Crack the dilemma of domestic home building materials and seize the new opportunities for going global in the Middle East market.

In recent years, the domestic home building materials industry has faced increasingly severe challenges. Oversupply and profit compression have become the norm, while the sluggish real estate market further leads to a decline in demand. Not only that, homogenized competition and intense price wars within the industry have made it difficult for many companies to find breakthroughs domestically. In order to break through these development bottlenecks, more and more companies are starting to focus on overseas markets, especially emerging markets such as the Middle East. The rapid rise of the Middle Eastern market has brought unprecedented opportunities for the domestic home building materials industry.

▍Domestic pain points

1

Supply exceeds demand, intensifying industry competition (internal escalation), and squeezing profit margins.

Market overcapacity: With a large number of enterprises entering the market within the industry, the issue of overcapacity is becoming increasingly prominent. The oversupply leads to intense price competition, forcing companies to compete for market share through low-price strategies. In recent years, the overall sales growth in the comprehensive home furnishing retail channels has been slow, with a compound annual growth rate (CAGR) of 1.3% from 2019 to 2023. The overall market growth has slowed down, resulting in an imbalance between supply and demand and exacerbating price competition. According to a report released by China National Furniture Association, in the past three years, the average profit margin of domestic home building materials industry has decreased from 10%-12% to less than 5%, significantly compressing profit margins.

Serious homogenization: Many companies lack differentiation; there is limited product design and innovation. Some Chinese home building material enterprises have insufficient innovation in areas such as smart technology and environmental protection technologies which results in flooding similar products on the market further intensifying price wars making it difficult for companies engaged in vicious competition to obtain higher profits through brand premium enhancement.. A report by iResearch Consulting points out that consumers pay high attention to product practicality and value for money indicating that companies need to find competitive differentiators among homogeneous products.

Real estate market downturn

Shrinking demand: In recent years, China's real estate market has shown signs of weakness especially in third- and fourth-tier cities where housing demands have declined directly affecting sales of home building materials. Data from National Bureau of Statistics shows that since 2021 China's real estate market has continued shrinking; from January-August 2024 national real estate development investment was at RMB6928 billion marking a year-on-year decrease of 10.2% (calculated using comparable caliber details see note6); residential investment was at RMB5262 billion dropping by10%. Reduced housing purchases mean synchronous decline in renovation activities as well as household product demands.

Since starting control policies like purchase restrictions & loan limits backin2017 government also partially restricts demand within home building materials sector

New home decoration shifts to improvement decoration: Due to the decrease in new home sales, consumers' demand is gradually shifting towards improvement-type demand for existing homes. It is expected that the proportion of existing home renovations will account for 53% in 2023 and continue to grow in the coming years.

3

Increased export difficulty

Fierce international market competition: Southeast Asian countries (such as Vietnam, Indonesia) are rapidly rising in the home building materials industry, especially in labor-intensive industries. These countries are gradually replacing a portion of China's global market share due to lower labor costs and tax incentives. In 2022, Vietnam's wooden furniture exports grew by 18.5%, while China's home building materials exports declined by 6.7% during the same period. Their geographical proximity to shipping hubs near the Indian Ocean and Pacific Ocean also gives Southeast Asian companies a strategic advantage in the global logistics network.

Transfer of foreign capital: With the escalation of trade frictions between China and the United States, some multinational companies choose to shift their manufacturing and supply chains to Southeast Asia to avoid tariffs on Chinese goods. This has led to a portion of international orders that originally belonged to China flowing towards Southeast Asia, further weakening the export share of Chinese enterprises.

Insufficient channel and digital transformation

Pressure on traditional offline channels: With the rise of e-commerce platforms, traditional home furnishing and building materials offline channels are facing significant challenges. Many enterprises lack the capability for digital marketing and e-commerce operations, making it difficult for them to adapt to market changes.

Digital transformation lags behind: Most home building materials companies are lagging behind in digital transformation. Although some companies have started to try online sales, the integration and operational management capabilities of online and offline channels are still limited, and online sales and brand exposure need to be improved.

The Chinese home building materials industry must find new breakthroughs, and going global has become a strategic choice for many companies. Emerging markets such as the Middle East provide new growth opportunities for businesses.

▍Middle East Opportunity

1

Blue Ocean Market, strong demand, high-end route

Strong demand, vast market space: The Middle East, especially the United Arab Emirates and Saudi Arabia, are undergoing large-scale infrastructure construction and urban expansion projects such as Saudi Arabia's Vision 2030 and post-Expo projects in Dubai. These projects have driven strong demand for high-quality building materials and home products. Compared to the oversupplied domestic market, the Middle East is in a rapid development stage where companies can escape from the dilemma of domestic overcapacity by entering the Middle Eastern market.

Strong demand in the high-end market: High-income groups in the Middle East have a strong demand for high-end home building materials. Companies can obtain high profits by providing high-quality, innovative design, and customized products instead of engaging in fierce price competition domestically.

Increasing demands for environmental protection and intelligence: The Middle Eastern market's demand for environmental technology and smart homes is rising, especially in luxury real estate projects. This provides Chinese companies with unique competitive advantages if they possess technological innovation capabilities.

2

Real estate and infrastructure boom

Infrastructure construction and real estate boom: The real estate market in the Middle East continues to be hot, especially in the UAE and Saudi Arabia. Major government-driven infrastructure projects will continue to drive strong demand for home building materials. Companies can seize these opportunities by filling the gap left by shrinking domestic real estate demand.

Policy support: Middle Eastern governments (such as the UAE and Saudi Arabia) promote local real estate and infrastructure development through a series of policies, providing a favorable market environment for international home furnishing companies. For example, the free zone policy in the UAE offers various incentives to foreign investment, helping enterprises quickly enter the local market.

