Introduction
The major issue with BASF was finding a way of differentiating its products in the commodity market. By 1998, the market for BASF packing grade expanded polystyrene (P-grade EPS) in China was small and less developed. Its future was uncertain, as many firms were still using analogue machines.
A similar condition affected the flame retardant (F-grade) EPS, which was not a popular product in the Chinese construction industry. The products made by BASF were of premium quality and had a high price tag compared to substitute products available in the market at the time, despite the low demand. The challenge for BASF was to retain its premium brand reputation and grow its market share in the country (INSEAD 1999).
Case background
Styropor, a trade name for EPS foam, was a patented product of BASF from the year 1950 to the year 1980. It was a major source of global market dominance for the firm. It commanded a 25 per cent world market share. The end uses for the F-grade and P-grade EPS were different and the separation depending on the use essentially created two market segments; the construction and the packaging segments.
BASF experienced comfortable market leadership in China, with a 60-70 percent market share in the 1980s. The key competitors at the time were Japanese producers. The product itself would take 3 months to arrive in the market from Germany. There were competitors from Taiwan who offered the same product, but at a lower price because of its lower quality of packaging.
It also took less time to ship. China grew the demand for EPS in the packaging industry, which was four times the demand for the same in the construction industry. The numbers were different in Europe, with the construction industry having the highest demand (INSEAD 1999).
Towards the end of the 20th century, new forms of materials were becoming available for use as substitutes. Taiwanese rival companies had also improved the quality of their product significantly in comparison to Styropor. Environmental friendliness was also used as a reason against EPS and alternative packaging materials like paper.
However, the reality was different, as EPS was equally environmentally friendly. One problem for the Chinese market was the lack of consumer education. Technology was a key differentiator of BASF products, but the Chinese market was not keen on technology because labour costs were low.
There was a growing trend in the adoption of vacuum moulders due to joint ventures between the Chinese and multinational firms. The capital requirement for switching to vacuum moulders was high and responsible for the slow pace of adoption (INSEAD 1999).
Key marketing issues for BASF
This section outlines key issues that face the marketing prospects of BASF products in China. The issues are provided under the subtitles of the 4Ps of marketing provided by Kotler and Armstrong (2013).
Place
Production for the vacuum packaging moulders by BASF happened in Malaysia, while Taiwanese competitors produced theirs in China. Chinese local manufacturers were experiencing a reduction in demand due to overcapacity. Importation of EPS was also facing a slowdown due to excess local capacity.
The Taiwanese competitor, Honest, already had adequate manufacturing capacity in China for all the segments of the market. In addition to Malaysia, BASF also served the market with its Nanjing plant. BASF was seeking to increase capacity at Nanjing to produce more F-grade, reduce inventory holds, and increase price certainty for the traders (INSEAD 1999).
Product
The BASF product had higher quality features in terms of density and stability, among other things. It also had fast cycle times that saved the customers energy and investment costs. BASF also diversified into EPS bead production to increase utilization of its manufacturing capacity.
Some of the alternative products available for insulation were the breeze blocks and Rockwool, among others. BASF products in China were the only ones having an Enersave approval. The introduction of the Enersave board by BASF would increase margins and reliance on the F-grade Styropor.
Price
Acquiring the product for export was not costly, as traders did not pay import duties. However, local producers had to pay the cost and an additional 16 per cent of the value as import duty. The prices of BASF products did not change throughout the 1990s, only that local competition grew and substitute products were offered at lower prices.
Promotion
BASF had a series of seminars in China, where experts from Germany explained the advantages of the F-grade EPS. Information was also presented in booklets that were adopted and sold by the EPS Association. The transfer of knowledge by BASF would help to create demand for premium quality products.
Printing of BASF and Enersave names on boards to provide on-site verification served to increase the visibility of the product in the market. The establishment of local distribution points would provide an avenue for promotion to major customers. A committed partner would help BASF distribute its products to clients who were unreachable initially.
Market segmentation
The BASF product only catered for moulders operating at full capacity. This helped in maintaining long-term cost savings. It was not suitable for all manual moulders. Additionally, it was not conducive for use in poor economic conditions.
The product would only fit high performance vacuum moulders in southern China because of their high quality. A majority of installed manufacturing capacity in China was underutilized by 50 per cent and it served the manual moulders’ market. Competition was cutthroat, such that some firms would have to merge or die.
The construction industry had high growth prospects and it would be a growth area for BASF products. However, consumer information and demand for insulation in China were low and selling products for insulation against heat was more difficult than selling products for insulation against cold. A viable market became the northern side of China, where temperatures were lower.
BASF sold separately to P-grade and F-grade customers. There was no market for the premium XPS board imports because of its high price. Moreover, it made no economic sense to produce it in China. BASF was also going to specific customers to make exclusive supplier arrangements to serve its emerging markets and increase overall market share.
Discussion and conclusion
After breaking down the case study into different components of marketing strategy, the following key factors emerge as strengths for BASF. First, the company has adequate organisational control that ensures corporate strategies are implemented in all its divisions and subsidiaries.
Currently, attention on the company is turning outwards to give priority to meeting with industry stakeholders and developing relationships with distributors and collaborators. BASF has an ownership advantage (Anderson & Holm 2010). In addition, BASF will be able to make market centric decisions.
It also has a better grasp of areas to make investments by having a local production facility in China, other than relying on joint venture partners. Ownership of a local plant also helps the firm remain responsive in increasing or shifting production capacity to respond to market changes (Ferrell & Hartline 2011).
International operations give BASF an edge on research and development (R&D). Operations in many countries can allow BASF to have different experiences and develop important skills that it can apply in the Chinese market. For example, the move to establish local manufacturing capacity was informed by experiences in European markets, where F-grade’s demand was higher than P-grade’s demand.
The construction of a local plant is a growth strategy, but is also a market defence strategy because it allows the firm to enjoy similar advantages to local firms to enable it offer cost, distribution, or quality gains to customers (Hulbert, Capon & Piercy 2010).
Industrial market segmentation, which separates businesses and industrial customers, follows the fundamental requirements of segmentation. There is adequate measurability evidenced by the research findings presented by BASF leaders in the case study. There is also substantiality to provide a significant portion of the business to BASF (Ferrell & Hartline 2011).
The segmentation is also helping BASF make suitable offerings, such as the Enersave board or the use of a distributor. Segmentation allows the firm to target and position its products well to capture market opportunities (Kotler & Armstrong 2013).
Although it faces prices challenges in a commoditised market, its partnership with Enersave and the move to have exclusive distributor relations will allow it to maximise its competitive advantages in fostering customer loyalty, increasing premium product awareness, and growing demand. This will ensure that BASF competes on a differentiation strategy, rather than being an unsustainable low cost competitor (Jobber & Fahy 2009).
Reference List
Anderson, U & Holm, U 2010, Managing the contemporary multinational, Edward Elgar Publishing Limited, Cheltenham.
Ferrell, OC & Hartline, M 2011, Marketing strategy, 6th edn, South-Western, Cengage Learning, Mason, OH.
Hulbert, J, Capon, N & Piercy, N 2010, Total integrated marketing, 2nd edn, Free Press, New York.
INSEAD 1999, BASF in China: Marketing of Styropor, INSEAD Euro Asia Center.
Jobber, D & Fahy, J 2009, Foundations of marketing, 2nd edn, McGraw Hill, Berkshire.
Kotler, P & Armstrong, G 2013, Principles of marketing, Pearson Education.