Case study: Siemens unit’s China strategy

The story
Siemens Building Technologies, a division of German industrial group Siemens that focuses on building automation, was by 2007 a leading supplier of fire detection systems in worldwide markets.

The challenge
SBT was especially strong at the premium end of the market, where it was usually the leading supplier of products and services. But China’s biggest and most attractive potential market for fire detection systems was at the low end, with about 17m sales worth more than €100m in 2007-08. It was also the fastest growing segment of the overall market in China.

The segment was dominated by local companies whose products sold for about 75 per cent less than high-end products. Moreover, the low end of the market was purely about products – customers were not seeking the additional services that are typical of the high end of the market, where products represent only a small part of the revenues and even less of the profits.

Ignoring the strong growth in China’s low-price segments was not an option: that would allow competitors to move in, generate significant profits through sales volume and achieve the financial strength to compete in the premium markets too.

The strategy
First, SBT decided to locate product development and management close to the customer, even though these were traditionally based at SBT’s headquarters in Switzerland. Part of the reason the management team heading the project pushed for a local base was to make the point to colleagues that success in China would require radically new processes.

Second, it adopted a two-pronged approach to sales. Rather than turning for sales support just to the local division, Siemens China, SBT brought in external “value-adding partners”. For the coastal regions and China’s biggest cities, SBT engaged the value-adding partners with whom it was already working on high-end products. For smaller cities in the western provinces, where typically there was no high-end demand, SBT recruited new partners for just the low-end products.

The reasoning was that it would be too costly and take too long to build a dedicated salesforce or even to use employees from the local company.

The third key decision concerned branding. SBT used the strength of the Siemens brand for the low-price market segment, but added “Cerberus Eco” to the name, based on a brand owned by SBT.

What happened
After almost two years in the Chinese market, SBT has captured significant market share. High sales volumes helped it to reach price targets for the low end as well as increase profitability for the high end.

However, problems arose in cities where SBT had used existing value-adding partnerships. Some of the sales agents that now had access both to high-end and low-end products pushed the latter in the high-end market at a mark-up they kept for themselves. This undermined SBT’s long-term efforts to differentiate clearly its high-end and low-end portfolios.

Using the Siemens brand and adding Cerberus Eco helped SBT to penetrate the market faster. This outweighed the risks of damaging the high-tech brand of Siemens.

Key lessons
A company known for servicing the high end of a market that chooses to enter a low-end segment must find the right approach for product development, service, sales, branding and pricing. These key areas must be localised in order to achieve the cost reductions needed to be successful at the low-end of the market.

While SBT had gone to a lot of effort differentiating products according to technical features, it became apparent that the right sales force was just as important.

Last but not least, the Chinese endeavour later helped SBT to conquer other fast-growing economies such as Vietnam, Indonesia and Brazil, with the products and processes it had developed for China.
- Financial Times, 17 Jan 2012