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Chinese household electrical appliance enterprises

PROJECT TITLE CONSIDERING THE CURRENT SITUATION OF THE CHINESE HOUSEHOLD ELECTRICAL APPLIANCE ENTERPRISES, HAS WTO CREATED THE BIGGEST CHALLENGE?

DATE APRIL 2003

KEYWORDS WTO HOUSEHOLD ELECTRONIC APPLIANCES COMPANIES bd.

ABSTRACT

As the mankind has entered a new era, China is also moving rapidly toward becoming a member of WTO. Under the concept of economical globalization, accession into the WTO will give China the chance of further integrating itself into the world economy.

In a word, China's entry into the WTO will help create a favorable environment for trade and investment, which in turn will contribute positively to the steady and sturdy development of China's economy.

But everything has two aspects, for the Chinese domestic companies, WTO brings not only advantages and opportunities but also problems and challenges. Since China joined WTO, many areas of China's economy stand to see change, from agriculture to insurance and banking to telecommunications. Among those sectors, as one of the most mature industries in China, the household electrical appliance industry were critically affected by WTO and changed dramatically. From industry consolidation to overseas investment, from domestic price war to anti-dumping actions, clearly, Chinese enterprises are pursued to become bigger players in the world markets. But how can Chinese enterprises best achieve this goal? What should China business be doing to succeed, whether in a prized-open, rules-based post-WTO domestic market place, or in tough-and now tougher-global markets?.

To compete with the coming foreign rivals, the Chinese companies have been prepared for the challenges. This requires the Chinese managers have a good understanding of how WTO can influence their current situation and future development strategies.

This dissertation analyzes the influences of the WTO on the Chinese household electrical appliance enterprises by considering their current situation, attempts to identify some fundamental problems that exist within the Chinese Household Electrical Appliance Industry.

China's accession to the WTO will bring important development opportunities for its economic construction, of course, it will also bring many challenges. I will address the issues of changing market competition, the ......market


The Chinese leadership believes that economic Globalization is unstoppable, so if China is to remain competitive its best option is to join in...

-Jonathan Reuvid, 2000cobc



1.1 Background of this study

Twenty years may seem to be a short time in a country's history, but for China the changes that have taken place within this short time are stunning. For any other country, change at the rate that China has absorbed it in the past two decades would be close to unimaginable. Since the open-door policy began in 1979, China has become one of the fastest growth economies in the world and one of the largest future markets. But as

After fifteen years of negotiations with the United States and other WTO members, China finally joined the World Trade Organization (WTO) on December 11, 2001. This means China will open wider to the outside world and get more involved in global trade and economic activities. Many areas of China's economy stand to see change from WTO accession, from agriculture to insurance and banking to telecommunications. Among the sectors affected, the household appliance industry seems one of the most open to a global challenge.

Consumer electronics products may be broadly classified into household electrical appliances (including refrigerators, washing machines and vacuum cleaners), home electronic products (including TV sets and audio equipment), and other consumer electronics products (including home computers).

Mainland China's entry into the WTO will intensify this competition and force makers to compete on an even playing field with foreign companies. While the WTO entry allows mainland makers greater access to overseas markets, it also means mainland companies will no longer be shielded by domestic-friendly government policies.

In today's competitive economy, supply or production capacity generally exceeds demand and, therefore, nearly all sellers are forced either to be highly competitive or almost collusive in their pricing. (Michael J. Baker,2000)

Competition has positive and negative effects which must be considered. It also affects the market and the firm itself but if carefully monitored and managed can be to the firm's benefit.

Competition in this case can expand market opportunities for all firms in the industry which serve the market.

The firms's response to an international market opportunity will be governed by a number of factors. The degree to which the company is affected by foreign country legislation, tariff and non-tariff barriers or industrial standards is likely to influence its reaction.

Despite those encouraging developments, some unfavourable factors emerged after China's WTO entry.

As a conclusion, the Chinese companies will have to confront the challenge of membership in the global trading community.

This report presents various aspects of the WTO and their potential effect on China's home appliance enterprises. It concludes with a discussion of possible future developmental paths under the new international trade rules.

Chapter 1 provides a brief overview of China's

Chapter 2 presents the growth of China's economy in the post

Chapter 3 outlines China's science and technology infrastructure

Chapter 4 reviews the historical development of the Chinese electronics

Chapter 5 discusses the status of technological development and evaluates the future growth of the semiconductor industry in China.


 

CHAPTER TWO

RESEARCH METHODLOGY


A literature review has been carried out in order that the topic could be studied further. The majority of the sources for this report are secondary, ie. text books, academic journals, newspaper articles and company literature. Use has also been made of the internet and web-sites dedicated to the WTO field and the Chinese household electrical appliance companies. This review is contained in Chapter Three.

Primary research involved telephone interviews with the Chinese General Manager and Directors.

Twelve questionnaires were distributed using e-mail to some selected Chinese Companies. The questionnaire was designed to ask respondents bout their existing knowledge of WTO, and the changes they have witnessed since the China's entry into the WTO.

The reasons why I choose the telephone interview are:

ü Allows personal contact

ü Some explanation cab be achieved

ü Speedy

ü Instant feedback is gained

ü High response rates achieved


 

CHAPTER THREE

WORLD TRADE ORGANIZATION


2.1 what Is World Trade Organization?

The World Trade Organization (WTO) was established on January 1, 1995. It administers the trade agreements negotiated by its members, in particular the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services( GATS), and the Agreement on Trade-related Intellectual Property stood at US$6.8trillion in 1999, of which services and intellectual property accounted for some US$1.4 trillion. The WTO's rules and disciplines establish a framework in which this exchange takes place. The disciplines and rules are negotiated among members through periodic rounds of multilateral negotiations and ad hoc or permanent interaction in various WTO fora ( Bernard M. Hoekman, 2001).

WTO's rules comprised of numerous parts including many multilateral trade agreements on agriculture, textiles and clothing, technical barriers to trade, trade-related investment measures, anti-dumping, customs valuation, reshipment inspection, rules of origin, import licensing procedures, subsidies and countervailing measures and trade-related aspects of intellectual property rights. These agreements form the legal relationships within which members are to conduct their trading activities.

