained and can provide an analysis of bearing failures (for example incorrect-or insufficient lubrication), to help customers identify avoidable problems. We have to be applications engineers, too' says Mr Dong.
• \ietnamese language catalogue. In 1994, SKF Vietnam chs*rt a detailed handb for end-users of all mor bearings (see Exhibit CS I 1.8.. o%siig th&ii to iderj worn-out bearings by weight size and picture, arid giving internationally recog classification codes alongside to facilitate new orders. This catalogue is an irnpo marketing tool, since Russian bearings are not marked, and very okl bearings may ha classification numbers worn off The handbook is also adapted to the nee Vietnamese engineers trained in Russian terminology. Since ball-bearing ted inology new to Vietnam, the technical terms are also new and vary between the nortth a south of the country. Competitors have so far produced only English Iangija marketing materiai&
• Emergency services for core customers. Big customers have very specific macbin requiring non - standard bearings that can be air-freighted from Singapore in emergency.
• Complementary products. SKF Vietnam is able to supply non-bearing items commo:
used by industrial customers, for example textile machinery components, lubrican mechanical tools, etc. These are not always SKF products, and represent only a srr portion of total business.
SKF's bearings are on average 20% more expensive than those of its competitors. Moreover, i company uses a fixed-price system, i.e. all distributors are told the price at which they may each bearing, which is similar to SKF prices elsewhere in the region. (In the markets, wh competitors' bearings tend to be sold, prices may vary considerably.) Transparent pricing simplified SKF's business relationships, as the customer knows that the price on the invoice is - real price paid.
SKF Vietnam has one-year contractual relationships with four state-owned importers, reflecting expansion of its Distributor/Dealer network (known as the D/D network).
In the south, Textimex, which is an SKF distributor as well as importer, has been joined by Machino-Import, which acts purely as an SKF importer. Imports to the south are divided roughly 50/50 between these two companies. Elmaco and Vinametal have been appointed as importers and distributors for the northern part of the country. Occasionally SKE Vietnam uses other importers for special situations. The importer is the conduit for SKE bearings to reach Vietnam. Shipments arrive at New Port or Saigon Port in Ho Chi Minh City in the south, and at Haiphong in the north.
Bearings normally carry 0% import tax since there is a strong demand for them in Vietnamese industry but locally produced supplies are not available. However, 40% duty is charged if customs declares them as automotive bearings. Import licences are granted to authorized importers on an annual basis for unspecified quantities of bearings. (In contrast, a licence to import many other goods has to be acquired on a case-by-case basis.)
Customs clearance - the responsibility of the importer - at present can take a week or more, longer in the north. Troublesome details may hold up incoming shipments, as for example if the country of origin of the bearings does not match that shown on the bill of lading. (The SKE warehouse in Singapore sources bearings from SKE plants around the world, depending on their availability.) One of the strengths of SKF is its ability to ship stock quickly to its various subsidiaries and offices. Including the time taken to prepare the shipment and the actual shipping time from Singapore (three to four days each), new stock reaches customers or distributors in Vietnam in three to six weeks at best. Unlike wholly owned sales offices in other countries, SKF Vietnam itself is not allowed to maintain stock in Vietnam.
In the south, the potential customer base is highly fragmented. Greater familiarity with concept of private business and a more dynamic business environment has, among people in
south, spawned a huge number of small, private and household businesses which are open new ideas and new opportunities. In this environment it is hard for the SKF team of engineers identify targets and to keep their lists of prospective customers up to date. Few of the more ft 500 registered SKE customers in the south are large-scale concerns, the main exception bei the two state-owned Ha Tien cement companies. Most industrial customers are concentrated the steel, paper and sugar businesses in Bien Hoa province, while farmers in the Mekong de area are big users of rice-processing equipment and other agricultural machinery. Marine-u bearings are also important products for a region with so many rivers and a long coastline. FE customers in the south are as yet familiar with the SKF brand.
By contrast, industry in the north of the country is concentrated at a relatively small number large state-owned enterprises. The principal customer base has so far been fairly easy to dent but purchasing patterns in northern enterprises are dominated by high cost-conscipusnesS. Giv the availability of cheap Russian-made bearings costing as little as one-third the price of equivalent SKF product, it has proved difficult to convince customers working with cheap.
Russian-made machinery of the long-term benefits of using high quality but more expensive bear ngs.
Most of SKE Vietnam's customers are in the aftermarket, requiring spare parts to repair existing machinery. Over time, the company intends to develop an OEM customer base as well, but this requires a different marketing approach. OEM business is less profitable than the aftermarket (because original manufacturers are highly cost_conscious) but it is a means of developing SKE's image and brand name in Vietnam and, more importantly, it generates the future aftermarket.
