Simon Lin, marketing manager for DuPont Greater China Teflon® Finishes, stood in the aisle of the Shanghai department store and watched the young well-dressed couple as they inspected the various brands of non-stick cookware on display for sale. After several minutes of comparing the different brands, the wife pointed to the DuPont Teflon® logo on the packaging of one brand, and said something to her husband. He nodded approval, they picked up the boxed set of cookware and headed for the cashier. It was January 1996 and Lin was researching the Chinese cookware market for DuPont. For six years, DuPont had been involved in the Chinese cookware market, licensing its non-stick technology to local manufacturers for use on pots and pans.
In spite of its efforts to develop the Chinese domestic cookware market and its Teflon® brand, sales had never reached expectations. Lin’s project was to make a recommendation on whether DuPont should continue with its current strategy, pull out of the market, or try some new approach. As he watched the young couple leave the store, he wondered what the company should do.
BACKGROUND ON DUPONT
In 1995, E. I. du Pont de Nemours and Company Inc. (DuPont) was a global industrial company with 193 years of continuous business. As a major producer of oil, natural gas and petroleum products and a leader in high-performance materials, specialty chemicals, pharmaceuticals, and agricultural products, it achieved 1995 revenues of US$42.2 billion and net income of US$3.3 billion. Although based in the United States, approximately 48 per cent of the company’s 1995 sales were outside the country.
Exports from the United States were approximately US$4.0 billion making it one of the largest U.S. exporters. Of its almost 105,000 employees, approximately 35 per cent worked outside the United States. According to Fortune in 1995, DuPont was the 13th largest U.S. industrial and service corporation and the 58th world’s largest industrial and service corporation. See Exhibit 1 for corporate financial highlights.
DuPont operated in approximately 70 countries worldwide, with about 175 manufacturing and processing sites that included 135 chemicals and specialities plants, five petroleum refineries, and 25 natural gas processing plants. It had more than 40 research and development labs and customer service labs in the United States and more than 35 labs in 11 other countries. See Exhibit 2 for a listing of countries with major DuPont operations.
Major product areas for DuPont included chemicals, fibers, films, finishes, petroleum, plastics, healthcare products, biotechnology, and composite products. The Chemicals segment included a wide range of commodity and specialty products used in the paper, plastics, chemical processing, refrigeration, textile and environmental management industries.
The Fibers segment included a diversified mix of specialty fibers produced to serve end uses ranging from protective apparel, active sportswear and packaging to high-strength composites in aerospace. High volume fibers were produced for apparel and home fabrics, carpeting and industrial applications used in consumer and industrial markets. The Polymers segment products included engineering polymers, elastomers, flouropolymers, ethylene polymers, finishes and packaging films for industries such as packaging, construction, chemical processing, electrical, paper, textiles, and transportation. Its Life Sciences business segment consisted of Agricultural Products, with a focus on crop protection chemicals and biotechnology, and Pharmaceuticals.
The Diversified Businesses segment included electronic materials and polymer businesses. DuPont had an unparalleled portfolio of 2,000 trademarks and brands. Some of the company’s best known brands were: Teflon® resins, SilverStone® non-stick finish, Lycra® brand spandex fiber, Stainmaster® stain-resistant carpet, Antron® carpet fiber, Dacron® polyester fiber, Kevlar® brand fiber, Corian® solid surface material, Mylar® polyester films, Tyvek® spunbonded olefin fabric, and Coolmax® and Cordura® textile fibers.
A DuPont chemist, Dr. Roy J. Plunkett, developed Teflon® in 1938 in DuPont’s New Jersey laboratory. Plunkett was working with gases related to Freon® refrigerants, another DuPont product. He had frozen and compressed a sample of tetraflouroethylene, which subsequently spontaneously polymerized into a white waxy solid to form polytetraflouroethylene (PTFE). The invention of PTFE was described as “an example of serendipity, a flash of genius, a lucky accident even a mixture of all three.” The discovery of PTFE was important because it was inert to virtually all chemicals and was considered the most slippery material in existence. These unique properties made it one
of the most valuable and versatile technologies ever invented.
