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Franchising in China - A Dead Duck?
 
 
 

 

  Is China's film industry overexposed?   Is China's film industry overexposed?  Edward Young  
         
 
Is China's film industry overexposed? The two main rivals – America’s Eastman Kodak and Japan’s Fuji Film – are aggressively building up nationwide networks of branded developing shops, blanketing billboards with advertising, and dropping prices in an effort to outdo each other and win the hearts, minds and disposable income of China’s increasingly affluent emerging middle classes. At the Chinese New Year in February, more and more people took advantage of the government-mandated weeklong holiday to visit family and friends, and go sightseeing. For the photographic film industry, ‘tis the season to be merry, with film sales peaking. But it is also the season of the stiffest competition.
 
During last year’s Chinese New Year, Kodak and Fuji faced off in a full-scale brand war for one of China’s most lucrative markets. Overnight, advertisements for Fuji Film on Shanghai’s packed subway were pulled down and Kodak’s bright yellow ads were put up in their place. Within the week, five Fuji stores in the subway had been re-branded by Kodak. But, Fuji fought back, saturating two kilometers of Shanghai’s historic Bund with seven shops and dropping the price for a roll of film from Rmb19 (US$ 2.29) to Rmb13 (US$ 1.57) – below cost price according to industry analysts.

Kodak’s advance seems relentless. It opens three shops a day on average, with the total now topping 7,000, over double Fuji’s 3,300 stores across the mainland, Hong Kong and Macao. Both companies are going digital in an effort to offer “total photo solutions.” Kodak has already outfitted 1,000 of its stores with digital imaging services – just behind Fuji – and plans to double the number by the end of the year. Each store’s strong yellow or vibrant green delivers a bold brand statement.

China is a crucial market for the two firms. In 1995, China was Kodak’s 17th largest market. Today, it is second only to the US, and Daniel Carp, Chairman and CEO of Kodak, believes it will soon be number one. “In my career, it will be the biggest picture market in the world,” he told American network television in April. Currently consumption is only a fraction of that in the developed world: average annual film consumption in China is 0.1 per person compared to 3.2 films in the US or Japan. Clearly it is worth fighting for.

Japanese Konica and Belgo-German Agfa-Gevaert are also-rans in the China market, unable to muster the immense resources needed to establish their brands. “Our brand is a latecomer, so we don’t have any brand value,” admits Terence Ching, marketing manager at Agfa-Gevaert in Hong Kong. “We would need to spend lots of money to develop it.”

So far, Kodak has fought hardest. The company’s film was ranked the “best brand for consumers” in a national survey of over 40 consumer products. And although the American behemoth refuses to say exactly how successful it has been, the same survey conducted last year by state television broadcaster CCTV, estimated that Kodak’s share of the roll-film market is as high as 63 percent. Kodak says this is too high – that it is failing to take into consideration Lucky’s strength in rural areas – but even conservative estimates put Kodak’s share at 50 percent, with sales of about US$ 500 million in 2000 according to the Far Eastern Economic Review. And sales continue to grow, up a further 10 percent in 2001.

But Kodak’s dominance is not just a result of aggressive marketing. Part of its success derives from an unusual agreement it made in 1998 with the Chinese government in which Kodak took over and revamped China’s ailing state-run photographic industry in exchange for a lock-out clause preventing foreign competitors manufacturing film in China until the end of 2002. The US$ 1.2 billion gamble seems to have paid off handsomely, and since the agreement was signed, Kodak’s business has boomed, becoming profitable on an operating basis in China last year – three years ahead of schedule.

The deal secured a solid domestic manufacturing presence for Kodak in China, allowing it to bypass high import tariffs and maintain a steady film supply, untouched by the whims of China’s custom agents or anti-smuggling campaigns that have hit competitor’s “grey channel” supplies. Kodak film in China is among the cheapest in the world – crucial for notoriously cost-conscious Chinese consumers – but quality remains high, thanks to cutting-edge technology installed in Kodak’s mainland factories. Consistent quality is at the heart of Kodak’s brand image.

Despite Kodak’s manufacturing advantage, however, Fuji has managed to hold onto a third of the market with sales in fiscal year 2000 of US$ 204 million. As well as competing with Kodak in rushing to open branded outlets, Fuji spent HK$ 65 million in 2001 on advertising, hiring the faces of Asian superstars like Aaron Kwok, Miriam Yeung and Norika Fujiwara to promote the brand to young professionals (US$ 8.3M). It may also be considering moving some of its manufacturing to the mainland and recently opened an investment firm in Beijing to investigate the opportunities once Kodak’s lock-out agreement expires.

 
Domestic manufacturer Lucky does not have the budget to hire international pop stars and television personalities to promote its brand, but what it can depend upon is nationalist support. Last month, Lucky claimed 20 to 25 percent of the color film market (not the eight percent of the CCTV survey). “As a film-roll producer of the Chinese themselves, Lucky is called a national hero by fellow countrymen,” the China Business Times said in April. “In the future, the Chinese people will care more and more about this banner of national industry.”

Lucky is a branding case study in itself; the name and slogans have changed with political events. Established in 1958 under the slogan “Developing China’s own film is as important as building a rocket,” the film was re-branded “Friendship” during China’s alliance with the Soviet Union and again re-branded “Red for Every Generation” as the Cultural Revolution gained pace in 1967. Its latest incarnation, as the “Lucky” brand was adopted in 1985.

The company is again changing with the times. This time following in Fuji and Kodak’s footsteps with a huge expansion of branded shops. Lucky opened 2,600 specialized shops by the end of 2001, up from 1,700 in 2000. It is also pushing growth in rural areas where it is strongest and where most long-term growth will be. But, unless it comes to some sort of agreement with either Kodak or Fuji, it looks unlikely that it will be able to sustain its market share against the determined onslaught of these two global brands.

Kodak took a gamble in 1998 taking on China’s debt laden, outdated photographic film industry. It turned it around and brought a hugely successful global brand to China in the process. The effect has been to improve the quality of film on offer to Chinese consumers while competition from Lucky and Fuji has kept prices rock bottom. As its exclusive agreement with the government comes to a close, can the brand capital Kodak has worked so hard to build keep the cold winds of Fuji’s renewed assaults out of its Chinese fortress?    

[25-Mar-2002]

 
  
  

Edward Young is a freelance journalist based in Beijing, China. He writes on Chinese business and economic issues and regularly contributes to international newspapers and magazines including the Financial Times.

     
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