Found in 2001, Siamgas and Petrochemicals PLC and their subsidiaries engage in the core businesses of trading and transportation of LPG, ammonia, and other petrochemical products under " Siam Gas" and "Unique Gas" trademarks. The company owns 7 LPG storage terminals and 20 LPG filling stations operated by the company and subsidiary, 131 LPG filling stations operated by dealers that are CODO ( company-owned, dealer-operated) and DODO ( dealer-owned, dealer-operated) contracts. It also operates 99 LPG stations throughout Thailand.
It has work force of over______ with operations mainly in Southeast Asia. SGP's turnover increased by ____% from BTH to BTH in 2009
According to their international experience, SGP has been penetrating into the foreign market outside its home country which are, Vietnam and Singapore.
Base on SGP experience they has chosen to enter each foreign market by wholly-owned subsidiary or take 100% equity of the share capital into the company. SGP enter into Singapore LPG market through wholly-owned subsidiaries of 100% equity share of Shall Gas Singapore.
Market Entry Strategy of SGP to enter into Chinese LPG market.
In January 2011 they have decide to acquired 100% share capital of BP Zhuhai China Limited (BPZH) which hold a 100% interest in and is operator of BP's LPG terminal, storage, wholesale and retail LPG bottling business in Zhuhai. BPZH is a wholly-owned enterprise in the People's Republic of China.
BP Zhuhai Business Overview
Located in the heart of Pearl River Delta, BPZH is a fully-integrated LPG business with terminal designed to import, store and throughput propane and butane, mix them at any ratio and distribute to the market via barges ( to secondary terminals), tank trucks ( to filling plants and industrial customers) and bottles ( to households and commercial sites).
BPZH has over 420,000 cubic meters of storage capacity, which can allow its owner to optimize purchases to resale. Based on an historical data seasonal price variations can be substantial. Historically BPZH's ability to fully capture this value has been constrained by the availability of barges meeting BP's operational standards and its appetite for flat price risk.
Most wholesale is currently made through tank trucks rather than barges as BP has limited access to approved barges. However, a different owner may not be constrained by this limitation.
The picture below shows the value chain and the business model under which BPZH operates.
Figure 4.1 BPZH's Value Chain Model
Refrigerated Propane and Butane are imported in separate tanks from Middle East and other product origins, such as North Africa and South East Asia. BPZH also provides storage services, referred as throughput service to third party customers who import LPG directly from offshore but need to store it for a period of time. Given BPZH's storage capacity. It is in position to provide this service on a fee basis which serves as additional income stream. third party titled cargos go through BPZH jetty, cavern and are then loaded into its tank trucks.
An offshore LPG players can also utilize this bonded cavern to store and export back the cargo without having to go through any local custom clearance.
The market entry strategies
Background
Liquefied Petroleum Gas has been one of the core products that SGP distributed to the customers throughout Thailand for several years. Their core products includes, trading and transportation of LPG, ammonia and other petrochemical products. There are three customers types of LPG ; households, vehicles users, and manufacturers. (i.e. light bulb, textile, ceramic tile, food processor, bread, latex glove, vehicle assembly, iron cutting, hotel, restaurant and fast food centre). The company provided both in land and sea freight transportation. The ammonia are imported from Malaysia and Indonesia which is for resale in the rubber, msg, chemical fertilizer and textile industries
It has the second largest market share in Thailand of 25.7%
The growth outlook of the company
SGP's core revenue is derived from the trading LPG, ammonia and other petrochemical products. As of September 2007, the trading business contributed 95.8% of the total revenue. About 59.7% of LPG trading revenue was obtained from households, 29.4% from vehicles users and 10.9% from various industries. LPG revenue accounted for 87% of total revenue, ammonia 7% and other petrochemical products 2%. Transportation and other services comprised 4% of total revenue. This is a non-core and value-added business.
SGP's international experienece
-Singapore
-Vietnam
LPG market trends
Market Entry into China
SGP felt that the need to expand into the international market as to achieved its vision " to be a leading energy operator in the South East Asia ". In this research we focused on expand into China. China is now the fastest growing economy in the world. The country is attracted by many multinational corporations (MNCs) firms who are seeking for new foreign market in order to expand their international investment. The detail regards the studying of Chinese LPG market have been mentioned in the literature review.
Market Entry
SGP chose to invest in the LPG business in China
It began its market entry in China by conducting a market research to assess the potential of the country in LPG business, investment and trade barriers.
However, after the market entry, according to Mr. Supachai, as SGP has international experiences, personal insights and the Chairman Mr. Worawit are very confidence about this market entry. SGP decided to enter the market through wholly-owned subsidiaries or acquisition as they believe this is the best option for the mode of entry. Since it has been suggested earlier in the chapter about the detail regards BP Zhuhai where it has the second largest LPG storage in China with a total capacity of 200,000 tons. It will lead to covering the whole market in South China Region and throughout Southeast Asia countries.