2.2 The Obligations for membership

One of the main obligations of WTO membership is the requirement that member countries treat trading partners equally. That is, the tariffs a member country imposes on any country's imports must be as favorable to any one exporting country as the most favorable tariff rates that member country charges on any other country's imports. A second fundamental principle under the WTO Agreement is the principle of national treatment: once goods have been imported they must not be discriminated against. Each member country has a protocol, or set of agreements, that cover the issues mentioned above. These are negotiated bilaterally with the individual countries or trading blocs that are already WTO members.

In order to accede to the WTO, China had to agree to take concrete steps to remove trade barriers and open its markets to foreign companies and their exports from the first day of accession in virtually every product sector and for a wide range of services. China further agreed to eliminate or significantly reduce restrictions on the rights of foreign companies to import and export goods and to distribute goods within China. Supporting these steps, China also agreed to undertake important changes to its legal framework, designed to add transparency and predictability to business dealings.

2.2 A brief Economic Impact of WTO

China's WTO entry makes an irreversible trend to integrate its economy into the global economic framework. As China joined WTO, both industry and government are moving at high speed to create amore open economy and society.

Firstly, the reduction in tariff and the liberalization of trading rights will boost trade for Chinaas well as demand for trade-related services. The commitments offered by other WTO members will give China a better chance to promote its products and expand its international market.

Secondly, WTO entry will put China back in the international investment spotlight. Investor confidence had been low recently due to perennial losses by multinationals and a series of defaults. Market access restrictions in various sectors will be relaxed. Rules and regulations will become more transparent and more consistent with international practice. Investors will appreciate the establishment of a more open and equitable investment environment.

Thirdly, although foreign competition will bring some short-term turbulence to China's domestic industries, it will accelerate the quality awareness of Chinese enterprises and put pressure on them to improve their productivity and efficiency. Those who can survive can be global competitors.

Lastly, China's entry will mean its commitment to a systematic and formalized plan with concrete steps for the opening up of its domestic service industries. Liberalization in the telecommunications, financial services and distribution sectors are all key to speeding up the development of the entire economy.

 

CHAPTER FOUR

Current Status Of China Household

Electrical Appliance Industry


3.1 A Brief History

The household appliance industry is China's most fast-developing industry. The development of electrical home appliance industry in China has experienced three stages: initial development stage in 1979-1983; fast-growing stage in 1984-1988; and stable adjustment stage since 1989. During the initial development and fast-growing stages from 1979 to 1988, the demand for and supply of daily-use electrical appliances grew rapidly in China.

During this period, the possession of household refrigerators increased 101 times, with an annual growth of 78.14 per cent; the possession of washing machines increased 287 times at an annual growth of 102.88 per cent. Also during this period, domestic demand for refrigerators had kept increasing at an annual rate of 92.23 per cent and that of washing machines at 84.82 per cent. (Baker & McKenzie, 2000)

Major electrical appliances, ranging from color TV, fridge, washing machine to air conditioner and microwave oven, all accounted for nearly 90 per cent of the sales on the domestic market.

Electrical home appliance industry has long been one of priority industries of government assistance. The government had adopted high tariff policy as well as import license system to electrical home appliance import to protect the domestic market (Appendix B)

Table 1 China Household Electrical Appliance Industry Production And Sales

Unit: RMB Brillion Yuan

China Household Electrical Appliance Industry Production And Sales

Source: Dempa shimbun, June, 2002

2001

Growth (%)

2002

Growth (%)

Production value

165.8

26.8

198.5

20.0

Domestic sales

123.7

19.7

147.6

20.2

Profits

14.9

9.4

16.1

8.1

Exports (US$B)

8.0

17.9

.8.64

7.7

Source: China Association of Household Electrical Appliance

Table 1 Output Of Selected Electrical Home Appliances (Unit:1000set)

1996

1997

2000 demand

Refrigerators

9,282

9,746

14,000

Washing Machines

10,689

11,972

16,800

Cookers/Cooktops

14,240

20,000

Dryers

406

Range hoods

2,640

3.2 The Chinese Household Electronic Appliance Market

3.1 Purchasing power

As the Chinese economy grew fast in recent years, the income of the Chinese people had increased largely. During the Eighth Five-Year Plan period, the average per capita income of urban residents rose from 1,387.30 yuan to 3,892.90 yuan, growing 22.90 per cent a year on average; per capita net income of rural residents grew from 686.30 yuan to 1,577.70 yuan, rising 18.10 per cent a year on average. At the same time, because of the effect of the reform of distribution system and other elements, the income disparity has kept expanding. The difference between the average per capita consumer spending between urban highest income families and the lowest increased from 2.74 times in 1990 to 2.93 times in 1995. Both the rise of income and the increase of income disparity will lead to the rise of the overall purchasing power of the society. As China's overall economy is expected to continue its growth momentum this year and the next, the income level of the Chinese residents and the income structure will also continue the development momentum initiated since this year. The reasonable rise of the income will ensure the purchasing power needed for limited expansion of daily-use electrical appliance market.

3.2Consumption habit

The improvement of living standard in recent years has imperceptibly influenced the habit of spending of urban and rural residents as they pay more attention to leisure time. When they select commodities, they emphasize convenience for use and how they can substitute people in doing family chores. Such a change of consumption habit will influence the demand structure of daily-use electrical appliances. In coming years, demand for highly efficient new products will rise remarkably.

The production quantities of Chinese main electronic products is shown on the below chart.

 

After almost two years of readjustment in steps, demand is emerging and will maintain the growth trend on the Chinese home electrical appliance market. But demand is stabilizing, while consumption is personalized and diversified. The demand for small electrical appliances will outpace that of traditional big ones. In the wake of the entrance of foreign multinational companies, competition on the domestic market will become fiercer and less and less brands, with advantageous enterprises and brands maintaining the leading position will control the market.

