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Rethinking the China Threat

2005-07-13 15:13

  The rising economic powerhouse hasn't produced consumer-electronics outfits that can truly compete with multinational giants

  Everybody knows that China is the world's next economic superpower. Each year, it gets billions and billions of dollars in foreign investment, powering its booming economy. The Middle Kingdom has more cell-phone users than anywhere else on the planet, and soon it will be tops among Net surfers, too. American consumers can't get enough of the low-cost TVs, DVD players, mobile phones, computers, and other gizmos that come out of China's factories.

  For believers in the China-rising story, the latest sign of ascendance was the December announcement that IBM (IBM ), one of the most venerable names in U.S. industry, was selling its PC division to Lenovo (LNVGY ), the No. 1 PC maker in China. Lenovo is owned in part by the Chinese government.

  A HAS-BEEN?  All the hype about the Lenovo-IBM deal and China's might obscures one problem: For a country that's about to become such a powerful threat to the U.S., China has a tough time producing world-class companies that can compete with the likes of America's Dell (DELL ) and Hewlett-Packard (HPQ ), or Japan's Sony (SNE ) or Asia's Samsung. Sure, China has Huawei Technologies and ZTE, both of them growing providers of low-cost, high-quality networking equipment. But when it comes to consumer electronics, Chinese outfits just aren't in the same ballpark.

  One might think that the prospect of Lenovo, the top computer maker in the world's fastest-growing economy, vaulting to the No. 3 spot in terms of worldwide production - behind only Dell and HP - would get investors excited. But their reaction has been underwhelming. Lenovo's shares, traded on the Hong Kong stock exchange, are off some 13% since the outfit unveiled its IBM plans. For all of 2004, Lenovo stock plunged 34%, compared to an 11% rise for the benchmark Hang Seng index.

  Why the skepticism? Many investors seem to think Lenovo's greatest success may be behind it. Yes, it's strong in China, the argument goes, but that's partly due to its government backing. Factor in Lenovo's home-team advantage, and you have a pretty good explanation for its leading role in the Chinese market.

  HITTING THE EXITS.  So far, Lenovo has been unable to make much headway selling its computers outside China, thus the appeal of IBM's PC business - which of late has been a money loser for Big Blue. IBM revealed in recent filings to the U.S. Securities  Exchange Commission in late December that the PC division lost just shy of $1 billion from 2001 through the first half of 2004.

  Perhaps Lenovo will be able to turn things around, but right now the big winners look like rivals Dell, HP, and Taiwan's Acer. All three stand to gain if customers have their doubts about trusting their data to Lenovo PCs.

  Other signs indicate that China may not have what it takes to be a major-league player. Just as investors soured on the Lenovo-IBM deal, they've also been exiting some other Chinese concerns with ambitions of becoming big-time global brands. Changhong, one of China's largest producers of TVs, suffered a major setback in late December when it announced that its American sales agent, Apex Digital, was unable to pay the $310 million that it owed the Chinese concern. Changhong's Chinese-listed shares plunged on the news.

  But even before the bombshell, investors had been skeptical of Changhong's chances, with its stock price dropping 48% in 2004, compared to a 16% drop for the Shanghai index of A-shares (Chinese stocks that are available to local investors but largely off-limits to foreigners).

  SUSPENDED TRADING.  Late 2004 also brought bad news for investors in Skyworth Digital Holdings, another one of China's top producers of TVs, DVD players and other consumer-electronics equipment. Founder and Chairman Stephen Wong was arrested by Hong Kong's anti-corruption police on Nov. 30 for allegedly conspiring to steal money from the company.

  On Dec. 22, the Hong Kong-listed company announced that it was appointing a new CEO, Wang Dian-fu, who has said the arrests of Wong and other Skyworth executives haven't hurt operations. That may be. But trading in Skyworth's shares has been suspended since the news of Wong's legal problems broke.

  TCL International, the Hong Kong-listed subsidiary of TCL Group, is another example of things not going exactly as planned. It made a splash in 2003 with its joint venture with France's Thomson Group (TMS ). That gave TCL control of the RCA brand and positioned the business to become a worldwide leader in TV production. And Chairman Li Dongsheng's vision may pay off in the long run, with TCL becoming China's answer to Sony or Samsung.

  TOUGH CLIMB.  For now, though, TCL has had difficulty because of rough price competition inside China. The Hong Kong-listed stock dropped 30% last year. In late 2004, Thomson surprised the market by announcing that it was taking a small stake in Konka, a TCL rival. But Konka too disappointed investors, with its stock down 20% for the year.

  These companies' poor stock performance doesn't mean it will be impossible for them - or other Chinese businesses - to break into the top tier globally. Lenovo, Changhong, Skyworth Digital, TCL, and Konka may still emerge as true competitors to the big consumer brands. But amid all the hype about China being a threat to the U.S., it's worth remembering that many of the upstart's potential global champions have a long way to go before they can achieve their lofty ambitions.

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