What TCL’s foreign foray says about China Inc going global

By Yuxin He

Yuxin He is a corporate analyst for Dragonomics Advisory and is a guest contributor to Dragonbeat blog this week.

Five years ago, a little-known electronics firm in Guangdong province – TCL – briefly became the world’s biggest television maker.

Countless consultants announced the coming of age of China’s global consumer-electronics champions, following Japanese firms like Sony and Panasonic in the 1970s, and Korean contenders like Samsung and LG in the 1990s.

Whatever happened to it?

TCL exploded onto the global stage when it took over the TV-making operations of French conglomerate Thomson. Shortly afterwards, it bought the mobile phone handset business of French telecommunications equipment maker Alcatel.

But the two high-profile acquisitions proved disastrous: losses from the enlarged TV and handset operations exceeded Rmb4bn in the first three years after the Thomson and Alcatel acquisitions – nearly triple TCL’s combined profit in the three years immediately before the acquisitions.

TCL’s European TV operations are now in liquidation; its North American business still strives to break even; and its handset gambit has shrivelled, leaving the firm as a contract manufacturer for low-end Alcatel phones sold in emerging markets.

Not only did the acquisitions destroy the firm’s global ambitions – they eroded its position in its home market as well.

TCL’s tale of disaster helps us to understand both China’s crazy-quilt corporate landscape, and the challenges Chinese companies face as they try to internationalise. Three broad lessons emerge.

First, the forces of local protectionism act decisively on Chinese manufacturing firms, for both good and ill.

TCL benefited enormously in its start-up period from local government support. But local protectionism also damaged it: local protection of competing domestic TV and handset makers made it impossible for TCL to increase its domestic margins or market share.

Locked into a low-margin domestic market where increases in volume (through consolidation of weaker domestic competitors) were impossible, TCL made hasty and ill-considered foreign acquisitions because it saw no other route to growth.

Then, after those ventures failed, local government support came to its aid again in the form of lifesaving subsidies – free land, tax exemptions, discounted loans and special support funds.

This sequence underscores a crucial fact about China’s business environment: barriers to market exit are extremely high.

In virtually any other major economy (including Japan and Korea), a company like TCL would not now be attracting new capital: it would be on its way either to bankruptcy or to acquisition by a stronger competitor at a knockdown price.

But in China, local governments can keep non-viable companies afloat for years, thereby contributing to excess capacity and preventing market leaders from achieving optimum margins and economies of scale.

This means it will be difficult if not impossible for China ever to create successful competitors to the likes of Sony and Samsung.

The second main lesson is that the murky boundaries between state and private ownership mean that any strategic move by a Chinese company must be understood partly in terms of its role in the unceasing struggle to define ownership of key assets.

TCL managers saw their foreign acquisitions less as the building blocks of a truly multinational company than as a stratagem in their decade-old struggle to privatise the firm. Many other Chinese firms face similar quandaries, as entrepreneurial managers try to wrest greater control from local governments whose support they need but whose large ownership stakes they resent.

Third, the TCL story underscores that most Chinese manufacturing firms are far from the global technological frontier and thus poorly positioned to exploit the shifts along that frontier, which is where the big money is made.

TCL was one of the biggest TV companies in the world’s biggest and fastest-growing TV market, and yet it made a disastrous bet on old-fashioned cathode-ray televisions just two years before the entire world, including its own home market, shifted en masse to flat-panel screens.

No company operating anywhere near the market’s cutting edge, or with a grasp of technological change or consumer trends, could have made such an elementary blunder. TCL was an extreme case, but most Chinese manufacturers suffer from a similar remoteness from the technological leading edge and the demands of rich-country consumers.

China’s dynamic market remains the world’s most fertile ground for entrepreneurship. But until China tames the forces of local protectionism and learns to be comfortable with wholly private ownership of large-scale firms, it is unlikely to produce any genuinely competitive multinational companies.

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