CASE STUDY ANALYSIS

- Arushi Agrawal

IIT Kanpur

• Largest burner manufacturer

• Founded in 1931 with headquarters in Paris, France

• Traditionally known in the market as providing the products of “best value”

• In the domestic range, Gino burners were usually 10%-20% lower in price

than the major competitors, and in some extreme cases, the price gap could

reach 30%

• The industrial range had an average contribution margin of about 30%, the

commercial range about 25%, while the domestic range was less than 20%

• Electrochemical device, which provides a

controlled flame for boilers and furnaces

• 2 major parts: the body and the head

• The body consists of electrical circuits,

dumper, fan, valve, pump and control box

• The head was a heatproof carbon steel tube

with nozzles

SEGMENTS BOILER CAPACITY USES

Domestic Upto 0.5 ton Households/sauna

Commercial 0.5-2 ton Offices/shops/restaurants

Industrial >2 tonAbsorption type chillers and

boilers

• Gino used output capacity as its variable for segmentation

• Becket: market leader In US

• China, a rising star

Area Market Size Gino Sales

Europe 574 276

North America 433 45

Asia 291 36

Rest of world 250 24

Total 1548 381

• Developed markets of Europe and U.S. have become saturated

• Highest growth in Asia, Middle East and Africa

• Demand was increasing for domestic and commercial burners

Range Output Range(kcal/hour) Gino Production in 1999

Domestic 50,000-300,000 329

Commercial 300,000-2,000,000 49

Industrial >2,000,000 3

Total 381

• Gino officially set up its Beijing office in 1995.

• The marketing manager, David Zhou, was in charge of overall

marketing issues, including channel management. He supervised

three assistant marketing managers, each in charge of marketing

related issues in one segment.

• Technical manager Peter Wang was in charge of overall technical

support to distributors and customers and was highly respected for

his ability to solve tough technical problems.

• Zhou reported to Jean-Michelle Pierre, Gino’s Pacific manager, who

worked in the corporate headquarters in Paris.

Prior to 1990

China was rich in coal resources and had been relying heavily on coal for its major

source of energy.

As coal was low in efficiency and high in emission of pollutants, the boilers used

were mostly coal combustion boilers, which had no need for burners.

1990-1995

Coal-combustion boilers were replaced by oil-combustion burners in order to limit

the pollution.

Weishaupt (Germany), Baltur & Riello (Italy), Elco (Germany), Quenod (France) and

Corona (Japan) became the established brands.

1995-1998

Competition moved more and more to price basis.

Annual local production amounted to no more than 5,000 pieces in total.

Take local manufactures at least five years to pose a threat to the international

manufactures.

Gino became the price leader in the domestic range market.

It gained Domestic-14%, Commercial- 8% and industrial- <3% market share.

Despite offering prices 10%-20% lower than Weishaupt, it had low penetration in

industrial market.

Post 1999

Domestic market: price wars.

Industrial burners- growth expected at 20% for next 5 years.

• Most burner manufacturers, relied solely on distributors for

sales.

• Weishaupt; only manufacturer having its own direct sale and a

distributor as well in China.

• OEM’s often tried to bypass distributors

• Manufacturer’s refrained from giving quotations

• Issues: Services, spares and prices going to OEM

• Decisions are made independently

• Word of mouth, scouting trips, design institutes

• Criteria: Price, Reputation, Service, Spare supply, reliability,

technical compatibility, personal connections

• Importance of price inverse proportion to the output capacity

of burners

• Purchase the machinery components for a project

separately to negotiate the prices

• Public tendering, used to select vendors for these projects

Example: A government project involving industrial burners

BURNER

MANUFACTURERS

100%

• Gino

• Weishaupt

• Baltur

• Reito

• Fico

• Quenod

• Corona

DISTRIBUTORS

• Jinghua

• FUNG’s

• Wayip

DEALERS OEMS (e.g.

boiler makers

etc.)

89%

• Feima

End-users (e,g,

District heating

center)

100%

5%

3%

95% 15% 12%

2%

75%

3%

Weishaupt, was the leading brand in industrial boilers in all parts of China.