3

Export taxes and geographical advantages

Tariff and tax advantages: The UAE's free trade zone policy provides preferential policies such as tax exemption and low tax rates for foreign investment companies, helping reduce export and operating costs. In addition, the Middle East region has close trade relations with Europe and America, making the cost of products entering the European and American markets through the UAE much lower than other regions, making it an ideal hub for exports.

Geographical advantage: As a global logistics hub, the UAE has advanced port and aviation facilities. Companies can quickly transport products to various parts of the world through the Middle East, thereby enhancing export competitiveness. Compared to the regional competitive pressure in Southeast Asia markets, the Middle East market has more strategic advantages.

Channels and Digital Transformation

Opportunities for Online and Offline Integration: Although the Chinese home building materials industry faces pressure from offline channels domestically, the Middle East market still relies on traditional retail channels. Companies can quickly establish brand awareness by combining online and offline methods and leveraging local sales networks. Additionally, the e-commerce market in the UAE is experiencing rapid growth, with increasing penetration of digital channels each year. Companies can gain a competitive edge in the market by strategically positioning themselves on e-commerce platforms.

Localization Operations: Companies entering the Middle East market can enhance their brand influence by establishing local subsidiaries or partnering with local distributors. They can also utilize digital tools (such as social media and e-commerce platforms) to increase brand exposure and customer loyalty.

▍The necessity of going to the Middle East: From domestic predicament to international opportunities.

By analyzing the pain points of the domestic home building materials industry and the booming development trends in the Middle East market, it is not difficult to see that going global has become an inevitable choice for industry transformation. The Middle East market provides vast growth opportunities, tax benefits, and policy advantages, while also avoiding the intense competition in the domestic market.

For domestic companies, leveraging market opportunities in the Middle East can not only effectively alleviate supply-demand contradictions but also elevate their brand's international image and realize a surge in product value. Just as more and more companies choose to establish factories in the UAE and utilize the "Made in UAE" label, they have not only smoothly entered the Middle East market but also opened up a new door to internationalization with good trade relations between the UAE and Europe and America.

▍Strategic advice for going to the Middle East.

1

Localization of products and design innovation

The Middle East region pays special attention to the heat resistance, moisture resistance, and sandstorm resistance of building materials. Therefore, companies should make localized improvements in product design to ensure high durability under high temperature and dry climate conditions. In addition, due to the clear preference for high-end luxury architectural styles in Middle Eastern countries, companies can introduce customized upscale home products to meet the needs of local high net worth customers.

Recommendation:

• Study the demand for luxury building materials and high-quality furniture in the Middle East market, especially in projects such as luxury villas and five-star hotels.

• Give priority to green and environmentally friendly materials, as the Middle East region's focus on sustainable construction is gradually increasing, aligning with global trends in green building.

2

Brand Building and Marketing

The Middle East market has a high awareness and loyalty towards international brands, especially in the high-end home building materials sector. Therefore, Chinese companies should focus on strengthening brand building by enhancing brand visibility through exhibitions, media promotion, and local partnerships. Participating in international construction material exhibitions in the Middle East (such as The Big 5 exhibition in Dubai) is an effective way to directly reach potential buyers.

Suggestions:

• By holding promotional events locally in the Middle East, combining digital marketing and social media to enhance brand influence.

• Establish experiential stores or showrooms in core cities such as Dubai and Riyadh to showcase high-end products, in order to strengthen customer trust.

3Strengthen cooperation with local businesses

Entering the Middle East market, relying on support from local partners is a very effective strategy. Collaborating with local developers, contractors, and distributors can help quickly penetrate the market. For example, many large projects in Saudi Arabia and the UAE are already led by international construction companies, allowing home furnishing suppliers to enter the supply chain through collaboration with these companies.

Suggestions:

• Find reputable local agents or distributors in the Middle East and leverage their market networks for rapid penetration.

• Collaborate with local developers and contractors to enter large-scale construction and infrastructure projects.

Using policy and financial support

The Chinese government's promotion of the "Belt and Road" initiative has provided strong support for enterprises going global, including export credits, insurance, and other financial tools. Middle Eastern countries have also shown a welcoming attitude towards Chinese companies, especially in the field of infrastructure construction, providing policy guarantees for the home building materials industry.

Suggestions:

• Actively participate in projects related to the "Belt and Road" initiative, and expand market opportunities with the support of Chinese policies.

• Apply for export credit and insurance services provided by Chinese banks to reduce financial risks.

5

Optimizing supply chain management

Logistics and supply chain management in the Middle East region are important considerations. Due to geographical location and climate factors, companies need to optimize product transportation and storage methods to ensure that building materials are not damaged during transport. In addition, working with logistics companies to ensure timely delivery of products to customers.

Suggestions:

• Collaborate with experienced international logistics companies (such as DP World) to ensure that product quality is not compromised during transportation and storage.

• Establish regional warehousing centers, especially in strategic locations like Dubai and Jeddah, to ensure the stability and efficiency of the supply chain.

6

Legal and Compliance Management

Companies entering the Middle East market also need to pay attention to local laws, regulations, and cultural traditions. For example, some countries have certain restrictions on the participation and investment of foreign companies, so companies should understand local regulations in advance to ensure compliance requirements are met. In addition, the cultural customs of Islamic countries have a significant impact on product design and marketing promotion, requiring special attention.

Suggestions:

• Work with local legal advisors to ensure that all business activities comply with the legal requirements of various Middle Eastern countries.

• Understand Islamic culture and respect religious and cultural taboos in product design, marketing, and advertising placements.