TCL’s Dongsheng Li: “We Should Control and Own Our Brands”

More and more Chinese companies, having won their spurs in their domestic market, are starting to explore new horizons through globalization. In the process, they face strategic and operational challenges centered around one central question: How should they make the leap from being successful Chinese enterprises to becoming excellent global ones?

TCL, the world’s largest manufacturer of color televisions, has been grappling with this issue. Following a joint venture with France-based Thomson (which owns the RCA brand), TCL is trying to leverage its manufacturing expertise in China while seeking growth in markets such as Europe and the U.S. Will TCL succeed? In a recent conversation, Dongsheng Li, TCL’s CEO, discussed these issues with Wharton’s
Michael Useem, director of the school’s Center for Leadership and Change Management ;Jonathan Spector, vice dean of the Aresty Institute for Executive Education at Wharton;  Liang Neng, a professor of management and director of the Executive MBA program at China Europe International Business School (CEIBS); and Knowledge@Wharton.



Useem:  What personal leadership qualities have served you well in building your company, and how did you learn or acquire them?



Li: That is a tough question. For leaders like me, we have studied a lot and built our leadership abilities through our work. Entrepreneurs like me have to rely a lot on our experience. We do not acquire our knowledge in school or in some other place before we come to work; we have had to build our leadership abilities on the job.

The first capability that is important for leaders like me is that we must have rich knowledge of our business and industry. We need to have very good mastery of opportunities and then develop the capability of setting a proper strategy for the company. The second important capability is having profound knowledge and understanding of Chinese society and economic development. That is crucial to business success. In the past two decades, China has gone through enormous changes. These have resulted in new opportunities, and it is very important for entrepreneurs to grasp them and take advantage of big trends. Yet another capability I consider important is that leaders must know how to recruit good talent for the company. They should be able to create the right environment to attract talent.



Spector:   I am interested in TCL’s strategy, given its acquisition of Thomson. Is your vision to create a global brand for TCL, or is it to win by creating a powerful manufacturing capability rather than a global brand?



Li: Our strategic objective is to become an internationally competitive player in the global consumer electronics business. We hope to achieve this goal through several strategies. In a big market, we should control and own our brands. I believe manufacturing capabilities are very important for TCL now. Compared to some players, TCL is not the leader in brand and technology, so how can we achieve a big market share? Our great advantage lies in production efficiency — the speed and the cost at which we can make products. Our products have a good price-performance ratio, which is a big advantage for our manufacturing capability. We should make full use of our manufacturing and supply-chain advantage to gain a position in the market and then try to build an international framework for our business as well as our brand. Ultimately we hope we can improve our technology and brand capabilities to become a leader in the electronics industry.



As far as our strategy for TCL’s globalization goes, we have our own special features. We mainly explore new markets by mergers and acquisitions. For now, we think that in the electronics products industry the European and North American markets are very stable and mature, which makes it hard for us to introduce a new brand. In addition to being difficult, the risk may be huge. By going the M&A route, we can acquire an existing company which already has a market position and brand and its own networks. That significantly lowers our cost of pursuing these opportunities.



Another advantage for us to do M&A is that they allow us to get to our ideal scale in terms of volume. We are already the biggest color TV manufacturer in the world. This brings us a lot of benefits and advantages. A merger with a major international company can also bring about other synergies. For example, it helps improve our R&D and manufacturing capabilities — and sometimes our markets can be complementary.



Neng Liang:  I have two questions related to restructuring. The first relates to domestic players. We know that TCL succeeded for two major reasons. The first was its strategy of overseas M&A, and the second was that the company was able to restructure itself. So for other SOEs (state-owned enterprises), what advice can you offer? What kind of difficulties do they face in the restructuring process, and how can they tackle them?

The second question is that TCL has successfully attracted several strategic international investors such as Toshiba. How can such investors select Chinese SOEs in which to invest? What kind of opportunities and challenges would the investors face?



Li: A company can go through many patterns of restructuring. TCL’s pattern is just one of them. Our strategy was very useful in TCL’s situation, but it is also helpful for the macro environment, i.e., the political and legal environment. Another very important factor is that when we went through restructuring, the timing was right for us.



For restructuring to work, it is important for it to have two features. First, it should march with the company’s development and growth, and second, the plan should be in line with the political and legal environment. These two features are both important and necessary. If a restructuring plan cannot enhance business development, then it is useless, and at the same time, if it is not in line with the legal environment, it will not be accepted by the rest of society.



Our restructuring plan initially helped us solidify TCL’s assets. In incremental terms, it brought about a lot of benefits that were shared by management, employees and shareholders. In our sharing plan, we set quite a high target for returns on assets (ROA): We wanted to achieve at least 10% ROA or higher before we would share the benefits. This 10% is much higher than the average figure for Chinese enterprises. As for sharing extra benefits, we decided that the major part would be taken by the shareholders and the rest would be shared by managers and employees. When we set up this kind of a sharing plan, we took into account the rest of society and the legal situation.



Liang: Let me clarify a bit about these figures. Actually, the restructuring plan at TCL was launched much earlier, in 1996 or 1997. At that time the company had an agreement with local municipalities and also its shareholders that only if returns on assets were higher than 10% could management share in the incremental part.



