Company Ltd, Hong Kong: Ukraine Market Research

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Executive Summary

A research is carried out in this report whether entry into Eastern Europe is a viable proposition or not. In this report, we have targeted Ukraine for our research with detailed background of the country and market analysis. We have gathered information through secondary resources regarding the existing watch and clock industry in this country. Furthermore, based on the acquired information regarding this market we have presented a possible marketing mix and mode of entry which would assist the company in a better way.

The major findings in this report are:

Ukraine’s watch industry is booming for several years.
Ukraine’s watch industry is dominated by Swiss watches and few local companies.
Ukraine’s economy is growing at a good rate and overall conditions are favorable to new businesses.

In conclusion, following recommendations have been put forward:

The company should consider entering Ukrainian market through export.
The company should also enter Ukrainian market for its new fashion label via joint venture or foreign direct investment.
The company should diversify its market by entering into Ukrainian market which is favoring new businesses and specially watch industry.

Terms of reference:

The company: Company Ltd. (Based on assumption)
Current Market: Hong Kong (Asia)
Target Market: Ukraine (Eastern Europe)
Product: Wrist Watches and Clocks

Introduction

The Company Profile

Company Ltd. was established in Hong Kong in 1975 within a small factory premises by Mr. XYZ who later died in 1997. The company has developed a wide range of wrist watches and clocks to serve different market segments. The company offers quality watches in a competitive pricing and in a timely delivery schedule. Until presently the company has focused on the local market and neighboring countries including China, South Korea, Taiwan and Indonesia.

The company has grown from mere sales of US$13,000 in its earliest year to remarkable sales of US$ 5.4 million during the last year of 2007. Most of the revenue generated by the company has been through direct exports or sales to local buying houses exporting to countries overseas. The company is financially strong as the director of the company has diversified its business into other area of electronic gift items.

Objective

The company aims to expand its watch and clock business to regions beyond Asia. For this purpose the company is targeting the Eastern Europe which includes countries such as Lithuania, Bulgaria, Estonia, Ukraine, Romania, Bosnia, Albania, Serbia, Macedonia and Slovak Republic.

Through this research, a potential target market of Republic of Ukraine is examined. A complete country, political, cultural, legal, competition and economical analysis is carried out with possible market entry modes and marketing mix which company may adopt for a successful entry in the Polish market of watches and clocks. Furthermore, a brief financial projection is developed with the help of the company’s finance manager.

Research Methodology

For the purpose of this research, secondary resources for information regarding Republic of Ukraine and its market are accessed. The information provided by these secondary resources is subject to certain limitations due to time limitations and inherent inaccuracy which may be present.

The research will be carried out with a brief detail of the company’s current product mix, its current market experience and analysis of its production and financial capability to enter into a different market.

A detailed analysis of Republic of Ukraine and market conditions prevailing in the country will be examined deriving conclusions upon the options available for the company to make entry into this market and the marketing opportunities which the company faces.

The Company’s Product Mix

The company started its business from simple analog wrist watches and later on developed products with new technologies. The company is currently engaged to cater two sub-markets within the industry of watch and clock manufacturing. These sub-markets are as follows:

Wrist Watches

The company is manufacturing wrist watches for both gents and women. These wrist watches are further classified into kids, teenagers, adults. The company manufactures different models for each classification developing newer designs every year and retaining only those designs which prove to be successful.

A research and development department is in a continuous process of developing new designs and technology. More successful models are offering technologies such as radio, navigation, blood pressure and sugar check up and even mp3. The company has recently launched a fashion label for its new range of wrist watches which has received tremendous appreciation from the market participants and is expected to go in production early next month. This would take the company’s products to the next level i.e. prestigious watches.

Clocks

The company manufactures different types of clocks and has a wide variety of models. These types include wall hung, table, floor standing and pocket clocks. The models of clocks are less changing and are well accepted by the buyers. A research and development department is in a continuous process of developing and improvement of designs and technology. The most popular models are table clocks and floor standing cathedral style clocks.

