SEVEN
CHINT Switches on China’s Electricity
Share the wealth, and people are committed.
—CHINT’s philosophy
Nan Cunhui, Wenzhou, and the Founding of CHINT
NAN CUNHUI, THE FUTURE FOUNDER, CEO, and chairman of the CHINT Group, was born in Yueqing County, Wenzhou, in July 1963, three years before the start of the Cultural Revolution. From the beginning, Nan’s education tended toward practicality rather than theory. To help his family make ends meet during the chaos and economic disarray that characterized the Cultural Revolution, he began selling eggs and rice bran in Wenzhou’s streets at the age of six. Child labor was one way of getting around the restrictions against private enterprise. While street peddling was forbidden and adults risked going to jail, children were usually exempt from prison, although they risked having their goods confiscated.
Like other children his age, Nan attended school while his father scratched out a living repairing shoes. But when his father had an accident that made it impossible for him to continue working, Nan—at age 13 and only 17 days from graduating middle school—dropped out and took up his father’s job. Armed with his father’s toolbox, he began scouring the streets of Wenzhou, looking for customers. Often, he worked from early morning until late at night. Although he earned at most a few dollars a day, he was more successful than many of his competitors. As Nan explains it, “I earned more money than other shoe repairers because I did the work fast and carefully.” Nan not only learned about shoe repair—he also learned to be on constant lookout for police patrols from the government office against “smuggling and speculation,” who were likely to arrest anyone working at an unofficial job.
As it did for millions of Chinese, economic reform changed Nan’s life dramatically. Many people in Wenzhou left to find work elsewhere; others began peddling in the streets of Wenzhou. The ongoing ban on “smuggling and speculation” was increasingly ignored. In January 1982, though, the authorities cracked down on the Wenzhou businessmen known as the Eight Magnates, who were famous for “speculation.” The “Nail Magnate,” who collected used nails and sold them to factories in Shanghai, was thrown in jail along with six other magnates and a scattering of entrepreneurs. The crackdown was so effective that many Wenzhou entrepreneurs fled the town, shops closed, and the local economy stalled.
Within a year, Wenzhou’s economy was half of what it had been. Under growing public pressure, local officials reversed themselves and decided to free Wenzhou’s imprisoned entrepreneurs. To mark the event, the officials offered to issue certificates of approval finally authorizing the entrepreneurs to engage in business. (Most of the entrepreneurs decided that it was safer not to show up for the ceremony.) Although caution reigned, change was clearly in the air. Nan, among others, identified electrical parts and components as both a major gap and a promising economic opportunity. With little to go on and even less to lose, he founded CHINT. Nan’s initial idea was simple enough: Disassemble a few electrical parts, copy them, and then sell the parts to the local market.
By 2008, the CHINT Group, the descendant of a tiny enterprise that Nan founded in Wenzhou a quarter of a century earlier, had grown to become China’s largest manufacturer of low-voltage electrical products, including power transmission and distribution equipment, meters for measuring, instruments, and solar products. In 2006, Forbes ranked it 15th among the top 100 Chinese companies. CHINT’s 2,000 retail outlets in China and 80 general agents abroad generated sales of more than €2 billion a year by 2006. Its trademark was recognized by the State Administration of Industry and Commerce as a “Top National Trademark,” one of China’s most prestigious honors for outstanding enterprises.
Nan, who was already a billionaire, was elected as a delegate to the 9th, 10th, and 11th National People’s Congresses. He had come a long way from his humble beginnings as a cobbler doing shoe repairs.
The Qiujing Switch Factory
Nan had had two options when he started his electrical parts and components business: He could either set up his own workshop or work as a salesman. Neither was easy. He had no technical knowledge, and he had even less sales experience. He had never even been away from his hometown.
Ultimately, he decided to set up a workshop with three friends. The first step was to buy some simple switches, take them apart, and trace the outlines of the pieces on paper in order to understand how they worked. The group of four worked hard, and in their first month, they managed to clear a total of about $10 after deducting costs. The sum was equivalent to one month’s salary for one worker, and there were four of them. Nan’s partners became depressed and abandoned the project, but Nan’s reaction was the exact opposite. He was delighted that the project had produced any money at all, and he decided to forge onward despite the fact that even his parents could see no future in it. They advised him to close the workshop and go back to repairing shoes. At least that way he could count on an income of $3 to $6 per day.
In July 1984, Nan teamed up with Hu Chengzhong, a childhood friend, to create a new venture called Qiujing Switches. Nan and Hu each invested RMB$6,465 to keep Qiujing Switches going. As it turned out, the two friends had skills that complemented each other: Nan knew about production and management, and Hu was experienced in sales. The two partners agreed that quality and brand identity were the keys to success, even though the industry at that time was loosely regulated.