This led SGP to acquired in BP Zhuhai China under the name Siamgas Hong Kong worth USD 101.1 million
This acquisition company BP Zhuhai with 143 employees
According to Mr Supachai, in the wholly-owned operation of BP Zhuhai, it is mainly financial funds and good practices that came from SGP. The management of SGP focused on growing the business, enhancing cash flows and addressing financing issues.
Adopted strategies to reach the target customers
By acquiring BP Zhuhai, it has provided SGP a significant opportunity to enter or expand in an attractive Liquefied Petroluem Gas ( LPG ) market with over 50 million in population. As BPZH has been developed as a world-class integrated LPG business with a proven track record of safe and reliable operations in the heart of Pearl River Delta, Guangdong Province which is the most affluent area in South China. It allows SGP to start the operation straightaway without wasting time to find the suitable sites and construction. It offers advanced bulk breaking terminal and jetty which allows flexible operations delivering marketing and storage competitiveness. Since the company has been operating in Zhuhai for many years, it came with a strong brand name and good established contacts with customers. Along with good access distribution to end users.
The demand and supply of LPG in China
Base on 2009 custom statistics and annual statistics, the whole of China's LPG consumption was more than 20 millions tons, of which imported LPG was 4.09 million tons, and 0.85 million tons was re-exported. The net import in 2009, therefore, was 3.24 million tons. The refinery LPG output in China was around 17 million tons. The chart below shows the supply and demand of the country over years
Figure 3.3 LPG Supply and Demand Balance in China
Continuous economic growth of the past 20 years and shifting of worldwide manufacturing and processing industries to China has led to high and steady LPG demand growth in China. There was a decline in demand in 2008, primarily due to the world financial crisis, coupled with the previous high crude oil. Both local production as well as imported dropped by around 10% in 2008. However, LPG consumption has increased in 2009 and has risen back to the level of 2007. Imported LPG demand and increased due to its competitive supply cost.
The LPG demand in South China ( Guangdong, Guanxi and Hainan provinces) was more than 6 million tons in 2009, out of which 3.5 million tons were imported LPG and 2.5 million tons were refinery products.
The bulk breaking terminals in PRD are not only used to import LPG into China to meet supply shortages, they are also used to re-export to South East Asia, to countries and regions such as, Hong Kong, Macau and Vietnam.
Mr Worawit the Chairman of the company said in the interview that they implemented their strategies very effectively. Through
In brief, SGP gained sound understanding of the Chinese LPG market and the customer.
SGP has a market share of __% in the Chinese LPG market.
However, since its core product is LPG which is the necessity good. The condition of the economy is not really affected the demand for the LPG.
Regions of operation
Due to the large size of the country, SGP has focused at the Southern part of China . SGP has very thoughtfully selected its geographical regions of operation in China. As the acquisition of BPZH, it is one of the largest LPG importers and marketers in China. Especially its LPG sales envelop are covered the Guangdong, Guangxi, Hainan, Jiangxi and Hunan provinces which are situated in the Southern part of China via barge and truck. The bonded business scope helps BPZH to re-export and throughput LPG to South East Asian countries and regions such as, Vietnam, Hong Kong and Macau by vessel. This allow SGP to maximize their profit as they operated as an oligopoly in the market.
BPZH claims that its strategy in Chinese LPG market was good but it could not achieve its goals fully because of the company and market reasons. The company reasons were mainly linked to the difficulties arising from the market.
Source : BP
Explain about the socio culture according to the literature review
The languages and the cultures wouldn't causes them the problems to operate in China
Resources
SGP sought to enhance value for its customer by providing standards and safety.
Human Resource Management
SGP believes that the human resources are their true business resource. According to Mr. Worawit, SGP has been well-prepared in this field since the chairman believe one day they will be expanding into the Chinese market thus, The managers from the management team who worked in Thailand will volunteered themselves to go to the subsidiary in China as the expariates. there has been volunteered among the management team
The Competition
The main LPG suppliers in the PRD area are local refineries, bulk breaking terminals specializing in LPG imports, and secondary terminals. The secondary terminals play the role of throughput and distribution for refinery and imported LPG.
Figure 3.4 Refineries and Bulk breaking terminals in South China
BPZH is one of the two main LPG importers in the west part of PRD region. New Ocean terminal is a direct competitor to BPZH with a storage capacity of 31,200 cubic meters (circa 7.4% with BPZH storage capacity). The other large terminals are in the mid or east of PRD with a core market that is different to BPZH.
