| Profit potential, also referred to as the attractiveness of an industry, is fundamental to the profitability of the enterprises in it. We can assess such potential by analyzing the five structural competitive forces in the industry, i.e., the threat of new intruders, the existing competitors, the bargaining power of suppliers, the bargaining power of purchasers and threats from substitutes. An enterprise should appreciate the structure of the industry it belongs to and then, by employing appropriate strategy, pursue favorable position and competitive advantages. In this paper, we try to review the development of Beijing's real estate industry in the past decade and evaluate its structural features. We also propose a series of actions for the real estate developers to adopt to deal with the problems they may encounter. By taking the actions, the companies can occupy advantageous positions in competition and furthermore, may help improve the structure of the whole industry.The real estate development in Beijing has been experiencing steadily rapid increases since 1992, when the industry initiated in the capital city, several years latter than those in other coastal regions in China. With average growth above 40 percent in housing investment, the total incremental supply of properties exceeds 10 million square meters pa, while the vacancy rate remains at relatively low level. Evidences indicate that, though there exist some hindering factors, Beijing will sustain an incremental expansion in real estate in the coming 10 years until its GDP per capita reaches US$8000. Drivers for the expansion include huge potential demand, complementary reforms and the development of housing financial etc.Compared to its great potentials of increase and profitability, the real estate industry's barrier to entry is quite low. Thus the existing firms are faced with severe threats of the penetrations of new comers from other industries as well as from outside Beijing or even from abroad, these new comers may boast plenty of resources such as capital, techniques and marketing specialty etc. In addition, local governmental authorities and their monopolized enterprises, acting as important part of suppliers for real estate developers, always take advantageous positions over the developers in their transactions. What they provide usually account for up to 50 percent of the total cost of a real estate project, thus restrict greatly the firm's effort to reduce cost. On the other hand, the other structural factors such as the existing competitors, substitutes, most of suppliers other than those mentioned above and customers bring about favorable positions for the real estate enterprises. For example, differentiation rather than price is the main form of competition between the existing firms. Most of the suppliers lack of bargaining powers due to the acute competition within their industries and the perfect information mastered by the real estate companies. So in many cases they have to offer credits to their most important customers, the developers, in order to win the contracts. Individual purchasers are not powerful either in bargaining with the real estate companies because of the limited information and their insignificant purchasing activities. There are almost no direct substitutes for the real estate products. In contrast, there are more and more well-developed complementary products and services such as newly built traffic facilities, community services, public civil project and housing financial innovation etc, will continue to promote the development of the real estate industry. In general, the industry is expected to maintain a strong attractiveness in the future.There are more than 2000 real estate developers today in Beijing, most of them are small in terms of total assets and accumulative production output. Small in size and weak with high average liability rate, many developers are involved in highly risky situations in their operations. They used to function under favorable market conditions existed b... |
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