"We have sold what had to be sold and phased out what had to be phased out," said Orient Home President Zhang Hongwei sadly in 2005, on the eve of selling 49 percent of the company's shares to U.S.-based Home Depot. "The only thing we have left is building materials and financial services."
Zhang's words still reverberate through the home improvement industry as competition has further escalated this year.
"The sustained, rapid development of the real estate industry is an important factor in the frenzy within the home improvement market," said Hu Hongke, an analyst with the China Merchants Co. Ltd. In 2006, due to government macro-economic controls, growth in the real estate sector slowed, which significantly impacted the home improvement industry.
On the surface, in 2006 the Chinese home improvement industry did not grow as rapidly as in previous years, but several investments of foreign capital changed the entire landscape of the industry.
Competition became fierce as more international venture capital entered the arena-Home Depot purchased The Home Way for $100 million, Singapore's Design Studio Furniture Manufacturer Ltd. invested $30 million in Beijing-based Dongyi Risheng, and Hony Capital and Legend Capital invested 60 million yuan in Kebao & Boloni Kitchen & Bathroom Furniture.
Insiders predict that the influx of international capital into the home improvement industry will result in unprecedented fragmentation. They say that large national and international enterprises will emerge in the next five to 10 years and that the "80/20 rule"-20 percent of companies controlling 80 percent of the market-will prevail. The influx of foreign capital will change the present dispersed market completely.
"While the country continues to open up its chain-retail industry to foreign capital, the reshuffling in the home improvement industry has started," said Hu.
In 2005, Home Depot acquired 49 percent, or a controlling share, of Orient Home, marking the start of foreign investment in China's home improvement industry. Orient Home and The Home Way, former rivals, are now both under the banner of Home Depot.
Home Depot, the world's largest home renovation retailer, acquired 12 stores of China's home improvement and building material supermart The Home Way, as the first step of its localization in China. After the acquisition, the 12 Home Way stores in six cities (including Tianjin, Beijing and Xi'an) helped pave Home Depot's entry into the Chinese market. In addition, Home Depot took control of the 3,000-plus employees of the 12 stores.
"Foreign retail heavyweights entered the market by practical means," said Hu. "They hope to quickly expand their share of the Chinese market by acquiring domestic retail enterprises."
Another senior analyst believes foreign investors are willing to spend big money on domestic retail enterprises because they have confidence in the prospects of the Chinese market. "From a strategic point of view, acquisition is beneficial to the rapid expansion of the latecomer," said the analyst. "And the strategy to grow by acquisition is also very secure."
"While foreign funds are high-key with Chinese ambitions, we regrettably noticed that local enterprises became ‘stepping stones' during acquisitions because of poor operations," said a home improvement insider.
Home Depot had been negotiating with The Home Way for years before it finally came to an end when the latter's financial chain became overstretched.
Due to blind expansion, privately owned building material supermarts always end up being purchased by transnational investors. Du Sha, Head of The Home Way and one of the wealthiest people in China, for instance, had been going through a crisis of supply cut-off and excessive debt before the acquisition. Expanding too quickly and being unable to raise funds through a listing, The Home Way failed to maintain a smooth cash flow.
Do or die
"The home improvement industry in China has witnessed rapid growth these years," said the chief representative of a foreign venture capital firms' China operation. "In 2006, private equity and equity exchanges at home and abroad all had an eye on home improvement enterprises."
This venture capital fund used to take an interest in sectors like IT, finance, health insurance, general consumption and retail chains that demonstrated explosive growth.