In a hotel suite that looks out across the manicured technology parks of Shenzhen, in southern China’s Guangdong province, consumer electronics entrepreneur Li Dongsheng weighs his chances of challenging Japan’s Sony Corp. “This is our target,” says Li, 48, chief executive officer of TCL Corp., which he has turned into the world’s biggest maker of television sets and the No. 12 mobile phone producer. “Now we can say we have the opportunity.”
Li began his global push in July 2004, when he took a 67 per- cent stake in a $500 million joint venture with Paris-based Thomson SA. He plans to sell the French company’s RCA televisions in North America, Thomson sets in Europe and TCL models in China, the world’s biggest TV market. With the deal, a new TCL-controlled unit called TTE Corp. leapfrogged ahead of all competitors, with 10 percent of the worldwide television market in the first quarter com- pared with 8.3 percent for South Korea’s Samsung Electronics Co., according to research firm iSuppli Corp. of El Segundo, California. “TTE is the first global Chinese company,” says Al Arras, 55, TTE’s Denver-born president, who joined General Electric Co. in 1979 when it owned Indianapolis-based RCA Corp.
It will be cheaper for other Chinese companies to follow TCL’s lead, says Shanghai-based Chris Ruffle, who helps manage $15.9 billion for Martin Currie Investment Management Ltd. in Edinburgh, Scotland. That’s because on July 21, China allowed its currency to strengthen by 2.1 percent against the dollar after a decade of holding the yuan at a rate that Western countries criticized as too low.
So far, Li’s international expansion has proved costly for investors. Since he took control of the RCA and Thomson brands, TCL’s shares have lost two-thirds of their value on the Shenzhen Stock Exchange, skidding to an all-time low of 1.88 yuan on July 8 from 7.03 yuan in July 2004. On July 12, the shares traded at 1.95 yuan. That compares with a 20 percent drop in the benchmark Shen- zhen Stock Exchange Constituent A-Share Index of 40 leading companies. In the year after Thomson shed the TV unit, its shares shot up 30 percent to trade at 19.6 euros on July 12.
TCL is leading a Chinese onslaught targeting international brands, from RCA to IBM. So far, the company’s investors are the losers.
Part of the reason for TCL’s plunge is that Li hasn’t stopped with TVs. In September 2004, he bought 55 percent of a $110 million joint venture with Alcatel SA, also based in Paris, to sell the French company’s phones in Europe and Asia. In May, he took over the entire venture after Alcatel backed out.
The worldwide ambitions of Li, the son of a city government official in the electronics and shoe-making factory town of Huizhou, are putting him in the vanguard of a throng of Chinese hopefuls targeting widely known international brands. In December, Beijing-based Lenovo Group Ltd. agreed to pay $1.25 billion for International Business Machines Corp.’s personal computer unit, making Lenovo the world’s third-largest PC company. In June, Cnooc Ltd., China’s biggest offshore oil producer, offered $18.5 billion for El Segundo, California– based Unocal Corp. in a bidding battle with Chevron Corp., the No. 2 U.S. oil company. On July 20, Chevron raised its offer to $17.1 billion. Also in July, Haier Group Corp., China’s largest home appliance producer, called off a $1.28 billion offer for Newton, Iowa–based Maytag Corp., the maker of Hoover vac- uum cleaners, after Benton Harbor, Michigan–based Whirl- pool Corp. offered $1.35 billion.
During the next two years, the Chinese will orchestrate as much as $80 billion of international acquisitions, more than 10 times the $7 billion in 2004, says Donald Straszheim, a for- mer Merrill Lynch & Co. chief economist who now heads Los Angeles–based research firm Straszheim Global Advisors.
The abundance of deals is sparking political controversy in the U.S., much as a slew of Japanese takeovers, including New York’s Rockefeller Center, did in the 1980s. “It’s back to the fu- ture,” says David Wolf, 41, chief executive officer of Wolf Group Asia, a Beijing-based consulting firm. Wolf adds that China will emerge as a global rival regardless of whether it buys up international brands. “China is going to compete against the U.S. whether or not they own Unocal or RCA,” he says.
