Early market entrants chalked up experiences in resource management, component sourcing, staffing, distribution systems and even environmental protection.
"Localization is an important part of our strategy in China, and local sourcing is part of this strategy," says Ruey Bin Kao president of Motorola China. He adds that this integrated supply chain process "gives us a good opportunity to leverage our [spending] and power across the organization."
The local focus takes many dimensions, including tailoring products for Chinese customers. For example, Sony has customized its Walkman P series, a music player that displays Chinese lyrics and photos. Sony also is developing its thinnest LCD TV monitor in China: a 16-millimeter-thick screen designed to hang on a wall because Sony's research found that Chinese customers prefer that kind of installation.
Yibing Wu, chief strategy officer of the Lenovo Group, says, "We tailor our products for the Chinese market." Lenovo, which had two-decade-old roots in China before it acquired IBM's PC business last year, sees immense growth in the domestic market.
"It will grow much faster than the mature markets" elsewhere in the world, Wu explains. In particular, smaller cities in China offer great opportunities. He says, "The income of the average Chinese is rising at a very fast pace."
Westinghouse Digital, which had been manufacturing products in China for many years, plunged into the domestic market last year. It set up its business in January and began selling LCD flat-screen TV sets in October 2006.
"We are still creating a virtual structure," says Richard Houng, CEO of Westinghouse Digital, describing the relationship with domestic manufacturers and retailers. "Some of the process was very new for us," he says, singling out the need for partnerships with Chinese companies.
Retail Realities
During the past year, a consolidation spurt has changed the Chinese retail landscape. A handful of retailers, such as GOME Electrical Appliances Holding Ltd. (China's largest electronics specialist) and Best Buy (which bought the large Jiangsu Five Star chain last year), control about 40 percent of sales in big cities, according to a McKinsey & Co. study. In some categories and markets, such as TV sets in the most populous cities, GOME's share approaches 70 percent.
McKinsey analysts recommend that manufacturers help dealers build marketing strategies, in-store promotions and inventory management systems-resources that Chinese retailers often lack.
"Companies that help retailers build these skills will secure their position as 'strategic vendors' to the major retail chains," explains Ingo Buyer von Morgenstern and Chris Shu of McKinsey's Shanghai office.
Among the companies embracing that promotional tactic is Sharp Corp., which has been building its Chinese sales base for more than a year. "Sharp's goal has been to boost marketing and sales promotion and carry out more unified sales activities," says Nobuyuki Sugano, corporate director and group deputy general manager for China at Sharp's International Business Group. Sharp hired a Chinese national to head this sales unit and is focusing on its top-of-the-line products to cater to status-conscious Chinese consumers.
TTE (part of TCL, the Chinese company that absorbed Thomson and its brands) agrees that "China does have a big market for high-end products."
"International companies coming to China assuming people here only buy cheap products all failed," explains Aaron Tong, vice president of TTE and a TCL executive.
Like many other companies, TCL set up a retail store to highlight its own products, but Tong acknowledges that "independent retail stores such as Guo Mei and Su Ning are still dominating the market. They are very powerful and make it difficult for suppliers."
"Chinese distribution channels are not very efficient but [are] very flexible," Tong continues, citing shifting business models. In particular, the common practice where manufacturers put their personnel into retail stores, wearing the uniform or badge of that store, puts the product maker in direct contact with end-users.
LG Electronics, which has operated in China since 1993, established a "select and centralize" process, which focuses on "sales branches," rather than retail stores. Its five sales branches cooperate with big retailers and dealers, such as GOME and Suning to promote sales. LGE has 13 factories in China, some of which are joint ventures. More than 98 percent of LGE's 38,000 employees are native Chinese.
Another example of the flexible model comes from Sony, which has opened hundreds of branded stores. Sony co-invests with local dealers to build the shops, and then it directly manages the in-store sales team. By doing so, it can track inventories and buying behaviors, according to the McKinsey research.
Motorola has adopted a "diverse and extensive" approach to vertical integration within China, explains Kao. In addition to national retailers and phone company sales outlets for its mobile products, Motorola recently established its "Motorola Flagship Stores" with trained personnel to sell customized products "in an environment that matches the coolness of our phones and accessories." The first flagship store debuted in Shanghai in July 2006, and more than 100 more stores were added by year-end.
On the other hand, Lenovo has avoided having its own storefronts. Rather, it works with a large number of franchised merchants, many of which sell Lenovo products as their predominant or exclusive product line.
Prima Technologies, which sells digital TV products and other equipment, relies on this branding approach. "It's often perceived best to have employees with a 'fresh outlook' on the brand and its heritage," says John Merrell, Prima Technology's marketing vice president. Unlike American tactics for "adaptive selling" of multiple competitive products and brands, Chinese retailing focuses on a single individual representing a single brand.
Merrell observes that this may be "changing with the influx of international retailers." Nonetheless, he expects that multi-product sales are "unlikely to work well for the higher premium tiered brands within China."
Establishing Business Practices
Panasonic, which operates 58 companies in China, including 29 joint ventures, exemplifies the way in which companies adapt to the Chinese way of doing business.