The various applications of PTFE contributed to significant advancements in areas such as aerospace, communications, electronics, industrial processes and architecture. Registered as a trademark in 1945, Teflon® had become a familiar brand name worldwide. It was recognized for its use as a coating on cookware and as a soil and stain repellant for fabrics and textile products. It was DuPont’s intention that the Teflon® brand and its various end-use applications would be associated with reliable, high-quality products and processes that made life easier. DuPont was vigilant in protecting the brand to ensure that it was of maximum marketing value to DuPont and its business partners.
As part of the brand strategy, the company developed a distinctive logotype for Teflon® (see Exhibit 3). The logotype was designed to reflect the integrity and identity of the brand, and to be appropriate across a wide range of markets and applications. It was intended for use on products, packaging, labels, advertising and all other types of promotional material that carried the brand name. Like the Teflon® trademark, the logotype was owned exclusively by DuPont and could only be used under license from DuPont.
TEFLON® FOR COOKWARE
When people heard the brand name Teflon®, they usually thought “non-stick.” This association was the result of years of consistent brand support and a determination to maintain a strong global reputation. Teflon’s® ability to shrug off whatever came into contact with it led to the application of protective nonstick coatings to pots and pans. This made cookware featuring Teflon® easy to use and easy to clean. Since cleaning up after cooking could be a difficult and messy job, having pots and pans that came clean with just a wipe would be a welcome addition to the kitchen of any family.
Since its introduction in the 1960s, over a billion pots and pans with DuPont non-stick surfaces had sold worldwide. Non-stick coatings could be bonded to aluminum, stainless steel, enamelled steel, cast-iron, glass, ceramics or plastics to form a smooth inner surface which released food easily and wiped clean after use. To meet a variety of cookware applications, DuPont developed various brands that differed in the formulation and thickness of the coating system. When combined with the thickness of the metal, the result was different quality and thickness levels. Teflon® was designed for regular use and offered excellent quality and value for money.
Teflon® had to be at least 25 microns thick with a two-layer system (primer and topcoat) that offered resistant, reliable, durable non-stick qualities. SilverStone® coatings were more durable for intensive use. SilverStone® had three layers with a combined minimum thickness of 35 microns, making it even more durable and resistant. SilverStone Supra® was a specially formulated super-durable coating for superior quality cookware. It was designed to meet the needs and demands of the most discerning user. It had three layers with a combined minimum thickness of 35 microns and included an advanced primer and an extremely tough mid-coat.
Although DuPont developed non-stick technology and non-stick coatings in 1938, it was not until the 1960s that Tefal, a French cookware company, first introduced non-stick cookware, using DuPont technology. The first markets were North America and Europe. As non-stick cookware was accepted, it became popular in Japan and other parts of Asia. However, by the 1990s, these markets (i.e., North America, Europe and Japan) were considered “mature.” Tefal went on to become one of the largest manufacturers of non-stick cookware in the world. Today, its operations are global and fully integrated.
Traditionally, DuPont had acted as a raw material supplier to cookware manufacturers by providing Teflon® brand non-stick coatings. In this approach, DuPont supplied non-stick technology to licensees who used Teflon® brand coatings on their cookware. Then, the Teflon® brand label was prominently displayed on the packaging of the licensee’s cookware. The Teflon® label implied to the consumer that the cookware was quality-made and dependable because it featured DuPont technology.
In effect, DuPont partnered with licensee manufacturers in promoting their non-stick cookware brands through differentiation and by creating a “pull through” marketing strategy in which the Teflon® label attracted the retail buyer. This was due to Teflon’s® high brand awareness among retail customers. For example, brand awareness levels in the U.S. were at 98 per cent for the Teflon® brand and at 95 per cent for DuPont’s premium non-stick brand, SilverStone®.
THE CHINESE COOKWARE MARKET
China’s population in 1995 was 1.2 billion people. Its major population centres (with populations) were Shanghai (7.5 million), Beijing (5.8 million), and Tianjin (4.6 million). The average annual income was RMB5,500 (approximately US$685), up from RMB2,140 in 1990.
Non-stick cookware featuring the Teflon® brand was first introduced to the Chinese retail market in 1989. Although the Chinese market had great potential, the non-stick cookware market experienced little growth over the ensuing years. By 1995, non-stick cookware represented less than two per cent of the industry’s “top-of-range” cookware1 sales. However, products featuring the DuPont brand held about 80 per cent of this small market segment. So, while the company’s market share was strong, it was the non-stick cookware market in general that performed poorly.