Many of the takeovers won’t work, predicts Hugh Young, 48, Singapore-based managing director of Aberdeen Asset Management Plc, who oversees $18 billion in Asian stocks. The Chinese lack management skills and so far possess scanty experience in running international companies, he says. “There are going to be some stunning successes but even more stunning failures,” Young says.
After Lenovo agreed to buy IBM’s PC unit on Dec. 7, the Chinese company’s shares slid 14 percent on the Hong Kong Stock Exchange, falling to 2.30 Hong Kong dollars on July 12. The benchmark Hang Seng Index fell 0.62 percent during that time. By contrast, Cnooc shares jumped 15 percent to HK$4.93 compared with a 2 percent rise in the Hang Seng Index after the Unocal bid surfaced on June 7.
One reason for the spotty record for China’s nascent Western acquisitions is trouble in melding cultures that are separated by thousands of miles, language and management philosophy. Li says he favors Asian corporate values over the ways of Western companies. In a 2002 speech to TCL employees, Li recounted how he’d set up a joint venture with South Korea’s LG Electronics Inc. In 1998, LG wanted to cut its Chinese investments with TCL to cover debts from the Asian financial crisis, which had slashed half of the won’s value in six weeks. Li recalled that LG’s manager wept when he told Li that LG wanted to sell. “He couldn’t hold back his tears,” Li said in the speech. “Don’t expect me to believe that a Yankee would shed tears if he had to sell his boss’s assets. That’s the difference between Western and Eastern cultures. And that’s the kind of corporate spirit we want to cultivate.”
Li has endured at least one culture clash so far. Last September, when Alcatel invested 45 million euros ($54 million) to gain a 45 percent stake in the phone venture with TCL, the French company had its sights on becoming one of the world’s top five handset producers. Alcatel planned to con- tribute its so-called 2.5-generation mobile phone technology, which lets users download text, pictures and video at speeds slower than the newest 3G Internet technology. In re- turn, Alcatel sought access to TCL’s low-cost manufacturing in China, the world’s fastest-growing market, with 359 mil- lion cell phone subscribers, according to BDA China Ltd., a Beijing-based research firm.
Eight months later, Alcatel walked away from the venture. It swapped its stake for 5 percent of TCL Communication Technology Ltd., the unit that holds TCL’s phone businesses. Far from lifting the French and Chinese companies’ combined 2003 global market share of 3.3 percent, sales fell by one-third for a 2.2 percent share in 2004. By the first quarter of 2005, the venture’s share had dipped to 1.5 percent, according to Strategy Analytics Inc., a Boston consulting firm. While Alcatel focused on no-frills, high-quality handsets, TCL’s line featured diamond-studded and fur-covered models popular with the Chinese. “The cultural differences between the two companies were huge,” says Etienne Fouques, a Paris-based Alcatel executive vice president. “The French side had an obsession with quality. The other side made fantastic handsets. There was no synergy at all.”
Li, who relies on an interpreter when conversations stray from Chinese, says TTE, the television venture with Thomson, is in better shape. He adds that TCL doesn’t yet have the international know-how to turn around a global business of 20,000 Chinese employees and 9,000 foreigners as quickly as he’d hoped. Li’s empire stretches from factories in Inner Mongolia to a research hub in Angers, France, to RCA head- quarters in the U.S. “We have to learn and understand Western culture,” he says.
Economist Andy Xie says hurdles to melding far-flung businesses are one of his concerns. “The cultural integration is still very difficult, and Chinese companies are buying brands that are in trouble,” says Xie, 45, Hong Kong–based chief Asian economist at Morgan Stanley, the world’s largest securities firm by market value.
While Sony, Samsung and other Japanese and South Korean companies built their own brands, the Chinese are try- ing to buy assets ready made and on the cheap, Xie says. “It’s a unique strategy by Chinese companies, and we do not know how it will work,” he says.
Losses at the Thomson and Alcatel units before they be- came part of the joint venture aren’t helping Li’s case. In the two years ended on Dec. 31, 2003, the Thomson TV division had a ¤258 million loss, according to a 2004 Ernst & Young LLP audit filed with the Hong Kong Stock Exchange. In the three years and three months through March 2004, the Alcatel phone business had a ¤507 million loss, Ernst & Young said. Li says these units remain unprofitable.