SWOT Analysis

Strengths and Weaknesses

The company is financially strong.
The company has been in watch & clock manufacturing and distribution business for 33 years and has shown steady growth rate.
The company has its own state of the art production facility.
The company has its own fully integrated research and development department
The company is serving to various markets in the region.
The company has launched its fashion label which has received tremendous response during fashion week and watch & clock exhibition in Hong Kong.
The market in Hong Kong and its neighboring countries are becoming saturated.
The company has yet to enter other markets than Far Eastern Asia.
The company’s production costs are increasing as the production facility is based in comparatively expensive region of Hong Kong.

Opportunities and Threats

The company’s new sport and specific function watches are getting increasingly popular and the company has an advantage over its competitors.
The company’s new fashion label is yet to go into production however the company has the opportunity to enter into luxurious watches.
The traditional floor standing clocks manufactured by the company are popular in the western countries thus possible markets available.
The company can shift its production facility to a cheaper region such as China.
The company has developed lines in electronic gifts which also gives opportunity for the company to enter western countries.
The market of Hong Kong is becoming saturated.
Tremendous pressure from manufacturers of Chinese region to produce low cost watches.
There are difficulties in bringing a new label with so much competition not even by local companies but also international brands.

Market Strategies

Market Selected

The company’s current markets have been Hong Kong and its neighboring countries. The culture and values are shared to some extent amongst these markets however the company has not been able to enter the European market. The European market is a big market with watch and clock manufacturing industry highly competitive and concentrating in the Central and Western Europe especially in countries like Germany, Austria, UK and most importantly Switzerland.

With the launch of new label and competitive technology the company believes that it is the right time to enter into the European market. With the intention of making its presence in the European market the company seeks thorough research of the possible potential markets in the Eastern Europe. For this purpose we have selected Republic of Ukraine as the subject country of our research.

PESTLE Analysis

Politics

The country of Ukraine is situated in the east side of Europe bordering the Black Sea, between Ukraine, Romania, and Moldova in the west and Russia in the east. The country is the second largest in the Europe. The official language is Ukrainian however Russian also is widely spoken and understood. The history of Ukraine is enriched with the economic activity this region has been able to generate over centuries due to its coastal line.

*Map of Eastern Europe and Location of Ukraine.*

Ukraine was previously part of the Soviet Union during which this region was creating 1/4^th of the agricultural output and was considered as an important region for enforcing regimes policies over the rest of the Europe. However, in 1991 the parliament of previously Ukrainian National Republic reinstated the resolution for independence from the Soviet. On 24 August 1991, the country declared its independence.

The country is a republic under a mixed semi-parliamentary led by prime minister and semi-presidential moving away from the Communist regime of the Soviet Union. The political situation is unstable evident from the recent opposition claims of rigged elections and subsequently change of presidents.

The local self-government is allowed however the appointment of the heads of regional and district administrations is done by the president. The country has established separate legislative, executive and judicial branches. However, the corruption-stricken systems are yet to be fully functioning with their desired objectives.

Social

The population of Ukraine is almost 46 million and is well proportioned with 47% constituting of men and 53% women (See Appendix II). The workforce that is considered from the age 16 years to 60 years comprises the most of the population making more than 60% of the population. However, the worrying point is that the country is facing with a negative growth in the population and the government is encouraging families to raise more children.

Name of Country	Ukraine
Capital	Kyiv (Kiev)
Area	603,700 sq km
Population	45,994,287
Men Population	21,210,958(47%)
Women Population	24,783,329(53%)
Age structure	0-14 years:13.9% (male 3,277,905/female 3,106,012)
	15-64 years:70% (male 15,443,818/female 16,767,931)
	65 years and over:16.1% (male 2,489,235/female 4,909,386) (2008 est.)
Sex Ratio	0.86 male(s)/female (2008 est.)
Population Growth	-0.651% (2008 est.)
Language	Ukrainian
Literacy	99.4%

Environment

The culture and local customs of Ukraine are very much influenced by Christianity. Various events around the year are being celebrated in view of Christian traditions. Also the role of gender is quite traditional with men being the major work force. It is apparent from architectural designs, crafts, music and art that the cross-border influence from neighboring countries and communism is obvious over the culture of the country.