The main local refineries are;
Local refineries
LPG production capacity (000s ton)
Guangzhou refinery
420
Maoming refinery
540
Hainan refinery
400
Huizhou refinery
300
Dongxin refinery
200
Hengqing offshore oil field
140
The key bulk breaking terminals in South China are as follows:
Bulk Breaking Terminals
Storage capacity (m3)
2009 Import volume (000s ton)
BPZH
423,200
432
New Ocean
31,200
746
Guangzhou Huakai
57,200
362
Dongguan Jovo
132,000
159
Shenzhen Sinobenny
162,000
516
Shantou Ex-Caltex
200,000
0
Chaozhou Ouhua
120,000
465
How SGP compete with their competitors as they have just enter the market.
Financials
How did SGP finance the acquisition?
In order to facilitating SGP's future expansion and enhance its operational and financial flexibility, to undertake a holistic reorganization of its borrowings via a syndicated financing. The loan of THB3.1 billion has been arranged on a 50:50 basis with Kasikorn Bank Thailand and United Overseas Bank Limited Thailand to support Siamgas's acquisition of BP Zhuhai LPG Limited.
According to the financial statement of COGEL
The bad debts level
EBITDA
Other profit Ratios
Analysis of the Case
There are two analysis in this case, firstly, it is the SWOT analysis of SGP before it enter into Chinese LPG market. This analyses the overall condition and the background of the company and thus, assesses if the company was in a position to enter into Chinese market.
After analyse the SWOT analysis for SGP, it then can be concluded that it was fit to enter the Chinese LPG market with its various competencies such as, financial resources, human resources, their international experience, which are the foundations for any new market entry.
Secondly, it will goes on and analyse the market entry strategy followed by the company to enter into Chinese LPG market.
Analysis 1 : SWOT analysis
Strengths
Integrated LPG trader with the second largest market share in Thailand.
SGP is an integrated LPG trader with the second largest market share after PTT. Where PTT is the government owned subsidiary
LPG industry is usually partially oligopoly business, which leads to high barriers to entry
As in Thailand, LPG industry comprises only three major traders; PTT,SGP and PICNIC. This makes the industry partially monopolized and represents a barrier for new players to enter the market. According with the Commerce Ministry's requirements, LPG traders must have registered capital of over BT150mn, sufficient storage to maintain legal reserve of LPG at 0.5% of trading volume next year, invest in at least 1mn cylinders and have a strong distribution network covering the entire country. These requirements also make it difficult for newcomers to enter the market.
High Level of business international experience
The company has expanded its LPG trading business to Vietnam and Singapore. Which they believe it will provide a boost to their earnings and revenue growth.
Good Financial management, steady increasing turnover and contribution from operations, recurring profit, record performance
As shown in the appendix, the income statement and the analysis of the ratio of SGP has proof to be profitable firm so far
Brand image
SGP has been operated as LPG distributor for more than 30 years of experiences, thus good brand image has been respected by the household of Thailand in provide a safety and reliable product and services.
Weaknesses
Gross Margin of LPG trading is Low
Given that the price of LPG is semi-controlled and floated, the selling price is determined by unit cost plus margin. The gross margin is relatively low compared to other industries.
Unit Price (Bt/Kg)
2004
2005
2006
2007
2008
2009
LPG
14.70
13.70
13.67
13.90
14.16
14.50
Ammonia
17.87
18.73
18.86
18.88
18.90
Other Petrochems
20.70
21.81
22.14
22.20
22.40
Contribution Margin/unit
2004
2005
2006
2007
2008
2009
LPG
4.4%
0.9%
3.7%
5.0%
7.7%
8.7%
Ammonia
30.7%
28.8%
36.2%
34.6%
36.0%
Other Petrochems
18.2%
21.0%
22.8%
23.2%
23.7%
Total GP
10.0%
10.1%
10.1%
10.4%
10.2%
11.0%
Opportunity
Penetrate into the new market China to start contributing revenue in this coming year.
According to company's expansion plan into Chinese LPG market will allow SGP to maximise its earnings and revenue growth as well as increase its reputation.
Threats
Risk from the government's complete floatation of LPG price
As a result of Thailand's government controls the prices of the refinery and gas separation level, therefore it controls the import prices and wholesale prices at PTT's main storage terminal, which are the main one in Thailand. This causes LPG price in Thailand to be semi-floated and semi-controlled by the government. However, the government allows retails LPG prices to float freely, except for LPG used in households. If the government revokes its policy to control selling prices and let them float completely, price will change according to the global market, and traders including SGP would have risk exposure to changes in selling prices. This will have impact on the earnings after the post-floatation.
More players after liberalization of LPG household market.
If the government liberizes the cooking gas market, a large number of new players will enter the market, since it reduce the barriers to entry, especially the world's largest producers. This could result that change from an oligopoly to a perfect market mechanisms as the competition will be more fierce and thus affect the gross margins.
Shortages may occur from promoted use of LPG
The government's promoted use of alternative fuels such as LPG will cause a shortage of LPG in the household sector and make it necessary for the country to import. This will leas to the price increasing in the future.