Since sales of Teflon® coating (through licence) were dependent on the sales of non-stick cookware, DuPont wanted to see the market grow. In investigating the market, Lin’s research team discovered several important demand-side characteristics of the domestic cookware market that hindered the growth of non-stick cookware, some related to consumers and some to licensee manufacturers.
First, Chinese consumers had traditionally used a different type of cookware than western consumers, preferring roundbottomed steel woks to flat-bottomed fry pans and sauce pans. Although top-of-range cookware was the primary food preparation utensil, Chinese also used pressure cookers and rice cookers. The preference for steel cookware was augmented by their use of metal cooking utensils, such as spoons and spatulas, instead of plastic or wood utensils. While Teflon® was stick-resistant, repeated use of metal utensils on the coating could cause scratches that were detrimental to its performance.
A second factor was that Chinese cooking processes differed from western cooking methods, which generally used lower temperatures and longer cooking times. In contrast, Chinese cooking methods favored relatively higher temperatures for shorter periods of time with frequent stirring. The high heat and frequent stirring, which could cause abrasions, put increased stress on the non-stick properties of the finish. This difference was compounded by other related factors. Chinese kitchens were generally much smaller than western kitchens, which limited the number of cooking pans a family owned. Also, cooking gas was available only in urban areas, which accounted for only 20 per cent of the country’s population.
A third limiting factor was price. Non-stick cookware was significantly more expensive than steel cookware. For example, an iron or stainless steel wok might cost only RMB20 or RMB30 and last for eight to 10 years. By comparison, a 26cm diameter pan with Teflon® non-stick coating would cost RMB80 to RMB150. Since the average worker’s monthly income was only about RMB500, non-stick cookware represented a major household purchase.
A fourth complicating factor was the consumer’s perception of cookware. Traditional Chinese consumers believed that cooking in iron woks was good for a person’s health, while using non-stick cookware was not good for one’s health. This was a misconception because Teflon was safe for cooking. In fact, Teflon® complied with the United States Food and Drug Administration (USFDA) regulations for use by consumers as a food contact finish, which meant it caused no harmful effects when used. On a positive note, Chinese consumers perceived non-stick cookware as easy to clean, easy to use, and good for cooking fish and eggs.
There were also supply-side issues to be addressed. Industry analysts had identified several other barriers to further developing the market that were common to Chinese non-stick cookware manufacturers. First, the Chinese central government routinely designated a priority list of particular state-owned industries (known as “pillar industries”) that were important to the further economic development of the country.
“Top-of-range” cookware refers to cookware that is used on top of an oven or cooking surface, rather than in an oven. This generally includes items such as pots, pans, and woks. These state-owned enterprises (SOEs) received special consideration from government agencies in becoming stronger domestic and international competitors. As non-stick cookware manufacturers were not on this list and, therefore, received no government support, developing the market and new products put a heavy financial burden on the individual companies and their partners.
Business financing and payment customs were another significant problem. Regardless of the credit terms offered to retailers, cookware manufacturers were heavily penalized by triangular debt, characterized by some industry analysts as “notorious.” Payment terms from retailers routinely exceeded 90 days and long past due receivables were common. In addition, key raw materials, such as aluminum and non-stick coatings, were sold only on a letter-of-credit or cash basis.
Combined with relatively high interest rates in 1995 and negative cash flow, cookware licensee manufacturers tended to self-impose low volume limits on how much non-stick cookware they would sell in the local market. By comparison, if the manufacturers sold only exports, all they needed to be concerned about was producing cookware, filling an overseas shipping container, and then sending it to their distribution customers. This was easier than selling to the domestic Chinese market, which had the use and cost issues noted above and potential account collection problems associated with local distributors.
When these severe financial burdens were coupled with the government’s tight credit policy, some licensee manufacturers were cash strapped and, by western accounting standards, close to bankruptcy. Therefore, these numerous forces combined so that Chinese licensee manufacturers had neither the resources nor desire to develop the domestic non-stick market. From 1989 to 1995, DuPont used the “pull through” strategy that it had used in other countries. DuPont had licensing agreements with cookware companies that manufactured their own cookware featuring Teflon® non-stick coatings and used the Teflon® label on their packaging as a sign of high quality.
