Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
NEP – Malaysia
Prepared by George Foster
NEP is involved in the research, design and development, assembly, distribution and rental of water filtration systems under its DIAMOND brand name. Its indoor filter unit product uses a unique technology to turn normal tap water into good quality mineral water. It is the market leader in the residential water filtration market in Malaysia and also has a presence in Singapore, Hong Kong, Taiwan and Southern China.
The business was founded by Michael Lim and a few of his friends in 1995. During its initial stage of establishment, NEP was involved in the distribution of numerous consumer products. In 1997, Michael chanced upon the Health Water System. In 1998, NEP decided to focus its resources on the sale and marketing of residential water filters. At that time, there was no premium water filtration system or leading brand in the market. Taking advantage of this accidental opportunity was a turning point for NEP and became the catalyst for its eventual success. Over the past 15 years, NEP has successfully introduced a range of point-of-use and point-of-entry water filtration systems, including the shower spa unit under its DIAMOND brand name.
Michael Lim Chang Huat is Group President and Founder of NEP. He started working in 1988 at age 19 in marketing. In 1995, with a capital of only RM 100,000, he set up NEP Holdings (Malaysia) Berhad with only a small staff. His lack of experience, capital and resources resulted in limited market traction. In 1998, he chanced upon the Health Water System, a water filtration system that improves the quality of tap water to rival natural mineral water. He saw this as a business opportunity that was overlooked by the market at the time. Within two to three years, the fate of Lim and NEP changed with the launching of this unique product. Since 1999, NEP has built a customer base of more than 1 million, with a cumulative turnover of approximately RM 2 billion. It flagship product, the DIAMOND Home Spring Water, has garnered numerous international awards.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable, growing company? How did it change over time?
Lim: “On 1 July 1995, we started NEP with an initial capital of around US$ 30,000. At the beginning, our core business was just selling personal care products. We started with a product range of 40 low-priced products, selling at US$ 20 to US$ 30 per piece. This business was not that profitable.
“In 1997, a salesman from Taiwan introduced us to a water filtration product and told us about its ability to purify and mineralize the water. He referred to it as ‘miracle water’, since the filtered mineral water had many attributes essential for health and skincare. Filtered water in the Malaysian market also had the potential to serve many other purposes such as for cooking, drinking and even making coffee. However, the selling price of the product was almost US$ 1,000. We asked ourselves: ‘If we were not able at NEP in prior years to sell products valued at US$ 30, how would we be able to sell a US$ 1,000 water filtration product?’
“The salesman noticed my hesitation and offered to demonstrate the power of the filtered water. He provided one for free and asked me to use the purified water for three days to wash my hair, assuring me that my dandruff problems would significantly improve. Surprisingly, after three days, I noticed the improvement. Since then, we believed that this product was indeed somehow miraculous.
“We ordered 15 units from the Taiwanese salesman, brought them to Malaysia, and installed them in different villages. We allowed people to try the filtered water for free and asked for feedback on the product. Potential customers who tried the water were really happy with the product and affirmed that the water was really good for cooking, skincare and many other uses. Most of them came back to ask about the price of the filtration system. This strong consumer feedback convinced us that this product had great potential. In fact, the demand grew exponentially. We started distributing the product under new branding – we called it ‘DIAMOND’. In Malaysia, municipality water requires some form of filtering. The filtration system helped improve water quality and was an immediate success.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Lim: “We used a couple of key strategies that helped us achieve a level of growth. For example, we had a free-trial programme, which consisted of sending free purified water to every potential customer. We had also set up many water stations across the country where customers were invited and given bottles to take the water away for free to try it. After two to three weeks, about 60% of the potential customers came back to buy the water filter. We also introduced the money-back guarantee for a period of time, which greatly increased confidence in the product.
