It has been about a year since TCL International, now known as TCL Multimedia, acquired the TV business from France's Thomson, owner of the venerable RCA brand. Vincent Yan, chief financial officer of TCL Multimedia, recently spoke to BusinessWeek Asia Correspondent Frederik Balfour about the merged business and the challenges of going global. Edited excerpts of their conversation follow:
Q: Now that you have Thomson's distribution in Europe and North America, do you plan to make TCL a global brand?
A: For now our strategy is to utilize the RCA name globally. To build a brand in a mature market is costly, we don't plan to do that. In China, the brand is pretty much TCL.
Q: Do you plan to move Thomson's Mexican operations to China?
A: No. We have restructured the Mexico factory. Antidumping law discourages or prevents us from selling TVs from here [duties are 25%]. That's because people advising the [U.S.] government are operating with a mindset of 20 years ago, trying to protect the U.S. producers. It's a joke because nobody in the U.S. is producing TVs, except for the one company that raised the issue with the government.
Q: But aren't there perceptions abroad that you get Chinese government subsidies, hence you can dump?
A: Of course we don't get any government subsidies. [But] how do you define government support? What is indirect support? Would you say Microsoft (MSFT) is not getting any support from the U.S. government when it meets leaders from China? If you say no, then I say TCL doesn't get any support [from the Chinese government].
TCL Corp. [the parent] is one of biggest companies in Huizhou [the municipality of Huizhou owns 25% of TCL], so of course the government supports TCL's activities. TCL is an important company nationwide and for the local government as well. [The local government ] will do whatever it can to help the company grow, such as tax preferences, something it offers to any company investing in the area. But that is by no means a subsidy.
Q: What direct input does the government have on TCL's activities?
A: The vice-chairman of our company comes from the government, but we are like any limited liability company where shareholders elect the directors.
Q: What role does the Communist Party play?
A: I'm not a party member. The head of party organization at TCL Group is also our president and CEO, Mr. [Tomson] Li.
Q: Is it easier for you to get financing because of your links to the local government?
A. TCL Corp. indirectly supports our cash flow, because we can borrow for some of our working capital needs in China, and our parent provides the loan guarantee to the banks. Otherwise Chinese banks wouldn't lend, they recognize us as Hong Kong company.
Q: How did you get such broad distribution in China?
A: We started making large-screen TVs in '93 or '94 at a price that no one else was offering. The only [ones] available were Sony (SNE) and Panasonic (MC) imports. We reduced costs by offering fewer features. By 1997 we were nationwide.
Q: How much do you spend on research and development?
A: TCL Group spends 1.5% of sales, which is low compared to what other multinational companies spend. But you have to look at the business structure. We don't offer products that require concentrated R&D.
Samsung [Electronics] offers cutting-edge technology. We don't. Everyone at the company would like to do that, but it's a matter of feasibility, and I don't see that happening now.
Q: How much management time is spent on making the merger with Thomson work?
A: The merger is not that difficult. We are pretty complementary, Thomson in Europe and North America, while we have little operations there. If you define "merger" as operating as a company, we have already succeeded. If you say the success of a merger should be a company tightly merged together, that's not the case. We are divided by geography, different profit centers, we operate in different modes.
The most difficult part is communication, to understand each other. Any cross-border deal has that. We knew before the merger that the cross-cultural talent pool is kind of small, [it's] difficult to find people who have a fit with the company.
Next issue is management talent, of how to run the company successfully. We don't have enough talent to do all work. We face extreme challenges from the marketplace, especially in LCD and plasma screens -- areas where neither of us is strong.
Q: When will TTE [the arm formed when TCL bought Thomson's TV interests] become profitable?
A: Sometime in 2007. The original plan was to become profitable by 2005, based on the assumption of no losses in Europe and North America. But the problem is Europe, where the LCD business is growing faster than we expected [this is an area where TCL is not yet strong], and we made a loss that was unexpected. We had about 16% return on capital in 2003, and 9% in 2004, because of Thomson's loss.
Q: Would you recommend mergers and acquisitions as a way to go global?
A: Not really. It's just one way. There are other ways to expand your business in the world.
Q: Does TCL try to distance itself from the government to avoid charges that you unfair assistance?
A: I don't see a need to do that. Our business partners and suppliers and customers never thought that way, though there are people who say it. My guess is they don't understand why TCL is so competitive, so they find some excuse. We never sell below cost. EDITED BY Edited by Patricia O'Connell