Konka? China Working to Build Global Brand Names
Chen Weirong had seen one too many throwaway items stamped “Made in China,” and vowed to put his company’s name on something a centuries-old nation could be proud of.
So it is that this week, Chen is introducing a leading-edge product that the China of just a few years ago couldn’t have achieved--a low-priced, high-definition television designed to compete with the Sonys, Phillips and Samsungs of the world.
The 32-inch TV, being unveiled today in New York, will bear the name Konka, a brand found in millions of Chinese homes but virtually invisible elsewhere. It also represents the ambitions of China itself, whose economic reforms have now begun to transform sweater factories and farms into manufacturing powerhouses.
Konka, China’s leading TV maker with 25% of the market, is one of a handful of Chinese corporations beginning to leverage their low-cost production base, manufacturing skills and borrowed technology into global brand names.
And they have a powerful backer. Driven by the same nationalistic pride and economic ambitions as its smaller but more advanced Asian neighbors, China’s government is using familiar forms of government support--protected markets, subsidized research and cheap financing--to create its own “100 glorious companies.”
The obstacles are formidable: overcapacity and fierce competition at home, a lack of marketing and sales know-how, technology constraints and growing criticism from its biggest customer--the U.S.--about a trade deficit approaching $70 billion.
Earlier overseas ventures by Chinese companies have been plagued by costly missteps and political controversy, such as the recent charge that Chinese government companies were being used to covertly acquire sensitive U.S. military technology.
But none of this has curbed China’s global ambitions.
Although many state-owned enterprises remain burdened with debts and aging machinery, the most successful firms have sought out foreign technology, capital and management expertise. And by signing on as anonymous contractors for the world’s leading brands, they have proven they can survive the harsh world that lies beyond their protected borders.
Today, a handful of these firms stand on the brink of global recognition: Konka; Galanz, the world’s largest producer of microwave ovens; Haier, a leading appliance maker; and Legend, a Beijing-based firm that has edged out Compaq, IBM and Hewlett-Packard to become China’s top computer company.
Like child prodigies bursting onto the world stage, these Chinese firms are emerging from decades of isolation and politically dictated industrial mismanagement with amazing speed, catching their competitors off-guard.
Some Warn Against Underestimating China
U.S. executives who have watched Chinese firms squeeze generations of development into a decade warn against underestimating them.
Take televisions. Five years ago, foreign firms sold 70% of China’s televisions. Today, led by a few aggressive domestic companies such as Konka Group, the Chinese control 80% of their own market, according to Daniel Hsieh, vice president of consulting firm William Kent International.
Foreign executives are now warily starting to consider the prospect of the Chinese turning their attention elsewhere. “These foreign firms worry they’ll have no global market” in a few years, Hsieh says, only half-jokingly.
A Chinese equivalent of a Fortune 500 firm would have been unthinkable as recently as two decades ago, when China began cracking open its long-isolated economy to foreign firms eager to exploit the low-priced work force and unmet consumer desires.
But foreign firms helped accelerate China’s leap from subcontractor to competitor by trading away--usually under pressure from the government--their older-generation technology for improved access to China’s markets, laments Dan Rosen, a noted China expert and author.
“The Americans, Europeans and Japanese all underestimated the longevity and the usefulness of those older technologies,” he says.
Foreigners also underestimated the ability of Chinese entrepreneurs to compete. Michael Coorey, president of New York-based Bessemer Holdings, said his firm’s bottled-water company in China barely survived an assault by several scrappy local firms that kept finding ways to slash production and distribution costs and undercut his prices.
“We thought simply by being Western and better managed, we could waltz in and succeed,” Coorey explains. “It turned out, we couldn’t waltz.”
Galanz, the microwave maker, certainly learned quickly. Less than a decade ago, workers at the large enterprise started by the government of Shunde, a Southern Chinese port city, were busy filling the closets of America with down jackets and knit sweaters.
But in 1993, Galanz’s managers decided their future was limited by apparel quotas in the U.S. and cheaper foreign competitors. They decided to try producing microwave ovens.
Using Japanese technology, Galanz invested $5 million in a microwave manufacturing line and launched an aggressive advertising campaign and cutthroat price wars. The first year, the company made 10,000 ovens alongside its jackets and sweaters. The next year, the firm increased its output tenfold despite a flood that closed the factory for nearly six months.