- Obviously, since OEM customers are, by definition, manufacturers of machinery for other industries, OEM business requires a country to have a reasonably-sized manufacturing base - and this is not yet the situation in Vietnam. However, it is an important long-term investment for SKE to make, since afterrnarket customers are likely to automatically replace a worn-out bearing in a machine with a new one of the same brand. OEM business represents approximately 20% of current SKF Vietnam sales.
The SKF representative office in Ho Chi Minh City is small. The staff of 10 is headed by Schwindling, the only expatriate, who is also the general manager of the Hanoi branch office. The Hanoi office reports to the Ho Chi Minh City office. Exhibit CS 11.4 shows the SKF Vietnam organizational chart. Until recently the Vietnamese authorities imposed strict limits on the number of staff a representative office could employ, arguing that since companies were not allowed to conduct business through representative offices they had no need for many employees. Current regulations allow the hiring of an unrestricted number of Vietnamese nationals but severely restrict the number of expatriates employed.
The four service engineers based in Ho Chi Minh City, led by Nguyen Phuong Dong, are responsible for identifying and meeting potential customers of SKF products, discovering their needs and developing the relationship. They are very important for the success of SKF in Vietnam'. Each engineer has a separate geographical area to cover as well as responsibilit) industry segment Mr Dong, for example covers Ho Chi Minh City and northwards as far coastal city of Nha Trang, in addition to the big end-user customers wherever they r based. Another engineer covers the big OEM customers as well as a geographical regie three engineers in Hanoi work on the same principle, but face a different set of probl tackling the customer base.
By 1995 SKF Vietnam expected sales of several million dollars, from zero four years
Growth in 1993 was 40% and in 1994 was 20%. In 1995 sales growth was conser estimated at 29%, compared with Vietnamese industrial growth of 15 - 20%. Three-fifths i Vietnam's sales are made in the south, and two-fifths in the north of the country. The c industry is its largest customer, accounting for nearly 15% of tumover steel accounts for afi 8 - 10%, and the paper and sugar industries for 5 - 10% each. The cement and steel industri expected to increase capacity substantially in the coming years, through local and fc investment, to supply the construction industry.
SKF Vietnam reports directly to SKF Asean Bearing Division, the company's regional headqu in Hong Kong, but supplies are normally imported through the large warehousing operati Singapore. Technical support is also provided via Singapore. SKF Vietnam may also co, specialists worldwide for additional technical assistance.
In the first phase of activity, SKF Vietnam devoted its efforts to contacting big end-users in aftemiarket. This meant building links with the cement plants, steel mills, paper mills and a industrial customers. In the second phase, the challenge has been to create a nation' industrial distribution network through which SKE products can be channelled. A third p much further down the line, will be to develop access to small customers who currently I after themselves. Exhibit CS 11.5 shows this pyramid of customers.
The introduction of dol mol policies in 1986 began a reorientation of the Vietnamese economy away from communist-style central planning and towards market-based principles. The communist economic system, combined with near-total isolation from the world in the wake of its 979 invasion of Cambodia, had left Vietnam a deeply impoverished country with estimated GDP per capita of less than US$250 and a shaky physical infrastructure, cobbled together from remnants of the French and US presence and Soviet equipment Since the late I 980s, Vietnam has moved from a rice-deficient country to become the world's third largest exporter of rice. It has reintegrated itself into the world economy through trade and investment links, reacquired borrower status from the World Bank and other muftilateral organizations, and achieved average GDP growth of 8% in the 1991 - 94 period. A foreign investment law was passed in 1987, and by mid-1995 over US$13 billion of foreign investments had been approved although perhaps only one-quarter of this sum has actually been invested.
Vestiges of central control remain, however. Prior to 1988 a small number of central trading monopolies dominated foreign trade activity, each conducting business for its own government agency or industry. Liberalization in 1989 introduced competition between state-owned companies through the granting of new import - export licences, and later manufacturing firms producing goods for direct export - including foreign-invested joint ventures - were also allowed to import and export goods, as long as they had the requisite licence. Very few private companies have met the additional criteria demanded to qualify for an import - export licence. Further, foreign trading companies - a classification which embraces all companies not manufacturing in Vietnam - are barred from establishing a subsidiary or branch office and may only operate under representative office status. Representative office activities are therefore confined to market research, relationship building and business coordination with offices in other countries. Direct business activity is forbidden, and the authorities have closed down several representative offices deemed to have overstepped the boundaries.
The concept of a national distribution network barely exists in Vietnam. Prior to economic reform there was little trade between different regions of the country, and barriers to the free movement of goods remained in the form of military or customs checkpoints at provincial boundaries even after formal restrictions were lifted.
