A Dragon Not Ready to Fly

The Day Care Center, Silicon Hutong Plaza
Beijing

As the early sales results for the Christmas season begin to come in from the U.S., it’s pretty clear that consumer electronics (led by the iPod) was the category driving increases in sales. Eric Taub at The New York Times notes that consumers are shifting to digital products and flat panel TVs in droves.

In a year where most of the world’s consumer electronics manufacturers are high-fiving themselves for record-breaking results, China’s largest television manufacturer, Changhong, is declaring a huge first-time loss.

The details are ugly and not fully known. What the NYT will say is:

• Changhong says it’s rep owes Changhong US$468 million, an allegation rep Apex Digital president David Ji denied last year, saying they only took merchandise on consignment from Changhong and only took commissions, never owning title to the goods. Hmm.

• Changhong apparently appointed a single representative in the U.S., that only Changhong CEO Niu Runfeng was allowed to deal with. Hmmmm.

• Ji has allegedly been detained by Chinese police is Sichuan as part of an investigation.

There is a lot going on here. Changhong apparently would not invest in building TV sets with digital receivers in them as required in the U.S. of all television manufacturers. That automatically restricted the number of sets it could sell. Then they were hit by the new anti-dumping actions of the U.S. government, and Changhong sets probably got a lot less competitive with the big-box and discount retailers that were Apex/Changhong’s largest customers.

This is a huge fall from grace for Changhong and Apex, which together supplied the U.S. with 90% of the televisions made in China that were sold in North America. The companies won a Best of Show award at CES last year for a game product. Now the partnership is clearly in doubt.

Clearly, the anti-dumping ruling hurt, since the companies were bringing TVs in so cheap that it was pretty clear that they were being sold at less than cost. But to what end? Japanese companies have long sacrificed profits to build market share, but it seems that Changhong has tried, but failed, to take a page from that book.

As all of this unravels, a several lessons for aspiring Chinese multinationals are becoming apparent:

• Long term success for Chinese technology and electronics manufacturers in global markets will be directly tied to their corporate governance.

• Consistent investment in technology will be essential for all industries to compete in global markets. When people are buying flat screen TVs, trying to hawk big cathode-ray-tube based boxes makes you irrelevant, not inexpensive.

• Cheap products and dumping may build market share, but they don’t build mind share. Marketing, the construction of a brand, and the ability to understand and anticipate market directions in the major consuming markets worldwide will all be fundamentals, not extras. Look at BenQ.

The problem is, near-sighted approaches to globalization a la Changhong are the rule, not the exception in China. As the world’s begins to expect China to conform to global standards of corporate governance and business practices, running things “the old-fashioned way” will become untenable.