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History Of Pirce Butcher

Apr 11, 2018

Liang Qiangde who was kindly called as “uncle DE” was thinking about how to convert to other industry when his Galanz make the annual sale by 30 million, net profit by 8 million by producing down jacket in 1991.

Galanz decided to convert to Microwave Oven industry after visiting Japan. Galanz employed 5 senior Microwave Oven engineers from Shanghai wireless factory 18 parts and invested over 4 million US dollars to buy 1990’s advanced Microwave Oven manufacturing equipment and technology from Japan TOSHIBA at the same year, then start to produce Microwave Oven.

Galanz produced 10K pieces of Microwave Oven in 1993, and reached to 250K in 1994,250K in 1995, the market share is 25%, rank top one in domestic market. Sale in 384 million, net profit 3.1 million. It means that Galanz had successfully converted from producing down jacket to Microwave Oven.

Due to the high margin in Microwave Oven industry, many producers are attracted to be in it. To crack down on the competitors and win the market, Galanz started the strategy of down the price crazily, that’s also why Galanz be called price butcher.

The strategy to down the price in large scale several times, made the margin decreased sharply in Microwave Oven industry. And small Microwave Oven factories could not run.

Galanz made the price lower than the cost price of 800K pieces scale, when it’s produce volume is 1.25 million. And made the price lower than the cost price of 2 million, when it’s produce volume is 3 million.

When killed all the competitors, Galanz successfully monopolized the Microwave Oven industry. Galanz was synonymous with Microwave Oven.

But price war like the magical Kungfu of double edged jolt, Galanz could not invest more to develop new products due, brand construction and merger and acquisition due to the low margin. meanwhile, price butcher impresses the customer with low quality products, once lose the price competences, customers will have no loyalty. After the increase slows down, Galanz had to give up price strategy.

LEIJUN used the strategy of internet thinking of higher cost-performance to rocket Xiaomi’s sales to over 100 billion. And the ecological chain that Xiao mi invested also used the same price strategy to shock all the market.(robotic cleaner worth 1699, air purifier worth 899, IH rice cooker worth 599)

Xiaomi’s strategy of radical price butcher not only created many sales legends but shocked the traditional manufacturing industry. They fear hearing that Xiao mi starts to produce your product.

Learn from Galanz’s experience, price butcher’s strategy could win the market at preliminary stage. But the low margin would seriously affect the development and brand

We could find some interesting things from Xiao mi’s prospectus of two listed companies. 

According to prospectus, Hua Mi Technology revenues 1 billion and 500 million, net income 2 million, the net sales rate is just 1.5 percent; the total income of first three quarters is 1 billion 296 million. Increased 37.1 percent, net income is 95 million 3 hundred and seventh thousand. Net profit rate is 7.4 percent.

Hua mi’s prospectus shows that, the sales of Xiao mi’s wearable electronics contributes in 97.1, 92.1, 82.4 percent in first three quarters. While Hua mi’s own brand just 17.6 percent.

We could see some shortness of Xiao mi’s ecological chain from above.

  1. The margin is too thin. Low margin leads to low profit, low brand of loyalty brand.

  2. Sameness product. the key point of Xiao mi’s strategy is break the obstacles at one point, produce better design and lower price product. higher cost-performance could lead to good sales in a brief time but will give the place out to new developed product. this will lose the function of hot selling product could provide stable cash flow.

  3. Limited selective products. Ecological chain of Xiao mi looks more at premium products, which have small markets, such as robotic, IH rice cooker. Xiaomi could utilize the low profit to grab the limited market share, once tap over, they will face hard product situation. While hundreds of ecological companies Xiaomi invested may break into the same industry, which will bring much resource consumption and waste of internal resource of Xiaomi.

  4. Raise consumer’s expectations higher. The gruesome strategy of Xiao mi ecological companies made the price lower by 30% than competitors. Once the ecological companies cannot deliver that discount, part of consumer will leave.

  5. The relationship between Xiao mi and its ecological companies is cooperative, not mother and subsidiary companies. Xiaomi just promised that discount will be available in 2 years but do not guarantee sales volume and so on. Currently, Xiao mi’s sales volume usually is 90 percent or more of ecological companies.

  6. Xiao mi would not invest just one company in one industry. Take vacuum cleaner for instance. currently what we know is Stone Technology, RUIMI, and it’s said that another 2 newly invested companies would also break into R & D of cordless handheld vacuum cleaner, like Dyson style. But companies who could label Xiao mi’s brand probably just have one or two products. The left would probably be the problem of lack of stable of orders. 

  7. We could see from Similar web, the page view of mi.com is around 200 million, while Taobao is 1200 million. Considering the small thousands of Xiao mi’s SKU, ecological companies such as Qing mi and huami acquire huge free page view (compare to prohibitive cost of Taobao’s clean out treasure to train), stop cooperation may prove the mortal blow to those ecological companies.

  8. The strength of Xiao mi’s ecological chain is more design than price. If conventional companies do not know this, decrease price would drag themselves into a challenging situation.  

Edited by Steven Xi, Apr. 11, 2018