3.3 Factors affecting the current development of China household electronic appliance enterprises

3.3.1 Saturated Domestic Market

A recent survey on household electronic appliance shows that in China's major cities, colour TV and refrigerator market is saturated. More than 90% of households had colour TV, refrigerator, washing machine, electronic rice cooker and electric fan. Specifically, colour TV finds a place in 97% of households, refrigerator and electric fan 95% and 94% respectively. In other words, the market is quite saturated with these goods. However, since many a family is demanding for a new one, there is still certain demand for these goods.

Domestic enterprises now mainly produce and export low- and middle-grade products, leaving the high-grade home electrical appliance market dominated by foreign products.

2.3.2 Competition

Competition seems to be the most serious problem to a company. Nowadays, the Chinese household electronic appliance companies are facing as more and more tough competitions from overseas.

China is the largest developing country in the world. Its entry into the WTO is not only in the interests of China, but also in the interests of all WTO members.

Japanese, Korean and German household electronic appliance manufacturers, who are increasingly moving their production lines to the mainland, or setting up joint ventures with mainland companies.The market share of foreign brands in the mainland domestic market increased slightly during 2001. Although the market share of foreign brands is much lower than local brands, foreign companies benefit from much higher profit margins.

According to a survey of 106 emporiums in 35 cities nationwide conducted by Sino Market Research Co., foreign brands now control 28.1% of the Chinese fridge market, 7.1 per cent up from the previous historical high of 21% in 1999.

The State Statistical Bureau survey of 1,000 "major emporiums" in 150 Chinese cities in September 2002 resulted in similar findings.

Jan-Sept. 2000

1999

1998

Rank

Brand

Units
(m)

Share
(%)

Units
(m)

Share
(%)

Units
(m)

Share
(%)

1

Haier

2.5

28.2

2.6

27.4

2.3

26.5

2

Rongsheng

2.1

23.9

2.6

27.5

2.5

29.5

3

Xinfei

1.0

11.1

1.2

12.9

1.0

12.3

4

Meiling

0.8

9.36

1.9

9.5

1.0

12

5

Samsung

0.8

8.79

0.7

7.5

0.3

3.9

6

Hualing

0.4

4.6

0.3

2.6

0.3

3.8

7

Electrolux

0.4

4.03

0.3

3.03

0.2

1.96

8

Siemens

0.3

3.85

0.3

3.1

0.04

0.4

9

Changling

0.3

3.55

0.3

3.4

0.5

5.67

10

Wanbao

0.2

2.57

0.3

2.97

0.3

3.9

Market Total

8.9

100

9.4

100

8.5

100

Table 2 Current Market Situation in the Chinese Household Electrical Appliances

2.3.3 Nationwide Price War

"Mainland China's ongoing price war is set to escalate as the country enters the WTO and TV makers face even greater competition."(January 2002, Global Times)

2.3.3.1 What is Price War?

"Price war" has been the catchphrase of the Chinese market of recent years. Nowadays, price war touches almost all sectors of the Chinese consumer goods market, and has become a deep-rooted problem that has heavily affected the household electronic appliance industry. Now I want to use the color television products as an example to explain how has the price war changed the whole industry.

As China is one of the largest TV manufacturing bases in the world, there are 87 TV makers in the mainland, capable of turning out 70 million units a year. However, the domestic demand only amounts to 20 million to 30 million sets, and exports only account for 10 million sets. In 1989, the TV market plummeted into depression due to a special consumption tax imposed by the Chinese government. This tax posed such a threat to sales that it was necessary for manufacturers to seek some kind of solution. One of China's top TV manufacturers, Changhong, declared a price cut of RMB 350 on each television set, effective August 9th, as an incentive to consumers, a move that dramatically boosted its sales figures, having seen the success Changhong has made, other enterprises such as Konka and TCL immediately followed suit, declared more and more discounts on their products, therefore, the price war have become routine in the Chinese TV industry over the coming ten years. According to statistics, from 1996 to September of 1998, the price of a 21″ television was reduced from RMB2935 (US$353.6) to RMB1543 (US$185.9), down 47.4 percent; the price of a 25″television was cut from RMB4917(US$592.4) TO RMB2432(US$293), down 50.5 percent, and the price of 29″television dropped from RMB8562 (US$1031) to RMB 4221(US$508), down 50.7 percent. (China Household Electronic Appliance Association, 1999) The price war had escalated to such a scale that even foreign manufactures, which had been conservative about their prices all along, could no longer afford to remain aloof and were forced to keep pace. Panasonic, Sharp and Samsung cut the prices of some of their models in an effort to remain competitive. The price war did benefit some manufacturers - some companies succeeded in using it to increase their market share and the popularity of their products, even if they were turning zero profits or even a loss. Thus, under the pressure of the nation-wide price war, the small and local manufacturers failed to achieve their profit and were bankrupted. As a consequence, only big companies, which can afford the loss, can survive in the China household electronic appliance industry

"A price war on domestic appliances resulted in the decimation of the 200 brands that existed in the domestic market in 1995, resulting in the mere 20 that survive today, an attrition rate of 90%."

(People's Daily, April 2001)

2.3.3.2 Why So Many Price Wars?

Price war, by no means the only strategy for market competition, has become the favorite weapon of Chinese enterprises nowadays. Particularly since the beginning of 2000, price war has been elevated to the status of a survival strategy by some Chinese enterprises. Without it, they can hardly advance in market competition. Even while taking the risk of economic loss, many enterprises are perseverant in carrying out round after round of price wars. Why is price competition so popular?

Imbalance between supply and demand. The domestic market is saturated and makers are stockpiling inventories -- enough for a year's supply even if production was halted industry-wide. Consequently, major color TV makers have been slashing the price of their excess stock.

Domestic and overseas markets are saturated, makers are stockpiling unsold products and R&D budgets are minimal. The stodgy market is forcing makers to slash prices, and quotes will keep falling for at least the next two years.

2.3.4 Overseas Expansion

When the firm decides to expand abroad into new international markets it usually discovers that the markets for its products and services are fragmented (Frank Bradley,1999).

