On Saturday, April 28, 2015, the Hisense-Hitachi joint venture (JV) opened the first-ever Hisense commercial central air-conditioner exhibition hall, where potential customers could experience Hisense's commercial air conditioner and learn about its manufacturing process and after-sales services. The exhibition hall was located in Indonesia and was followed by a series of aggressive marketing campaigns in Malaysia and Thailand. These three countries were the target markets selected by the JV after it was once again allowed to sell its products in Southeast Asia starting in June 2014.

Before re-entering the Southeast Asian market, the Hisense-Hitachi joint venture had mainly used the world-famous Hitachi brand to explore overseas markets. After the JV had accumulated enough capacity to adopt a product differentiation strategy, it decided to treat the Hisense brand as the focal brand in Southeast Asia and adopted a series of distribution strategies that differed from its approach when selling Hitachi- branded products in other overseas markets. Why did the JV treat Indonesia, Malaysia, and Thailand as target markets? Should the distribution mode be the same in the three neighbouring countries? Could the previous international operating experience be replicated in Southeast Asia?

THE JV'S AUTONOMY TO EXPLORE MARKETS IN SOUTHEAST ASIA

As early as 2011, Hisense had begun to track and investigate the commercial central air-conditioner market in Southeast Asia. In 2013, Hisense sent staff to Southeast Asia and spent considerable time making preparations because the consumer acceptance of the Hisense brand was low, and sales of its other products were far below Hisense's expectations for the Southeast Asian market.

The Hisense brand and many other Chinese brands had been unpopular in Southeast Asia for a long time. In the 1990s, cheap and inferior Chinese products, ranging from motorcycles to shoes, had flooded into Southeast Asia. Due to product defects and a lack of after-sales services, complaints from local customers accumulated, and these inferior Chinese products eventually left a deep negative impression. Between 2005 and 2015, it was difficult to change local customers' initial impressions despite Hisense and many other Chinese manufacturers having made great efforts to enhance their brand reputation in this market.

Although Japanese and South Korean manufacturers charged higher prices, they offered higher-quality products and were considered to be more trustworthy.

From 2012 to 2014, the Hisense International Marketing Company (HIMC) assumed responsibility for the JV's global sales of commercial central air conditioners; however, sales did not reach Hisense's expectations. In response, in June 2014, the JV assumed responsibility to explore the Southeast Asian market. Three main considerations led to this decision. First, compared with the HIMC, the JV was more familiar with its products and was able to provide a more complete product cycle service system, a critical factor in consumers' purchasing decisions. Second, the HIMC, Hisense's global sales platform, would never focus on selling only the JV's commercial central air conditioners, so there were questions about whether it would adopt an effective marketing strategy for the JV's products. Third, China and the Southeast Asian countries belonged to the same cultural region, where residents' consumption tastes and preferences were similar. Therefore, there was a desire to determine whether the JV could replicate its successful marketing strategy in the Chinese market and apply it to this new territory.

THE JV'S PRODUCT DIFFERENTIATION STRATEGY

In the commercial central air-conditioner market, manufacturers were generally divided into two strategic groups, both competing in the domestic and overseas markets at the same time. In the first group, there were mainly Japanese, South Korean, European, and American manufacturers, famous for their superior products and high prices, such as Daikin, Hitachi, Samsung, Mitsubishi, Toshiba, LG, York, and Electrolux. They held more than 70 per cent of the market. The second group was composed of Chinese manufacturers, such as Midea, Gree, Haier, and Zhigao. They mainly produced high-quality products at medium prices, which helped them win an increasing number of orders. Their market share had been growing quickly in recent years.

If the JV had only the Hitachi brand, it would be restricted to competing with the first group and would lose the opportunity to compete with the second group. After having experienced a successful marketing strategy with the Hitachi brand, the JV began considering producing Hisense-branded products for the purpose of competing with high-quality products made by other Chinese manufacturers. The Hisense- branded and Hitachi-branded products focused on different market segments and were able to develop a complementary relationship.

The double-brand strategy needed to go through several developmental phases. Initially the JV changed only the logo, the packaging, and some of the product parameters in an attempt to make a simple distinction between the Hisense and Hitachi brands. By 2013, the JV was capable of differentiating between the two branded products in performance and parts ¹ (e.g., overall framework designs, compressors, surface materials, and motors). These products represented an advanced phase of product differentiation and the JV's differentiated products could better cater to customers' needs.

