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Market analysis

All these factors should make the business of Festo winning in Hong Kong. But unfortunately the positions of Festo in the Asian market have weakened during last 5 years. Festo has been presented in Hong Kong since 1976 and the beginning of its business was quite successful. Festo was one of the leaders in the Asian pnematic market. Its products were known for their quality, originality, its service was known for its completness. But since other pneumatic producers started their activities in the Asian market Festo began to lose its positions.

Because the production itself is Western Europe where the components and labour cost much more expensive than in Asia, the price of Festo products looses comparing to the prices of its main competitors. At the moment Festo is not among three market leaders but takes the forth position. Currently its market share makes only 10%. The price still remains the biggest disadvantage. Due to this high price Festo is mainly presented in the higher-end market where customers are more interested in trademark itself and they can afford such biggest name as Festo.

In this connection there were made some personnel changes and Festo Hong Kong has a new marketing team now. As mentioned above Festo presses towards its presentation in every world market and it wants to strengthen its positions especially in Asia now and to be presented in all three segments (low-, middle- and high-end markets) (see Appendix 2). Festo has a chance here to come up with a brand-new local product, the price of which will allow Festo to increase its market share and to win 25% of it (see Appendix Productportfolio).

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Know-how is one of the strongest points of Festo. There is a number of products’ local versions for many regions all over the world which due to the locality of materials, HR could compete at those markets. Festo has its experience in the field of R&D. The development of a new product will allow Festo to strengthen its position in Asia and to prove once again its originality comparing to any other producers. ? Pneumatic market continues to show potential. Sales in the Asian market for pneumatic equipment continue to show potential for growth (25% growth till 2006 is expected).

However, mounting price pressures and the likely moderation of Asian economic growth in the medium term mean that suppliers of pneumatic equipment must focus their competitive strategies to maintain margins. Technical innovation and interaction with customers to produce complex pneumatic systems are rising in importance. At the same time, falling prices are generating a need for volume production in order to gain economies of scale, which is driving consolidation between leading firms.

Suppliers must choose where to position themselves on the price vs. quality continuum. The automation of production processes is sustaining strong demand for pneumatic equipment, and as secondary producers automate production, pneumatic systems are increasingly penetrating new application areas. Equally, users of the large installed base of pneumatic equipment are being encouraged to invest in new products by the constant upgrading of pneumatic technology.

The combination of electronics with pneumatics and the creation of intelligent products, which are both faster and permit precise electronic control, is spurring replacement demand and contributing to the market’s appeal to new users. Suppliers to the Asian market for pneumatic equipment compete in an intensely competitive environment. Growth in this market for valves, accounting for the largest share of sales across all product markets, is expected to be driven by favorable economic conditions, by the continuing popularity of solenoid valves, and by the rising availability and use of intelligent valves.

Meanwhile, similarities can be drawn between the market for filter regulator lubricators (FRLs) and the market for cylinders. In both product areas, revenue growth is being impacted by falling prices. While demand for FRLs is being driven by growing demand for pneumatic systems, it is being constrained by price reductions caused by competition and the sale of products in a modular format. Hong Kong manufacturers produce both industrial machinery and parts. Initial development of the industry was prompted by a rise in local demand.

Industrialization in the Chinese mainland since the early 1980s has provided an added boost to Hong Kong’s machinery industry, which is the most wished market segment for Festo (constant demand, periodic deliveries of spare parts etc). Large manufacturers have started automation in producing standardized parts. Automatic tool handling and computer numerically controlled workstations are being adopted. Most of them have also set up production facilities in the Chinese mainland to take advantage of the lower production costs or to target the domestic market of China.

Hong Kong-made machines are price and quality competitive. Prices are lower than those of Japan and Europe. Hong Kong manufacturers are able to handle small batch and large variety of designs at shorter delivery lead-time. Competition among Hong Kong manufacturers is increasingly keen. In addition, manufacturers have to compete with other Asian competitors such as Taiwan in the medium-level market, and with Chinese mainland enterprises in the lower-end market.

And this is where Festo should start its strategy – to help local Hong Kong machine producers to compete at their market. As Hong Kong manufacturers mainly carry out the assembling of machine parts, material and component costs on average account for the largest share of total cost of production. Major parts are imported from Japan and Germany, including mechanical parts (e. g. pneumatic & hydraulic mechanisms and compressors), electrical parts (e. g. process cooling & heating equipment), and electronic parts (e. g. temperature, pressure, distance and time controls).

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