Under this partnership arrangement, DuPont worked with Chinese licensees to develop the non-stick cookware market and build Teflon® brand awareness. Both parties benefited. DuPont helped to strengthen the Chinese brand by adding the Teflon® label to the packaging, and DuPont benefited through the revenue received from additional sales of cookware using its non-stick coating. By 1995, DuPont was working with six Chinese licensee manufacturers.
After years of investing in and developing brand awareness in the Chinese domestic market, the market had shown some growth but not as much as was expected. According to estimates by industry analysts, three million units of non-stick cookware had been sold in China in 1995, less than two per cent of the domestic cookware market. By comparison, for the same year, 15 million units of non-stick cookware were sold in Japan, and 50 million units were sold in the U.S., or 80 per cent of the U.S. market.
In 1995, DuPont had spent US$1 million marketing non-stick cookware in China and two million units featuring Teflon® coatings had been sold. Over the years, the cost of market development for Teflon® products had exceeded the revenue that DuPont received from the sales of the products. While DuPont had seen this as investing for the future, it determined that it had to make a decision about its future participation in the Chinese domestic market: continue with the licensee partnerships as it had, find an alternative strategy for the domestic market, or pull out of the market.
Lin considered the options. Continuing with the current licensing strategy would not require any changes in operations or significant changes in financial commitment. DuPont could continue providing market development support to its licensee manufacturers. However, not only was this effort not realizing the full potential of the Chinese market, but the arrangement was not profitable for DuPont. The development cost exceeded the revenue that DuPont earned from non-stick cookware in the Chinese market.
As a publicly traded company, DuPont had to account to its shareholders for its profits. If DuPont withdrew its market development support from the local cookware manufacturers, it could redirect its efforts to developing other products or markets. However, to do so would most likely be the end of any significant resources directed at developing the non-stick cookware market in China.
A second option was for DuPont to work more closely with the local manufacturers in developing the Chinese market. DuPont could help the manufacturers develop marketing programs for Teflon® non-stick cookware products. This could include advertising programs, point-of-sale displays and product demonstrations. Since DuPont hoped that the non-stick market would eventually turn profitable for them, being more involved with the licensee manufacturers could help this happen sooner. This would require them to be patient and see the Chinese non-stick cookware market as a long-term investment.
A third option that had been suggested was for DuPont to produce its own brand of non-stick cookware. Lin knew from the market research that the Teflon® brand was well recognized and respected by Chinese consumers and this awareness influenced their purchase decision. The young couple Lin had seen in the store confirmed that. With DuPont’s strong marketing skills, it would be relatively easy to develop and promote its own brand of cookware. Since the Teflon® brand was a determining factor in the purchase of non-stick cookware for Chinese consumers, having a DuPont brand was a logical extension. A new brand could allow the company to extend the brand to other types of non-stick kitchen appliances, such as rice cookers.
However, this strategy required skills that the company did not currently possess. While DuPont was a manufacturing company, it had no experience in manufacturing cookware. It would either have to learn the process through internalization or rely on another company for the manufacturing. If it did this, how would it manage the relationship? Should it form a joint venture with one of its current licensee manufacturers or should it subcontract the manufacturing? If it decided to use a joint venture arrangement, DuPont would want a majority (greater than 50 per cent) ownership position for control purposes.
In addition, there would probably be increased costs due to DuPont’s high concern for product quality. If it went with a current licensee manufacturer, would the manufacturer see this as a threat to its own brand? DuPont also would need to get the product to the consumer. This would require a distribution system. But, DuPont currently did not have a system established for distribution, wholesalers, and marketing support. It would need to either create its own distribution channels or try to get into the established, although problematic, Chinese distribution channels.
The distribution system in China varied from province to province. There was no national system in place. The system used by their licensee manufacturers involved many middlemen, was inefficient and used some business practices with which DuPont was not comfortable. Developing its own brand could require establishing a whole business system to accommodate the new products.
If it established its own brand, DuPont would need to begin by resolving these critical issues. Each approach had benefits and drawbacks. It was past noon and Lin decided to consider the options further over wu tsao before continuing his research.