Gauging demand in industrial markets can involve some huge bets. Shanghai’s 30 kilometer, $1.2 billion bullet train line is one example. This product of Sino-German joint venture is really a prototype for fast things to come in transit – dependent China. Indeed plans are being drawn for a 1,307 kilometer bullet train line form Shanghai to Beijing and that’s probably a $ 100 billion bet! And China does change its mind – in 2005 a multi dollar upgrade of its wireless networks was substantially scaled back. A big bet that did go bad was Iridium LLC – its 72 satellite, $5 billions communication system may be in orbit but the company can’t sell the associated phones. Iridium badly miscalculated demand for its approach to global telecommunications and the entire system is currently in disuse and is now classified by investors as space refuse.
Three factors seem to affect the demand in international industrial markets differently than in consumer markets. First, demand in industrial markets is by nature more volatile. Second, stages of industrial an economic development affect demand for industrial products. Finally, the level of technology of products and services makes their sale more appropriate for some countries than others.
The Volatility of Industrial Demand
Consumer products firms have numerous reasons to market internationally – exposure to more demanding customers, keeping up with the competition extending product life cycles and growing sales and profits, to name a few. Firms producing products and service for industrial markets have an additional crucial reason for venturing abroad dampening the natural volatility of industrial markets. Indeed perhaps the single most important difference between consumer and industrial marketing is the huge, cyclical swings in demand inherent in the latter. It is the true that demand for consumer durables such as cars, furniture or home computers can be volatile. In Industrial markets, however two other factors come into play that exacerbates both the ups and downs in demand: Professional buyers tend to act and derived demand accelerates changes in markets.
Purchasing agents at large personal computer manufacturers such as IBM, Apple, Acer, Samsung and Toshiba are responsible for obtaining component parts for their firms as cheaply as possible and in a timely manner. They monitor demand for PCs and prices of components such as microprocessors or disk drives, and changes on either customer markets or supplier prices directly affect their ordering. Declines in PC demand or supplier prices can cause these professionals to slam on the brakes in their buying; in the latter case they wait for further price cuts.
All the PC computers here and abroad are monitoring the same at a, they all brake (or accelerate) simultaneously. Consumers monitor markets as well but not nearly to the same degree. Purchases of cola, clothing and cars tend to be steadier.
For managers selling capital equipment and big ticket industrial services, understanding the concept of derived demand is absolutely fundamental to their success. Derived demand can be defined as demand dependent on another source. Thus the demand for Boeing 747s s derived from the worldwide consumer demand for air travel services and the demand for Fluor Daniel’s global construction and engineering services to design and build oil refineries in China is derived from Chinese consumers’ demands for gasoline. Minor changes in consumer demand mean major changes in the related industrial demand. In the example in exhibit a 10 percent increase in consumer demand for shower stalls in year 2 translates into a 100 per cent increase in demand for the machines to make shower stalls. The 15 per cent decline in consumer demand in year 5 results in a complete shutdown of demand for shower stall making machines. For Boeing, the September 11 terrorist attacks, the continuing threat of more of the same, and the subsequent armed conflicts in the Middle East combined to dramatically reduce air travel (both vacation and commercial) worldwide, which in turn caused cancellations of orders for aircraft. Moreover the airlines not only canceled orders, they also mothballed parts of their current fleets. During August 2003 there were 310 jetliners stored in a Mojave Desert facility waiting demand to pick up again. The commercial aircraft industry has always been and will continue to be one of the most volatile of all.