“NEP has consistently won major awards that has reinforced the brand quality of our products. In 2001, we won the International Exhibition of Inventions, New Technology & Products Gold Award and Special Complimentary Award at the 29th International Exhibition of Inventions in Geneva, Switzerland. The year 2002 saw us win two awards: the 3rd Global Golden Rim Awards & Global Quality Assurance Product Golden Rim Award; and the Research & New Technology Award & Jury’s Special Award at the 51st Brussels Eureka World Exhibition of Innovation in Belgium. From 2005 onwards, we have won a sequence of Reader’s Digest Brand Awards for our products in Malaysia and Singapore and later also in Hong Kong and Asia.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Lim: “When we started the business 15 years ago, there were many players in the market but no market leader. Since the product was commodity-like, we positioned it in the market as a health-focused filtration system, as opposed to a normal filtration system. Also, the trial strategy helped us tremendously to convince our customers of the quality of our product. Moreover, we are the first company in this space that laid importance to branding, in which we heavily invested. Our thinking was to change from being just a trading company to a market leader in the fragmented water filtration industry. Over the years, we have managed to become the leading brand in the water filtration market.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
Lim: “We wanted to improve and upgrade our product to be the best in the market. So, we collaborated with a Japanese university researcher to differentiate our product, both from a design and from a technology point of view. The second challenge was to raise capital for the initial stage of our branding initiative. The reason was that, in Malaysia, taking a loan from a bank is extremely difficult for start-up companies, unless you have strong collateral. Grants from the government were non-existent because the water filtration industry was not a promoted activity accorded with grants and special incentives. There was also limited venture capital and private equity activity in Malaysia at that time. Instead, we used our own money, as well as borrowed from friends and relatives to grow the business. The third challenge was the limited access to talent in the industry, since the residential water industry is small; we had a hard time convincing people to join a start-up then.
“Since we had limited capital, we could not afford to open a retail shop in Malaysia. We therefore established a dealer network and provided an innovative platform to these dealers/distributors to help them become entrepreneurs in their field. They were paid on a sales commission basis and this helped us to keep our costs competitive. While the required capital to start a business in Malaysia was more than US$ 30,000, the distributors were asked to invest their own capital of only US$ 2,000 to US$ 3,000. The NEP product brand name – DIAMOND – gave them the opportunity to grow with the brand.”
Q5: At what stage did you invest significant resources seeking to grow your company internationally/beyond your domestic country or region? What factors were pivotal in deciding when to seek growth internationally and where to seek that growth?
Lim: “By 2001, our business in Malaysia was profitable. One of our distributors saw the opportunity to sell our product in Hong Kong. However, since it did not sell well, he decided in 2003 to shut down his Hong Kong operations. In contrast, we believed in Hong Kong and decided then to enter the market ourselves. Most importantly, we saw Hong Kong as our gateway to China. If we could build a brand in Hong Kong, then we could do the same in China. Hong Kong spoke the same language and had a similar culture. Thus, we decided to venture into Hong Kong. Subsequently, we have ventured into Taiwan, and to Shenzhen and Shanghai in China.”
Q6: What were the biggest challenges in building growth internationally? How did you meet or adapt to those challenges?
Lim: “The first challenge we faced was to duplicate our success story in these new markets and adapt to the new territories. The other challenge we faced was that people in Hong Kong did not initially trust NEP. Our company and brand was from Malaysia – an issue we were facing back then. We found it hard to convince them that we were a quality brand that invested in R&D and also provided excellent customer service. To overcome this, we offered a 120-day money-back guarantee in Hong Kong, where customers could return the product after using it and a full refund would be given if they were dissatisfied.
“Since celebrities in Hong Kong have a significant influence on the general public, we used famous Hong Kong artists to endorse and promote our products. We also conducted a lot of customer events such as customer parties and celebrity events. One of our key events was when we booked Ocean Park in Hong Kong in 2006 for our customers for one day and celebrated our 11th anniversary with them. The main idea behind such events is to make the customers our brand ambassadors. Thus, when we launched any new products, the customers would help us introduce them by giving strong product recommendations. Our 120-day money-back guarantee helped tremendously to make our customers feel more comfortable in recommending our brand to their friends.”
Q7: What major role, if any, did key aspects of the ecosystem in the country (or countries) you first sought international growth either promote or impede your ability to grow in those international markets?
Lim: “We entered the residential water filter market, be it in Malaysia or regionally, based on a need for clean, healthy, purified water. As consumers become more affluent, they are increasingly focused on health and concerned about having chemicals and contaminants in their food and water. DIAMOND water filters provide the solution, giving consumers and families clean water that has been enriched with essential minerals for a healthy body. It is based on this need and lifestyle which provided the impetus for our business expansion.”
Q8: Seeking international growth often has both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in seeking international growth.
Lim: “Our high moment was in 2005-2006, when we launched the 120-day money-back guarantee in Hong Kong, China and Malaysia. Our sales grew to US$ 14-15 million per month, which proved that we had managed to establish ourselves in the countries we operate. The low moment was the initial stages, when we were trying to grow the business but were limited by the lack of funding.”