Short March: Innovation and IPR in Huizhou -- TCL

UNCLAS SECTION 01 OF 03 GUANGZHOU 011568

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SENSITIVE
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STATE FOR EB, R, EAP/CM, EAP/PD, DRL
STATE PASS USTR
USDOC FOR 4420/ITA/MAC/MCQUEEN, CELICO, DAS LEVINE
USPACOM FOR FPA

E.O. 12958: N/A
TAGS: KIPR ECON ETRD EINV KPAO ELAB CH
SUBJECT: Short March: Innovation and IPR in Huizhou -- TCL
Communications and Huizhou University


(U) This document is sensitive but unclassified. Please
protect accordingly. Not for release outside U.S.
Government channels. Not for internet publication.

REF: A) Guangzhou 11352 and previous, B) 05 Guangzhou 20435
(notal)


1. (SBU) Summary: TCL Communications -- part of embattled
color television and cell phone giant TCL and one of the
largest domestic manufacturers of fixed line phone
equipment in China -- is itself struggling to find some
greater room in a highly competitive environment for a
relatively low technology commodity, but it is nevertheless
embarking on further R&D to expand and improve its product
line and taking some steps to protect its intellectual
property rights as well. Afterwards, Huizhou University
students demonstrated their good understanding of the
importance of intellectual property rights (IPR) in
establishing an innovative culture in China. End Summary.


2. (SBU) In Huizhou, our way station rest stop on the way
back to Guangzhou from our "short march" to eastern
Guangdong (ref A),we arranged to meet with executives of
color television and cell phone giant TCL -- Huizhou's
largest enterprise and, after merging its color TV
operations with those of France's Thomson, the largest
manufacturer of cathode ray tube sets in the world. We had
previously visited TCL, but senior executives had almost
been "too busy" -- perhaps because the company's fortunes
have not been particularly rosy (ref B). But this time, at
the intercession of municipal authorities, TCL made
available Yuan Yuncheng, Chief Operating Officer of TCL
Corporation. We had also hoped that the meeting would have
been directed at TCL's color television or cell phone
operations, but instead the meeting was at TCL
Communication Equipment, even though the CEO of that branch
company, Gu Gong, also received us.

TCL Communication
--------------

3. (SBU) Gu said that TCL Communication builds phone
equipment, cell phones, and networking equipment, both
wired and wireless, and the company is the largest
manufacturer of conventional, fixed line phones in China.
This was the original product of the parent corporation,
TCL, and was the basis for TCL's initial rise as a whole.
Although TCL Communications' primary market is China,
Europe is their main export market. The company is also
increasing its presence in Southeast Asia and India.

From Traditional To the Newfangled
--------------

4. (SBU) Gu noted that despite its dominant domestic
market share, TCL Communications is in a tough competitive
environment because its products have largely been
commoditized. To meet the challenge of that environment,
the company has recently broadened the types of products it
manufactures, including VOIP phones, ADSL and WLAN
equipment, and a fixed line CDMA-compatible phone. The
company is shifting its focus on developing the broadband
and wireless markets and moving away from the cutthroat low
margin industry of conventional phones, of which 85% are
built in China.

IPR Even For Commodities
--------------

5. (SBU) Knowing that a focus of the Consulate during the
"short march" was on IPR, Gu noted that the company has had
problems with inferior copies of their phones being sold at
lower prices by counterfeiters. TCL Communication now
employs an IPR department and a law firm to enforce its
IPR. Parent company COO Yuan added that IPR problems for
TCL were not limited to the fixed line phone company
division alone but extended to the company as a whole, and
TCL aggressively pursues the protection of its interests.
(Huizhou Science and Technology Bureau Deputy Director and
IP Office Director Chen Tian, who accompanied us to TCL and
who participated in a separate meeting with Huizhou
Secretary General Ye Zexiong, told us that because Huizhou

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is the home base to many major Chinese and foreign-invested
consumer electronics firms, the city and its business
associations were very active in brand protection and
seeking to root out counterfeiters, including those from
other areas in China.)

TCL Needs to Innovate
--------------

6. (SBU) COO Yuan turned the conversation to the need for
TCL as a whole to continue improving its products in order
to compete in a very challenging market place. In that
respect, it has enhanced its research facilities in Chengdu
and Xi'an due to the high quality engineering universities
located in those cities. TCL's engineers and researchers
are predominantly Chinese and fairly young (under 30 years
old),most going directly to TCL after graduation. There
are few engineers and researchers with previous work
experience, especially work experience in foreign companies
or overseas. Yuan introduced Liu Bingyun, a Vice General
Engineer of the parent company and the General Manager of
the R&D Center for TCL Communications, as typical of the
quality staff that the company has hired to spur further
innovation.

Envisioning the Future
--------------

7. (SBU) In response to a question about whether TCL, like
some U.S. high technology firms, has "skunk works" or
"brainstorming mosh pits" to come up with new ideas or
products, Yuan said that the TCL company encouraged a lot
of interaction between the R&D centers and the production
and marketing offices. Asked about a TCL vision of the
future of consumer electronics, Yuan said he envisioned one
in which consumers who traveled frequently would seek a
small, single multi-functional device incorporating phone,
messaging, e-mail, web-browsing, photography, and audio
video but at the same time, homes would feature much larger
standalone devices -- personal computer, phones, cameras,
televisions, and/or home entertainment systems. Yuan
expressed confidence that TCL would play a role in
manufacturing products for such markets.

Comment on TCL
--------------

8. (SBU) In Guangzhou's "Tele Tale Harts" message (ref B),
we assessed the prospects for three south China consumer
electronics companies adopting different strategies for
success -- TCL as a Samsung wannabe competitive across all
product categories, XOCECO wanting to be a mini-Sharp
focused solely on high-end products such as flat panel
televisions, and upstart Amoi focused on being, well,
upstart and full of buzz in its products. Of the three,
TCL, with its bumpy joint ventures with Thomson (in the
increasingly obsolescent production of cathode ray tube
(CRT) color televisions) and Alcatel (in cell phones and
other telecoms products),has been the big fizzler, losing
RMB 692 million (US$ 86.5 million) in 2005 compared to a
RMB 373 million (US$ 46.2 million) net profit in 2004.
Still, the company is still scrappy and enjoys a lot of
support from both Huizhou and provincial authorities.
Unfortunately, such support doesn't translate directly into
product sales, especially since TCL faces huge competition
in every one of its product categories.

Huizhou University Students
--------------

9. (SBU) At Huizhou University, an audience of 250
students enthusiastically commented on Congenoffs
presentations on IPR and American innovation culture. They
clearly drew the connection between the notion that IPR
violations constituted theft and could have far reaching
safety and other consequences, although there continued to
be arguments that watching illegal DVDs was all right in
the absence of genuine products or that China needed an
opportunity to catch up in IP before a more effective
enforcement regime could be put into place. On innovation,
audience members clearly understood that the successful
American experience was one of incredible dynamism (in
being able, for example, to discard outmoded ways of doing

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things without hindrance by entrenched interests
potentially hurt by rapid change) and diversity and
openness -- with many students wishing that China could
follow a similar path.

Looking Ahead to the "Long March"
--------------

10. (SBU) This is last of Consulate Guangzhou's "short
march" messages, and soon we will be transmitting our
series on cities visited during our "long march" into the
Hakka and Minnan "heartlands" in northeastern Guangdong and
southwestern Fujian Provinces.

Dong