Because they knew next to nothing about technology, Nan and Hu went to Shanghai to seek help from retired technicians at a state-owned factory that produced switches. The two partners didn’t have enough money to stay in a hotel, so they slept on the floors of the homes of the technicians they were trying to recruit. Several of the technicians who made the trip to Wenzhou to see Nan and Hu’s facility left after taking a quick look at the company’s shabby surroundings. A few decided to stay. They had been impressed not by the company’s physical plant but by the boundless enthusiasm of the two young men.
In the 1980s, as China’s economic boom was gaining speed, Nan’s intuition about the industry was proved right. Demand outstripped supply for almost all electrical products. Buyers began flooding into Wenzhou’s electrical flea market, known as the “City of Electrics.” Everything was for sale, regardless of whether it worked or not. There was no standard for quality, and product testing was almost unheard of. Local competitors used flimsy plastic or cheated on the amount of silver in the contacts for the switches. Some even substituted bronze, which corroded almost immediately. Nan and Hu decided against compromising quality even though that meant charging higher prices in a competitive market. Nan had already decided on the philosophy that would characterize his career. “We are not going to earn money,” he said, “by cheating in a business that has an impact on human life.” As frustration with faulty products surged, customers were increasingly ready to pay a premium for better quality. Qiujing Switches began to attract a larger customer base, and the company made a net profit of roughly $3,000 in 1986.
To improve quality further and obtain a formal government license, one of Qiujing’s technicians suggested setting up a test lab at a cost of $86,886. Since Qiujing’s total assets were less than $28,962, the proposal seemed outrageously expensive, but Nan and Hu decided to go for it anyway. They borrowed money and set up the first thermal overload relay test lab in the region. The company had to pay 2.5 percent interest per month on private loans, and they used their family homes as collateral. As a result, they had to rent space to live in. With the test lab, however, the State Electrical and Mechanical Department awarded Qiujing the first production permit for mechanical and electrical products in Wenzhou in 1988.
Not long afterward, Wenzhou experienced a long overdue crisis as a result of the failure of many of its small businesses to institute quality control. In 1990, an explosion in a coal mine resulted from a spark from a substandard electrical switch. A team, composed of representatives of eight state ministries, was sent to Wenzhou to crack down on electrical producers that lacked certification. The five-month crackdown was dramatic: 1,267 shops selling low-voltage products and 1,544 family workshops were forced to close, and 359 business licenses were revoked. Only 20 percent of the manufacturers, including Qiujing Switches, survived. Qiujing Switches, which had already distinguished itself as a reliable manufacturer, expanded its market share at the expense of the substandard producers.
In 1990, Nan Cunhui and Hu Chengzhong decided to split the company. Each of the original partners received $209,065 of the company’s assets. Hu founded Delixi, which eventually competed with CHINT in the production of power transmission and distribution switches and Nan went on to create CHINT.
CHINT’s Expansion
To encourage foreign direct investment, Wenzhou’s local government offered concessions (real estate, water, electricity, etc.) to foreign joint ventures. Many of Wenzhou’s leading entrepreneurs decided to take advantage of the new policy. In September 1990, Nan established Wenzhou CHINT Electrical Co. Ltd., a Sino-American joint venture. He brought his younger brother and brother-in-law into the new company, a practice that is more or less common for family businesses in China. Nan’s share of the company fell from 100 to 60 percent. Each of the company’s original nine employees was a shareholder in the company.
CHINT’s low-voltage business took off. The company upgraded its production lines and built new factories at a cost of $1.7 million. It also invested in an enterprise resource planning (ERP) system to control expanding production, sales, accounting, and human resources. In 1994, CHINT spent $463,972, acquiring what at the time was the most advanced test facility in China and the largest low-voltage electrical test lab ever established by a Chinese private enterprise.
Rapid Growth and Reorganization
The investment and the government permit from the State Electrical and Mechanical Department, which CHINT had acquired after investing in its test lab in 1988, soon paid off. When stricter regulations were introduced, the local electric manufacturers, which were not allowed to operate without a permit, rushed to CHINT, anxious to operate under the umbrella of CHINT’s brand. In exchange, CHINT collected a royalty and management fee. By early 1994, more than 40 enterprises were affiliated with CHINT.
Taking over so many small enterprises enabled CHINT to expand rapidly, but it also had a downside. Managing so many enterprises turned out to be much more complicated than running a centralized company. Quality control was especially difficult to maintain. To tighten CHINT’s control over the expanding network, Nan overrode the objections of several members of his family and initiated a stock split in 1994. The maneuver left CHINT in control of 48 enterprises. There were different levels of participation: 100 percent ownership, controlling share of more than 50 percent, single largest share between 20 percent and 50 percent, and participation with less than a 20 percent share. CHINT’s shareholders increased to 40. Nan’s share in the company fell to 40 percent, but the exchange of shares increased CHINT’s net assets from $463,972 to $5,799,656. Nan’s personal assets increased 20-fold over the next three years.