TARGET BRAND AND MARKET SELECTION IN SOUTHEAST ASIA

"Hisense" as the Target Brand in Southeast Asia

Before exploring the Southeast Asian market, the JV sold most of its products in overseas markets under the well-known Hitachi brand. However, the regions to which the JV was permitted to export the Hitachi

¹ Hisense, accessed November 24, 2016, www.hisense.com/sycp/syzykt.

brand were originally quite limited. If the JV used the Hisense brand, it could enter more regions. After independently developing a new product line with the Hisense brand, the JV treated these products as its focus in the subsequent overseas expansion.

Treating Malaysia, Indonesia, and Thailand as Target Markets

Southeast Asia comprised 11 countries, and the JV needed to select its target markets because of limited resources. It first considered Hitachi's overseas market-entry restrictions, and excluded the Philippines and Singapore. It then investigated the other Southeast Asian countries and concluded that several countries were unsuitable for the JV's entryfor example, Vietnam, Cambodia, Burma, and Brunei, due to market capacity, language, political environment, population, and culture. Ultimately, the JV decided to focus on Malaysia, Indonesia, and Thailand.

The JV chose Malaysia because of its language. In Malaysia, 60.4 per cent of the whole population was Buddhist, and people mainly spoke Bahasa Malaysia, English, and Chinese (Chinese immigration made up 25 per cent of the whole population)² (see Exhibit 1). If the JV entered this market, the JV's expatriates would face a lower language barrier and could effectively communicate with their customers in Chinese or English. Also, Hisense already had an HIMC branch in Malaysia; however, the sales performance of Hisense's products was unsatisfactory due to local consumers' deep-rooted impressions of Chinese-made products. Despite Malaysia having disadvantages, the JV still attempted to tap this market.

Indonesia had a population of 255 million and a large market capacity, and thus was the most promising market according to the JV. Nevertheless, it could be the most difficult market to enter due to political tensions between Indonesia and China. Furthermore, the JV faced the challenges of a huge language barrier (Indonesian only), a high cultural distance (about 88 per cent of its population was Muslim), and geographic diversity. ³ Although these obstacles were great, Indonesia's market potential ultimately motivated the JV to enter this market.

Thailand was the largest commercial central air-conditioner manufacturing base in Southeast Asia. The country was made up of five groups of provinces, and 96.4 per cent of the country's population was Buddhist. Therefore, compared with Indonesia and Malaysia, Thailand was much less ethnically diverse. Despite being a latecomer and facing fierce market competition, the JV thought that Thailand still offered market opportunities for expansion due to the country's steady economic growth. In addition, it was much easier to recruit local sales representatives or technical engineers with professional experience from the commercial central air-conditioner industry. Therefore, the JV treated Thailand as another regional target market.

EXPANDING TO MARKETS IN MALAYSIA, INDONESIA, AND THAILAND

Firms could distribute their products through either exclusive agents or non-exclusive agents. An exclusive agent was the only agent who could sell all of a manufacturer's products in one region. Alternatively, a manufacturer could allow multiple agents to sell its products in one region.

² The data are from the Business Data Center of Ministry of Commerce of the People's Republic of China, accessed November 24, 2016, www.mofcom.gov.cn/article/tongjiziliao.

³ Ibid.

Malaysia

The JV initially planned to use non-exclusive agents in Malaysia. However, many local small agents did not prefer this mode. In their opinion, if the manufacturers had no branch or factory in their local market, these small agents worried that the manufacturers would not provide after-sales services. Local exclusive agents, who were responsible for selling the manufacturers' entire product range and providing after-sales services, had engaged in this industry for more than 30 years, and had very good credit records. Although the exclusive agents' prices for distribution were higher than the prices offered by the manufacturers, small agents nonetheless preferred to take products from exclusive agents. Tony Liu, the director in charge of the JV's Southeast Asian market, said:

The first time we visited our customer, a large agent, he asked me which kind of visa I had applied for. I told him it was a one-year work permit. He said, "This implies that after one year I may not see you anymore." Why did he ask this question? Because he was very skeptical of the foreign manufacturers' expatriates.

The commercial central air-conditioning industry required a relatively long sales cycle. For example, from tracking the project to winning the order usually took six to 12 months and the installation required another several months. If the expatriate salesman could not stay long enough, what he had promised the customer after finishing the project might not be fulfilled. One customer said: "Today you come here, but when your work permit expires, you will go back and may no longer be responsible for this business. Thus, it is too unsafe to do business with you." For this reason, we did not think that choosing the non-exclusive agent mode was a wise idea in this market.