Chinese firms have been known to accumulate overseas assets since the 1980s. Large Chinese firms, however, expanded overseas systematically only since the mid-1990s. (Kris Olds, 2000) Since China joined the WTO, Numerous Chinese companies are expanding their market and investing in overseas in order to enter world market and protect them from foreign companies' attacking.

China does not have an overseas investment law or any policy encouraging overseas investment. Moreover, the procedure to receive approval for overseas projects is long, bureaucratic and inefficient, which partly influences the operation of overseas investments.

Unfortunately, sales for these products in the domestic market have been stagnant. Consequently, Chinese corporate executives have regarded overseas expansion as an effective means of "exporting out" its problem of industrial over-capacity.

China's overseas expansion has been driven by a variety of forces.
First, after two decades of economic reform and development, China has built up significant productive capacity, especially in household electrical appliance manufacturing, textiles and clothing sectors.


Second, as China's industrial consolidation has gathered pace, more and more workers from state-owned enterprises have been laid off. The unemployment problem has been exacerbated by the tens of millions of migrant workers from the countryside who flock to the cities each year. The problem will doubtless be intensified by China's entry into the WTO.

2.1 Limitations in Chinese companies' overseas expansion

Chinese electronic companies are obsessed with entering overseas markets - not only by exporting but also by establishing plants to manufacture TVs and refrigerators in the United States and other countries. Even more puzzling is that while the global consumer appliance manufacturers are moving to China, using it as a production base, and exporting the final products home, Chinese companies are setting up factories in the US in order to sell their products to American customers. Does this global strategy make any sense? Is globalization really strategically necessary for Chinese companies or is it a simply move based on unrealistic goals like those in the Great Leap Forward of the 1950s?

A simple comparison can perhaps clarify the point. Take China's Haier, for example. Both Whirlpool and Haier produce refrigerators. Recently, Whirlpool moved its production base to China and Southeast Asia but still maintains design centers and a distribution network in the US. Haier, on the other hand, set up a factory in the US - where labor (and other) costs are 10 times higher than in China and intends to compete with Whirlpool. If the US refrigerator market is a new market, Haier's move makes sense. However, the US market for refrigerators matured and became saturated a long time ago, making profit margins much lower than in developing countries. And if the short-term profit is not what Haier is looking for, what can the Company acquire by doing this? More sophisticated technology? As it was able to export 500,000 refrigerators to the US last year - before establishing a production base in the US - Haier has already demonstrated that it has the technological and manufacturing capabilities to make quality refrigerators and thereby compete with consumer appliance giants. So what is the motivation to set up a factory in the US? Perhaps Haier can acquire some market shares in the tough US market, and thereby improve its international image. But is this a realistic goal? Can Haier improve its image and technological sophistication simply by having a US presence? Think about the example of Hyundai and Daewoo and Samsung and LG, South Korean carmakers and electronic manufacturers, respectfully. These firms have been in the US market for a while and have been able to grab some market shares, but all they have really gained are low-end customers. This has neither provided substantial profits nor helped them build strong global reputations. Yes, people around world may buy Samsung and Hyundai products, but compared to Japanese appliances and cars, South Korean products are viewed mostly still as cheap and low-grade. South Korean companies have tried for almost twenty years without making any remarkable progress in this regard. Is this what Haier and other Chinese companies hope to achieve?

Establishing overseas operations has significantly reduced Chinese companies' market entry barriers, improved their understanding of, and response to, the target markets, and enabled them to keep pace with the latest technological advances. More importantly, they could be now more familiar with international business practices, and that has greatly improved their competitiveness in the world marketplace.

Conclusion

Since China joined WTO, the competition between domestic and foreign brands will surely be all the more intense. For Chinese household appliance makers, " compulsory course" is to learn to maintain the present advantageous position and develop with steady steps; and for foreign companies, a good knowledge of " Chinese kongfu" is a prerequisite to their getting a foothold in the Chinese market. In a market where the fittest survive, all enterprises are equal.


 

CHAPTER FOUR

Literature review


The review of Literature researched many sources to gain as much insight into the field of WTO by the Chinese household electrical appliance companies as possible. Sources used included textbooks, journal, newspapers, periodical, the Internet, market reports and trade publications.

Ø The WTO debate

There has been an extensive debate on the issue of WTO in the literature and in the popular press which raise the need to examine its elements. The aim of the WTO is to facilitate global trade by breaking down tariff- and non-tariff barriers between nations.


While the government moves ahead with its legal and regulatory reforms, opposition is emerging from protectionist forces within China. Local governments, industrial ministries not yet effectively refashioned into independent regulatory bodies, and PRC enterprises form the core of this opposition.

But not all enterprises fear WTO accession. The reaction of Chinese companies to the small amount of WTO information they have obtained to date has been decidedly mixed. Haier Group, Legend Group, Huawei Technologies Co., Ltd., and other large Chinese companies with realistic aspirations of growing into competitive multinational corporations are eager to take advantage of the influx of new business and technology.

In fact, most Chinese companies have little information about China's bilateral commitments. Press articles have provided general information about the WTO and the impact of WTO accession on specific industries and regions, but an official Chinese version of the US-China bilateral agreement has not been made available to PRC companies, and the EU and other bilateral agreements are unavailable in any language. To be sure, the release of the US-China agreement was an unprecedented step taken mainly for US domestic political reasons; the texts are generally kept secret until the POA is complete. In the absence of such key information, however, companies have made few significant adjustments beyond those the government has orchestrated.

Since joining the WTO, China has made full use of WTO rules and dispute mechanisms, which have helped to build a fair trade environment for Chinese firms.

