SW CHINA ELECTRONICS GIANT SETS SIGHTS ON U.S. MARKET, SEEKS

UNCLAS SECTION 01 OF 02 CHENGDU 000262 SIPDIS DEPT FOR EAP/CM SENSITIVE E.O. 12958: N/A TAGS: ETRD EINV PGOV KIPR KNNP CH SUBJECT: SW CHINA ELECTRONICS GIANT SETS SIGHTS ON U.S. MARKET, SEEKS TO BECOME A GLOBAL PLAYER IN 10-20 YEARS CHENGDU 00000262 001.2 OF 002 ¶1. (U) This cable contains sensitive but unclassified information - not for distribution on the Internet. ¶2. (SBU) Summary and Comment: Sichuan electronics giant Changhong recently told us success in the U.S. market, elusive up to now, would be a litmus test of its arrival as a major global player. The company's long-term strategy includes building a single worldwide brand name, and strengthening quality control so that it is able to compete on more than just price. Changhong's chairman frankly compared his firm's relatively weak position in overseas markets to that of Korean companies such as Samsung in the 1980s; at the same time, he boldly predicted Changhong would become a world-class electronics firm in 10-20 years. ¶3. (SBU) Comment: Changhong noted it is resolving unspecified "patent issues" in Europe and the United States. These difficulties may be helping Chongqing, like some other Chinese companies, slowly realize that it will be impossible to operate successfully as a world-class multinational without showing more respect for intellectual property rights. End Summary and Comment. International Partnerships, Domestic Base, One Brand -------------- -------------- ¶4. (SBU) Changhong Chairman Zhao Yong told Consul General November 12 that his company already enjoyed a number of successful partnerships with international corporations such as General Electric, IBM, Dell, Intel, and Samsung. He said that his company's products, which include flat-panel televisions, mobile phones, and an array of other consumer electronics, were selling better in Australia and Europe. Changhong, which is based in Sichuan Province's second largest city, Mianyang (septel),already enjoys a sizeable share of China's domestic market for LCD and plasma televisions. ¶5. (SBU) Zhao stressed that the company would concentrate on building a single worldwide brand name: "Changhong" (i.e. a strategy similar to that of Japan's "Sony"). The company had struggled with its branding strategy for 10 years, and in 2005 even hired a U.S. firm to explore the idea of selling Changhong products under different names in different markets. While some executives were still concerned that that Western markets might not respond well to the Changhong name, recent stronger sales in Europe (300 million Euros) have allayed their doubts, he said. U.S. Market the Highest Goal, Despite Previous Problems -------------- -------------- ¶6. (SBU) The United States is Changhong's largest potential market, Zhao stressed, adding that his firm could never truly be a global company without a major U.S. presence. Changhong's international sales currently account for USD 700 million, or roughly 10 percent of total sales. Ambitiously, Zhao hopes to grow this number to 30 percent over in the next three years. ¶7. (SBU) Changhong previously encountered patent problems in the United States, and in Europe, Zhao said. It had resolved these problems in Europe, and soon hoped to negotiate settlements of them in the United States as well, he added. (Note: Press reports indicate that U.S.-based TV maker Zenith sued Changhong in 2004 for violating two of its patents. Changhong reportedly agreed to pay a patent fee to Zenith, but has not paid it so far, according to Changhong former U.S. distributor, APEX, which has had its own legal problems with Changhong. End Note.) Expanding Foreign Manufacturing, CHENGDU 00000262 002.2 OF 002 But Still Lack International Competitiveness -------------- ¶8. (SBU) Changhong has established manufacturing bases outside China, and company officials seek to staff these operations, at least in part, with relocated Chinese managers and engineers. Zhao said his company had already invested USD 130 million in two factories in South Korea, and also had factories in the Czech Republic and Indonesia. ¶9. (SBU) Unprompted, Zhao frankly acknowledged that Changhong products were weak competitors when compared to major Korean and Japanese brands, and needed to compete mainly on price. He compared Changhong's weak, current market position to that of Korean brands in the 1980s (which were then just starting to compete, mainly against the Japanese majors). He confidently asserted, however, that Changhong would be a global player within 10-20 years. (Note: According to press reports, the high rejection rate by U.S. consumers of Changhong products -- reaching double digits -- was a source of contention between it and former U.S. distributor, APEX -- suggesting that poor quality has been a major problem. End Note.) ¶10. (SBU) Comment: Changhong flat panel televisions are among the least expensive brands available locally in Chengdu, and appear to sell well. One ConGen LES said that the most Sichuan homes have a Changhong television. A visual comparison of picture quality between Changhong and other major brands of televisions from Samsung, Sony, and Philips, reveals that Changhong's picture quality appears to lag behind the more expensive foreign brands. As with pirated DVD movies -- many of which have lower picture quality than legitimate copies -- most consumers in southwest China currently rank price above quality in their electronics and other consumer purchasing decisions. End Comment. BROWN