As China Prepares to Enter the WTO, Its Firms Are Gearing Up to Compete

They weren’t easy to find, but the 116 exhibitors from mainland China at this month’s giant International Consumer Electronics Show represented double last year’s turnout--and their booths were more sophisticated than in past years, when most delegates didn’t even speak English.

The upgrade was deliberate. As China prepares to join the World Trade Organization and braces for the fierce competition it will meet at home, more and more of its firms are aggressively ramping up to compete on other countries’ turf, fanning out across the globe in search of new customers and sources of technology and capital.

After decades of serving as anonymous suppliers to U.S., European and Asian multinationals, Chinese firms want a brand name and a global niche of their own.

“Now our country will enter the WTO and our company wants to get more strength to send products all over the world,” said Lou Xiao Yu, an engineer with Shanghai Television & Electronics Import & Export Co., who was in Las Vegas seeking a U.S. distributor. “We need foreign-country resources, and foreign countries need Chinese labor and services.”

Chinese firms have proved to be fierce competitors and quick learners, and so are among the world’s leaders in manufacturing products sold under other company’s brand names. They have also, much to the dismay of foreign firms, made China a huge source of pirated products and smuggled goods.

But once China joins the WTO, probably this year, Chinese firms are expected to abide by global trade rules. In exchange, these companies will get new opportunities abroad, because other countries will be forced to remove discriminatory barriers against Chinese goods. As China’s market opens, the prices of imported components and raw materials should drop, further lowering the production costs for these firms.

“I certainly think the WTO is going to help a lot of Chinese firms be more competitive internationally,” said Nicholas Lardy, an expert on the Chinese economy at the Brookings Institution.

For a glimpse of China’s potential, consider the domestic computer and electronics industries, which were among the first sectors opened to foreigners after the communist country began its move toward a free-market economy. Originally, a handful of foreign firms, including IBM Corp. and Compaq Computer Corp., dominated the Chinese PC market. Today, Chinese firms such as Legend Computer claim 85% of those sales and are expanding globally.

Haier Group, China’s leading appliance maker, was established in 1984 and didn’t start selling overseas until 1992, Lardy said. Today, the Qingdao-based firm ships to more than 100 countries, and its small Haier refrigerators have captured more than 20% of the U.S. market.

A decade ago, consumer goods such as refrigerators, washing machines and air conditioners were not even listed among China’s top exports. Today the overseas sales of those goods are valued at nearly $6.5 billion.

But China’s efforts to transform its firms from subcontractors to household names won’t be easy. A slowing U.S. economy could put a drag on the rest of the world, making it tougher for Chinese companies to develop new markets. These firms face onerous red tape at home, including government restrictions on investment abroad. And Chinese executives often have trouble getting visas to visit the United States because of fears about illegal immigration.

Chinese firms may supply the bulk of the appliances that appear in American homes bearing prominent U.S., Japanese and European brand names, but the “Made in China” label still carries a stigma of poor quality.

The DVD players made by Xiamen Republic Electronic Co. are already found in U.S. stores under the GPX label. So Zhang Hui, who was attending her first International CES, thought bargain-hunting Americans would jump at the chance to buy a similar product bearing REC’s own label at a sharp discount.

Though the giant trade show attracted 122,000 attendees from 120 countries, a frustrated Zhang feared that she might go home empty-handed.

“Our prices are 30% lower than our competitors’, and we feel our sales and service are very good,” lamented the Xiamen Republic sales manager. “But I think it’s difficult for Americans to accept Chinese products. I don’t know why.”

To boost China’s visibility at this year’s CES, Wei Jianguo, a vice minister in the Ministry of Foreign Trade and Economic Cooperation, hosted a banquet and distributed materials touting China as a “rising star in the international market.”

Wei said the survival of China’s $50-billion electronics industry depends on its firms’ finding foreign partners, tailoring their products to overseas markets, improving customer service and sinking roots in the countries they sell to.

“They must not only export products from China, but they must establish factories in foreign countries and use the local labor force,” he said.

There is more than just money at stake. Thanks to its already booming export trade, China is a primary contributor to the United States’ politically sensitive trade deficit, which is believed to have reached about $363 billion last year.

China’s WTO membership won’t translate directly into greater access to the U.S. market, which is already quite open to imports. But these Chinese firms still place the U.S. at the top of their expansion list because this country offers a huge customer base and the advanced technology and capital they need to succeed globally.

Mike Stawicki, a product manager for Haier America, said cultivating goodwill in the United States was one reason his firm built a $30-million refrigerator plant in Camden, S.C., two years ago.

“We don’t want to be considered a Chinese company,” he said. “We want to be a global company. That means being part of the neighborhood.”

Upgrading China’s image isn’t easy for these pioneering firms. Quality problems have been particularly bad in the low-end television market, where U.S. retailers have been burned by Chinese firms that have failed to deliver their goods or dumped inferior products.

When Konka Group, one of China’s leading television manufacturers, entered the U.S. market three years ago, its game plan was to offer sophisticated technology at a lower price than its competitors. During its first months in the market, it suffered some quality problems, according to David Elrich, an editor with Etown.com, an online consumer electronics publication.

But Elrich said the Chinese manufacturer has improved its quality and service and appears to be making headway in mass-merchandising outlets such as Fry’s Electronics and Wal-Mart.

Konka believes staying on the leading edge of the technology curve is critical to redefining China’s image, according to Wendy Wu, executive vice president of Konka America in San Diego.

The firm has postponed a plan to develop a line of high-definition televisions because of the slow adoption of that technology in the U.S.

But last year, Konka was the first manufacturer in the U.S. to offer a 13-inch combination television-DVD player, and it will be selling several flat-screen models this year. U.S. sales overall jumped from 5,000 a month in 1999 to 30,000 a month last year.

To take advantage of the North American Free Trade Agreement, Konka recently moved its U.S. headquarters from San Jose to San Diego and is manufacturing some of its television sets in Tijuana.

Others are close behind. Konka’s fiercest rival, Sichuan Changhong Electric Co., was at CES this year scouting for a U.S. partner to distribute its products. Changhong plans to open a U.S. sales office in the Midwest and a research facility in Silicon Valley.

“I just hope they do a good job or it hurts all of us,” Wu said of her Chinese competitors.