Wednesday, May 18, 2005

Internationalization for Chinese companies: A beautiful trap?

On May 2, 2005, TCL Multimedia Technology Holdings Ltd., a subsidiary of TCL, reported a first quarter net loss of HK$205 million, down from net earnings of HK$253 million, a year earlier. Burdened by operating losses in the European and North American operations of its majority-owned joint venture, TCL Multimedia was a leading television manufacturer alongside Thomson SA of France. Meanwhile, its sister company, cell phone producer, TCL Communication Technology Holdings Ltd., posted a first quarter net loss of HK$386 million, down from net earnings of HK$206 million, a year earlier, as it struggled with excess inventory and the launch of a joint venture of its own with another French company, Alcatel SA.

What happened to TCL? As one of the most well-known conglomerates in China, TCL believed that teaming up with large international firms and seeking overseas expansion would be an effective way to enhance their competitive edge, especially as trade protectionism in Europe and the U.S. grew stronger. The purpose of setting up of the joint venture TCL-Thomson Electronics (“TTE”) and TCL & Alcatel Mobile Phones Limited (“TAMP”) in 2004 was to expand market coverage by gaining access to the obtained leading brands and exploiting low-cost manufacturing opportunities. These joint ventures made TCL the No.1 television manufacturer and the No. 7 mobile phone manufacturer in the world.

However, the worse-than-expected performance of these joint ventures made us rethink the goal of international mergers for Chinese companies. Does TCL aim to enlarge its size or enhance its brand value, increase sales or improve profits, become a market pioneer or just following the industry trends? What was the reason behind TCL’s “worse-than expected performance”?

First of all, television and cell phone industries are very competitive both domestically and globally, and demand growth is waning. It is very difficult for TCL to maintain an increasing rate of growth. One way out of the ever-changing and highly competitive market is through product innovation and through the fast pace of new product launches. However, in its joint venture with Thomson and Alcatel, TCL can hardly boost its R&D capabilities, since both companies are wanting in the area of product innovation. TCL’s focus on low-tech CRT television technology instead of high-tech LCD technology is also a high risk proposition. Although there is still some demand for CRT in China and other developing countries, such economies of scale from the cooperation between TCL and Thomson may not be sustained for a longer period of time.

Second, corporate management is a critical issue. Thomson is a huge company operating worldwide, while TCL has never run a global operation and can hardly glean such information from other companies in China. Within a limited timeframe (18 months as expected by management), TCL must integrate Thomson’s worldwide research, sourcing, production and distribution channels. However, a traditionally state-owned enterprise such as TCL has not integrated its corporate governance in the systematic way that Thomson has. Obviously, TCL had a hard time managing a company operating in totally different cultures. The low synergy of management styles between the two companies has prevented the new joint venture from better utilizing its resources. TCL and Thomson also have differing corporate strategies. TCL’s domestic competitive strategy is in the area of new product development while Thomson is well known for its quality improvement of existing products. Different operating environments among Thomson’s global branches have also worsened the integration of management in the new company. Moreover, the compensation design is not consistent within TTE. A senior manager in China complained that he earned less than the average employees of TTE in India. Such unfairness damages morale. Some employees have already left the company.

Third, the company lost its hold on the traditional market as the joint venture extracts too much attention from TCL. China’s domestic market is becoming more and more competitive as foreign competitors have begun entering low-end product markets which are traditionally the sole domain of domestic manufacturers such as TCL. As the joint venture did not enhance TCL’s overseas performance, the loss of its domestic competitive advantage certainly makes things even worse for the company. In 2004, TCL’s cell phone sales dropped 30.2%, causing it to fall from the ranks of the top three cell phone companies in China.

Finally, TCL faces the problem of cultural conflict. There is a joke about this. When the CEO of TCL planned to hold a meeting at the company’s French branch on a Sunday, the CEO was angry that he could not find anyone there. While Chinese culture emphasizes obedience and hard work, Western styles boast openness and efficiency. The difficulty of cultivating a unified culture in the new company has prevented the successful execution of the joint venture.

From TCL’s example, we can see that for Chinese companies which plan to expand abroad, perhaps the most important goal should be to analyze the market and devise strategies to suit that market. For example, although TCL wants to enter the French market through the Alcatel brand, the local customers in fact prefer the TCL brand to that of Alcatel. By establishing a joint venture, TCL sacrificed its brand equity, and the unattractive Alcatel brand became the bottleneck, impeding TCL from expanding into the European market. As a result, TCL has had to absorb huge losses from the overseas operation. Moreover, the products for the global joint venture have to be highly localized to meet customer needs in various markets. Lagging behind in LCD technology is the main reason that has prevented the new joint venture from rapid global expansion.

Needless to say, communication and mutual understanding between two different cultures is the foundation for the new joint venture to achieve sustainable development. TCL’s failure to integrate cultures and management styles is certainly impeding the new joint venture from improving its efficiency and building up its new competitive advantages.

TCL is certainly a pathfinder and its experience will serve as a valuable lesson for its followers. On May 1, 2005, Chinese PC manufacturer Lenovo announced that it finished the acquisition of IBM’s worldwide PC business. As more and more Chinese companies enter the global market and become increasingly experienced, internationalization should not be a beautiful trap.

Guyun (Clare) Tang
Lulu Xu
Xiaoli Zhou


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