‘You either become a global company, which allows you to survive and compete, or you become outmoded,’ Li says.
TCL itself reported a 57 percent decline in profit to 245.2 million yuan last year even as sales jumped 42 percent to 40.2 billion yuan from 28.2 billion yuan in 2003, the year be- fore Li embarked on his overseas quest. In the first quarter of 2005, TCL had a loss of 327.2 million yuan compared with profit of 247.6 million yuan in the year-earlier period. “I can understand the doubts investors have,” Li says. “Right now, the numbers don’t look pretty.”
Even so, Chinese companies have little choice except to follow TCL’s example of buying name brands and moving abroad, says Paul Gao, a Shanghai-based principal of U.S. consulting firm McKinsey & Co. “The Koreans and the Japanese had the luxury of a protected domestic mar- ket,” Gao says, referring to import restrictions that barred most foreign competitors from gaining a foothold. “China is far more open as a market. It’s fiendishly competitive, and if they want to compete globally, they don’t have time to build their brands organically.”
Li says that’s why he’s in such a hurry. He’s striving to boost television set sales to 22.5 million this year from 16.7 million in 2004 and to double handset sales to 20 million. “You either become a global company, which allows you to survive and compete, or you become outmoded and get eliminated,” he says. “Those who exist in between don’t survive very long.”
Li, slightly built and bespectacled, says he knows about survival. He was raised in Huizhou, an industrial town a two-hour drive north of Hong Kong. His high school education was interrupted when Mao Zedong unleashed the Cultural Revolution in 1966. As a teenager, Li toiled in farm labor for three and a half years. “It was very hard work,” he recalls. “At night, I studied.”
In 1982, six years after Mao’s death ended the Cultural Revolution, Li completed a bachelor’s degree in engineer- ing at South China University of Technology in Guanzhou, the capital of Guangdong province. Back then, the Huizhou government was setting up a company to make audiocassette tapes. Li signed on as the 43rd employee and the 13th man- ager, TTE Brand Director Denise Guo says.
In 1987, at age 27, Li proposed that the company, still 100 percent owned by Huizhou’s local government, branch into fixed-line telephones. The government chose the name TCL for Telephone Corporation Ltd. Li took the title “second general manager” of the phone-making business, which was housed in a tin shed. The first phones were outmoded when they hit the streets, he recalls.
Later that year, Li visited Amsterdam-based Royal Philips Electronics NV. “I remember feeling completely baffled,” Li said in a 2002 speech to employees. “They were at a level we couldn’t possibly reach.” Even so, Li pursued his bet on Chinese-made telephones for the Chinese public, gambling that a plethora of consumers and cut-rate prices would overcome technological drawbacks. “Everyone in China was getting into phones,” Li says. In 1985, only three people per thousand had access to a phone line, according to United Nations statistics Today, more than 500 people in every thou- CHINA’S TCL Changhong Electric Co., with a 21 percent market share. That year, TCL sold 8 million sets in China. “I no longer feel they exist at that unreachable level,” Li said, referring to Philips in another speech. “If we keep our current pace, we can narrow our differences even more and eventually surpass them.” A change of strategy at Thomson played into Li’s hand. Seek- ing to sell off its consumer electronics business, sand have either a fixed-line or mobile phone, amounting to 692 million phones for China’s 1.3 billion people, according to BDA China.
In 1992, Li proposed that TCL begin mak- ing televisions, which were evolving as the next consumer craze. Li says his own quest to buy his first TV, a 16-inch (41-centimeter) Hitachi model, took him three years after he started at TCL. The Huizhou government named him general manager of electronics and put him in charge of TCL’s new television venture. “Being in the right business at the right time is very important,” Li says.
In 1993, three years after China opened its stock exchanges in Shanghai and Shenzhen, Huizhou’s leaders started shedding ownership of TCL. During that time, many Chinese provinces and cities were setting up their own consumer electronics ventures, spawning some 50 Chinese TV manufacturers. As Li battled with dozens of local TV makers at home, he found his first chance to expand overseas: He set up a facto- ry to make TV sets in neighboring Vietnam.