Ukrainian constitutions permits accessibility to free education to all citizens and a certain level of education is compulsory. The emphasis on education system for all and with standards meeting those of developed countries has heightened the literacy amongst the nation indicating rates of 99.4%. The country operates a majority of state schools, colleges and universities where private institutions are also making their place in the betterment of the nation.

Economics

Ukraine was considered as the republic with favorable economic conditions in comparison to other parts of the Soviet Union. However, after the declaration of independence the country suffered tremendous downfall in its economic growth. The country suffering from recession lost more than half of its GDP in its early years from 1991-1999 and inflation was recorded in 5 digit figures.

The overall economy was falling apart almost 40% reduction in industrial output since 1991 which led to increase in crime and corruption and nationwide protests and strikes. However, near the end of the 1990s the economy began to stabilize and different economic sectors started to show positive growth. The government started to liberalize the economy by bringing in significant structural reforms. However, the dependence of the country for its energy needs on Russia still makes Ukrainian economy vulnerable to external shocks.

This was apparent from a recent row between the two countries over the pricing issue which led to a temporary cut off of natural gas. This has led to rethinking of the government over the fulfillment of the energy requirements and steps are taking place to draw energy from another source or develop infrastructure to utilize wide deposits of natural resources embedded in the grounds.

Since 2000 the country has enjoyed an excellent growth rate averaging above 7% (See Appendix III). The country has a broad agricultural base and sufficiently produces quantities of meat, milk, grain and vegetables. The country has a diversified industry with steel industry being the major one having large customers in the mining industry making it a major export in addition to food products.

GDP (purchasing power parity)	$320.1 billion (2007 est.)
GDP – real growth rate:	7.3% (2007 est.)
GDP – per capita (PPP):	$6,900 (2007 est.)
Unemployment rate:	7% (2007 est.)
Population below poverty line:	37.7% (2003)
Investment (gross fixed):	26.3% of GDP (2007 est.)
Imports	$60.41 billion (2007 est.)
Exports	$49.84 billion (2007 est.)
Inflation	12% (2007 est.)
Foreign Direct Investment (Inward)	$31.08 billion (2007 est.)
Foreign Direct Investment (Outward)	$895 million (2007 est.)
Currency	Hryvnia (UAH)
Exchange rates	1US$: 4.74 PLN (4 Sep 2008)
	1 PLN : 1.64 HKD (4 Sep 2008)

Sources: CIA Fact Book 2008, Yahoo! Finance.

Due to the location of Ukraine, the country enjoyed the business flowing from Asia and rest of the Europe to Central Asian countries which declared independence from the Soviet Union. However, the country still needs to make improvements in the fight against corruption, developing of financial markets and reforming legislative framework.

The unemployment in the country still surges to high levels and population living under the poverty line is relatively high almost 38%. The economy still faces high inflation rate of 12% mainly due to high energy prices and current account deficit. The economy of Ukraine is expected to grow on a steady pace in the years to come with foreign investment coming in the country however there is uncertainty over the government’s plans to reinstate tax, trade and customs privileges which were removed completely in 2005 and to maintain restrictive grain export quotas.

Legal

In order to safeguard and promote industry cooperation the Ukrainian Watch Association was established in the year 2006 (Serebryanskaya, 2007) with the support of market participants which has helped the industry in many ways. It allowed the participants to face up the difficulties in a unified manner including those pertaining to influencing state institutions to support the industry.

It also provided means of training consultants and craftsmen enabling them to design and produce watches which are of excellent quality and comparable to their counter brands available internationally. It also co-organizes the annual specialized watch exhibition ‘Kiev Watch Salon’ which itself is getting attention from worldwide participants and has now become a real business forum where distributors can meet their retailers and customers, conduct seminar and training courses.

