Online Extra: TCL's Boss Talks Strategy

The fast-rising Chinese electronics maker's Tomson Li explains his expansion plans for domestic and global growth

Tomson Li is chairman and chief executive officer of TCL Corp., one of China's most dynamic and successful electronics companies. Having started TCL as a simple cassette maker in 1981, he now has big ambitions for this maker of TVs, DVD players, PCs, and mobile phones. Li hopes to oversee the transformation of TCL -- based in Huizhou, in China's Guangdong province -- into an international player that can eventually rival a Samsung or Sony (SNE ).

Li met with BusinessWeek Beijing Bureau Chief Dexter Roberts for a wide-ranging interview on Sept. 10 in the Chinese capital's International Hotel. And on Nov. 3, following the announcement that TCL had formed a joint venture with French electronics maker Thomson, Li spoke with Asia Technology Correspondent Bruce Einhorn in a conference room at the Conrad Hotel in Hong Kong. Following are edited excerpts from those two interviews:

Q: Can you sum up your company's strategy?


The Chinese economy will be an integral part of the world economy, and I want TCL to play a part in this. In the next three to five years, we want to see TCL's television and telecoms business make us one of the top five manufacturers globally. In household electronic goods and PCs, we want to be at the top of domestic manufacturers. This year we will sell 10 million each of TVs and mobile handsets. In the first half, TCL already sold 4.7 million TVs and 4.8 million mobile handsets.

Last year, total exports were $1.1 billion. However most were [sold under other brand names]. Our own brand name made up just $300 million of that. In five years, we aim at exports making up 45% of total revenue, and the proportion of our branded products will continue to grow. Our export growth has outpaced our overall growth over the past four years. Over the next five years, multimedia electronic products and mobile communications products will be our most important products.

We already have five manufacturing bases in China and overseas in Vietnam, Germany, and Indonesia. In China, we may consider adding new production bases in the Southwest and the Northwest. Overseas, we're looking at South America, India, and Russia for production.

Q: Last year TCL's reasearch and development spending was less than 3%, below international standards in your industry. How do you plan to change that? What are some of the other challenges TCL faces?


Our main challenge is we must improve our R&D level. Most Chinese companies lack intellectual-property rights. We want to focus on business in international markets. We must upgrade our technology and R&D -- this is a big challenge for all Chinese companies.

Over the next five years, we aim to raise R&D expenditures to 5%, which is standard for internationally competitive companies. That's the direction we want to move in. We also want to improve the level of human resources. TCL is still a Chinese company [that lacks internationally qualified managers].

Q: Where are TCL's advantages over foreign rivals?


Over the past four years, we have seen competition mainly from domestic rivals. But ever since China entered the World Trade Organization, we have seen competition from foreign rivals. Japanese enterprises are leading in R&D. Taiwanese and Korean companies have very low production costs. Lots of these companies are setting up in China.

I believe our competitive advantage over international companies is in two areas: One is the efficiency of our supply chain. Second, we know the market better than foreign competition. Our supply-chain management is characterized by high efficiency level and low costs. We can respond to the market faster. In terms of the Chinese market, we are particularly good at knowing what the consumer needs.

Q: Where are your advantages over domestic rivals?


Another advantage is that our management and employees have a passion to work. I myself put in at least 50-hour work weeks. Although it's a state regulation that employees work five days a week, we're implementing a five-and-a-half-day work week, and our employees are gladly accepting this.

In terms of corporate culture, TCL is quite unusual. One reason is our shareholding structure. A number of managers are also shareholders -- that serves as an incentive for them to work hard. Our shareholders make up approximately 3% of our total workforce, or about 1,000 employees. The total share held by these 1,000 employees makes up 40% of TCL Holding Co.

Subject to a number of factors, the number of public shareholders may go up. That's particularly likely if the portion of TCL held by the state is reduced. Also, TCL has never received any investment from the state. TCL has grown up from the market economy. This has allowed us to know the market better and made us more competitive.

Q: How serious are falling prices in the mobile-phone sector?


For any one single model, the trend is definitely toward falling prices. For example, a model might have reduced its price 10% in the first half. Maybe it will be reduced a further 10% in the second half. But as new phones with new features are continually rolled out, the overall average price of mobile phone models won't drop that much -- and at a slower pace than any one model.

For TCL, the challenge will be to speed up the pace of development -- how to roll out new products to meet the demand, how to continue to improve our R&D. We are introducing new products every month, instead of yearly. We plan to have 40 new products this year. On average, the lifespan of a new phone is only six months.