The competitiveness of people and enterprise, increasingly dependent on their ability to create new assets, provides an attraction for mobile foreign investment, which, when combined with a political capacity to adapt and change, is an additional element to be considered in the WTO debate. Also, there is the role of governments which is becoming increasingly important in influencing the location decisions of companies, particularly those engaged in mobile foreign investment. (Frank Bradley, 1999)

...To promote efficient competition in all markets requires comprehensiveness. By this we mean that many areas of government policy and their application impinge upon competition and efficiency in markets. Therefore, policymakers need to create an overall operating environment for businesses that is most conducive to competition among them... (Kerrin M.Vautier, 1999)

More and more companies, whether small or large, young or old, recognize that their choice is between becoming global or becoming extinct. (The Wall Street Journal, 30 April 1998)

Globalization is key to survival in the 21st century. In this day and age, no country or company can survive with out becoming globalized. For the Chinese enterprises, staying a national player is no longer an option. (Lee Kun-Hee, Chairman of Samsung)

The mature period has signified that the market is becoming saturated; the industry is excessive in capacity; the market faces fiercer competition and manufacturers are in lower level of profitability. Such situation will exist in the coming years, posing a grave challenge to manufacturers of household electrical appliances.( June 2002, Global Times)

The improvement of services before, during and after sales and promises to buyers concerning different aspects have become especially important in marketing.

Without domestic demand, you cannot sustain your development; without international demand, you cannot become powerful. In another word, one enterprise cannot get access to international markets without competitiveness on domestic markets. -Haier slogan

Some domestic enterprises have started their process of internationalization by investing in foreign countries, establishing factories there and entering local markets.


 

CHAPTER FIVE

THE DIRECT IMPACT OF WTO ON CHINESE

HOUSEHOLD ELECTRONIC APPLIANCE COMPANIES


Introduction

Before China joined the WTO, most of the Chinese household electrical appliance manufacturers didn't realize the challenges created by the WTO entry, in their optimistic opinion, WTO simply means good opportunities for the overseas investments, more profits, and even a chance to become multinational companies, maybe there are some threats from overseas rivals, but we can ignore them. For many years, these ideas dominated the whole industry; none of the companies seemed have prepared for the WTO entry. One of the most famous slogans used by most companies is: 'because I don't know, I am not scared'. However, since China has become the WTO membership, in the future, the companies' action will be more and more restricted by the WTO rules and international laws, if they keep their traditional thinking in mind, they will be punished by the WTO rules and failed in the international competition.

5.1 Protection of Intellectual Property

5.1.1 Definition

Intellectual property can be defined as information that has economic value when put into use in the Marketplace (Maskus, 2000). Ownership rights to intellectual assets span those ideas, inventions and creative expression on which there is a public willingness to bestow the status of property (Sherwood, 1990).

Before China joined the WTO, most Chinese household electrical appliance companies pay nothing for the modern technologies used in their products, which are belong to the high-technologic foreign companies. Without the restriction of the specific rules, they sold their products freely both in the Chinese domestic markets and the overseas markets. Thus, no the intellectual property charges, they faced less price competition than their foreign competitors, especially in the international markets.

Since China joined the WTO, this situation has changed dramatically, numerous of foreign companies realized that

One of the Chinese official who worked in WTO office for years, said if all the Chinese companies can pay their intelligence property fees automatically to the foreign companies, it just means they are grown up; if one day, the foreign companies begin to pay the intelligence property fees to the Chinese companies, that means they become mightiness.

5.2 Antidumping Charges

Another factor that can affect the Chinese enterprises is the antidumping charges by the foreign countries.

Since 1988, EU has started its investigation into allegation that China's color television producers sold their products in European market at a price below cost. In July 1991, and in March 1995, EU twice resorted to hefty tariff measures and shut the door to big-screen and small-screen Chinese-made televisions.

The nine producers, including Changhong, Xoceco, TCL, Haier, Hisense, Konka, Skyworth, Panda and Furi, control about 90 per cent of China's domestic TV market
In November 1999, EU took a stern measure to charge 44.6 per cent tariff on Chinese television sold on European market.

Quite a number of Chinese manufacturers are not familiar with relevant laws and regulations on dumping charges, and for this reason, their inaction to face up to complaints raised by their competitors, has inflicted upon them losses of lofty profits and market share.

Dumping is defined as "exporting a product at a price lower than the price charged in the home market. Companies consider dumping as a tool to increase market share and wipe out competitors in the importing countries by selling a product at a price the domestic producers cannot support.

Typically an anti-dumping action means charging extra import duty on the particular products countries in order to bring its price closer to the 'normal value' or to remove the injury to domestic industry in the importing country.

With the rapid development of its foreign trade, China became one of the countries severely affected by anti-dumping allegations and protectionist measures. From 1978 to 2001, 33 countries and regions undertook anti-dumping and protectionist measures against China, bringing forward 498 cases concerning over 4,000 products and affecting over 16 billion US dollars in exports. In 2001, 17 countries and regions launched a record 67 investigations against China.

China's expanding foreign trade arouses resistance from some other WTO countries. Because of the pressure brought by the global economic downturn, many countries took trade protection measures permitted by the WTO to resist imports and protect their own domestic industries. (Jonathan Reuvid, 2000)

5.3 Technical Barriers

Conclusion

The PRC government and Chinese companies are attempting to prepare for the new rules of WTO membership with varying levels of commitment.

Chinese enterprises ought to work out a comprehensive and long-range development strategy, bear the importance of anti-dumping campaign in mind and be on the alert against any possible anti-dumping measures, in order to protect their legitimate rights and interests on the international markets


 

CHAPTER FIVE

THE INDIRECT IMPACT OF WTO ON CHINESE

HOUSEHOLD ELECTRONIC APPLIANCE COMPANIES

6.1 Consolidation

In the globalization era, no company can defeat its competition rivals and meet the market demand by itself, as a result, mergers and acquisitions are good methods to strengthen the whole strength of the Chinese electronic industry.

Philipps's love affair with Changhong, Kelon's alignment with Little Swan, Wanjiale's "handshaking" with Huadi, in addition to price wars, e-commerce, multi-dimensional development, network appliances - all these strongly indicate that China's home appliance industry, a constant media hot topic, has entered into a new round of consolidation.
In future, the trend of alliance must be the necessary style in the more intense situation. Some companies without the superiority of competition will be eliminated from this industry, and enterprises would become more and more centralized.