Li: For example, if our ROA was between 10% and 35%, then we could share about 15%. If it was between 35% and 40%, then we could share 30%. If the ROA was higher than 40%, then we could share 45%. This kind of a restructuring and sharing plan was not against the law at that time. From this case you can see that timing is very important; you have to pick the right time to do things. For example, our stock options sharing plan was instituted in 1997. At the end of 1996, the net assets for TCL were just about 300 million RMB. At that time, maybe such an option sharing plan was feasible; but it is not suitable for the current situation.



In sharing stock options, we know that the government should take the majority, so we mainly paid the government dividends. For the management, we mainly had incremental stock options and kept them in the company.



In the process of restructuring, we also issued some rights to buy stock options to government, management and employees. Further, we changed the proportions of each party’s stock options in our business. The government held about 50% of our shares, but on the basis of approval by the local municipality, the local government sold 18% of the shares to overseas investors. This was in the beginning of 2002. After selling some part of its stake to overseas investors, the government held only 40% of our shares. This year we went public, which meant we sold a lot of shares to social shareholders. Now the government holds only 35% of our total shares. Another 35% is owned by our management and employees. Overseas investors hold about 12% of our shares. The rest of the stock is held by social shareholders.



Liang: In a nutshell, that is how TCL went from being a state-owned company to a listed, public company. 



Li: The second question relates to how overseas investors can choose the right company to invest in China. There are several criteria, but the most important one is that they should choose the right management team. There are a lot of critical success factors for a company; the most important one is people. The right management team would have a rich and proper understanding of how to operate a business for overseas investors. Another prerequisite for investment is to choose an industry with good potential.



Knowledge@Wharton: Here are two questions. The first relates to how TCL is developing its management structure and processes to manage a global company. So far the company’s management has been extremely entrepreneurial but essentially Chinese. But after becoming the dominant partner in your joint venture with Thomson, how is TCL managing the cultural differences in communications, management expectations from senior managers, and line operations in these regions?



Second, we would like to know what you think about TCL’s strategy for turning around the U.S. market. The American market has been in decline for a couple of years now, and it’s a competitive market in which no one is profitable except, perhaps, Sony. What is TCL’s plan for the U.S.?



Li: The first part of your question relates to a very big challenge and a headache for us. We are also thinking about how to establish an effective management structure all around the world. We are very clear that although we are the dominant party in the joint venture, we should use the tool of resource integration with all our employees. In this merger with Thomson, management teams from the two companies have taken jobs with the joint venture. At headquarters, we have formed an executive committee that is composed of top managers of both companies.



This committee is mainly responsible for reorganizing, developing and managing the global business. In this joint venture we believe our major markets are China, emerging economies, Europe and the U.S. Accordingly we have set up management teams to operate these four business units. They are looking at functional areas such as manufacturing, sourcing, supply chain management and product R&D. They are working on coordinating the use of global resources. Our objective in making this global allocation is to maximize our synergies and make the best possible use of our resources. We are now establishing a global information management system and a common legal system, and also a global financial system. We estimate it will take us at least 18 months to complete this integration.



Our toughest challenge as we go through this integration is how to effectively communicate with other companies, and how to achieve mutual understanding about business values and cultures. To communicate more effectively, we have done a lot of training, and our senior management has organized a lot of meetings. We believe that by conducting such projects, it will push forward our integration while generating a lot of synergies.



As for your second question, regarding TCL’s strategy about the U.S. market, we think that in recent years the U.S. market has been tough, especially for consumer electronics products. But the U.S. is a crucial part of our global operations, and it is important for us to explore this market. In the past, even Thomson was not doing very well in the U.S.; it was experiencing losses, and its market share was shrinking. To deal with this situation, we have established two committees: one for cost containment and the other for value creation. The committee on costs focuses on manufacturing, sourcing and supply-chain management to improve our competitive and financial situation. The value creation committee focuses on new products, planning and development, new markets and opportunities, and new customer resources to increase our sales and marginal contribution. We are also considering some business restructuring and reforms for the U.S. market to improve our efficiency.



Spector: You mentioned that TCL’s strategy for North America or mature markets will be based on M&A and that in the future there will be more acquisitions. This means you will have to be good at integration. What has been the toughest problem in the Thomson acquisition? And how will that make you do the next acquisition and integration differently?


Li:  At the moment TCL does not have any detailed future plans for future acquisitions. We have already invested a lot of our time, resources and energy in the venture with Thomson. We have learned that there are several key issues we should consider when we go through a merger or make an acquisition. The first is that we should see if the assets of both companies are complementary to one another. That is much more important than just looking at their book value. The second is that we should establish an effective communication mechanism for the management teams of both companies, especially in the initial stages. Sometimes when communication is not effective, it leads to many lost opportunities. How can we make communications effective? We should be fully prepared for our projects and do good homework on due diligence. The third issue is that we should keep high the morale and confidence of our people. That is very important. In the first six months, we should have some deliverable results from the merger to increase people’s confidence. There also needs to be a clear understanding of the long-term objectives of the merger or the joint venture, and these objectives should be shared by the management and the employees so they can dedicate themselves to these goals.

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