Ukraine – Market Analysis

When Ukraine declared its independence it had no watch industry in the country. However, in 2001 a factory was established with first Ukrainian own watch brand ‘Kleynod’ which received great support from the buyers. Since then the Ukrainian watch market has shown great potential and is developing at a rapid pace.

There is a strong demand for watches in different price segments and has led to greater interest for the producers to invest in this industry. The industry has been able to generate good revenues for the producers, distributors and retailers of watches. The technologies used by the local industry are comparable to international standards and have been upgraded according to new requirements.

However, the participants are under immense pressure to compete with the international brands offering a range of different brands of all styles and value. The import of international brands watches and clocks have increased tremendously effecting the growth of the local industry. More prominently the imports from Swiss watch industry has shown high growths.

In 2005, Ukraine stood at 30^th position for the importation of Swiss watches and by 2006 it rose up to 24^th positions showing a growth of 50% compared to last year. This growth further increased in the year 2007 reaching 29 million Swiss Francs in the first 5 months. The appetite for luxurious watch brands has pushed businessmen to pay more than US$1,000 on an average for purchasing such watches.

However, at the same lower range priced watch and clock brands such as Casio and Romanson have seen a greater delight by the majority of customers who couldn’t afford high prices watches. The sales of such brands have increased several folds and will continue to do so in the coming years. All of these factors have put newer challenges for the local industry which has to compete in all respects with the foreign brand.

The trend in the market is becoming increasingly popular for new designs. The electronic items such as mobile phones and PDAs have affected the sales of watches but as the watch and clock manufacturers are integrating the new technologies in their designs the trends are changing and watches with additional features are becoming more popular. At the same time luxury watches and clocks have their own prestige and style which influence buyers’ willingness to spend more money.

The market for watches and clocks is well supported by the growth in the overall economy. Ukrainian economy has shown healthy growth rates since 2000 and has sufficient investment by locals and foreign investors. Thus, keeping healthy projections regarding the country and its economy it is expected to do well in the near future.

Modes of Entry Into Ukrainian Market

The company based in Hong Kong aims to enter the Eastern Europe market. There are several mechanisms though which the company can make entry into the foreign market which would be discussed in the following with their relative advantages and disadvantages. However, the most important objective in deciding which mode of entry to be used is that the launch in the foreign market should be revenue generating and long term.

Exporting

The company can enter into Ukraine market by exporting from Hong Kong. This will allow the company to use its current production facility and focus on the marketing and direct sale of its watches and clocks in Ukrainian market. This method of entering into a foreign market is a well tried and established method of reaching the desired objectives. There is little adaptation required for watches and clocks therefore exporting can speed up entry and minimizes risks.

By exporting to the target country there is no need for the company to make substantial investment in foreign production facilities. The export arrangement will involve in entering into import and distribution agreement with a local company in Ukraine which will place order for the company watches and clocks and sell through its own outlet or area sales agents.

However, the company exports will be subjected to the custom tariff imposed by the government of Ukraine on imports under the classification covering watches and clocks. This will also incur transport costs which may vary as per available vessel. Furthermore, this will limit the extent to which the company’s products can gain access to neighboring countries of Ukraine and any support which may be available to local producers in that country.

Licensing

The company can enter into Ukraine market by entering into a licensing agreement with a local producer say for example Kleynod or others which will permit this local company in the Ukraine to use the property of the company. The company can act as a licensor and local producer a licensee. The process can allow market entry at greater pace and risks are reduced. The property refers to intangible assets such as trademarks, patents, and production techniques.

The licensee will pay a fee in exchange for the rights to use the intangible property and possibly for technical assistance. This could also allow the company to perform entry on a trial basis where the actual size and conditions of the market are uncertain.

The investment by the company will be minimal as the production facility of the local producer will be utilized and only the technology and designs will be shifted for a payment in return. The possible return on investment can be very large from licensing if the adaptation of the property proves successful.