"Thanks to our 'Kaizen' activities (group activities directed toward achieving incremental quality improvement), we have been successful even in this very severe CRT business competition," explains Ikusaburo Kashima, director, member of the board and deputy chief of overseas operations for Panasonic's parent, Matsushita Electric Industrial Co. Ltd.
TVIA Inc. Vice President Ben Silva cautions, however, that Chinese procedures can be radically different from those of other countries.
"Our ideologies about deadlines are different," he says, based on TVIA's experience in making semiconductors for HD equipment.
Silva says he has encountered situations where Chinese suppliers notified TVIA about production slippage "the day before" shipments were due.
Motorola's approach has stressed development of local management, including a "Women's Business Council" to promote workforce diversity.
Intellectual Property Preservation
With its notorious history of counterfeit products and rights oversights, China retains a reputation as a challenging environment for trademark and technology protection.
Since joining the World Trade Organization in 2001, China officially has cracked down on many of the problems. For example, Panasonic characterizes the role of Chinese authorities as indispensable.
"Raiding the factories which produce such counterfeits and confiscating those goods are methods of prevention, but the reality is that, this is really an endless war," says Panasonic's Kashima. Aggressive enforcement has been somewhat effective.
Motorola has formed six patent committees comprised of engineers and heads of R&D centers. These groups evaluate which products and technologies need intellectual property protection and decide how to apply for patents in China.
"We create awareness among our employees for the protection of IPR," Kao says. "We also work closely with relevant government offices in China to lobby for stronger IPR protection."
TCL's Tong says, "IP is becoming a very critical issue in China. Global companies with strong IP are using the patents as a strategic weapon to fight Chinese firms. For us, if we do not handle it well, we can literally be driven out of the business. We are strengthening our effort in creating our own IP. We also are working with other local partners to deal with major international patent holders who are seeking royalties in China."
LG Electronics' President and CEO Nam K. Woo points out that his company set up an Intellectual Property Group in China in 1999, mainly to protect and utilize its intellectual and property rights. The group has "restored more than 10 million Yuan in economic losses by virtue of complaints and litigation," he says. The support of government agencies gives Woo "more confidence" that LGE's trademark applications and patent applications will be secure.
TVIA's Silva offers even more substantive examples. "We've had a couple of pirated experiences with products that [were labeled as] Samsung parts," he says, although the items were bogus. "You really have to watch your supply chain very, very, very closely and certify vendors and all the components."
Ankur Sheth, CEO of DG2L Technologies, which is concentrating on HDTV and MPEG-4 compression technology, observes that the Chinese government "has become more supportive of IP rights" and that the "overall climate is improving."
"This is more than a legal issue," Sheth adds. "There's a political component, of course, but in the end, this comes down to working with the right partners."
Component Sourcing
The sheer scale of the Chinese market-and the continued globalization of the electronics component supply chain-also is a major factor in domestic operations.
Motorola has about 100 suppliers within China, and it enforces its "global standard quality process and team to monitor the products they provide" to assure that "all the components can meet Motorola's requirements." That demand means that Motorola provides "relevant and extensive training to our suppliers in China," Kao explains.
Panasonic has been accelerating its local parts procurement, reaching 90 percent domestic sourcing for some products. At the same time, it has stepped up its quality reviews.
Westinghouse's Huong recommends early involvement of supply chain providers.
"We are qualifying products at an early stage," he adds, noting that many suppliers are familiar providers with which Westinghouse has worked for its export products.
Lenovo, like many global firms, brings in supplies from all over the world, including the U.S. and Taiwan. But Lenovo's Wu points out that the growing number of consumer electronics suppliers within China-for products such as hard drives-has created a direct supply base.
"Having our factories in that part of China has created a tighter interaction with suppliers," Wu says.
Expecting Growth
Such efficiencies offset the often daunting challenges of operating in China. That's one rationale for the constant reiteration of the word "growth" as CE companies accelerate their Chinese ventures.
China is "the fastest growing geographic region in which we operate," says Sony CEO Sir Howard Stringer.
Merrell of Prima Technology pinpoints his company's "continued expansion across multiple product segments" while adding the perspective that China's internal market is a factor for "growing" his company's international distribution.
Motorola China's Kao takes the "growth" motif a step further. "As more and more Chinese companies go to the global market, China will integrate more into the global economy and gradually will adapt to international business practices. Such a change will further improve its business environment at home," Kao predicts-adding that such moves mean that "our confidence in doing business in China is growing as well."
Make Inroads in China
The China International Consumer Electronics Show (SINOCES) in Qingdao on July 6-9, 2007, provides an inroad to the Chinese consumer electronics market for international buyers. Major U.S. retailers that attended last year include Best Buy, Circuit City, Radio Shack and Wal-Mart, as well as a delegation from the U.S. Department of Commerce. CEA partners with the China Electronic Chamber of Commerce (CECC) to sponsor SINOCES, to help promote the International CES, to an international audience. In response to CEA's international growth and the success of the 2006 SINOCES, CEA has opened an office in Beijing, China. Visit www.CE.org/International for more information. 