Manufacturers Average price Market Size

Domestic Boilers &

Water Boilers310 RMB 2,500 per unit RMB194 million

Commercial boiler

and other Industrial

Applications

-- RMB9,000 Rmb198 million

Industrial Boilers 60 RMB65,000 RMB221 million

Range Market Size

Domestic 79,900

Commercial 20,080

Industrial 2,920

Total 102,900

• Three distributors were set up in China

• Wayip Trading Co., in Guangzhou: 100% Gino burners, looking for HVAC products

• FUNG’s Co., in Shanghai: 90% annual turnover from textile machinery

• Jinghua, in Beijing: Made and sold boilers also

• Revenue split between burners and spares: 80/20

• Distributors fulfilling the budget were awarded a bonus of 1% of ordered value

• Transfer Price (US$)Free on board (FOB) price in U.S. dollars that Gino quoted to the distributors.

• Base Price (RMB)The total acquisition cost to distributors in order to have full ownership of a

burner, to have it in stock and ready for sale.

• Public Price (RMB)“Grossing up” the base price by 60% of all models

• Contract Price (RMB)Actual transaction price that a distributor reached in transaction with its

customer.

A burner with a,

Transfer price of US$100;

Base price(for distributor): RMB1,232

Public price(for customers): RMB1,972

Contact price: RMB1,578 (at a discount of 20% for the customer)

Gross profit to distributor: RMB346

• Achieve annual sales of 15,000 units

• Industrial burners > 200 units

• Optimize the channels to cover more area

• 2 OEM accounts + 2 end user accounts in 2 years

• Improve service and spare supply

• Build the brand Image

Feima, a leading boiler company, offered Gino for direct sales to

get additional discounts of atleast 10% and in return would give

purchase 100% of domestic burners, and 50% of commercial and

Industrial burners from Gino. Gino is really excited about this offer

as it meets its long term objective of OEM accounts and Industrial

segment penetration. Currently, Feima meets its burner

requirement through Jinghua, leading distributor of Gino, and

hence Jinghua is opposed to this offer.

Losing one out of three distributers means direct hit on sales and

hence Gino has to take this decision very carefully. If Zhou, Marketing

manager of Gino SA, decided to accept Feima’s OEM business and

deliver burners directly to Feima, Gino is very likely to lose one of its

main distributors in China, and ultimately harm future sales. It could

also have a negative impact on other 2 distributers. If Zhou doesn’t

accept Feima’s offer, Gino will lose the potential opportunity to create

an OEM business in China and potential sales, primarily in Industrial

segment. Moreover, it will have to succumb to demands of distributers

again, hurting sales in all segments including lucrative Industrial

segment.

RANGE VOLUMECURRENTLY

FROM GINOOFFER

Domestic 1055 350 1055

Commercial 163 50 81

Industrial 71 3 35

Total 1289 403 1171

Whether to acquire OEM contract of Feima and disappoint its existing

distributor or to forgone extra revenue from sales was a difficult choice Gino

has to make. The decision was bound to have larger impact on Gino sales in

China. Gino has to make sure any decision should address following Key issues

or Concerns:

A) Resolve the existing conflict in a possible win-win situation for both parties.

B) Control the distributers bargaining power

C) Penetrate into high growing Industrial segment of burners

D) Revenue and high profitability

• Response from Gino’s other two distributors

• Message sent to competitors

• Attitude of Gino’s corporate management

• Feima’s response

• Relationship with Jinghua

• Gino SA benefits from global presence, well-established channel

network and strong brand reputation.

• A substantial price gap from competition of up to 30% and significant

contribution margins.

• The company also sustains a 14% domestic range market share.

• As one of the largest burner manufacturers and exporters, Gino SA

banks on reputable employee base (technical and marketing) that is

motivated by its compensation structure.

• Gino enjoys strong market share is largest European market and hence

financially stable.

• The emerging markets like China were growing rapidly and Gino had

strong distributer relationship in China, a major advantage in burner

market.

• Excessive reliance on distribution channel for meeting the sales

targets leaves Gino SA with little to no power in managing its product

flow and after sales services.

• Shirking amongst distributors in stealing sales from other provinces

and reluctance to stock Industrial burners is leading to an opportunity

loss of at least 50 units.