We do believe that cell-phone profit margins will further narrow over the next few years. The net profit margin in the first half was 9% to 10%. The gross profit margin was 20%. Inventory control is very important for manufacturers. If one doesn't control inventories in this business, it will lead to huge losses.

One way to meet the challenge [of falling handset prices] is to move away from just making phones to developing multimedia communication devices. Of course, we'll move from producing black-and-white to color phones. We'll add functions like PDA and information enquiry services. For example, with our next phone, one can track news and follow stock prices in Hong Kong as well as China. It also offers notebook functions. The next generation will be able to send and receive e-mail. That will come out in the first quarter of next year.

Q: In such a difficult business climate, what makes your handset business competitive?


A key reason is our industrial-design team. They have been able to identify what our customers want. We were pioneers in incorporating gemstones into our designs, for example. At the time, people said we were crazy. Now, Motorola (MOT ) and Nokia (NOK ) have followed this trend.

We now have about 12% market share. The leaders are Motorola, Nokia, and Bird -- all of them are our rivals. I'm very confident that the mobile handset business will be like any other. Chinese makers will dominate, and our aim is to be No. 1 in the Chinese market. We are not so ambitious overseas. On a global basis, we want to be among the top five brands.

Q: What's TCL's strategy for going overseas?


We have three main strategies overseas. First, we will fully use our advantage in manufacturing when working with our partners [such as Thomson]. This has been our major strategy. The risks are low, but at the same time, the profit margins are also lower.

Our second strategy we have followed in Southeast Asia, India, Russia, and the Middle East. In these regions, we have sold our branded product. This strategy involves a higher capital investment, and we have to devote more of our resources. We have done particularly well in Vietnam, Russia, and Indonesia.

Our third strategy is adapted to the Europe and U.S. markets -- the largest overseas markets. These markets are more mature and are already dominated by other brands. To develop our brands there involves higher investment and more risk. That's why we have acquired companies. This has lowered our cost, and the risk is lower.

Whether this third model will be successful, we don't know yet. But we have seen other companies from Taiwan and South Korea that have not been very successful [with their branding strategies]. Two examples are Acer and LG, both of which lost of a lot of money going overseas. There are really successful examples like Samsung, but most companies aren't like them.

TCL's strategy is that we want to find strategic partners. We don't want to work alone and have to bear all the risk. That's because in these mature countries, the growth is relatively stable, and entry barriers are higher. Our strategy is different from Haier -- that's partly because we are in two different industries. Haier is in household appliances. We are in electronic devices and mobile communication devices.

Q: What's your opinion of trade frictions with the U.S. and anti-dumping actions that have been taken against Chinese TV makers?


Protectionism is growing in the U.S. As for the anti-dumping actions, I don't think they're fair. The TV industry in China is totally market-driven. The state doesn't offer any assistance at all. But the U.S. still says China is not a market economy.

Anti-dumping actions are getting more and more political. This is not purely a trade issue. It has a strong political color. Actually, we are using the legal process to try to turn around this issue of anti-dumping. However, because of politics, we don't know what the final outcome will be.

Q: At the press conference announcing the joint venture, you described Thomson in such glowing terms. It has been in the business so much longer and is so much bigger. Shouldn't it be Thomson taking over TCL?


Our TV competitiveness is stronger.

Q: Why go ahead with this deal?


Being the No. 1 player in TVs is very important in reaching our goal of being a global company. In consumer electronics, Chinese enterprises will be the next major supplier. So TCL should take the chance to grab this opportunity. China is already the largest manufacturer of consumer electronics. But in the past, Chinese weren't managing the international market. This will really be a breakthrough in this area.

Q: TCL has so many products, not only TVs and DVD players but also phones and PCs and others. Why? Aren't you running the risk of spreading yourselves too thin?


All the successful international consumer-electronics companies have a lot of products. They're not single-product companies. Although in these two years Sony has had problems, I still think that Sony is a very strong company. And Samsung in the past two to three years has proven to be one of the most competitive companies in the world. These two are engaged in popular products.

Also, many technologies of these products are interrelated. There are lots of overlaps in the markets. Consumers expect companies to be able to provide many products in their households.

Q: But almost nobody except Dell (DELL ) makes money in the PC business anymore. Why should you be in PCs?


Look at Legend. Its major profit is from the PC business. This year, TCL's PC business will have a profit. For our overall development, we believe there's good hope in the PC industry.

Q: Now that you've done the deal with Thomson, are you going to start spelling your first name with an 'h'?


When I started to call myself Tomson, I wasn't aware of a company named Thomson. [When negotiating this deal,] the first time people exchanged name cards, they were very surprised. It's destiny.

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