Having accomplished the stock reallocation, Nan initiated a series of structural changes within the group. He expanded the core business, weeded out the low-quality producers, and focused on those enterprises with the greatest growth potential.
Building a Sales Network
When Qiujing Switches had split into two companies in 1990, Hu Chengzhong kept the original sales team and its resources. Sales for Nan’s new company (CHINT) suffered in the short term, and CHINT immediately set about reestablishing a new sales network across major cities in China. Luckily, an abundant supply of Wenzhou salespeople was available to help out. The sales network was to become a major factor in CHINT’s future success.
While the multinationals were mostly present in the first- and second-tier markets, CHINT’s salespeople hit all the tiers. Wenzhou sales personnel were accustomed to travel and were not particularly bothered by hardships on the road. When reforms began in China in the late 1970s, the salespeople had covered thousands of miles, carrying their samples on their shoulders. It was not unusual for a salesperson to walk ten hours a day on muddy country roads in order to visit remote villages. If a salesperson had a chance to share a hotel room with 20 other people for only $0.23 per night, he would consider it a luxury. With this kind of determination from its salespeople in the 1990s, CHINT soon established a sales network that provided in-depth coverage of far-flung cities and villages. Multinational companies lacked the staffing and the resources to keep up.
Until 1995, Wenzhou salespeople regularly visited customers and then returned to the head office with orders. Between 1995 and 2000, however, CHINT created ten sales offices in major cities. These offices began hiring agents to reach smaller cities and counties through their own outlets or through small shops. From 2000 to 2005, CHINT transformed the ten sales offices into ten distribution centers. The goal was to reinforce sales, marketing, and after-sales service and reduce delivery time.
After 15 years of rapid expansion, CHINT began to realize the need to optimize the sales channels. Most of its agencies had been created and managed by Wenzhou salespeople who sold directly to customers after traveling to their location. Many of the salespeople settled in the areas where they worked. But as CHINT transformed itself from a family business to a more modern enterprise, the company needed outlets to make more sales, provide better service, and use its resources more efficiently.
CHINT solved the problem by setting up a tiered distribution system. Preferred agents (or distributors) with higher sales volumes, better technical competence, and reliable after-sales service received greater discounts. Core distributors were treated with more favorable conditions, and weak distributors were replaced if they were unable to meet sales and performance targets. The three-year transformation process proved painful since it required changing the rules for a network that had been based on established relationships. Nevertheless, by 2008, CHINT had ten distribution centers, seven sales companies, 900 major distributors, and 2,000 smaller distributors.
Sharing Equity with Employees Critical to the Enterprise
Although restructuring was a challenge, Nan decided to heed an old Chinese proverb: “Hoard wealth, and people are detached; share wealth, and people are committed.” The challenge for most businesses is to recruit and retain the best people. Added responsibility and above-average pay works to a certain extent, but the most effective approach is to share ownership of the company. After considerable deliberation, Nan decided to reward key employees with shares, an unusual approach in China. Starting from 1998, the number of shareholders steadily increased from 40 to 100 in 2008, and Nan’s ownership in the company fell from 40 percent to 20 percent. Each year, CHINT created a number of millionaires by awarding shares in the company. Nan’s philosophy held that sharing was more than generosity. It made good business sense.
As the number of shareholders grew, CHINT established a board of directors with some external directors and a supervisory board. The modern ownership and management system began to unlock CHINT’s growth potential and paved the way for CHINT to go public.
Focusing on Quality
The CHINT Group made quality a top priority to an extent that at times surprised its customers. In 1995, a dealer in Greece was astonished when his order arrived by airfreight. The transportation costs had already wiped out CHINT’s profits on the order, so why had airfreight been used? When the order had originally reached the ocean freight forwarder, a quality controller had noticed a minor problem with some of the items. They were fine according to domestic standards, but not according to those set by CHINT. Nan inspected the products himself and decided not to ship any more orders until a thorough test had been carried out. Realizing that quality is an essential ingredient in the life of a brand, he preferred to lose money than to lose his credibility. After missing the ocean shipping deadline, Nan then spent more than $60,000 to send the products by air in order to make sure that they arrived on time. “I would rather spend millions of dollars,” he explained, “than have even one substandard product leave our factory.”
Starting in 1995, CHINT chose the month of May as its “quality month.” In addition, to guarantee quality control, all products had to be signed for by a quality manager before shipping. One quality control manager was so tough that she ended up making a number of enemies in the company. When Nan heard about it, he promoted her to be a company shareholder.
