Case Studies PART D

CASE STUDY 17.2SIAM SANITARY WARE CO. LTD—PARALLEL IMPORT INVIETNAM

Waewrak Tontrakul and Richard Fletcher

Siam Sanitary Ware Co. Ltd backgroundSiam Sanitary Ware Industry Co. Ltd (SSI) is a Thai-based company. It was established in 1984 as a joint venture between

the Siam Cement Public Company Limited (SCC) and Toto (Japan) Co. Ltd to produce sanitary wares under the ‘Cotto’

and ‘Toto’ brand names. The company operates four factories with a capacity of up to two million pieces per year. Its

products are sanitary ware such as water closets, lavatories and acrylic bathtubs.

SSI enters overseas market in two ways: on a direct export basis and on an indirect basis via Siam Cement Trading

Co. Ltd (SCT). SCT has branches in Myanmar, Malaysia, Cambodia, Vietnam, the USA and Australia. SCT is headquar-

tered in Bangkok and imports and exports goods for both the Siam Cement Group (SCG) and non-SCG-owned

companies. SCT has exported the Cotto brand to several countries including Vietnam, China, Myanmar, Cambodia and

South Asia, and has exclusive rights for the export of this brand.

The Thai domestic market is the major market for SSI. Its marketing objective is to increase market share every year.

Although SSI has its own marketing division, it mostly uses the SCC distribution channels because of the coverage of

SCC agents in both Thailand and overseas. SCC provides a logistics system that distributes goods more effectively. SCC’s

sales division is divided into six areas in Thailand: metropolitan, northern, southern, western, eastern and northeast.

Every area has the same discount structure for SCC wholesaling via SCC dealers. For projects where additional discounts

are required, such as hotels, office buildings and housing projects, SCC sales representatives have to contact SSI’s

marketing division to establish an acceptable discount level.

Vietnam marketIn the early 1990s a large number of buildings, such as hotels and office buildings, were constructed in Vietnam along

with refurbishment of houses. This led to high demand for sanitary ware in Vietnam. As a result, several overseas

sanitary ware manufacturers entered the market, including American Standard, Cotto and Inax (Japan). These were in

competition with three local manufacturers that were Vietnamese state-owned enterprises. In 1997 American Standard

established a factory in Binh Duong on a joint venture basis and Caesar, a wholly own Taiwanese company, established

a factory in 1998. This was followed by Inax (a Japanese joint venture operation) establishing a factory in Hanoi. This

led to fierce competition in the sanitary ware market in Vietnam.

SCT had exported Cotto to Vietnam since the early 1990s and the brand was well accepted in the market due to its

quality, design and price. The sales turnover increased gradually and reached 40 million Thai Baht in 1996. In 1996

there was a demand to export the Cotto brand to Laos by agents in northeast area of Thailand. This led to dramatic

increases in turnover by this division in the order of 60 million Thai Baht (A$3 million). Coincidentally, export sales to

Vietnam by SCT fell sharply. In 1997, sales dropped by 50%. The cause of this drop was the development of a grey

market where the distributors in northeast Thailand began supplying Vietnam via Laos in direct competition with SCT’s

authorised distributor of the product in Vietnam.

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PART D International Marketing Implementation

Grey marketing or parallel importing can be defined as the importing and selling of products through market distri-

bution channels which are not authorised by the manufacturer. It occurs when manufacturers use different market prices

for the same product in different countries. This allows unauthorised dealers to buy branded goods intended for one

market at a low price and then sell them in another higher-price market, at a higher profit than could have been

achieved in the low-price market (Hollensen 2001, pp. 508–9).

Unlike counterfeiting, parallel imports are genuine goods but re-channelled into markets for which they are not

originally intended. Consumers can tell parallel imports apart from authorised products as the former are sold at

discount outlets, bearing labels in foreign languages, and are not covered by a manufacturer’s warranty and after-sales

service (Yang et al. 1998).

How did parallel import in Vietnam occur?In the case of Cotto products, the domestic dealer from northeast areas exported the cheapest model of Cotto’s products

to Laos. Initially, SSI didn’t realise that the goods would end up in Vietnam because Thailand and Vietnam have no

common border with each other. SSI expected that the product would be consumed in Laos. Soon after the export to

Laos by the Thai distributors commenced, the SCT Vietnam branch informed their Bangkok HQ that there were some

Cotto products from Laos being sold in the north of Vietnam. Goods were delivered by truck from the Thai–Laos border

to Laos–Vietnam border in the middle of Vietnam (see Figure 1). Most of the parallel import goods were sold in the

north of Vietnam. Meanwhile, goods shipped to authorised dealers in Vietnam were sent by sea to two ports: Haiphong

in the north and Ho Chi Min City in the south.

