Global Strategy 3rd Edition by Mike Peng

Exercise 5

Emerging Markets: Pearl River Goes Abroad
To many readers of this book, Pearl River is likely to be the world's largest piano maker you have never heard of. It is also the fastest-growing piano maker in North America, with the largest dealer network in Canada and the United States (over 300 dealers). Its website proudly announces that Pearl River is "the world's best selling piano." Although some of you may say, "Sorry, I don't play piano, so I don't know anything about leading piano brands," you most likely have heard about Yamaha and Steinway. Therefore, your excuse for not knowing Pearl River would collapse.
The problem is both yours and Pearl River's. Given the relatively low prestige associated with made-in-China goods, you probably would not associate a fine musical instrument such as a piano with a Chinese firm. Pearl River Piano Group (PRPG) is China's largest piano maker and has recently dethroned Japan's Yamaha to become the world champion by volume. Despite PRPG's outstanding capabilities, it is difficult for one firm to change the negative country-of-origin image associated with made-in-China goods.
PRPG was founded in 1956 in Guangzhou, China, where the Pearl River flows by. Pearl River (the company) in fact exported its very first piano to Hong Kong, yet its center of gravity has remained in China. Pianos have become more affordable with rising incomes. The one-child policy has made families willing to invest in their only child's education. As a result, the Chinese now buy half of the pianos produced in the world.
If you think life will be easy for the leading firm in the largest market in the world, you are wrong. In fact, life is increasingly hard for PRPG. Rising demand has attracted numerous new entrants, many of which compete at the low end in China. These over 140 competitors have pushed PRPG's domestic market share from 70% at its peak a decade ago to about 25% now-although it is still the market leader.
Savage domestic competition has pushed PRPG to increasingly look for overseas opportunities. It now exports to over 80 countries. In North America, PRPG started in the late 1980s by relying on US-based importers. Making its first-ever FDI, it set up a US-based sales subsidiary, PRPG America, Ltd., in Ontario, California, in 1999. Acknowledging the importance of the US market and the limited international caliber of his own managerial rank, PRPG's CEO, Tong Zhi Cheng, attracted Al Rich, an American with long experience in the piano industry, to head the subsidiary. In two years, the greenfield subsidiary succeeded in getting Pearl River pianos into about one-third of the specialized US retail dealers. In ten years, the Pearl River brand became the undisputed leader in the low end of the upright piano market in North America. Efforts to penetrate the high-end market, however, were still frustrated.
Despite the enviable progress made by PRPG itself in general and by its US subsidiary in particular, the Pearl River brand suffers from all the usual trappings associated with Chinese brands. "We are very cognizant that our pricing provides a strong incentive to buy," Rich noted in a media interview, "but $6,000 is still a lot of money." In an audacious move to overcome buyers' reservations about purchasing a high-end Chinese product, PRPG made its second major FDI move in 2000, by acquiring Ritmuller of Germany.
Ritmuller was founded in 1795 by Wilhelm Ritmuller, during the lifetimes of composers Beethoven and Haydn. It was one of the first piano makers in Germany and one of the most prominent in the world. Unfortunately, during the post-WWII era, Ritmuller's style of small-scale, handicraft-based piano making had a hard time surviving the disruptive, mass-production technologies unleashed by Yamaha and more recently by Pearl River. Prior to being acquired by Pearl River, Ritmuller had ended up being inactive. Today, Ritmuller has entered a new era in its proud history and has operated a factory in Germany with full capacity. The entire product line has been re-engineered to reflect a new commitment to a classic heritage and standards of excellence. PRPG has commissioned international master piano designers to marry German precision craftsmanship with the latest piano making technology.
Sources: Based on (1) Beijing Review, 2009, The return of the king, May 21, www.bjreview.com; (2) Funding Universe, 2009, Guangzhou Pearl River Piano Group Ltd., www.fundinguniverse.com; (3) Y. Lu, 2009, Pearl River Piano Group's international strategy, in M. W. Peng, Global Strategy, 2nd ed. (pp. 437-440), Cincinnati: South-Western Cengage Learning; (4) Pearl River Piano Group, 2012, www.pearlriver piano.com; (5) Pearl River USA, 2012, www.pearlriverusa.com.
Drawing on the industry-based, resource-based, and institution-based views, explain how Pearl River, from its humble roots, became China's and the world's largest piano producer.