However, there is a possibility that the returns from manufacturing and marketing the product by the company itself may be lost. Furthermore, limited time agreement or any conflict between the involved companies causing the agreement to fail may lead to loss of intangible property which may be very important for the company’s future.

Joint Venture

The company can enter into a joint venture with a local investor in Ukraine. Through joint venture the company can achieve the objectives of market entry, risk-reward sharing, and technology sharing, joint product development and at the same time conforming to government regulations.

However, there are certain success factors which the company should understand before deciding upon joint venture which may include strategic goals between partners, size of partners and ability of partners to learn from each other while protecting their proprietary skills. Such alliance may also require consideration regarding ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources and government policies towards such alliances.

The joint venture can also run into problems if the partners enter into conflict over decisions regarding new investments, mistrust over proprietary knowledge, performance uncertainty, cultural clashes and lack of parent company’s support. Therefore, joint ventures with a local company in Ukraine would require careful understanding of the terms of such alliance and consequences of any failures.

Foreign Direct Investment

The company can also carry foreign direct investment in the target market of Ukraine. This would require investment in the ownership of production facilities in this market. This would involve transfer of resources including capital, technology and personnel. Foreign direct investment can be made through acquisition of the existing production unit or setting up a new facility.

This is a time consuming requiring heavy start up investment and is a riskier proposition with uncertainty regarding the market and political conditions in the target country which till now have been to some extent unstable. Furthermore, with Russia becoming dominant player in the region imposes new challenges for countries which declared independence from the Soviet regime in 1990s. This would require more commitment and management of local resources may be difficult to achieve.

The company could however practice greater control in the operations and adaptability of the product to the trends in the target market become more achievable. The sales can be far promising and a wider market including neighboring countries such as Russia, Poland and Lithuania which are also recording good growth and higher income amongst their population.

Implementation

From the above, it is therefore suggested that the company may enter the target market of Ukraine through export. The ‘Kiev Watch and Clock Salon’ provides a good opportunity for the company to participate and discuss with the interested businesses which may be willing to place order for the company’s products. The company can then produce the ordered product in its current production facilities and focus more over marketing and distributing in the best possible manner in Ukrainian market.

However, for the fashion label which will go into production next month the company could enter into a joint venture or through foreign direct investment to open a watch boutique in Kiev (the capital of Ukraine). By doing so the company would be able to differentiate the two product categories. Through export of traditional and technology supported watches and clocks could be made through an importer in Ukraine whereas to give more focus over the fashion label and comparatively expensive range the company could apply a different approach.

Marketing Mix

As prescribed in previous section, the company should enter into Ukraine’s watch and clock market through exports it should devise its marketing mix accordingly.

Product

The company would offer wrist watches and clocks to Ukrainian market.
The models of wrist watches would include simple analog and digital offering new technologies and design.
Both modern and classical designs would be offered to the market.
Fashion labeled product would be offered separately from the existing product lines.
New designs would be offered in light of the initial market survey or response from the local business contact.
As there are no legal conditions regarding the design therefore no alteration to the existing designs would be made.
Watches and clocks would be offered in a new distinctive packing.
Fashion Label would be offered in a well designed packing which would be uniform for all markets including this target market.
Existing product lines of watches and clocks would be offered with product international warranty for 1 year.
Fashion labeled product would be offered with 2 years warranty with full servicing for 1 year.
The local business is expected to have sufficient knowledge regarding repairing and servicing of watches and clocks. However, maintenance manual booklets would be supplied with the product and troubleshooting manuals would be supplied to the local business operator.

Price

Pricing strategy would be completely formulated based on the production cost plus profit margin plus transport cost plus import tariff plus cost of any government restrictions.
There is a big proportion of Ukrainian market which can afford watches between US$10-US$150 therefore more focus would be made on those models which fall between this price-ranges.
Fashion label products are to be priced uniformly across different market segments with adjustments to import duties and taxes.
Pricing would be made in view of the completion existing in the market.
In the initial period, lower margins would be considered for the existing product line in view of making an entry into Ukrainian market.