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FIGURE 1 Transportation route used by authorised and unauthorised distributors

By road to Hanoi (Unauthorized channel)

By Sea freight to Haiphong port(Authorized channel)

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Case Studies PART D

In an intensely competitive market, parallel importing enables retailers to buy the same goods at a lower price than

would be the case if they bought from authorised distributors in Vietnam. Figure 2 shows that retailers could save US$10

per item if they purchased the sanitary ware via unauthorised channels.

Contributing to this price difference are two factors. First, goods shipped via the authorised channel have to pay full

import duties levied at Vietnamese seaports on Thai goods. Second, the transportation used by unauthorised distribu-

tors tends to be cheaper—the cost of transportation by sea and customs clearance from Bangkok to Haiphong is higher

than delivery across country by truck.

While export sales to Vietnam by SCT dropped sharply in 1997, sales by northeast dealers to Laos (or Vietnam)

jumped to double that of the previous year, then it fell back to its previous level. SCT claimed this was because the

parallel import cannibalised the sales of the authorised channel in Vietnam and reduced the motivation of authorised

distributors. This may have been due to other factors such as the limited coverage and resources of SCT’s authorised

distributor in Vietnam, increased competition in the market, rising tariff levels in Vietnam and the Asian currency crisis

late in 1997.

When SSI received representations from SCT (Vietnam), they investigated the allegations and found that the price

at which goods were sold to the domestic agent was actually higher than the price at which goods were sold to SCT in

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SCC

Thailand VietnamLaos

SSI factory

Authoriseddistributors

Consumers

Unauthoriseddistributors

Retailers

Authoriseddistributors

Consumers

RetailersSave 80 – 70 = US$10

Export viaSCT, Vietnam

1000 Baht (US$40)

US$70

1300 Baht (US$52)

US$80

US$70

1625 Baht (US$65)

FIGURE 2 Parallel importation in practice

Source: Adapted from Hollensen, S. (2001) Global Marketing: A Market-responsive approach, 2nd ed, Prentice Hall.

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PART D International Marketing Implementation

Thai Baht (see Figure 2). Furthermore, sales via the domestic agent increased dramatically while sales to North Vietnam

(Hanoi) by SCT (Vietnam) tended to slow down. Sales in the south of Vietnam via authorised distributors were still good

due to economic growth. SSI decided to allow the parallel import into Vietnam instead of stopping it but gave a

commitment that the price to the domestic agent in north-east Thailand would not be lower than the price charged to

SCT. Furthermore, SCT would focus its attention on more expensive models rather than on the cheap models that were

popular for parallel importing but not profitable. To ensure that the parallel import didn’t create a bad image for the

Cotto brand, the distributors were required to provide warranty service as there is no warranty from SSI for parallel

import products in overseas markets. Since SSI began allowing parallel imports, its overall revenue from Vietnam

reached 100 million Baht per annum (A$20 million). Around half of this volume was from parallel imports. Since 1997,

SCT sales to Vietnam via authorised channels have dropped sharply while the level of parallel imports remained the

same.

Questions1. What are the factors that create a parallel import situation?

2. Why should firms try to prevent parallel imports?

3. In what circumstances should firms allow parallel imports?

4. What are possible strategies to reduce the potential for grey markets to develop?

5. When SSI allowed parallel imports into Vietnam what benefits did they derive for (a) the short term and (b) the long

term?

REFERENCESAhmadi, R. and Yang, B. (2000) ‘Parallel imports: challenges from unauthorized distribution channels’, Marketing

Science, Vol. 19, No. 3, Summer, pp. 279–94.

Ang, S. H. (1999) ‘The influence of physical, beneficial and image properties on responses to parallel imports’, Interna-tional Marketing Review, Vol. 17, No. 6, pp. 509–24.

Hollensen, S. (2001) Global Marketing: A Market-Responsive Approach, 2nd edn, Financial Times, Prentice Hall.

Yang, B.R., Ahmadi, R. and Monroe, K.B. (1998) ‘Pricing in separable channels: the case of parallel imports’, Journal ofProduct and Brand Management, Vol. 7, No. 5, pp. 433–40.

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