It is well known that China's home appliance industry, after 20 years of rapid development, has attained a production capacity well exceeding market demand in such products as color TV sets, refrigerators, air conditioners, washing machines, and microwave ovens. Statistics show surpluses of 20,000,000 TV sets, 8,000,000 air-conditioners, 10,000,000 refrigerators, and 11,000,000 washing machines - causing enterprises to launch direct price wars to try to survive the "hard way."

In terms of technology, Chinese products have been following the steps of international brands; and although lacking in innovation, Chinese firms have never given up the dream of conquering the Chinese market. However, recently, 100HZ big screen TVs made an appearance in China, posing another formidable and ineluctable challenge for Chinese enterprises.

Faced with ever-intensifying price wars and a search for breakthroughs in new technologies and products, both the government and enterprises have to consider the important questions of development and prospect for China's home appliance industry.

Previously, the pattern was that small enterprises lacking competitiveness went broke without exception and large businesses enjoying many advantages merged and bought out small enterprises. However, today Chinese enterprises must garner enough strength in terms of management, quality, technology, and service to meet challenges from international giants as China has joined the WTO. Domestically, the market for home appliances is approaching saturation in cities and cultivation of rural markets is difficult to implement, causing further problems for Chinese enterprises in bringing their capabilities fully into play. Consequently, simple consolidation cannot solve such a complicated problem as the double-edged international and domestic pressures.

Under such circumstances, the question of how the consolidation will be carried out is of uttermost importance. It is fortunate that the home appliance industry, as one of the earliest industries undergoing market reform, encountered fewer restrictions than others. Therefore, it is not surprising that they adopted one big reconstruction move after another.

Zhang noted cooperation with overseas competitors and exchange of resources have opened new opportunities of development for Haier, citing Haier's recent cooperation with its Japanese counterpart Sanyo. Under their cooperation agreement, Sanyo will use Haier's distribution network in China and Haier will use Sanyo's network in Japan. Both companies will benefit from the exchange of market resources, as it cost time and money to set up the distribution network in the market,


6.2 conclusion

Undoubtedly, the future of the industry is austere. Although it is maybe too early to discuss wins or losses, one thing that is nevertheless certain is that consolidation cannot be evaded and the public will wait and see who will survive in the end.



 

CHAPTER SENVEN

THE REACTIONS OF MULTINATIONALS


Other preparations foreign investors are making focus on the WTO commitments themselves. For example, some companies in China are resisting pressure from PRC officials and companies to make deals under terms that do not comply with WTO standards. They are also taking steps to time their market strategies to coincide with China's opening commitments.

No matter their approach, all foreign companies are coming to grips with what China's WTO entry will mean and what it won't. WTO membership will mean that China's markets will become more open to foreign companies. It will mean that foreign companies will receive national treatment and benefit from a more uniform, rules-based system of trade. Regulations will become more transparent, eliminating some of the unpleasant shocks that result from the current practice of sudden regulatory change.

China's WTO membership does not mean that all of the problems foreign companies face in China will go away. WTO requirements do not cover China's process of doling out operating licenses, for example, though the criteria companies will have to meet to obtain such licenses may change. There will still be competition from domestic and foreign competitors--although companies with operations in China may also find that the impact of tariff reductions on their competitors' imports is minimal because so many products come into China without paying full duty rates. Operational barriers--whether the result of infrastructure or bureaucratic limitations, or both--between different regions in China will persist, even after companies become able to conduct business across the country. And the market itself will take time to mature, particularly during the next several years of intense restructuring. Companies may find, for example, that while there is no longer an import tariff on their product, there is no market for it yet in China.

Some Chinese companies generally reluctant to change, in the international market, they just taking a position 'wait and see', follow traditional lines of business, being satisfied with their local business success, or fear the additional stress of international business and the risks involved, thus, how those companies could survive when more and more multinational companies entered the Chinese domestic market at the same time China has joined the World Trade Organization?

In addition, Chinese makers of electrical appliance will acquire the national treatment on the world market through greatly weakening foreign anti-dumping attacks on China and sharpening of the export edge of Chinese products.

The entry into the WTO will promote the upgrading of quality and product-mix of home electrical appliance. China would make great use of foreign fund resource to entail a large-scale restructuring of assets to eliminate those inefficient enterprises that have a poor capability and low and unique competition means. That would force the home electrical appliance enterprises to make innovations in technology, management, and service, optimise and upgrade the industrial structure and build up their long-term advantages in competition.

The entry to the WTO will be beneficial to the use of foreign investment and the introduction of advanced equipment by China. When the entire tariffs are reduced, import costs of some raw materials, technology, equipment and parts and components will drop, thus cutting down the production cost and strengthening the international competitiveness of home electrical appliances. Of course, the decline in import tariffs would greatly reduce the effect of attacks of smuggled products and accessories to the home market.

After China joined WTO, the foreign electronic products will not be superior position in price of products. The technologic innovation will become the key point for winning in competitions of the Chinese market.

The entry to the WTO will favor the technical improvement and renovations of Chinese home electrical appliances. WTO's provisions on protecting intellectual property right are due to speed up the pace of China's home electrical appliance industry from imitation to innovation by their own efforts. Plus the technology export from foreign enterprises, that would push forward the technical innovation of China's home electrical appliance industry. In terms of technical laws and regulations, the agreement on technical law and regulation standards TBT will also bring about many advantages to

...Multinationals find that selling products under Chinese brand names-especially in developed markets-is extremely difficult, since the merchandise is often regarded as cheap, low-tech and of poor quality. Plus, the sales efforts of many Chinese companies are weakened because they lack the management and marketing skills of their foreign rivals...

6.1 Lack of international trade knowledge

According to a survey conducted by the Information Centre of the Development Research Centre under the State Council (DRC) among more than 5,000 business executives, only 3.2 per cent of the surveyed executives said they thoroughly understood WTO rules, and more than 20 per cent of the executives admitted they know little or nothing about the WTO.

Although many domestic enterprises are quite successful in doing OPAT, quite a few companies are investment abroad without clear target market, or failed in selecting of correct projects. They didn't conduct detailed market survey before hand, some project feasibility study report were written even without pre market survey in the local place to where the enterprise would like to invest.