Place

The target market is Ukraine and possible entries into the neighboring countries.
The targets of the existing line of wrist watches are kids, adults and women.
The targets of the existing line of clocks are household buyers which may include both male and female customers.
The local business should be based in Kiev and it should be financially strong company.
The local business should be existing distribution lines across the country. Additional preference would be given to that business which has experience of doing trade with neighboring countries and have solid contacts in those regions.
The local business should be reliable and which should be trusted by the customers for many years.
For fashion label products a watch and clock boutique to be opened in Kiev.
The ideal location for such boutique would be Kiev High Street which has various branded stores and good visitors’ turnover.

Promotion

The company would enter into Ukraine market via exports of its current product lines, therefore, the main focus would be marketing of its products.
The company would approach either directly with marketing agencies or would direct the local business to perform marketing activities.
The marketing activities would involve placement in trade listings, newspapers and other watch & clock magazines.
The company would also participate in Kiev Watch & Clock Salon.
The company would display its products and take part in different seminars to promote its product.
The company would seek to arrange a fashion show to promote its fashion label.
The company would seek to launch a promo for its boutique with invitations to businessmen and other possible clients in the market.
The company would offer discount on different Christianity events including Easter Eggs Day, Christmas and New Year’s Day.
The company would participate in organizing young people talent search for designing of watches and clocks which the company could later adopt as its product.

People

The prime target of the market population for fashion label is 28-60 years.
The prime targets of the market population for current product are kids and adults.
There are more men customers than women. Therefore, they more focus on the technical aspects of watches
Ukrainian population is much more experienced in the watch industry therefore careful and targeted approach would be beneficial to influence customers’ choice.
The customers almost 60-70% are more inclined towards classical designs while remaining prefer sport and unusual models with specific functions.
The market segment willing to pay between US$1,000-US$3,000 for a luxurious watch is the prime target for company’s fashion label.

Financial Considerations

The company should consider the following financial considerations before deciding upon the entry into targeted market of Ukraine.

Participation fees in Kiev Watch and Clock Salon 2008 and Sampling Costs for display at the exhibition and distribution.
Pricing Strategy incorporating the transport costs, export benefits and cost of import duty.
Terms of payment and other modalities to be discussed and offered to the local business in the target market.
The Ukrainian market is expected to grow in view of its watch & clock industry. It has shown almost 50% increase over that year and is expected to grow with greater appetite from visitor and neighboring countries.
The company should expect to achieve good profitability from its current product line. However, fashion label would require more time from achieving return on investment.
The company should have a contingency plan regarding failure of any arrangements which the company may consider.
The company should set aside a marketing budget of US$75,000/- for Ukraine market.
The company should invest US$200,000/- for its fashion label either through joint venture or foreign direct investment.

Conclusion

It is therefore concluded that Ukraine presents itself as the next watch & clock industrial region of the Europe after the Swiss watch industry. However, the market is competitive where various international brands have already made their presence and are making excellent business. This market represents two divisions of population that either low income or big spender businessmen. Therefore, there is a great potential for the company to launch both its current product line and its upcoming fashion label in Ukraine.

It is also suggested that export presents the most viable approach to the market however a different approach of joint venture or foreign direct investment could be made for the company’s luxury product line. The company has the experience and is financially strong to enter into a market which may be largely different on cultural and market conditions but a market worth taking risk.

Thus, the objective of this report is served by detailing a complete analysis of the target market i.e. Ukraine along with the company’s analysis and brief financial considerations.

References

Bennett, R. Blythe J. & Alder H. (2002). International Marketing: Strategy Planning, Market Entry & Implementation. Kogan Page Publishers.

Central Investigation Bureau. (2008). Ukraine. CIA Fact Book. Web.

Fletcher, R & Brown, L. (2008). International Marketing: An Asia-Pacific Perspective (4th edn.). Frenchs Forest, NSW, Australia: Pearson Education Australia.

Serebryanskaya, E. (11 Oct 2007). Market Focus Ukraine. Web.

Yahoo! Finance. (2008). Currency Converter. Web.

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