Seeing the big picture
September 21, 2004
TCL’s strategy has always been to think big, even when it started out in the early 1980s. Photo by Simon Song
It’s hard to imagine that this modest nine-storey building, sheathed in white tiles and jammed up against a residential compound for traffic police, is the headquarters of the world’s largest TV manufacturer and one of China’s first true multinationals.
Yet TCL, with 28.2 billion yuan (HK$26.59 billion) in sales last year, and an average annual growth rate of 40 per cent for the past 13 years, has been astonishing people for years. The Shenzhen-listed firm has mushroomed from a small-time maker of audio tapes to a 40,000-worker conglomerate producing everything from TVs and mobile phones to power plugs and batteries.
Like many Guangdong enterprises, TCL got its start in low-tech manufacturing. Yet from its earliest days, there was something different about the company. Where other outfits focused on manufacturing, TCL was intent on building a brand name first and worrying later about where it was made.
Arthur Kroeber, managing editor of Beijing-based China Economic Quarterly, said TCL is "very sales-driven, unlike other mainland companies which are production-driven’’.
It was one of the first Chinese companies to harbour visions of global reach, not content just to sell its wares under foreign companies’ brand names. It also, in violation of mainland law, has always had an English, not a Chinese name.
Throughout its history, the company reached out to the world for partners. It was built through a string of domestic and foreign acquisitions.
The deal that crowned TCL’s rise came in January.
A photo at its Huizhou headquarters captured the moment, showing TCL chairman Li Dongsheng signing an agreement with Richard Harrington, CEO of French electronics giant Thomson, in the office of French Prime Minister Jean Pierre Raffarin, with President Hu Jintao looking on. The joint venture, two-thirds owned by TCL, is the world’s largest TV maker.
Yet that moment of triumph can be read another way - two giant firms trapped in a mature, fiercely competitive market joining hands in a last-ditch bid to save their collective skins.
Thomson spokesman Jean-Georges Micol admits Thomson approached TCL in a bid to unload its loss-making TV arm. Thomson had been operating in China for 15 years with a number of plants in Dongguan and Foshan. "Thomson is a strong contender in the US and Europe, but it’s small in Asia. TCL is strong in Asia,’’ said Micol. "This deal is a strategy to stop losing money and to gain a strong position in the market.’’
Cui Shaojie, media director of TCL’s brand control centre, said TCL Thomson Electronics (TTE) gives TCL a way around the anti-dumping laws that limit its access to the US and European markets.
While Li has said publicly that TTE aims to make 20 million TVs this year, and become profitable within 18 months, industry analysts wonder if the venture will prove more burden than boon : Thomson’s TV operations lost more than US$100 million (HK$780 million) last year. Since TCL itself is only modestly profitable - it had net earnings of 373 million yuan on sales of 14.7 billion yuan in the first half - the new company starts life in straitened circumstances.
Moreover, TCL won’t gain any brand recognition, since TTE products will bear the Thomson brand in Europe and the RCA label in the US. The alternative, though, was prohibitively expensive : Cui said it would take up to five years to build a brand name in the US, at an annual cost of between US$300 million and US$500 million.
Micol said Thomson wasn’t willing to sell or put its TV sales arm into the joint venture because it also handles the company’s profitable operations such as DVDs and MP3s.
Despite the risks and the limitations of the Thomson deal, TCL may have had little choice. China’s TV industry has been embroiled in bitter price wars for a decade, with little sign of an end. Just last month, TCL was forced to cut its LCD TV prices by 30 per cent. "TCL doesn’t have enough money to finance the R&D to make internationally-competitive products,’’ Kroeber said.
Such concerns were far from the minds of the 13 officials from the Huizhou Bureau of Electronic Industry who in 1981 borrowed 5,000 yuan from the government and established TTK Electrical Home Appliances. In one of China’s first joint ventures - in this case with a Hong Kong firm - it made audio cassette tapes.
TTK, which stands for tian tian kai, or "open every day’’, flooded the mainland with TTK-brand cassettes, and by 1985 it was selling 50 million tapes a year.
The market was soon saturated, and TTK managers cast about for a new product. During overseas sales trips, they noticed the ubiquitousness of telephones and figured China one day would be just as wired. At the time, Huizhou only had 1930s-style phones and residential lines were a rarity. The company began producing phones in 1985 and changed its name to TCL (Telephone Company Ltd).
"They didn’t do any in-depth research. They just relied on their market sense,’’ Cui said. By 1989, TCL had 60 per cent of the China market, and shipped phones to the US and Europe.
A few years later, in search of new worlds to conquer, TCL turned to colour TVs. "We look to the market all the time. We produce whatever sells well in the market,’’ said Denise Guo, TCL vice general manager.
In 1992, TCL began selling colour televisions under the TCL label that were manufactured at the Huizhou plant of its Hong Kong partner.
While other mainland companies build factories first and then worry about marketing and sales, TCL took the opposite tack, launching sales long before opening its own production lines. "We had to build our sales channels and strong branding sense first,’’ Cui said.
TCL got deeper into the TV business in 1993, when it teamed up with its Hong Kong partner to form a joint venture with a Shaanxi firm that owned an unprofitable TV production line, buying full control of the Shaanxi operation the next year.
TCL’s TV operations shifted into high gear in 1996, when it acquired Hong Kong-based Luks Industrial Co’s television plant in Shenzhen, a move feted on the mainland as a landmark example of a state-owned enterprise buying a Hong Kong firm. One year later, TCL bought a television maker in Henan province, then added production lines in Inner Mongolia, and Jiangsu and Jiangxi provinces.
TCL’s story is a history of joint ventures and working with other firms. The strategy "didn’t fall from the sky’’, Cui said. Managers studied how multinationals worked, he said.
While remaining a state-owned enterprise, TCL operates "very differently’’ from other state-owned companies, Kroeber said. In 1996, Li Dongsheng signed a deal with the Huizhou government, which still owned 100 per cent of the firm, under which TCL’s top executives would be awarded shares in the company if it met certain predetermined profit targets. In 2002, Li sold stakes amounting to 11 per cent of the company to a dozen investors, including Toshiba and Philips. Now the government’s share has been cut to 25 per cent, while managers own another quarter and 38 per cent is held by public shareholders. Li holds about 5 per cent.
Kroeber said Li set a precedent by bringing in foreign expertise and capital. "TCL was very aggressive to internationalise from the beginning. It was already very different from other joint ventures.’’
In 2002, TCL made its first purchase outside Asia, buying German TV maker Schneider, followed by the acquisition of US audio-video maker Go-Video Corp a year later. The Thomson deal capped it all.
Yet Cui admitted that TCL is not yet a truly competitive international player. Its role models, he said, are Samsung and General Electric. Senior managers are told to use a book about Samsung as their text. And the company recently adopted a management system made famous by GE - "6 Sigma’’. It is featured on numerous propaganda banners - even outside the toilets.
Even as it was building a TV giant, TCL jumped into the burgeoning market for mobile phones in 1999, though with mixed success. TCL Mobile just cancelled plans to sell shares in Hong Kong after reporting earlier that sales fell 30 per cent from the same period last year.
Li Dongsheng has been quoted as saying that while overseas expansion may pose risks, it’s less risky than sitting at home and waiting to die when China’s World Trade Organisation membership opens the door to full-scale foreign competition on its home turf.