When foreign firms such as Whirlpool, LG and Samsung began crowding into the Chinese market, Galanz looked for business overseas. The easiest route: producing ovens for its foreign competitors to sell under their brand names.
By the end of 1998, Galanz’s output had jumped to an astounding 4 million microwave ovens, and this year the firm expects to produce 6 million. Next year, its production capacity will double to 12 million.
Yu Yaochang, Galanz’s deputy general manager, said his strategy is simple: focus on a few markets and relentlessly pare back costs while staying on the cutting edge of technology. The company, which opened a research lab in California this year, was one of the first to produce a remote-controlled microwave oven. Next on the list: electric rice cookers.
Already, the Chinese firm controls 70% of domestic sales and claims 25% of the microwave market in Europe, though less than a third of its sales there are under its name.
But its leading challengers, the South Koreans, are rebounding after their nation’s economic crisis.
“The only way is to keep expanding and increase our market share,” Yu explains. “We must really go in and hit hard and destroy our competitors.”
Galanz, 32 Others Get Preferential Treatment
Like other key Chinese companies, Galanz has the right friends. The government has identified 33 export-oriented firms--including Galanz and Konka--for preferential policies such as easier access to state export funds, low-interest loans and looser export quotas.
Such subsidies are one reason many foreign firms are pushing for China’s entry into the World Trade Organization, which would force the government to end such practices.
“The playing field is not level,” complains Franklin Starn, general manager of Whirlpool Co.’s washing machine joint venture in Shanghai.
Still, Starn expresses grudging respect for his local competitors. He admits that Whirlpool recently agreed to begin manufacturing washing machines for an unidentified Chinese company to sell under its name--a decision that just a few years ago would’ve been unthinkable for a prestigious U.S. brand.
But Starn insists a rumor that Haier, Whirlpool’s biggest Chinese competitor, might build a plant in North or South Carolina isn’t keeping him awake at night.
“It’s one thing to break ground on a refrigerator plant in the Carolinas,” he says. “It’s quite another to try to sell refrigerators in the U.S. market. . . . There’s one big gorilla at the top of the hill and it’s Whirlpool.”
Perhaps. But the irony is that many of the appliances in American homes with well-known brand names are already produced in China. That means China’s biggest firms not only are battling some of the world’s most successful companies, they are also competing against themselves.
But Chen, the general manager of Shenzhen-based Konka Group, isn’t satisfied serving another master.
Konka--a joint venture between a Chinese local government and a Hong Kong firm--has embarked on a $175-million government-backed spending spree designed to extend its brand name from New Delhi to New York. The firm is traded on the Hong Kong stock market.
Chen’s strategy, which he outlined during an interview at Konka’s headquarters in this industrial zone bordering Hong Kong, is to target consumers in smaller countries and developing markets who are willing to eschew a status brand for good quality at a low price. He is phasing out contracts to produce televisions for other labels.
Konka--which produced 4.5 million television sets in 1998--is now one of the top five TV brands in the Middle East and Australia. The firm has started building TVs in India and plans to break ground this year on a plant in Tijuana.
By paring production costs to the bone, Chen has freed up more money for research and has opened a design lab in the United States.
The firm introduced Konka brand color televisions to the U.S. in November. It has since sold 100,000 sets here, including a popular candy-colored model, through chains such as Fry’s Electronics and Office Max, as well as the Home Shopping Network.
But Chen is counting on his high-definition TV--available in U.S. stores in two months--to put Konka’s name on America’s Christmas list. Also available this fall will be a combination television/DVD player and a new line of flat-screen televisions.
High-definition television has gotten off to a slow start, thanks to high prices and a dearth of television shows produced with the more expensive technology.
And by jumping into the most sophisticated end of the market, Konka is taking on giants such as Mitsubishi, Sony and Samsung. Displacing them from retailers’ shelves will be very tough, analysts warn.
But Chen is betting his reputation--and the image of his country--on a 32-inch HDTV that promises the same clear picture and sound as its leading competitors for about $3,000, significantly less than the premium brands.
“For a country of 1.2 billion people to be just making products under other companies’ names, it’s an embarrassment,” he says. “It’s a matter of national pride.”