The factor that may affect the LPG market
Oil price
The rise in oil price may increase the consumption of the LPG as it is the subsituition of the oil fuels. Thus high demand of LPG
Global & National Economic Situation
Since LPG is consider to be one of the cheap source of energy. It can be called as necessity goods for many countries, thus, during the boom period of the economy, more investment and more spending level it will also increase the demand of LPG, however, in the recession period, peoples are trying to reduced cost in which case, the demand for LPG is still high, as peoples switch from expensive oil to consume LPG.
Population Growth
Due to the growth of the population, I will allow LPG operating firm to enjoy their profit optimization. As more population means higher demand for LPG.
Government's Energy Policy
Under the implementation of the government scheme which continue to subsidize the prices of cooking and automotive gas but will stop subsiding the price of LPG for industrial users, which will be effective from July 2011. Despite the rising price of LPG for industrial sector, SGP hopes the number of potential industrial users who are likely to switch to other fuels such as oil will be limited as much as possible as there are high switch cost incurred, since they are no major differences on prices of LPG and other fuels.
Analysis of the strengths and weaknesses of SGP
Is SGP's objectives of operating successfully in the Chinese LPG market realistic?
Base on SGP company structure, their experience in the LPG business, it seemed to be a great opportunity to invest in Chinese LPG business. They have been carried out a well-structured market analysis before entering the market together with a good financial supports and their management team has a high level of international experience in successful penetrating into the foreign market, such as, Vietnam and Singapore, which are the countries outside the company's origin. The company has many strength in which they are fit to enter the Chinese LPG market.
As for SGP, China seemed to be a suitable potential market as it has the largest growing economies in the world and it has the third most LPG consumption in the world. Therefore, the objectives of being successfully penetrated into Chinese LPG market is realistic.
Was the market entry strategy followed by SGP to enter the Chinese LPG market in the light of the literature?
The company first made a decision to enter the Chinese LPG market as it will allows SGP to increase their earnings and to be the energy leader throughout South East Asia. After they have conducted a thoroughly market research they decided to enter as wholly-owned subsidiaries which they believed it is the best option of market entry into China. It formed an extensive business strategy in China and adapted those strategies in the most suitable regions for their business. Therefore, the process of market entry strategy followed by SGP is similar to the one mentioned in the literature.
Did the market entry strategy followed by the company respect the criteria of a good market entry strategy
According to the SWOT analysis, it clearly show that the strengths are favoured the market entry decision. The decision to acquired BPZH is give the rise to the company as it covered most of the Southern part of Chinese LPG market. Since the Chinse LPG market was >>>>
The regions of operation the company choose to enter has shown the highest consumption of LPG in China. The level of competition that the company is facing is not relatively high since BPZH has the second largest storage throughout the Southern China. The other large terminals are in the mid or east of PRD with a core market that is different to BPZH. Therefore it has been avoided direct competition. In the acquisition, SGP choose its structure and control in such a way that all the operation in China was managed and since the company financial position are in good practices.
Hence, the market entry strategy followed by the company did respect criteria of a good market entry strategy.
Was the market research adequate?
The market research that SGP has carried out was mainly focused on the potential of Chinese LPG investment, the level of the existing competition, the consumption of the product its offered, regions for the operations, the company that they acquired backgrounds . With a thoughtful selection of the regions of operation. It gives rise to the company as the Southern part of China has the most consumption in China together with the location of the acquired firm is the most suitable to the best distribution channels which can reach the the maximum number of customers throughout the Southern china , as well as across the South East Asia countries. Moreover, it opted the market research with its international experience and the personal insight? Thus, the market research carried out by the company was adequate.
It then can be concluded that the market entry strategy followed by SGP was good as it was an appropriate strategy right from the market research, to the process and the choice of the mode of entry, to the implementation of their business strategies. This includes its selection of region of operation, and the products and services they offered to their customer.
The Performance Analysis
This analysis gives an overview of the company in Chinese LPG market. This analysis gives an overview of how successful the company is in the Chinese LPG market.
The duration of the operation in China
The acquisition of BPZH took place in 2010 and is currently operating in the country
Current market position and the trend of the LPG
Second largest Storage in Southern Part of china
Market Leader in the Southern part of China
Competitive advantages at the level of offers and resources
Resources:
Strong distribution channel
Favour from country's leading financial institutions
Increasing turnover
Sound quality management practice
Good understanding of the market
Good quality management practices
Brand image and reputation
This analysis shows that it is currently present in the country and has a growing turnover, leading the market position in the regions of their operation. It's sound understanding of the market and strong distribution channel allow them to maximise their profit optimization. Moreover the connection with the financial institutions give them scope for their future growth and expansion. This analysis indicates that SGP is a successful company in Chinese LPG market.