Apart from local concerns about the JV's expatriates, the business climates in Malaysia and China were distinct. For example, in the Chinese market, if the JV wanted to sell a product to customers in Shanghai, it needed only a truck. However, if it wanted to sell products to Malaysian customers, they would qualify as exports, making the process more complicated in three specific ways.

First, the agents needed to have the ability to import and exchange currencies. Second, they needed to deal with the process of customs declaration and clearance as well as other procedures the Malaysian government required. Third, they needed to have product warehousing. Most agents considered it a hassle to deal with exporting procedures or warehousing. They wanted to pay only in their own currency, receive the required products in return, and leave the complicated procedures to exclusive agents or manufacturers to complete. As a new market entrant, the JV was inexperienced. It worried that even though it dedicated resources to these tasks, the effect would not be satisfactory.

Although the expatriate manager considered many exclusive agents, it was not easy for him to make a decision. Ultimately, he selected an exclusive agent who had been influential in the commercial central air- conditioner industry for more than 30 years and had a very good credit record. Because the agent was a Chinese immigrant, he was familiar with both the Chinese and Malaysian cultures, and was able to communicate with the JV expatriates in Chinese. Before the agent began to co-operate with the JV, he had distributed other brands' products for many years. To avoid conflicts, the JV required the agent to form a new company that would focus on selling only Hisense-branded products. Moreover, the JV required him to open a Hisense exhibition hall, and hold a press conference for more than 500 participants, including local agents, consultants, and commercial central air-conditioner experts. The press conference was successfully and it had proved useful. The JV received its first order in less than two months.

Commercial central air conditioners required highly skilled and professional maintenance crews. However, it was difficult for the exclusive agent to recruit maintenance employees from the local market. To solve this problem, the JV provided an expatriate team composed of a sales representative, a technical support engineer, and an installation engineer. The three expatriates had worked in the JV for more than three years and were familiar with the business operation process. The sales representative, in particular, had been in charge of the JV's overseas marketing before leaving for Malaysia, and had worked in a job rotation through every department of the JV. Due to this previous working experience, the sales representative served an important role in facilitating communication between the JV and the exclusive agent. These expatriates applied for a two-year work permit, and the exclusive agent felt very satisfied with their work.

The JV's exclusive agent mode in Malaysia was similar to the approach it had adopted in Russia; however, the two operations had significant practical differences. In Russia, the JV offered no expatriate team, but in Malaysia the JV did. These expatriates worked together and ate lunch together with the exclusive agent's staff, as if they were ordinary colleagues. In reality, they belonged to two companies. Having an expatriate team in the exclusive agent's company could help the JV track the local product sales closely. For example, when the exclusive agent or the local market implemented changes, the JV could quickly adjust its strategy.

Indonesia

When entering the Indonesian market, the JV offered potential local customers who were unfamiliar with the Hisense brand an opportunity to visit its factory in Qingdao, China. After detailed analysis, the JV divided these local customers into three groups. In the first group were customers who eagerly wanted to visit the factory. They already intended to co-operate, and the JV did not have to worry about their sincerity. In the second group were customers who had not decided whether they would visit the factory. They were key customers, and the JV needed to make great efforts to create or seize opportunities for co- operation with them. In the third group were potential customers who had no interest in visiting the factory. If the JV invited them, they were often unwilling to go and had no intention of co-operating. If the JV failed to create other ways of attracting these customers, it would be nearly impossible to do business with them in the future.

As more customers visited the factory, the JV gradually found that these visits were running at high costs, and visitors had to spend at least four or five days on such trips. To enhance the Hisense brand reputation and develop more customers, especially in the second and third groups, the JV decided to open a comprehensive exhibition hall, which was a synthesis of exhibition, experience, design, and maintenance elements. In the exhibition hall, customers could experience Hisense's commercial central air conditioner for themselves and learn more about the manufacturing process and after-sales services. On Saturday, April 28, 2015, the JV opened its first Hisense commercial central air-conditioner exhibition hall in Indonesia.

In the Indonesian market, the JV was challenged by a high cultural distance and a huge language barrier. In this situation, the JV selected an exclusive agent, who was a Chinese immigrant and proficient in both Indonesian and Chinese. He was a former shareholder of a commercial central air-conditioner agency company. To avoid competition in the same industry, he withdrew his shares and set up a new company for selling only Hisense-branded products.

