Part 2: Consumer Electronics
The following is part two of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series and part 1). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's consumer electronics industry.
Consumer electronics is one of China's most mature industries, and one of its most developed in terms of overseas expansion. For some Chinese consumer electronics companies, the move abroad started as early as the 1990s, and even the late 1980s. 100% of large industry leaders interviewed have already started moving abroad, as have 80% of smaller leading companies.
80% of large industry leaders interviewed consider building their brand image from domestic Chinese to global name brand their primary goal in expanding abroad. Respondents hope to establish themselves as a top-rate international brand not only to build their reputation for quality, reliability, and innovation, but for reasons of national pride, to become "a Chinese brand known to all the world" that can compete with Japanese and Korean brands like Sony (NYSE:SNE) and LG. Many respondents indicated they were willing to spend up to 10 percent of their annual budget on marketing efforts abroad to build this sort of brand awareness.
While overseas sales have slowed recently for companies including Haier (600690) and TCL (000100) due to the financial crisis, a large majority of respondent companies are moving overseas in response to strong demand for their products, especially from emerging markets which have been less afflicted and still expect to see positive economic growth in 2009.
Current and Future Operations
Chinese consumer electronics companies strategies differ greatly as to which overseas markets they choose to target, and when. Some larger industry leaders such as Haier chose to go straight to the developed markets of North America and Europe to build their image as top rate international brand and facilitate later transition into other developed and/ or emerging markets. Other large companies such as TCL and the majority of smaller company respondents have chosen to enter emerging markets in places such as southeast Asia and Africa first, where their brands are more competitive with their existing technology, quality, and brand image. All respondent companies hope ultimately to establish a profitable presence in Europe and America, and will establish more R&D centers in these areas to better utilize the talent and technology advantages there and expedite the improvements in technology, durability, and brand image that will enable them to compete in these developed markets.
Many respondent companies began their move overseas exporting as original equipment manufacturers (OEM). Larger and smaller industry leaders alike are now pushing their own brands overseas. As one respondent told us, "the whole home appliance industry has realized that selling their own branded products is the only way a company can succeed in the long run. Selling OEM is more profitable than trying to sell with our own brand in the short term, but in the long run, we must build up our own brand."
Establishing partnerships and joint ventures was by far the most commonly pursued method by respondent companies in getting their branded products to market overseas. By partnering with a company already successful in the target market, Chinese consumer electronics companies can utilize the partner's pre-existing distribution and retail networks to bring their products to market, saving the time and expenses of building these key resources from scratch. Haier, for example, teamed up with Japan's SANYO (OTC:SANYY) in 2002 to form joint venture SANYO Haier Co. Ltd. and used SANYO's sales network to sell Haier branded products in Japan. The JV was liquidated in 2007, but only because both companies shared agreed "it had fulfilled its role of permeating the Haier brand into the Japanese market".
In addition to selling their products overseas, Chinese consumer electronic companies are increasingly investing in moving production closer to their target markets. Industry leaders such as Haier, TCL, Gree, Changhong (SHA:600839), Hisense (SHA:600060), for example, have all already established factories overseas in order to expedite and improve profitability of their expansion. Having factories abroad lets these companies avoid anti-dumping and tariff barriers, and reduces exchange rate risk. As inflation and labor costs rise in China, the move abroad also helps these companies keep costs down. As one respondent company told us, "inflation in China has increased production costs for air conditioners 20% year on year. We really don't have a choice—producing in lower-cost countries is becoming more and more important to growing profit."
Respondents feel the biggest challenge in moving abroad is understanding and adapting to a new business environment—learning the ropes, for example, in how to work with local distributors, and other local business practices and routines essential to smooth and successful operations abroad.
Working under international regulations and laws is another top challenge, getting the various certifications required by different countries for market entry in particular. This is most challenging for smaller and medium-sized companies, for whom the high fees of applying for these certifications alone are restrictive.
For larger companies involved in a wide array of partnerships, joint ventures, and different ownership strategies, building the right organizational structure to manage these company sub-segments has also proven difficult.
A related challenge is differences in culture. Cultural differences have proved challenging not only in efforts to tailor a product or marketing campaign to local tastes, but when working with and managing local team members.
Finally, and crucial to solving the above problems, Chinese consumer electronics companies are having a hard time finding the talent they need to expand abroad, both in terms of technological capability and experience leading and managing in a cross-cultural environment.
These challenges are not insurmountable; Chinese consumer electronics companies already compete with other multinational brands in developed and developing markets all over the world. Going forward, in addition to maintaining strict dedication to quality control and innovation, Chinese consumer electronics brands should learn from companies like Haier, for example, and work to develop deep understanding of their target markets in order to best meet needs of local consumers.
They also need to learn how to create long-term brand value and not compete solely on price.
The next several sections of this report will be published on Seeking Alpha by product category. For more information about this report and accompanying charts and graphs, please contact CMR directly at www.cmrconsulting.com.cn.
CMR Senior Analyst Ben Cavender, Analysts Natalie Zhu, Meredith Sun, and Charlotte MacAusland, and Summer Intern Christie Sze Contributed to this report.