Kelon: From Guangdong To Your Kitchen?

A success in China, white-goods maker Kelon is going global

Lunchtime is over at the Kelon refrigerator factory, and employees who went home to eat are riding their motorcycles back to work. Motorcycles are beyond the reach of most Chinese factory workers, who can afford only bicycles.

Not so at Guangdong Kelon Electrical Holdings Co., an appliance maker owned by the village of Rongqi in the Pearl River delta. The average wage at Kelon is $1,500 a year--twice that at government-owned enterprises, which have long offered employees the "iron rice bowl" of lifetime employment. "We don't have an iron rice bowl," proclaims a scarlet banner inside Kelon's gates. "To survive, we must struggle."

A PERIOD OF CONSOLIDATION. As new Chinese Premier Zhu Rongji maneuvers to rejuvenate the Chinese economy, Kelon's struggles may be played out in factories all across the country. The refrigerator industry, like others from auto making to television manufacturing, is plagued by excess capacity. With economic growth slowing dramatically, demand in many parts of China is dropping. At the same time, the Asian currency crisis threatens some export markets. Like other Chinese stocks traded in Hong Kong, Kelon has been on a roller coaster as investors alternate between euphoria and despair.

A period of consolidation is approaching for many Chinese companies. The strategy of Kelon, China's No.1 refrigerator maker, provides a hint of what others may be planning. Kelon executives say they are heeding the lessons of the Asian meltdown by curtailing investment in new plants and turning to other companies for cheaper parts. "The question now is how to make good use of capacity elsewhere," says company Vice-President Don Lee.

For example, Kelon is working on acquiring a stake in a Guangdong component manufacturer. This use of low-cost suppliers is nothing new for Kelon; its privately held parent company makes air conditioners for General Electric Co.

As an enterprise controlled by village leaders, not Beijing bureaucrats, Kelon can be more responsive to market forces than its plodding cousins. In 13 years, it has grown into one of China's most admired manufacturers. "They are more like a private company," says Andrew Kuet, associate director at Deutsche Morgan Grenfell Inc. in Hong Kong. As a result, Kelon is more competitive, with workers given financial incentives to increase productivity. "If you want to be comfortable, work in state enterprise," says Chairman Pan Ning. "If you want to make money, work in a village enterprise."

WELCOME SHAKEOUT. Kelon stands to gain from Zhu's efforts to stimulate the rural economy. Most families in big coastal cities already own Kelon's $240 refrigerators, and sales growth--which averaged a torrid 30% a year in the first half of the 1990s--is falling. So Kelon needs to reach potential consumers in China's hard-to-reach interior. To get closer to those markets, Kelon is moving some production to western Sichuan province and to Liaoning province in the northeastern Rust Belt. Labor costs there are half those in Guangdong.

Despite the currency turmoil, Kelon figures it can still push ahead in exports. While sales to Southeast Asia will be just 20,000 this year, Kelon has 300,000 refrigerator orders from the U.S.--double last year, and accounting for $24 million of overall revenue of $410 million. To ensure that its technology can keep pace, Kelon has opened a research center in Japan--a first for a Chinese company.

Kelon is in a relatively strong position. On Feb. 26, the company reported 1997 profits of $68 million, up 27%. With results like that, Pan welcomes a shakeout. "Overcapacity is a good thing," he says. "It makes other companies get out of the market." Having struggled so long, Guangdong Kelon is not about to relax now.

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