Besides undertaking the agency business, this exclusive agent also managed a small household air- conditioner manufacturing factory. Therefore, he was competent at providing after-sales services; but it

was difficult for him to recruit local staff to fill jobs in technical support and marketing. To address these urgent needs, the JV provided a two-person team of expatriates: a sales manager and a technical support engineer.

In Indonesia, most people spoke only Indonesian; few could speak Chinese or English. Although the JV's expatriates could communicate with the exclusive agent in Chinese, they faced a language barrier when contacting their customers. The JV's expatriates could not speak Indonesian, while most of the local customers could not speak Chinese. Because of this language barrier, the JV recruited an Indonesian Chinese sales representative who had just graduated with a master's degree. He was proficient in Indonesian and Chinese and could assist the JV's sales manager in recruiting more agents beyond the exclusive agent's distribution channel.

When exclusive agents sold the JV's products, they had no emotional involvement because they were familiar with neither the JV's history nor its culture. Therefore, if a JV's sales representative provided the exclusive agents with only a printed brochure, they would be less likely to distribute the JV's products. To solve this dilemma, the JV required newly recruited sales representatives to take a three-month intensive job-training session in its factory before contacting customers. During training, the sales representatives ate dinner, lived, and communicated with their colleagues in the dorm provided by the JV. These colleagues helped them to better understand the JV's culture and to quickly improve their professional skills. When the sales representatives visited their customers, they could introduce their customers to what they had experienced in the JV. Only by having a deeper understanding of the JV's culture and products would customers want to do business with its sales representatives in the future.

Thailand

Thailand was the largest commercial central air-conditioner manufacturing base for the whole Southeast Asian market. Many manufacturerssuch as Daikin, Mitsubishi, LG, and Panasonichad factories there, and competition was fierce. According to Hitachi, though its products were of high quality, it had neither a price advantage nor a local manufacturing advantage. Having reached the conclusion that it had no competitive advantage, Hitachi had exited this market.

The JV, however, did not agree with Hitachi's conclusion. After investigating the Thai market, it decided the Thai market was worthwhile to enter. The JV first registered a branch and then adopted a non-exclusive agent mode to explore the market. In this regard, there were two main considerations. On the one hand, because Thailand had so many manufacturers, the JV could recruit professional employees more easily than in other Southeast Asian countries. On the other hand, an exclusive agent could not cover such a big market, and the agents were used to taking products directly from the manufacturers.

The JV's Thai branch, which was located in a five-star office building, recruited some expatriates to be responsible for technical support, service, and training. To overcome the language barrier, the JV recruited a local Chinese translator who had lived in Thailand for more than 10 years and was proficient in Chinese, Thai, and English.

After the personnel were ready, the Thai branch director provided his agents with weekly training and discussions about progress. The director not only helped solve problems they encountered but also obtained new market information from these agents.

Daikin held more than a 50 per cent of the market share in Thailand, Malaysia, and Indonesia, and exerted much bargaining power over its agents. Besides Daikin, the three other main manufacturers were Mitsubishi, Panasonic, and Toshiba. Each held approximately 10 per cent of the Thai market.

Facing this market structure, the JV developed its own strategy. First, the JV focused on those distributors that Daikin had offended and those that held negative opinions of Daikin. This strategy echoed a Chinese idiom: "Your enemy's enemy is your friend." Second, the JV explored those relatively small agents who had weak co-operative ties with Daikin or other large manufacturers. Third, it focused on identifying new emerging opportunities to work with other manufacturers' main agents.

Although Malaysia, Indonesia, and Thailand were neighbouring countries and were in some ways culturally similar, each country's market expansion logic differed substantially. The JV chose to develop distribution strategies on a country-by-country basis. Was this approach the right decision?

EXHIBIT 1: FACTORS THE HISENSE-HITACHI JOINT VENTURE CONSIDERED BEFORE ENTERING THE MARKETS

Factors

Malaysia

Indonesia

Thailand

Population (in millions)

30

255

67

Chinese immigrant percentage (%)

25

2

14

Main language(s)

Bahasa Malaysia, English, Chinese

Indonesian

Thai, English

Ethnic diversity

High

High

Low

Geographic diversity

High

High

Medium

GDP growth rate (%)

4.5

4.5

3.5

Industry maturity

Not mature

Relatively mature

Mature

Political risk

Low

High

Low

Note: GDP = gross domestic product

Source: Ministry of Commerce of the People's Republic of China, accessed November 24, 2016, www.mofcom.gov.cn.

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