SKF is the world's leading ball and roller bearing company, with a market share of approxim 18%. This gives it a strong edge over its nearest competitor, the japanese company, NSK 1 roller bearings and seals business constituted 93% of group sales in 1994. Recession is qui( reflected in the resufts of bearings manufacturers, and the impact of the slump in deman 1990 - 93 is apparent from the losses faced by SKF (Exhibit CS 11.1., although by the end of I production was 30% higher than at the nadir in 1992 and had recovered further during 19 Restructuring of the global ball-bearings industry since the late I 980s has left a handful companies dominating the world market
The bearings industry serves two fundamentally different types of market
• The original equipment manufacturer (OEM) customer, to whom the bearji supplied are crucial components of their end products. Examples of OEM custom would be the car and truck industries, aerospace, general machinery and he industry. Exhibit CS 11.2 shows SKF's sales breakdown by application.
• The aftermarket, for whom bearings are no more than spare parts. Aftermarket sal to both industrial users and automotive repair services, tend to be made to deai and distributors, who sell the product to the end-user.
OEM customers are price-sensitive, since their costs of production are reflected in the final pri of their product, whereas aftermarket users are more concerned by product availability and t speed of delivery than price. Particularly in the industrial afterrnarket, customers are significan more concerned by the cost of machinery standing idle than by the price of a replacem€ bearing.
SKF bearings are manufactured and sold throughout the world. Eighty factories in 20 countri manufacture 25,000 different items, ranging from high volume standardized bearings to custo production of a single, highly specialized bearing. The company's reputation is bui[t on unrivalled global distribution network which allows it industry leadership in price setting. recent years SKF has concentrated on improving lead times, for example in reducing the tin between the order of the raw material and the delivery of finished spherical roller bearings, fro IlOdaysin l989to29daysin 1994.
An Asia Pacific strategy for the group was developed in the mid-I 980s and, in the five years 1994, sales in the region doubled to 12% of the group total. (The geographical breakdown SKF sales is shown in Exhibit CS 11.3.) The specific objective of SKF in the Asia Pacific regio stated in the 1994 annual report, is to enhance its direct presence by increasing the number' wholly owned sales companies, and thus to bring SKF closer to its end-customers, theret gaining greater insight into their needs as well as increasing the potential for offering thei technical and other services.
At present, SKF's Asian region produces approximately 40% of the bearings ft sells and is thL partly dependent on exports from Europe, which has excess production capacity, to meet sak demand. (The American region's self-sufficiency ratio is 80%.) A new state-of-the-art plant wer into operation in Malaysia in 1992 and now supplies OEM customers in Japan: among othE countries. SKF has also established joint venture production facilities in China (Shanghai) an Korea.
In 1990 and 1991, as Vietnam began to open its economy to the outside world, Fredrik Jonsson began to visit the country from SKF Thailand where he was based. During his frequent visits he contacted prospective major customers of SKF bearings and investigated market potential. It seemed that there would in future be a market for bearings, though current activity was limited. His proposal to establish a representative office in Ho Chi Minh City was accepted by SKF in 1990, and in April of the following year the Vietnamese authorities approved the application. Jonsson moved to Ho Chi Minh City and opened the office in June 199 I. In 1993, after the initial pioneer' phase was complete, Schwindling took over as general manager from Jonsson.
The office was in the Textimex Building on Nguyen Hue, one of the main thoroughfares in the centre of what used to be called Saigon. The building was owned by Textjmex, the central Vietnamese import - export organization for the whole textile industry. A good relationship had been built up between SKF and Textimex over the years since Jonsson had begun visiting, not least because textile mills were important potential customers of SKF's textile machinery components. Textimex was also able to introduce SKF to customers in other industries. The Vietnamese state-owned company became SKF's importer for all bearings, not just those suitable for textile machinery, and provided valuable help to SKF in navigating through the maze of regulations to establish its office. SKF also persuaded Textimex to open a showroom on the ground floor of the building.
By mid-1995 SKF had been developing business for four years in Vietnam through a representative office in Ho Chi Minh City. As the world's largest ball-bearing company, its goal was to win a commensurate share of the nascent Vietnamese market Under existing Vietnamese regulations, however, the activities of trading companies - which was how SKF Vietnam was classified, since it had no manulcturing facilities in the country - were severely limited. With these constraints, how could Jean Jacques Schwindling, general manager of SKF Vietnam, establish SKF as the dominant supplier of bearings? Two top executives of SKF were visiting Vietnam in November for the first time - a signal of the interest being shown in this market's potential.