How would you measure success in a market that just a handful of years ago did not exist? No, I’m not talking about the latest electronic gizmo or the latest social network. The market I am referring to is classical Architectural Coatings in China. Several China-based coatings producers claim enormous success in that market. Is their claim genuine? Is their success long term sustainable? Are they leaders or followers in terms of the real drivers for this market? The real answer to these questions may rest with how they might define success.
No one can deny that China has been the clear winner in the economic development race. They are now number two in the world and are projected to overtake the U.S. in the next few years. China has experienced over two decades of high economic growth, which has been fueled by the consecutive increases of industrial output, consumer consumption and capital investment.
China’s GDP has been growing at 9.8 percent per annum (NOTE: In an effort to control inflation the Central Government has indicated that growth in the immediate future should be throttled back to about 7.5 percent). National industry output has been advancing at 15 percent annually and will continue to sustain a strong growth for the remainder of this decade.
As a result, the fast-growing middle class is creating an enormous consumer society. As the fastest-growing economy in the world, China has attracted the attention of investors and corporations around the world for the last two decades. The result of this phenomenal growth is that today China is regarded as the world’s largest producer and consumer of coatings with a total coatings production exceeding 9.5 million metric tons.
With the evolution of a middle class, over the past decade 400 million Chinese families have experienced the historic drive to pursue the universal dream of home ownership. This drive towards home ownership has given rise to an unprecedented expansion in home construction, which in turn has resulted in a significant growth in architectural coatings.
Although there is no exact measurement of the size of this market it is estimated that in 2010 the architectural market in China was about 3.5 million metric tons. It is further expected that it will grow at a rate in excess of eight to 10 percent over the next five years. However, there is a caveat with this projection, i.e., the home construction expansion will continue at its present rate.
Since 2004, the largest architectural segment has been interior water-based coatings. In 2010 that market was estimated to be one million metric tons. The overall improvement of per capita income for the average Chinese individual has allowed more families to become homeowners. Until recent times, the government and banks were highly supportive of individual home ownership. Due to the global economic downturn Chinese banks have backed off in their lending, which has slowed the housing development compared to just a few years ago.
What DIY market?
On the surface, the architectural coatings statistics sound like a good thing for coating producers. Unfortunately, many segments of the traditional coatings market in China are not well developed. The Chinese architectural market is highly competitive and extremely diffuse. It is estimated that there may be as many as 8,000 paint producers inside China at least half of which who produce an architectural coating.
Unlike industrial coatings such as automotive coatings or inks, there is an absence of rigorously enforced quality standards for architectural coatings in China. As a result, the market is beset with a wide range of product composition, quality and performance. In addition, there is essentially no DIY coatings market in China. The market is completely controlled and managed by contract painters whose objectives and positions are not in sync with either the paint producer or the homeowner.
If we review strong, well-defined and well-managed architectural coatings markets around the globe it is noted that growth and stability cannot exist without an established DIY market whereby producers and users are in sync. In other words the primary drivers in most successful architectural markets tend to be homeowners, not contract painters.
Although there are well-known international coatings companies established inside China the route to market is essentially through contract painters, not through homeowners. This absence of homeowner participation has given rise to confusion about what is really needed by the Chinese architectural market.
Homeowners vs. contractors
Historically, the average Chinese citizen has not invested a lot of money in either improving the basic appearance of their home nor in the use of coatings to protect its various substrates. That position has changed somewhat over the past decade and was significantly reinforced by the Beijing Olympics. In an effort to impress the visitors to the Olympics and of course, the rest of the TV viewing world, the Chinese Government pushed a massive coatings project of unprecedented size and scope.
Offices, manufacturing plants and homes were all painted in a variety of dazzling colors designed to impress the viewer. Even today various cities in China not only dictate that certain buildings be painted but what color is to be used. In the countryside, many small towns have instituted regulations regarding the painting of homes and offices. Due to the historical cultural influence in China, this entire painting requirement falls in the hands of “Contract Painters” and along with this fact comes a host of problems.
The average Chinese homeowner contracts with a coatings company to do their painting. The company would visit with the homeowner, submit an estimate of the amount of paint that is to be used and in some instances they would work with the homeowner in choosing colors. The concept of flat versus eggshell, or eggshell versus gloss may come up but the question of what type of coating to use—interior or exterior, water-based or solvent-based—is generally not discussed nor what resin type such as vinyl, acrylic, polyurethane, alkyd, etc.
What generally happens is that the contractor will estimate far more paint than is required to do the job. Even so, the contractor will often add water or solvent, depending on the system used, to the paint in an effort to extend coverage and minimize the amount of paint that has to be used. The contractor will then take the overage paint and use it in other jobs or will sell it to smaller, less organized contractors.