Li says the new company endured setbacks, which he didn’t describe. Most TCL executives wanted to pull out. “I was wavering myself,” Li said in a 2002 speech to employees. The general manager, Li Chunyu, fought to keep going. Changhong Electric Co., with a 21 percent market share. That year, TCL sold 8 million sets in China. “I no longer feel they exist at that unreachable level,” Li said, referring to Philips in another speech. “If we keep our current pace, we can narrow our differences even more and eventually surpass them.”
‘TCL has been losing sizable market share to foreign vendors in China,’ one researcher says.
A change of strategy at Thomson played into Li’s hand. Seeking to sell off its consumer electronics business, Thomson executives traveled to Asia to find a buyer for its television unit, says TTE’s Arras, who, as a Thomson executive vice president, was a member of the delegation. “TCL was the most international company,” Arras says. “I did not see another Chairman Li out there.”
In November 2003, the companies announced the TTE joint venture. Li became chairman and moved into a new, 19-story TCL Tower in Shenzhen, about an hour’s drive from TCL’s base in Huizhou. TCL put its share of the Thomson venture into an existing company called TCL International Holdings and then changed the name to TCL Multimedia Technology Holdings Ltd. Today, TCL holds 54.8 percent of the Hong Kong–listed television unit. “We have confidence that the TCL management team is taking the right steps to drive the business toward their announced goals,” Thomson Chief Financial Officer Julian Waldron wrote in an e-mail to Bloomberg News. He declined to comment further.
TCL’s mobile phone business began to grow, too. In 2003, it sold 10 million handsets valued at $100 million and claimed 10 percent of a domestic market that Finland’s Nokia Oyj and Motorola Inc. of the U.S. had long dominated. In April 2004, TCL and Alcatel announced their ill-fated phone venture. Initially, investors welcomed the joint ventures. Shares of TCL Multimedia rose to a four- year high of HK$3.21 on Jan. 8, 2004, from HK$1.87 on Oct. 23, 2003.
In January 2004, parent TCL Corp. had its initial public offering in Shenzhen, home of the smaller of main- land China’s two stock exchanges. The shares surged 78 percent to 7.59 yuan from 4.26 yuan on the first trading day, after investors demanded 86 times more than the available shares. Then in September 2004, TCL listed its phone unit, TCL Communication Technology Holdings Ltd., on the Hong Kong exchange. Its stock rose 16 per- cent during the first day to HK$1.16.
Since then, shares of TCL and its publicly traded units have shed at least 43 percent of their values. Sales from the two biggest Chinese phone manufacturers, TCL and Ningbo Bird Co., peaked in 2003 and then fell when Nokia and others renewed their push, says Ted Dean, managing director at BDA.
“TCL has been losing sizable market share to foreign vendors in China,” says Neil Mawston, a London-based researcher at Strategy Analytics Inc. “Nokia, Motorola and others aggressively launched more low-end phones in rural regions.”
Investors cheered by TCL’s initial surge have fled. “It has been quite disappointing,” says Martin Currie’s Ruffle, 46, who bought TCL Multimedia shares at their 1999 IPO and has since sold most of his stake.
Li, whose achievements at TCL have earned him appointment to the Central Committee of the Chinese Communist Party and the French Legion of Honor medal, has suffered along with his institutional investors. Li personally holds 5.6 percent of TCL Corp. shares. He also owns just less than 1 percent of TCL Multimedia and 0.6 percent of TCL Communications, according to data compiled by Bloomberg. The collapse of the market value of the three companies slashed his fortune to $46 million as of July 12 from $170 million at its peak in February 2004. In April, Xinhua Far East Ratings, a Hong Kong–based firm that specializes in mainland Chinese companies, reduced its rating on TCL Corp. debt by two levels to BBB, its second-lowest investment-grade rating, from A–. Xinhua Managing Director Ivan Chung, a former Moody’s Investors Service analyst, says TCL’s worse-than-expected 2004 results, losses in its joint ventures and deteriorating sales of handsets prompted the cut. Chung also cites an increase in TCL’s gross debt to $722 million from $311 million, raising its debt-to-capital ratio to 38 percent from 33 percent.