6.2 Increased Competition

China's entry into the WTO, will increase the Market liberalization process, and thus increase competition, not only from multinationals but also from China's own developing indigenous business sector.

a. From Multinationals

As China joined WTO, the Chinese government put forward a series of economic policies, from effective government reforms to flexible foreign investment policy, all of the policies have gave the multinationals a much more active environment than ever before.

With a stronger capital base and often more political clout, and being more "well-connected", the bigger multinationals are more capable in overcoming entry barriers and enjoy better bargaining power in negotiations over terms and conditions in setting up new operations in the Mainland. Furthermore, the Chinese government has thus far shown an inclination to encourage multinationals, rather than smaller companies based in Hong Kong, to participate in its liberalized program such as experimental projects.

6.3 The localization Process of Multinational Companies in China

6.3.1 The Definition of Localization

Localization is a process which reverses the trend of globalization by discriminating in favour of the local. Depending on the context, the 'local' is predominantly defined as part of the nation state, but can be the nation state itself or even, occasionally, a regional grouping of nation states. (Colin Hines, 2000)

From my primary research and secondary data collection, I draw a conclusion that the one of the main barriers for the development of multinational companies in China is: their "slack" localization process. Before China joined WTO, without the support of the related international laws and trade rules, they felt the strong government local-protection, thus, it is difficult for them to set up their own distribution and sales network across the country, because the Chinese laws forbids it. A typical example will be: if the Japanese Sanyo Company wants to set up a TV factory in China, they must find a Chinese partner and invest on this TV factory together, and then, if their partner is China Haier Group, the new factory must be named like this: China Haier-Sanyo Group, and additionally, the Chinese investor- Haier must control the new company.

But this kind of example will no longer be existed in the Chinese market, as the Chinese government cancelled hundreds of rules that used to restrict the localization process of the foreign companies. Nowadays, in order to compete with the Chinese manufacturers, more and more foreign electrical giant are now focusing on their product after-sale service, distribution networks and technology development.

 

 


 

CHAPTER SEVEN

CONCLUSIONS


In the past two decades, globalisation brings not only many advantages and opportunities but problems and challenges as well. China's World Trade Organization entry has boosted its economic growth and advanced its legal and governmental reforms; furthermore, it also improved the Chinese market mechanism, and created a more healthier competitive environment for the Chinese companies.

. Government agencies need to accelerate the pace in formulating new policies or modifying existing regulation to the needs of the new circumstances. Managers of industrial companies need to formulate strategies for similar purposes. But above all, they should both know how to take advantage of the rules of WTO to protect the national interest from their respective perspectives.

After China became the member of the WTO, Chinese household electrical appliance enterprises can enjoy more equal trade than before in the international market. Meanwhile, it also means Chinese products will own more and more competitive capabilities form the overseas market.

By the development in recent years, the Chinese household electrical appliance industry has become the most important and mature industry of the Chinese manufacturing industries due to the powerful strength, closing with international advanced technological and joining in the international competitions. Although, the Chinese household electrical appliance industry grew rapidly in latest 20 years, there are still a lot of problems and challenges because the supply outstripped demand; moreover a large amount of foreign companies entered the Chinese household electrical appliance market. However, the advantageous effects are more than disadvantageous effects in general.

In my opinion, the development of the Chinese household electrical appliance industry will appear the following trends in coming years. Firstly, the growth of this industry will slow down. Once there was the rise period at a high speed in the 1990s in the Chinese household electrical appliance industry, with the saturation of the domestic market gradually, it has stepped into steady rise period in recent years, so top speed growth will be difficult to appear in the domestic electronic market at the following several years. Secondly, the paces of expanding the overseas market will be accelerated greatly. With the weakening and even disappearing of various kinds of trade barriers of foreign countries, the market competitiveness of the Chinese electronic products will be stronger and stronger. According to whole world range, China should be the manufacturing industry's kingdom in future, because of the most outstanding industrial function, the cheapest cost and more open-mind policies at present. Thirdly, acquisitions and mergers will be frequent further. Foreign companies want to expand the Chinese market. Meanwhile Chinese enterprises want to widen the overseas market. The result will be that the acquisitions and mergers between foreign and domestic corporations become more and more frequent. Finally, the trend of rising constantly appears in the whole market with the arrival of new round of technical revolution that is represented by information technology. For example networking products are in their growth period now. The increasing of market demand will be the power for the growth of the electronic industry. Now some traditional electronic products certainly can appear new growth because the technology of network and digitalization is adopted extensively.

China's entry into the WTO will inevitably expose Chinese TV makers to fierce international competition.

For the multinationals, tariff reductions under accession to the World Trade Organization, will not be the most significant gain for foreign firms. Market access for various service sectors, the right to own and operate distribution facilities, increased transparency in Chinese laws and how they are formulated, and an improved investment environment will, in my view, be the main benefits.

However, according to my telephone interview with Mr. Liu Qinghua, I find that most the Chinese companies are hopeful that any difficulties WTO entry brings will be temporary.Makers are hopeful that their worldwide market share will even increase after WTO entry, as China-made TVs will no longer be subject to European import tariffs, which makers say have greatly restricted the country's colour TV exports to Europe.

On the up side, mainland makers expect WTO membership will help them succeed, by forcing them to become more efficient and market-oriented. WTO entry will also put an end to industrial monopolies and local protectionism, opening the country up to the outside world and competition.

WTO entry will also force the Chinese government to adjustment some of its domestic rules, regulations and laws, as well as change the way the government operates. However, the Chinese government will continue to promote favourable policies that support local firms' overseas investment and encourage their global expansion.

But the combined effects of the price war and WTO entry will also make life much more difficult for small local players. According to China Electronics News, these domestic companies account for 15 percent of the country's total output of TVs. (The 10 top local brands account for 70 percent and foreign brands, 15 percent). Over the next two years, smaller competitors will really begin to feel the pinch.

Haier's success depends on its business globalization, advanced management methodologies and systems, brand recognition, and consistent business strategy. Haier has provided a successful experience for those traditional Chinese companies, learning form Haier, they could establish an effective competitive system, pay attention on the product and service, and have the strong brand recognition.

