A change of channels

Chinese TV manufacturer finally finds its feet in Central Europe

Lian Yongping vividly recalls a difficult time in 2007 when many Czech white goods retailers turned down his offer for a business meeting to introduce the Changhong television.

"They didn't want to know about our TV, which was completely new to the Czech market, but our perseverance and the quality of our products allowed us to break into the market eventually," says Lian, general manager of Changhong Europe Electric.

The challenge of a lack of brand recognition that Changhong faced is common to many Chinese companies when they venture abroad.

Changhong entered Europe just as old cathode ray tube TVs were beginning to be supplanted by those with LED technology. In that technology Changhong was a leader, which gave it a big advantage over rivals.

"Our leading technology and our ability to satisfy customer needs allowed us to break into the market," Lian says. "Slowly, different retailers listened to our story and came to visit our factory, and eventually we were well recognized."

In 2007 when Changhong started production in the Czech Republic, it made only 100,000 TVs a year, and almost all of them were original equipment manufacturing sets for European brands. Today, the number of Changhong's OEM orders has fallen to nearly half its entire production of 800,000.

Lian says most of Changhong's TVs assembled in Prague are sold in Western European countries including France, Germany, Italy, Portugal and Spain.

Changhong Europe Electric is a subsidiary of Sichuan Changhong Electric Co Ltd, a consumer electronics company whose headquarters are in Mianyang, Sichuan province. In addition to TVs, the company, founded in 1958, sells air conditioners, refrigerators and other home appliances.

After becoming an established brand in China, Changhong looked to overseas markets for export opportunities, and Europe was an obvious target, but import regulations there were a deterrent for many.

"Before 2000, European anti-dumping rules imposed tariffs of about 40 percent on imported TVs, making it impossible for us to make money," Lian says.

"The European Union later moved to a system of quotas on TV imports, between 20 million and 30 million TV sets from around the world, of which about 400,000 were allocated to China. But this quota was so small that it, too, made it impossible to make money."

Changhong decided to look at a model of setting up manufacturing in Europe to serve the local market, and the Czech Republic was chosen because of its central location, industrial capability, stable investment environment and skilled but relatively cheap workforce.

"The Czech Republic's central location in Europe means it is not too far away from our target markets in Western Europe," Lian says. "Purchasing power there is stronger than in Eastern Europe. The Czech Republic's history as an industrial power means local workers are highly skilled, but salaries in manufacturing are lower than in countries such as Germany."

The Czech Republic's industrial capacity means it is easy to build a local supply chain that can help Changhong complete its manufacturing of televisions. The country's foreign investment regulations are stable, which helps companies such as Changhong make long-term investment plans, he says.

In 2005, the subsidiary Changhong Europe Electric was established. It bought 110,000 square meters of land in Nymburk, central Bohemia, and in 2006 built a TV factory on 40,000 square meters of land, 10,000 sq m of that taken up by the factory and the rest by infrastructure such as roads and car parks.

The factory was established with investment of $12 million (9.5 million euros), and now, as the existing factory nears full capacity the company plans extensions, Lian says.

This expansion will require an additional investment of 20 million euros from the parent company, for which Changhong and the Czech Republic government have signed a memorandum of understanding.

Changhong also has plans for the factory to produce refrigerators. That has always been part of the company's business strategy in the Czech Republic, Lian says, which is why it bought another 110,000 square meters of land, with 70,000 square meters available for producing refrigerators.

The company has already started to sell refrigerators in the Czech Republic using retail channels established through its TV sales. When exactly it starts making refrigerators in the country depends on market conditions, Lian says.

Although duty imposed on refrigerators imported into Europe is not high, the size of fridges means transport costs are high, which makes producing them in the Czech Republic a profitable proposition.

Changhong's highly automated Czech factory includes an electronic system that keeps track of every TV not only from the beginning to the end of the assembly process, but through to its packaging and transport to retailers.

"We wanted to fully track our TVs so that if faults are discovered we can analyze the data," Lian says. "If several TVs in the same batch are faulty, it may be a component problem, but if TVs assembled on the same day are faulty, the fault may lie with one of the assembly staff."

Apart from the company's advanced assembling facility, top quality changing room and catering facility are also provided for the workers.

Even the factory's canteen, which uses the services of an outside caterer, is a high-tech affair. Workers are required to select their meals a day in advance online, and they collect their meal by swiping a staff card.

Lian says its high level of automation illustrates Changhong's commitment to keeping its costs down in every sphere.

"If we did not have this system we would probably need to employ a couple of people to take orders and keep track of them. But in expanding into Europe, Changhong realized that labor costs here are a lot higher, which is why we have this level of automation."

Localization of management practices is also a key to success, so at the moment only a few of the 400 employees in the factory are Chinese. Four local management team staff responsible for key functions in the factory report directly to Lian, and the rest of the team report to the local managers.

Lian says Changhong's investment in the Czech Republic represents the beginning of a trend of Chinese companies going global by shifting manufacturing overseas.

"Once we have shifted manufacturing to Europe, any import tariff the European market imposes will not have an impact on us. This was a precondition for us in establishing a firm presence in Europe.

"In fact, European import duties will only help us by limiting some of our competitors who cannot produce in Europe."

cecily.liu@chinadaily.com.cn

(China Daily European Weekly 10/10/2014 page19)