Hans Wijers

One of the more interesting aspects of manufacturing is how a company can virtually dominate a given market, yet remain relatively unknown in the eyes of consumers. Enterprises that produce components or smaller elements of larger products often see their brands languish in obscurity, even as they reap the rewards of their overwhelming market share.

It is this sense of anonymity that Akzo Nobel is facing as it navigates the occasionally treacherous waters of the Chinese market.

"China has a key role to play in the company's growth strategy," says Hans Wijers, chief executive officer (CEO) of the Dutch Fortune Top 300 company.

Despite its undeveloped brand presence, the company's three main businesses pharmaceuticals, industrial and decorative coatings, and chemicals have performed well in China.

The public is buying its Marvelon contraceptive pills, but few people actually know much about the company that controls half of the domestic market. The industrial coating manufacturer remains largely anonymous, despite the fact that it is an industry-leading supplier of protective coatings for wooden furniture and ships, as well as powder coatings for household electrical appliances.

Wijers and the company are poised to establish a stronger Akzo Nobel brand presence in China, however.

The CEO caused a stir when he showed up at the June ribbon cutting ceremony of a new factory in Suzhou, East China's Jiangsu Province. It was the first time that a top Akzo Nobel official attended the launch of a new production site in China.

Akzo Nobel sponsored the largest Chinese cultural celebration ever staged in the Netherlands between October 2 and 17. The Arnhem-based company asked 35 Chinese artists to submit paintings that were later reproduced on banners using the company's Sikkens paint. These featured the Akzo Nobel logo, and were displayed in Amsterdam's Museumplein, in front of the city's three most important museums.

Wijers will come to China again in November. He is to open Akzo Nobel's new powder coatings plant in Langfang, North China's Hebei Province. The CEO will undoubtedly also be busy meeting with Chinese news reporters to unveil some of Akzo Nobel's plans for the mainland.

Coatings already account for two-thirds of the Dutch company's China operations, and will remain at the forefront of Akzo Nobel's aggressive expansion strategy. Its decorative coating business, however, does not yet have a lead in China's coatings sector, even though the company leads in several industrial market segments.

Consolidation and further expansion of the decorative coatings market will play a substantial role in helping to establish Akzo Nobel as the country's major coatings supplier, Wijers says. He admits that Akzo Nobel does not move as quickly as companies such as Nippon Paint Co and ICI, which are firmly established in China as the current front-runners. "But the game is just beginning," Wijers says.

He is referring to a series of acquisitions Akzo Nobel plans to initiate in China's decorative coatings industry. Acquisition is a tactic that Akzo Nobel favours, and the owner of about 40 individual brands expects this approach will help it take control of the market.

"China's decorative coatings market is quite fragmented, but like other decorative coating markets across the world, it will quickly start to consolidate," Wijers says.

There are over 7,000 decorative coating manufacturers in China. The top five producers only represent 25 per cent of the market. In Europe, however, the top three or four suppliers control 70 to 80 per cent.

Many small coating companies are struggling to survive rising raw material costs driven by surging petrol prices.

Total sales in the domestic coating industry hit 53.9 billion yuan (US$6.7 bullion) last year, rising 25.71 per cent year-on-year, according to figures from the National Bureau of Statistics. Profits generated last year only rose less than 1 per cent year-on-year, however. High oil prices have been blamed for eating into companies' profits. Analysts say consolidation and reshuffling will accelerate soon.

Akzo Nobel signed an agreement in September with the intention to acquire Guangzhou Toide Paint Manufacturing Co's coating business. Based in South China's Guangdong Province, Toide Paint is one of the largest private Chinese manufacturers of emulsion paint.

"We need brands that Chinese people are aware of and like," Wijers says. "The Toide acquisition is particularly important because it gives us access to more than 200 distributors throughout China, particularly in the south and throughout large urban areas. Toide's annual sales stand at around US$10 million."

Wijers refuses to reveal the amount of money involved in the acquisition.

Leif E Darner, a member of Akzo Nobel's management board, adds that the company's acquisitions in China will be "a consistent, step-by-step process."

"It will be a string of acquisitions region-by-region," says Darner, without releasing the names of the next targets.

Darner says the criteria for acquisitions include a company's geographical coverage, distribution capabilities, and brand positioning.

"We will invest in the brands (we acquire) like we will invest in our own brand, Levis," Wijers says.

"We have always sought that combination of the Akzo Nobel corporate brand and strong local names. We think that same pattern will develop in China."

Akzo Nobel opened its first Chinese decorative coating plant for Levis in June. The Suzhou factory stands on an existing multi-business site, where the company runs plants producing car refinishes, powder coatings and coil coatings. The 40 million yuan (US$4.9 million) factory produces water-based wall paints with an annual capacity over 10,000 tons.

Wijers says Akzo Nobel will also invest more in a China marketing team and build its own national distribution network.

Average annual decorative coating consumption in Europe and North America is 9 to 10 litres per capita. Current Chinese consumption stands at less than 1 litre, but is growing at 30 per cent per annum, Wijers says, adding that consumers are tending to move away from traditional tiling to paints.

"This is particularly true among young, urban, middle-class purchasers, as well as architects. It produces more colours and more complex facades," he says.

Akzo Nobel currently runs 13 industrial coating factories in China. The company has supplied coatings to key projects such as Pudong International Airport in Shanghai and the West to East gas pipeline. It also recently won a contract to paint the Olympic swimming pool for the Beijing Games in 2008.

"We are looking at organic growth for industrial coatings," Darner says.

"We are growing with our customers, and investing in new factories and distribution as the market grows."

Akzo Nobel achieved a sales volume of US$655 million in China last year, accounting for 3.7 per cent of its global total.

With five production sites across the country, chemicals now contribute 27 per cent to Akzo Nobel's total China sales. The factories are operated under Akzo Nobel's three major chemical business units polymer, functional and pulp and paper.

Wijers says Akzo Nobel will increase investment in China for both the domestic and export markets, but he declines to release further details.

Pharmaceuticals are the smallest arm of Akzo Nobel's China operations. They contribute 6 per cent of the company's sales in the country.

Wijers says that the Chinese healthcare market is still difficult to access, despite its very positive growth prospects. The major reason, he says, involves lengthy registration processes, centrally co-ordinated pricing, the hospital tenders system and the fact that distribution of modern medication is still limited to major cities.

The Dutch company plans to strengthen research and development (R&D) co-operation in China to come up with new drugs.

"We are in the final stages of signing contracts with two companies in Shanghai to discover active ingredients in natural products," says C David Nicholson, executive vice-president of Organon International's global research. He declines to reveal further details.

Organon, Akzo Nobel's pharmaceutical business unit, established a joint venture in Nanjing, East China's Jiangsu Province, in 1992. Organon China's main products are Marvelon, the anaesthetics Norcuron and Esmeron, the psychiatric drug Remeron, and hormone therapy treatments Livial and Andriol.

The company has established 20 production sites across the country since it came to China in the 1980s, with two representative offices in Beijing and Shanghai.

Darner says Akzo Nobel has no plans to set up a regional headquarters in China.

"We are a business unit managed company," Darner says. Each unit runs its own business, its own factories and builds its own infrastructure. The representative offices in Beijing and Shanghai provide shared services in human resources, finance, and communication, and facilitate business units that export to China.

"We have found this (decentralized system) is the most efficient way of managing a global corporation," Darner says.

"We are very flexible and we are closer to our products, to our development and to our customers."

(China Daily 10/31/2005 page3)