• Gino’s primary weakness was its poor market penetration in Industrial

segment.

• High additional staff expenses

• The emerging markets such as China have lot of potential

for growth and profit margin was generally higher in such

markets.

• Industrial segment is expected to grow at 20% annually for

next 5 years.

• Gino can capitalize in these opportunities and convert

itself into major player.

• OEM’s were ready to purchase directly from manufacture

rather than distributor to get better prices.

• Political influence of local manufacturers may lead to reduced

profit margin

• Traditional markets have become saturated

• Poor growth in domestic range market

• Loosing any of the distributor

ADVANTAGES:

• Increased unit sales through Feima

• Brand image and potential end-user channels built

• New OEM channel developed

• Decreasing distributor power

DISADVANTAGES :

• Disappointed Jinghua.

• Fear in distributor channel may lead to poaching and exits

• Industrial stocking remains a challenge

• High marketing investment

• Longer cycle times.

ADVANTAGES:

• Good relationship with distributor Jinghua

• Jinghua will be responsible for 40% of Gino’s China reserve, as before

• Retain the current competitive advantage

• Industrial segment sales promote

DISADVANTAGES:

• Feima’s relationship with Gino and Jinghua can get impacted and Feima

can go to Gino’s competitors

• Gino will also possess a heavy opportunity cost for industrial segment

• The bargaining power of distributor will be difficult to control

• High investment

ADVANTAGES :

• Maintains relationship with both, Jinghua and Feima

• Accepting the Feima’s offer for industrial segment, will increase Gino’s

industrial sale by approximately 12% , making this alternative consistent with

Gino’s goals of OEM accounts and market penetration in Industrial segment

• Meeting company’s target of selling 200 industrial burners

• The bargaining power of distributers will be reduced.

DISADVANTAGES :

• Other distributor’s OEM accounts will ask for same margin and eventually the

margins of entire industry will be affected.

• Distributors will be difficult to convince for reduction in margin

• Marketing and other expenses needs to be streamlined

• Can impact the entire profit margin of industry

• Looking for long term RELATIONSHIPS not immediate profits

• TRUST and REPUTATION with dealers is vital in B2B

• Customer says “price” but wants “experience”

• No other dealers available. Weishaupt’s dealers not ready to switch.

• 40% of total sales from Jinghua

• No current warehouse of Gino in China. Existing workforce can not provide service

• Channel power is required to negotiate effectively.

is the best fit for the situation

MIDDLE WAY

A win-win situation for all the parties

Before the global distributors meeting, Gino need to convince Jinghua about

this offer highlighting its increase in profitability. The contract between

Jinghua and Gino gives right to Gino to enter into OEM deal, and hence

Jinghua has to understand this. During the same period, Gino should keep

FUNG’s and Wayip into confidence with this action plan. FUNG’s and Wayip

will also benefit as their high inventory cycle time for industrial burners can be

reduced from Gino’s warehouse. The warehouse to house the inventory would

also built a good competitive advantage as compared to other competitors.

Satisfaction of Feima is very important for Gino because it can further build on

industrial burners segment and improve its industrial burners demand.

1. Jinghua not agreeing to the plan:

Gino can sign a memorandum of understanding with Jinghua that Gino will

not acquire any other industrial burner OEM contract for 2 years.

2. FUNG’s and Wayip’s concern about loss of future industrial sales:

This can be a potential threat to FUNG’s and Wayip’s future sales in

industrial sector. Gino should convey its intent to penetrate in industrial

segment. They already have lost around 50 sales and hence this action has

been taken.

3. Other OEM’s of distributer ask for same margin:

Any discounts in Industrial segment should be compensated by increase in

volume of industrial burners.

If GINO works according to option 3, i.e., The Middle Way,

satisfying both the distributor Jinghua and OEM Feima and following

a proper financial and marketing strategy, it will surely expand its

market by maintaining a good relationship with its distributors as

well as customers. This will lead to an overall growth of the company

and enhance its status in the long run.

These slides were created by ARUSHI AGRAWAL, as part

of an internship done under the guidance of Prof. Sameer

Mathur (www.IIMInternship.com)