Extract 1

Rapid Commoditisation and Pricing Deterioration in Consumer Electronics Industry The consumer electronics category of products includes smartphones, computers, televisions, video game consoles, automotive technology, and many other home products as well as emerging product categories such as wearable and 3D printers. It is a rapidly changing, dynamic industry that is highly competitive and influenced by technological developments. Manufacturers are under enormous pressure to bring unique and differentiated products to market. Any successful product quickly attracts copycat products from competitors, resulting in rapid commoditisation and falling prices. From a distribution perspective, online retailing has been a major trend and has become much more prevalent within the industry. With the rise of the smartphone, comparison shopping applications and access to direct retailer sites, pricing has also become much more transparent and comparison shopping much easier. Although the US Census Bureau estimates that approximately 94% of all retail business is still conducted in brick and mortar locations, many consumers are now using mobile devices to comparison shop within stores and ultimately making their purchase online if they find a more attractive price. Purchasing power is in the hands of the consumer. This trend is expected to continue and, in response, many traditional consumer electronics retailers are now enhancing their online systems and implementing price matching policies to better compete. The multi-functionality of the mobile devices has displaced sales of digital cameras, camcorders, and GPS navigation devices. Not surprisingly, the projected growth of smartphones and video game consoles is expected to drive strong unit growth in smartphone and gaming accessories, which will offset declines in audio, video, and camera accessories. Source: Adapted in part from Euler Hermes, December 2014.

Extract 2 China's fitness boom energises sportswear brands China is in the grip of a government-backed exercise boom, boosting local sportswear brands and the likes of Adidas and Nike, which are gaining market share on the back of consumer upgrading and an embrace of the 'athleisure' fashion trend. Analysts say that Nike, Adidas and New Balance, which command higher prices than local brands, are viewed by Chinese consumers more as fashion labels than sportswear. Global brands are still very strong in shaping fashion trends especially in the female market. Their sales growth stems from consumers upgrading as incomes rise, as well as the growing acceptance of sportswear in leisure and work settings. Local brands, still perceived as copying design innovations from overseas, are also benefiting, with their sales increasing rapidly as more Chinese take up exercise. Sunway University Business School ECN1014 / April 2021 Midterm Test Page 2 of 3 Gym membership in the country has doubled since 2008 to 6.6 million last year, according to the China Business Research Academy. Running has become a popular pastime, with more than 100 marathons held last year compared with 51 in 2014. Yoga practitioners are estimated to have grown from 4 million in 2009 to more than 10 million today. The ruling Communist Party has also boosted the uptake of sports. Facing an epidemic of obesity-related diabetes and other lifestyle-associated illnesses, China's government has pledged that the number of football pitches across the country will rise from roughly 50,000 to 70,000 by 2020 - by which time it aims to have increased sports venue area per capita from 1.6 to 1.8 square metres. As people themselves are getting into exercise, so government initiatives are accelerating the trend. As the market expands, margins are under pressure from the rise of e-commerce in China, a boon for consumers that has pushed brands to cut prices in the face of more transparent competition. The relative losers in this spate of upgrading and exercising will be the lowest-end Chinese brands. Annual growth is expected to be less than 3% for these groups, compared with overall market growth of 8%, over the next five years. Future momentum for Nike and Adidas sales could also be dented by competition from niche upstarts such as Under Armour. Lululemon, the Canadian yoga brand, is catching on among wealthy urbanites and has opened stores in Beijing and Shanghai. The upper end, not necessarily more expensive but more unique companies targeting millennials are the ones growing faster. Source: Adapted from Financial Times, 21 March 2017.

Extract 3 Fragmented sportswear sector creating merger and acquisition opportunities Despite the presence of a handful of large international and regional players, the sportswear market remains relatively fragmented. Significant players include Nike, Adidas, V.F. Corporation, Puma, and Under Armour. The remainder of the market is comprised of smaller firms with strong local brand recognition, but with limited resources to develop a broader market presence. The larger players have shifted to more of an internal focus with organic growth driving expansion across international markets and new product categories. The larger industry players have also shown an increased focus on profitability and cost efficiency, which has included implementing strategies to optimise the supply chain, improve inventory management, reduce lead times and improve product quality. Scale matters and the large brands are focused on chasing growth in emerging markets by building out their delivery platforms in high growth markets and pursuing acquisitions that fill a gap in either technology or a product category. Long-term success in the sportswear industry will be driven by product innovation, where companies have focused on providing technical advancements balanced by aesthetic design to drive brand recognition, revenue growth and higher gross margins. Smaller industry players with innovative designs and niche brands, but which lack the financial resources to expand, have a history of being acquired. Source: Adapted from Catalyst Corporate Finance, Spring 2014. Sunway University Business School ECN1014 / April 2021 Midterm Test Page 3 of 3

(A) Using demand-and-supply analysis, consider how the 'multi-functionality of the mobile services' (Extract 1) has posed challenges for digital cameras, camcorders, and GPS navigation devices. [8 marks]

(B) It is reported in Extract 1 that in the consumer electronics industry, 'any successful product quickly attracts copycat products from competitors, resulting in rapid commoditisation and falling prices. Using appropriate diagrams with the explanation, what is meant by the above statement under perfect competition (explain the diagram in your own word for this question). [10 marks]

(C) In the sportswear market different retailers are under pressure 'to cut prices in the face of more transparent competition' (Extract 2). Does this mean that the sportswear industry is perfectly competitive? [12 marks]

(D) Using a diagram, explain two reasons for which 'scale matters' (Extract 3) in the sportswear industry and suggest two reasons for which merger and acquisition should not, however, be necessarily encouraged (explain the diagram in your own word for this question).