Online Extra: Kelon: "We Are a Multibrand Company"

Chairman Gu Chujun explains the $4 billion refrigerator and air conditioner maker's three-pronged strategy

Gu Chujun is chairman of the board of Guangdong Kelon Electrical Holdings, based in Shunde in China's Guangdong province. Under his tutelage, Kelon has successfully adopted a multibrand strategy for its refrigerators and air conditioners in China, helping it pull in $4 billion in revenues last year. Unlike competitor Haier, Gu says his company still isn't ready to push its own brand overseas. Dexter Roberts, BusinessWeek's Beijing bureau chief, recently interviewed Gu at company headquarters. Following are edited excerpts:

Q: What have been the most important things to focus on in building your company's brand to date?


This year we'll celebrate our 20th anniversary. As you know China was a planned economy before. You didn't have to worry about whether consumers liked your products. Since the early 1990s, China has moved toward a market economy. People now put great emphasis on brands. At one point there were more than 100 refrigerator factories in China, but as companies like us and Haier produced high-quality refrigerators and won consumers, we became famous brands.

Q: How will that process of brand-building change in the next few years?


Our goal is to build Kelon's high-end brand. One difference between us and other companies like Haier is that we are a multibrand company. We have Kelon as the high-end brand, Ronshen as the middle- to high-end brand, and Combine as the low-end brand, mainly targeted at the less well-off Chinese family or at Chinese farmers. So far, our multibrand strategy is proving very successful.

Q: Can you elaborate on this multibrand strategy?


The China market is different from Germany or the U.S. I think that 90% of German families can afford a Siemens (SI ) refrigerator. But for a Chinese family the situation is different. One brand cannot meet all the demands of the Chinese market.

At Kelon, our Kelon-branded refrigerators cost $1.80 per liter, similar to Siemens, while our Ronshen brand costs about $1.30 per liter. Finally our Combine brand is less than $1 per liter. No one can compete with us in offering such a low price. If other refrigerator manufacturers were to sell their refrigerator for such a cheap price, they would have no profit. But we are still profitable.

Q: What are the biggest challenges you face in doing business and in developing your brand in China?


Because we have three brands in both refrigerators and air conditioners, our biggest challenge is very large-scale production. For example, this year our goal is to sell 10 million refrigerators, but if we can only sell 3 million refrigerators, our efficiency and cost will be much lower than those companies who only have one brand but also sell 3 million refrigerators. We have three assembly lines, and we have to advertise for all three brands.

Q: What do you see as the biggest challenges for Chinese brands going overseas?


One big issue is that "Made-in-China" doesn't represent high quality. Even though our products are of very good quality, in overseas markets people aren't familiar with our brand. China still needs time to let people begin to know it can make quality products.

To change people's perceptions of products made in China, requires effort by all Chinese companies. Kelon alone cannot change that. So I hope that all Chinese companies begin to produce high-quality products and don't make fake and bad products that destroy the reputation of all China brands. But this needs time.

Now our overseas sales revenue is only $500 million, just a very small part of our total. We don't have our own brand in the overseas market, but we manufacture other brands to sell in the international market.

Q: What are your revenues, advertising budget, and R&D expenditures?


Our advertising budget in the domestic market is about 5% of our total sales revenue. And in overseas markets we don't advertise [because] we don't have our own brands.

R&D is about 2% or 3% of our total revenue. Kelon's refrigerator technology is very good. In a recent technology contest, we beat Siemens. For the same size refrigerator, Siemens consumed more energy than a Kelon refrigerator.

Q: What about revenues?


Our revenues and profits have been increasing very fast in recent years. Last year our total sales revenue reached $4 billion, with a growth rate of over 30%. Our overseas sales revenue doubled in 2002 and [again] in 2003. In 2001, our overseas revenue was only $60 million, in 2002 it was $120 million, and in 2003 reached $230 million. And this year we plan to reach $500 million.

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