- What were the reasons for a decline in profitability of Bolina?
- Did increase in patents help the firm?
- How successful was the strategy to launch brand ‘Bolina’?
Bolina Holding Company Limited designs and manufactures toilet seats, wash basins, urinals, bidets, squat pans, soap containers, faucets and bathroom fixtures. In 2002, it began as an Original Equipment Manufacturer (OEM) for the international customers and mainly focused on the global market. However, by 2008, the firm developed its own brand ‘Bolina’ as a way to improve profits and enhance its long-term viability.
The company’s total revenue (2009) was CNY 240.4 million, this increased to CNY 913.3 million (2013), but then declined and reached CNY 716 million (2015). The strategy to cut down on external sales and focus on the brand was expected to support the revenue growth, while at the same time strengthen profitability. Although the measures did not go in the desired direction. The total revenue for the company (2016) further slumped to CNY 360 million, this was a weakening of 49.7% as compared to 2015. Bolina’s profitability on gross profit as well as EBITDA/unit sold saw a decline after 2013. In this blog, Televisory analysed the reasons for a fall in the profitability of Bolina, while also provided views on its near-term business strategy.
Moreover, as stated above Bolina began its business as an Original Equipment Manufacturer (OEM) in 2002 and products were manufactured in whole or in part in accordance with customer’s specifications and were marked under customer's brand name. Bolina gradually ventured into Original Design Manufacturing (ODM) segment, it started both designing and manufacturing products for customers to be sold under the customer’s brand name. In 2008, the company developed its own brand ‘Bolina’ as mentioned above. The firm sells Bolina brand products in China, whereas externally its products are sold to international customers under third-party brands on OEM or ODM basis. Bolina’s largest ODM and OEM customers are American Standard, Gerber, Kelim, Crane and Western Pottery. The products sold under ODM and OEM are mainly exported to the United States, Canada, South Korea, Argentina and numerous European nations.
While the company continue to serve the OEM/ODM customers, its focus shifted towards designing and development of its own brand products. In 2011, four years after the brand launch, Bolina had a 4% market share of China's ceramic sanitary ware industry, making it the second largest mid-to-high-end ceramic sanitary ware company in China. In 2011, it had 14 patents, this increased to 22 in 2012, while it currently holds over 40 patents, this is a reflection of its strong R&D capabilities. However, focus on product development increased the R&D expenses by 193% in 2012 as compared to 2011, while these continued to rise until 2014. (as shown in the below chart).
The company increased its production capacity to implement its new strategy to launch and strengthen its brand. Its capital expenditures too stepped up between 2011-13 owing to increase in capacity and filing for patents. The firm’s production capacity, which stood at 0.9 million units (2002) increased to 1.9 million units (2006) with the start of its second sanitary ware production line. By 2008, with the development of its own brand 'Bolina’, the production capacity increased to 3.1 million units. The total production capacity reached 3.9 million units (2011) and 4.9 million units (2012) as seen in the below chart.
The company continually operated at higher than 90% utilization since 2011 except in 2016 (low utilization in 2016 was due to increase in production capacity by 1 million units). Furthermore, the firm faced constraints regarding the selection of right mix for production bifurcation of OEM, ODM and own brand as its business focus changed. The company took the risk of strengthening its brand and cutting down the OEM sales volume in 2014 as shown below.
The firm had an established customer base for several years for OEM customers in other regions. The products were of superior quality and therefore, provided a higher bargaining power over its customers, with depletion of focus towards OEM. The company continuously increased the price of its products sold under OEM. The average selling price was CNY 75 (2009) and increased to CNY 124.7 (2016). The company also strengthened its core competency in product design. In addition, owing to its patents, it also had the leverage to sell its products to its ODM customers at the price it demanded. The firm took advantage of this and went on increasing the selling price of its products sold under ODM. The average selling price for products sold under ODM was CNY 128 (2009) and this increased to CNY 146 (2016). It started selling branded products at a much higher average selling price (CNY 325) than that of its ODM and OEM products. However, the company was selling its branded products in a highly competitive and fragmented market of China. The company succumbed to the competitive pressure and reduced the selling price of its branded products. These products followed an opposite trend and their value decreased continuously and declined to CNY 132 (2016).
The firm increased its selling and marketing expenses in order to strengthen its brand and distribution network of products. Presently, it has a celebrity as its brand ambassadors and its products are advertised on TV. It also set up different distributors and point of sales throughout China, which aimed at capturing more market share in different regions. The company had 96 distributors and 485 point of sales in 2016. All its distributors were required to sell Bolina brand of products under an agreement with the firm. The selling and distribution expenses increased by 220.7% in 2016 as compared to 2015. The increase was mainly attributable to the subsidies and support provided to its distributors to expand the reach of products in new markets.
The average revenue per unit sold went on increasing up to 2013 for the company as a whole. However, thereafter, this sided as the firm took a hit in realizations of its branded products. The company devised a strategy to put its resources in R&D and patent filing. This strategy was successful as it could leverage it to demand a higher price in the market for its products under OEM/ODM segment. The firm increased its selling and marketing expenses by a large margin to push its branded products in the market, but it was unable to earn a commensurate revenue. The consumers in China are not very much quality and brand conscious when it comes to bathroom fixtures and sanitary ware.
The company took few orders for OEM, focussed on ODM orders and sold its branded products to make the best use of available capacity, especially on its branded sales. The firm had to continuously reduce prices owing to high competition in China. Notably, the price of products sold under ODM and OEM were maintained or increased gradually. In addition, under OEM and ODM, OEM faces a moderate constraint on pricing as these products are subject to a negotiated contract with customers and can be price sensitive though ODM continues to be its major source of revenue. In 2016, the average selling price of products sold under ODM was higher than that of products sold under its brand and OEM. Cumulatively, EBITDA per unit sold kept on declining during the past few years before ultimately becoming negative in 2016. This was due to the combined effect of a decrease in average selling price of its own brand products, increase in R&D expenses and increase in selling and marketing expenses.
Thus, considering the existence of several small and medium sized competitors in China and from the above analysis, Televisory can conclude that the company should not lose its existing ODM customers to fulfil its business goal of strengthening the reach of its branded products. The firm is now planning to add another production line and increase its capacity further. This will help the entity to fetch revenue from its existing big international customers under OEM and ODM, while also realizing its vision of selling maximum products under its brand. The ODM and OEM will always act as a hedge against the company’s inability to sell its own branded products for profit. The firm has taken aggressive steps to strengthen its brand. These steps have not yielded positive results in the past few years. However, in the long run, these steps may prove to be successful. Secondly, the strategy that the company can adopt for further expansion should be the acquisition of competitors rather than adding new production facilities.