Shanghai Daily news

While much has been said about the rapid growth of China's electronic manufacturing industry, few of the major players have established a global brand presence. George Yang profiles which firms are making the grade abroad and the avenues they must take if they are to become known beyond their own backyard.
It is unlikely many entrepreneurs will deny that China is currently dominating the world's electronics manufacturing industry because of its low production costs. However, most agree that China lacks branded products that are recognizable in the global market.
At present, only a few Chinese electronics companies have established a brand presence in overseas markets. The majority of domestic enterprises are still playing only in their backyards.
Of the bravest to have ventured into the developed markets to polish their global profiles are Haier, Legend, Kejian and SVA.
For such a large portion of the world's electronics market, the number is relatively small. However, these companies have aspirations that are much greater than their home market.
Haier, China's largest appliance maker, is selling small refrigerators under its own brand in the United States.
It has ambitious plans to win a 10 percent slice of the US market for full-size refrigerators by 2005.
To do so, Haier must sell 500,000 units a year, 80 percent of which would come from its manufacturing plant in South Carolina and the rest from China.
Legend Group, China's largest computer maker, has unveiled "Lenovo" as its global brand to tap the overseas markets.
Legend officials said that the brand change would help the company penetrate into foreign markets because it is distinctive.
In an attempt to build name recognition, Kejian, a Chinese mobile phone producer, has sponsored Everton, one of England's Premier League soccer teams.
Elsewhere, the Shanghai-based SVA is selling its branded plasma display panel televisions in US retail chains such as Costco Wholesale.
A report prepared by management consulting firm McKinsey & Company said Chinese companies most likely to succeed in establishing brands in overseas markets were those with a "track record in low-cost, high-quality manufacturing" and who "show marketing prowess on the local level."
In general, most Chinese manufacturers have relied on a fully-integrated model used in the domestic market with their own distribution networks and large and inexpensive sales force.
"Replicating this model with traditional products in developed markets would be prohibitively expensive and time-consuming," the report said.
At present only a few Chinese companies, such as Haier, have built factories in the United States.
The Qingdao-based Haier believes that the added expense of producing goods in the United States will be outweighed by its ability to respond more quickly to changes in local consumer tastes.
Meanwhile, industry officials admit that it is not an easy job for Chinese electronic enterprises to brand their products in overseas markets.
"Creating and sustaining brands abroad is too complicated for domestic companies. They usually lack distribution channels and marketing skills," said Victor Fung, chairman of Li & Fung Ltd, a Hong Kong-based trading giant. "Getting brands through mergers or acquisitions could be a good way instead."
Suitable takeover targets for establishing a presence in the market would be foreign companies with valuable assets, including brands, customer bases, technology, or channels, the McKinsey report said.
One leading Chinese electronics maker has pursued this approach.
The Guangdong Province-based TCL International Holdings purchased an insolvent German television maker, Schneider Electronics AG, for US$8 million in 2002 in an attempt to break into the European market.
Included in the acquisition price were Schneider's plants, its distribution network of chain stores and trademark rights to a series of brands.
TCL, one of China's largest television manufacturers, hopes Schneider can help it expand its share as Europe now imposes quotas on TV sets imported from China.
A professional management team is helping TCL understand the European market and sales networks and some Schneider employees have been rehired to oversee production.
TCL's example provides proof that most of China's appliance and consumer electronics manufacturers with large aspirations have little choice but to go global.
As the competition in the domestic market is fierce, profit margins at home have dwindled sharply over the past years.
Due to years of price wars in the domestic electrical appliance market since the mid 1990s, the current profit margin on the production of cathode ray tubes is less than 2 percent.
As the task of establishing global brands is complicated, most Chinese companies have been content with their role as original equipment manufacturer, or OEM.
Through this designation, they supply the world's biggest brands and retailers' private labels with products ranging from toys to televisions.
Guangdong Galanz Enterprise (Group) Co, for instance, makes microwave ovens on an OEM basis for almost all the world's leading consumer electronic companies.
Jiangsu Little Swan Group Co supplies General Electric Co with dishwashers while Sichuan Changhong Electric Co makes televisions for retail giant Wal-Mart.
"The OEM strategy offers domestic companies a shortcut to go global, said Ye Bingxi, a marketing official of Royalstar Group. The company is a leading manufacturer of washing machines and refrigerators in the country.
"This route enables them to build up scale quickly, without the need for investment in marketing," he said.
Although the best Chinese OEMs have shown that they can be as profitable as sellers of branded goods - after all, they don't bear the costs of marketing and research and design - they view selling branded products as one avenue to getting an even bigger slice of the pie.
However, analysts say that domestic appliance and consumer electronics manufacturers have to find a method to sell branded products abroad as the OEM strategy will not work forever in the long run.
"The cost advantage of Chinese products will surely diminish as other countries will sooner or later be able to offer high-quality goods at a more competitive price," said Clay Timon, chairman and chief executive officer of Landor, a US-based consulting company which helps clients to build brand power.
On the other hand, branded products can be more profitable than those of OEMs, Ye adds.
Despite the sales boom of made-in-China products abroad, the profit growth of Chinese manufacturers is still much lower than that of their US counterparts.
For household appliances, the US profit pool is worth more than US$2 billion, nine times that of China's, McKinsey reports.
"Since brands represent high quality and advanced technology, domestic companies can charge higher prices if they stamp their own labels on the finished goods," Ye said.
Regardless, China has already become the world's largest home appliances manufacturing center. Almost all global electronics giants, such as Sony, Matsushita, Philips and Thomson, have already set up in the country, either by establishing wholly owned or joint ventures.
At present, China ranks number one in terms of output of five kinds of home appliances, namely air conditioners, microwave ovens, refrigerators, televisions and washing machines, said Xu Dongsheng, China Household Electrical Appliances Association vice general secretary.
Chinese output of air conditioners and microwave ovens account for 60 to 70 percent of the world's total. Refrigerators made in China account for 20 percent of global output, according to the association.