Merrill Lynch, the second-biggest U.S. securities firm by market value, has told clients that TCL Multimedia may rebound in the second half of 2006, a year later than Merrill originally predicted. “TCL’s management needs more time to move up the learning curve,” Hong Kong–based analysts Min Lu and Tien Yu Sieh wrote in a June 27 report when they cut their rating on TCL Multimedia shares to “neutral” from “buy.” “We continue to believe internationalization bodes well for TCL’s long-term growth potential,” they added.
Li says investors need to give him more time. He says he can cut the television and handset business losses by year- end. He wants to produce more phones, TVs, tubes and chassis in China, where labor costs are about 5 percent of the levels in the U.S. and France and 60 percent of the rate in Mexico, where RCA sets are made.
Li says he’s aiming for sales growth in markets as diverse as the U.S. and the poorest regions of western China. In the U.S., RCA ranks third, with a 10 percent market share, be- hind Sony and Sanyo Electric Co. and ahead of Toshiba Corp., according to Chicago-based research firm Synovate.
Li’s growth strategy is to capture a niche producing what TTE describes as “affordable digital.” The company’s 22 new models range from $279 cathode-ray-tube sets to $3,000 high-definition products. “We are a mainstream brand offer- ing good quality; good, decent pricing; but not a lot of high- end features and complexity,” Arras says.
At the same time, Li says, he’ll spend an undisclosed amount to update TTE technology to create more high-end televisions for Western markets. Increasingly, the company will build Thomson and RCA models on a TCL chassis. “It’s a brilliant strategy,” Wolf Group Asia’s Wolf says. “It’s like Volkswagen does with its Audi and Skoda brands.”
Li says he also sees opportunities at home. While almost every household owns a TV in wealthy Chinese cities such as Shanghai, where gross domestic product per capita is $6,000 a year, little more than half of the homes in western China have one. There, where GDP averages $1,000 per capita, TCL is selling a cheaper brand called Rowa, which accounts for 10 percent of TTE’s Chinese sales.
TCL sets match the quality of imported rivals, says Wang Yongzhi, 40, a Beijing Internet consultant who bought a 29- inch TCL TV in 2002 for 2,100 yuan ($254). “I had a Sony in the early 1990s,” he says. “At that time, the quality of Japanese and Western sets was much better. Now, there’s not much difference.”
To meld TTE’s Chinese, North American and French units, Li’s executive committee meets monthly in each location. He sends Western employees to work in China and vice versa and encourages Chinese workers to learn French and English and the Europeans to learn Mandarin Chinese. “We go to Europe and North America; we don’t just work,” Li says. “We also go to watch ballgames together and visit the church for Sunday worship.”
TTE’s Arras says Li and his team are learning that in a glob- al company, they have to delegate. “Top folk can’t be every- where,” Arras says. At the same time, managers have to take individual responsibility. “I get a lot of suggestions and ideas, and they tell me, ‘Al, it’s your decision,’” Arras says. “It’s one of the reasons I am still here.”
Arras says that in last November’s budget, the Chinese wanted to increase U.S. television sales by 5 percent. He deter- mined that the goal could be met only by cutting profit margins, which would delay RCA’s recovery. At first, he agreed to do it. Then in March, he persuaded the Chinese to settle for no sales increase this year.
Some investors who have abandoned TCL Corp. and its units since the Thomson and Alcatel deals say they haven’t ruled out returning. “Li Dongsheng is still a big figure in China,” says Liu Yang, Hong Kong–based managing director of Atlantis Asset Management in London, who oversees $1.8 billion in Asian stocks and has sold all of her Thomson Multimedia shares. “TCL will survive, that’s for sure. It may even become another Sony someday. That’s why I want to give my- self a little bit of time to watch.”
In one of his many speeches to staff, Li disclosed that he endured many sleepless nights before deciding to do the Thomson deal. He also said he feels a responsibility as Chi- na’s global pioneer. “We are the first company to step out of China,” Li says during the interview in his hotel suite. “Our success concerns not just us but determines whether or not other Chinese companies can walk the same path we did.”
How’s he sleeping now? “Not bad, not bad,” Li says be- fore excusing himself to head off for another intercontinental executive committee meeting. Investors have to wait a while longer before they can rest as easy.