By adding additional water or solvent to the coating the ultimate performance of the coating is compromised. Unfortunately, the Chinese architectural market is primarily based on esthetics and price, not performance. In some instances the coatings that are eventually applied to homeowner dwellings are so poor that the locals have coined the term “wall cancer” signifying that the coatings are terminally sick and will eventually die.
All of this less than ethical behavior by the contract painter could be avoided if the average homeowner was more involved in the process and more educated about architectural coatings. Several of the larger, international coatings producers have attempted to solve this problem by offering their paints through in-house paint contractors. Unfortunately, the outcome achieved has not been as hoped.
Mature markets by comparison
In the U.S. and Europe the architectural coatings market has undergone significant changes over the years. The U.S., like China, used contractors to both produce and apply coatings for many years. With the advent of water-based coatings there was a conscious effort on the part of the paint producers to bring the individual homeowner into the process.
Admittedly, most of this desire to get the homeowner involved was based on a belief that the coatings producer could extract more profit from the homeowner than working through a contractor. That assumption proved to be correct. There is still a contractor painting market in the U.S. but it is small compared to the total DIY market.
China’s architectural market appears to be driven by a combination of new home construction and government policies regarding the need to paint a given structure. Unfortunately, neither of these two drivers are long-term sustainable. As we have seen in the U.S., economic conditions have reduced new home construction by a considerable amount. What has saved the U.S. architectural coatings market is the fact that there exists a strong DIY market and that over the years homeowners have been educated as to the need to protect and improve the appearance of their single largest investment.
If a homeowner cannot acquire a new home they often invest in the renovation of their existing home. In addition, through several years of intense education and development of the DIY market the U.S, homeowners today are provided with a wide variety of highly crafted products that make it easy for them to carry out the actual painting activity themselves and removes the added cost of a contractor.
In addition, through working closely with these homeowners over the years, the coatings manufacturers have been able to develop formulations that meet the real demand of the ultimate user such as issues involving odor, ease of clean up, resistance to various products, touch up ability, non-flammability and no lead levels. The same situation has happened in Europe.
However, in China, the development of the architectural coatings market has not progressed along the same line as in the U.S. and Europe. Mostly this is due to the fact that this market is in many ways still new to the Chinese consumer. In China the architectural coatings market is comprised of a large amount of solvent-based coatings and in some areas toxic lead is still used as a pigment.
What needs to happen in China is for the coatings producers to cultivate a different route to market rather than through traditional contract painters. As mentioned earlier, the objective and strategies of contract painters are not in sync with the coatings producers or the homeowners, yet they are the primary route to market for coatings producers.
AkzoNobel, through its acquisition of ICI, has done a remarkable job in an attempt to bridge the gap between the coatings producer and the ultimate customer, the homeowner. Still, even with numerous outlets a large amount of architectural coatings provided by most producers still flow through contract painters rather than be purchased by the homeowner.
The Forgotten Market
The good news is that the emerging middle class in China appears open to take on a more aggressive participation role in the area of architectural coatings. The question to ask is, “Are the coatings manufacturers poised to take advantage of this apparent market change”?
Another way to phrase this question is, “Do the coatings manufacturers understand what the real drivers are for the Chinese Architectural Coatings market”? Reading various comments from many of the coatings producers it would appear that they have one thing in common; they tie their remarkable success to the unprecedented expansion of home construction inside China. In other words, their definition of success appears to be tied to a continuation of the unprecedented home construction in China.
If we look at history, tying eventual success to a market driver that is not fully understand, was not developed nor managed is at best dicey if not fool hardy. I fear that the majority of the coatings producers have forgotten what the real drivers for the architectural coatings market happen to be. Most of us understand that when something happens quickly, comes out of nowhere and takes off like a rocket that it can just as easily go away as quickly as it appeared.
The Forgotten Market for the coatings producers in China is a genuine understanding of the true drivers that will keep them successful with their future strategies. Riding the unprecedented home construction growth is at best a short-term strategy. What happens when this growth levels out or worse, declines? Given the current makeup of the Chinese architectural market there doesn’t appear to be a good back up plan. Unless the coatings producers in China take on a more aggressive leadership role rather than ride on the coattail of other happenings there will be a day of reckoning and it won’t be pretty.
Innovation is often tied to the needs of the marketplace. Sometimes when the market is expanding rapidly it’s difficult to stop and take a pulse beat to determine how healthy the market happens to be and what its needs are. I fear this is happening in China today in regards to architectural coatings. As many coatings companies are busy “minting money” so to speak, they have not recognized that they are not leading the market but rather they are simply riding the coat tails of events over which they neither understand nor control.
It is time for these coatings producers to return to doing what they know made them successful in other markets. It’s time to return to the basics of the Forgotten Market. It’s time to take on the responsibility of educating the consumer, of leading the development of the architectural coatings market so that in the long-term the coatings producers and the consumers of coatings, or homeowners, are in sync with each other. Until this market leadership change happens the real driver in the Chinese architectural coatings market will be more opportunistic in nature than strategic.