World Trade Organization, will make a country wide open to foreign competition, for each enterprise only by actively taking part in global competition can they seize a chance to survive. Now the competitive threat not only exist in the overseas markets but also in china own domestic market.

The government should adopt more active measures to further improve the external environment and mechanisms for company's development and improve the overall quality of opportunities for Chinese companies, thereby laying a solid foundation for the further development of Chinese companies in the 21st century.


 

CHAPTER SIX

RECOMMENDATIONS


China's accession to the WTO is a major event of historic significance to China's opening up and modernization drive. This will be an important milestone in the economic development of China.

The development of the Chinese electronic industry mainly depends on two basic elements. Firstly, the huge demand of the domestic market. Secondly, the demand of the international market increased quickly.

6.1 They are now keen to adopt new technologies, launch new products, diversify into new product lines and form new partnerships as a way of surviving the battle.

From my interviews with several Chinese entrepreneurs, their attitudes are quite optimistic about the situation after WTO entry, the majority of enterprises maintained the most active reaction was enhancement of their own competitiveness. Also I found that mostentrepreneurs are full of expectations of the government, they expected that the government could quickly accomplish the change of government functions after WTO entry. The Chinese managers also hoped the government would adopt measures to improve macro external conditions, such as perfecting the social security system, deepening State-owned enterprise reform, improving the market system and straightening out the relations between government administration and enterprise management etc.

6.2Chinese enterprises should gain a deeper understanding of WTO rules to turn challenges into opportunities.

6.3 With intense competition coming from their international counterparts, domestic enterprises should take the opportunity to adopt modern enterprise management systems.

6.4 Domestic manufacturers also must improve their product and service to face a higher degree of foreign competition.

6.5 Enterprises' mergers and acquisitions will help Chinese enterprises form big companies to fend off the threats from international competitors.

6.6Chinese domestic companies should also be encouraged to go overseas and take advantage of their resources, markets, or labor and enjoy the benefits of the globalization.

6.7 With the situation expected to intensify for a further two or three years, the leading makers must have begun to look for new directions and strategies instead of relying solely on pricing.

6.8 Domestic enterprises should try to consolidate overseas resources effectively through foreign investment and set the international market as their target. By these means, enterprises can improve their competitiveness and survive the competition with foreign multinational companies.

6.9 Meeting the needs of accession to the WTO, all enterprises should probe the effective management way of science.

6.10 Chinese enterprises ought to work out a comprehensive and long-range development strategy, bear the importance of anti-dumping campaign in mind and be on the alert against any possible anti-dumping measures, in order to protect their legitimate rights and interests on the international markets.

6.11 From the change in senior managers to the shifting in strategic investments, from strategic alliances to internationalization, from adjustments in company products to searches for new areas for economic growth, profound changes have been taking place in the household electrical appliance industry; and a new, reframed industry pattern is rapidly taking shape.

As China's electronic appliance markets are becoming more competitive and therefore less profitable, and as foreign brands are flooding into the domestic market, it is understandable and wise that Chinese companies have started to think globally. But when they do so, it is essential that they be realistic and focus on short-term profits and long-term survival - rather than obsessing over meaningless nationalistic goals like becoming "one of the top global 500 companies" or "the first Chinese company to set up factories in the US." However, in order to become truly global and survive international competition, Chinese companies need to bear the following four things in mind:

1. Do not target developed countries if the markets for Chinese firms' products are mature, because targeting these markets will do no good - either financially or strategically. In these mature and well structured markets, marketing costs will be extremely high, profits will be low, and the only achievement Chinese companies can hope for is to become a marginal player serving low-end customers.

2. Target developing countries where markets for these products are underdeveloped, yet have great growth potential. Relatively speaking, the cost of entering these countries and developing the market is low and it is easier to target the middle class, build brand loyalty, establish a good image, and hence become major players. This tactic will pay off both financially and strategically. India and Indonesia (after it becomes more stable), for example, may be the best places for Chinese companies to begin their globalization campaigns.

3. Target new industries and technologies that will totally change and reshape the industries in which ambitious Chinese companies belong. Television production may be a good illustration. One direction for the television industry is that TV sets become computers with big screens. Future TVs will not only receive the programs broadcasted by TV stations, but also display movies, MTV, other shows and content from the Internet. The functions of television will also be greatly broadened. One of the great challenges now is how to process and transmit quickly the video and voice data via cables and how to make pictures on TV screens more vivid. A computer-TV and relevant software that can process video and voice data faster should be in great demand in the next ten years. Since these are relatively new technologies and are still under development, in these areas, Chinese TV companies do not really lag behind foreign TV makers. What Chinese TV manufacturers can and should do is to target these new technologies, identify a few emerging software and Internet companies, invest heavily in or establish partnerships with them, and thereby become a leader in these areas. Doing this would pay off in two ways. On one hand, the new technologies and Internet themselves have large markets and could bring enormous profit, turning Chinese TV makers into brand new, high-tech companies. On the other hand, Chinese firms could apply the new software and internet-related technologies to their own industry and gain an upper hand in the high-end TV market. The transformation of Corning from a lackluster glassware maker to a hot, leading optical fiber manufacturer is a good example.

4. Think less as a Chinese company and more as a global company - i.e., identify market and investment opportunities on a global basis and mobilize resources on a global scale. China is still important, although not because these enterprises are based in there, but because China has a large market and talent-pool. For a truly global company, India, China and Brazil are similar markets merely with different labels. These ideas may sound radical to Chinese companies that have been used to patriotism and carrying out the mission of reviving the nation. However, to become a global company and compete with other globally operated companies, a global rather than "China" perspective is prerequisite. For instance, in the Internet arena, it is possible that many software companies with emerging technologies are located in the US or Europe, where markets for testing these new technologies are great. So, if a Chinese TV maker wants to enter into these arenas, it will be necessary to set up a US or European-based company and compete against other leading firms for the US market. It is hard to call this company a truly US company or a Chinese company. But remember, nationality is not as important as financially and strategically helping the Chinese parent company!



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