China's TCL: Still Trying to Get Through
Among Chinese companies trying to go global, personal-computer maker Lenovo is the name that people in the West recognize. The company has jumped to the No. 3 spot in worldwide computer market share thanks to its acquisition of IBM's (IBM) PC division. But before Lenovo took the plunge, the best example of a big-name Chinese player trying to expand abroad was TCL, a producer of TVs, cell phones, computers,and other consumer products.
Over the past few years, executives from the Guangdong-based TCL have been on the prowl, picking up well-known but troubled brands in the U.S. and Europe. The TV division, TCL Multimedia, now owns the RCA brand following a deal with France's Thomson. The cellular phone division, TCL Communication, also found a French company with a sagging brand and today controls the handset division of the Alcatel (ALA) brand.
The mobile-phone deal, concluded in 2004, was supposed to give TCL the juice it needed to establish itself as a real threat to powerhouses like Nokia (NOK) and Motorola (MOT). Inside China, the world's biggest cellular market, TCL was a newcomer to the business but rising fast. By the end of 2003, it had 10% of the market and, along with Chinese rivals such as Ningbo Bird, seemed ready to use its big base in China to become a global force.
Things didn't turn out as planned. Nokia and Motorola executives recognized that they were vulnerable and fought back aggressively in China. Meanwhile, TCL and other Chinese handset makers lost their way, steadily losing market share as consumers punished the local companies for quality problems and lackluster features.
"Our brand was damaged," concedes Liu Fei, the chief executive officer of TCL Communications. TCL also suffered from poor inventory management that left it with six months' worth of phones.
And Liu says that TCL even permitted Chinese distributors of its cell phones to return the goods, for a full refund, for an unlimited period of time. Today TCL's share inside China is a pitiful 1.8%. And Alcatel, which had originally signed up to be a joint-venture partner in the handset business with TCL, got cold feet and gave most of its stake in the venture to the Chinese company. (Today, Liu says, the French parent company owns less than 5% of TCL Communications.)
Now it's the job of Liu, a 42-year-old with a Ph.D. from the University of California, San Diego, to fix TCL's cellular division and help the parent company get back on track as a Chinese company that can compete globally.
In an interview in Hong Kong, Liu points out that he actually left TCL in 2002, when he was a vice-president at the company, after a falling out with management. "I believed the company was heading in the wrong direction," he says. "The management team was incapable of running an international company."
Since returning to TCL, Liu says he has treated the company as if it were a sick patient, and he's the doctor. "CEOs are like surgeons," he explains. "You have to cut when you need to. When you have a cancer patient, you don't worry about the future, you just worry about staying alive."
To keep the company afloat, Liu says that he fired two-thirds of the management team and revamped the sales policy. Out went the unlimited return policy for distributors, who now have just one month to send back unsold phones. "After 30 days, it belongs to you," he says. That has helped TCL keep its inventory levels to less than a month.
Liu also hasn't been shy about taking the knife to overseas operations. As a result of the Alcatel deal, TCL had hundreds of high-priced employees in France.
He's moved about 450 jobs from the Paris area to Shanghai and Shenzhen and reduced research-and-development costs, which had been 10% of Alcatel's cellular sales, to about 4%, which he says is the industry average. Liu contrasts his quick decision to cut in Europe with that of Taiwanese rival BenQ.
Like TCL, BenQ tried to jump-start its global brand by acquiring a down-on-its-luck European cellular brand, Siemens. But BenQ did not move quickly to cut jobs in Germany that it had inherited from Siemens, and that is costing the company dearly. Last month, BenQ's German subsidiary went into bankruptcy and on Oct. 24, BenQ announced a record quarterly loss of $370 million. BenQ's Taipei-traded stock has declined from $1.09 (USD) per share in March to 48 cents on Oct. 25.
Stronger in China
TCL, by contrast, is recovering, says Alex Kao, vice-president and analyst in Hong Kong with KGI Asia. He expects TCL to break even this year, on sales of $770 million for about 14 million handsets, and looks for 20% top-line growth next year, about double the industry average.
Kao believes that TCL will be making inroads in markets in Latin America and Europe, selling to operators such as Vodafone Group (VOD) in Britain, Telefonica (TEF) in Spain and CTI Movile in Argentina. Although TCL has long since surrendered its top local handset-maker spot to Lenovo, Kao believes that TCL is going to recover lost ground in China, the world's largest cellular market. "Their momentum is shifting back to China," he says.
But can any Chinese company hope to break through and become a real global player? The head of one of TCL's most powerful rivals believes it's possible. Michael Tatelman is the Beijing-based Motorola executive in charge of the U.S. company's handset business in China. He believes that the industry is ripe for consolidation. "There are too many of everything here," he says. "Too many manufacturers, too much distribution, too big a footprint."
Still Up in the Air
Being able to innovate requires a significant amount of scale, he points out. "Out of the local manufacturers, there will be a few that either combine or grow organically to achieve that scale. The market will shake out as most do. Emerging from it will be a strong and innovative group of smaller players."
And, Liu Fei argues, TCL will be one of them. "The world market needs a Chinese competitor serving the global wireless market," he says. "Will it be TCL-Alcatel? Will it be Lenovo? Will it be somebody else? That remains to be seen."
The good news, he says, is that TCL deserves to be mentioned as one of the contenders. The time lost over the past few years "is such a sad story," he says, adding "now we are back at the beginning. But I still believe China will have a great company."
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