Over the years, CHINT developed an effective quality assurance system that included factory automation, product testing, inspection, and a quality hotline for employees to report problems. Evolving from a labor-intensive manufacturing process to one that was technology-intensive also improved product quality substantially. In 2004, CHINT received China’s National Quality Award, the country’s highest quality award and the first made to a private enterprise in the low-voltage business.
Investing in R&D
Many small businesses in China begin by reverse-engineering existing products to see how they are made. When the business scales up, most entrepreneurs realize the importance of developing their own technology. Nan believed that CHINT could grow only through vigorous innovation. A major emphasis was placed on researching and developing new technology to update its products. From 1996, CHINT committed 3 to 5 percent of yearly sales to R&D and established research centers in Silicon Valley in the United States, in Europe, and across China. Out of CHINT’s 20,000 employees, 20 percent were engaged in technology. Since 1998, CHINT has introduced more than 100 new products, most of them with independent intellectual property rights.
Nan’s success made others anxious to copy even his minor innovations. For example, a week after CHINT added a red dot to the I in its logo, a score of companies introduced red dots in their logos as well. Even CHINT’s meeting room layout was copied by other companies. From products to sales channels, there were no secrets: Everything could be imitated. Nan didn’t seem overly upset. “The followers copy fast,” he said. “That pushes us to be more innovative. We would be in trouble if nobody copied us.” Nan acknowledged that when it came to technology, CHINT still had a long way to go compared to the multinationals.
Nan’s Challenges
The low-voltage market is divided into four segments, M1 through M4, based on price. M1 is at the top of the market, and M4 at the inexpensive, low end. Many small Chinese local companies served the M4 market through flea markets in which product quality was not guaranteed and prices were very low. These manufacturers tended to engage in small-scale production, focus on a narrow product range, and have a regional presence.
The M3 market is served by large domestic manufacturers that provide a wide range of quality low-voltage products. They benefit from economies of scale and some even have their own distribution networks, although coverage and service levels of these networks vary greatly. About 70 percent of products are sold through distributors and roughly 30 percent through design centers. The distribution network plays an important role in reaching a diverse customer base. Prices are extremely competitive.
The M2 market is generally served by domestic niche players such as Changshu Switchgear and Tebian Electric Apparatus. These companies usually trace their roots to state-owned enterprises with long track records. Specializing in certain product categories, they invest heavily in niche markets and work directly with system designers and integrators. They have good reputations. They are knowledgeable about their field and maintain high quality in the categories in which they specialize. In the same product category, some multinational companies offer standard products (often produced in Chinese factories) and advanced products (with more sophisticated features incorporating the newest technology, often imported from factories in developed countries). Generally speaking, their standard products could be grouped in the M2 market.
The M1 market is served by multinationals marketing their most advanced products. Quality and reliability are very high. In China, these multinationals mainly serve other multinationals and the big utility companies. They usually dominate their sector when it comes to projects that are considered critically important. The price they ask is usually very high. For example, if a simple electric component is priced below RMB 1.2 in M4, it would be in the range of $0.19 to $0.23 in M3, $0.22 to $0.28 in M2, and $0.31 to $0.47 in M1.
CHINT was the unquestioned leader in the M3 market, but it faced challenges from below and from above. It also had to deal with the fact that the distinction between the mid-tier M2 and M3 segments is often not very clear-cut.
THE MULTINATIONALS BEGIN MOVING INTO THE MID-TIER MARKETS
Multinationals such as ABB, Siemens, and Schneider Electric have shown themselves to be formidable competitors in the China market. When they first entered the market, they focused on the M1 segment and avoided direct competition with the domestic players. Gradually, they began to move into the mid-tier segments. Given their deep pockets and technical knowledge and the high quality of their products, Nan felt that he had good reason to be concerned about future competition. Schneider Electric highlighted the threat when it acquired 15 companies in the 1990s. Its share of the low-voltage market in China suddenly increased to 15 percent, and its sales in 2008 were estimated at well above $1.5 billion.
In 1994, Schneider offered to buy an 80 percent interest in CHINT, but Nan declined the offer. A year later, Schneider sued CHINT in Hangzhou for intellectual property infringement. The suit was amicably settled out of court. In 1998, Schneider offered to buy a 51 percent share of CHINT. Nan turned Schneider down again, and the next year, Schneider took CHINT to court again for intellectual property infringement, this time in Beijing. The court decided that Schneider’s patents were no longer valid. Once again, in 2004, Schneider offered a hefty sum to acquire 50 percent of CHINT’s equity. Nan said, “I was quite tempted as I probably won’t make so much money in generations.” But he decided not to sell.
Meanwhile, the lawsuits continued. Since 1993, Schneider has filed 24 suits against CHINT. Internationally, Schneider took CHINT to court in France, Germany, Italy, and other countries. CHINT had “CHINT” registered as its English trademark in 1998. Schneider then registered “CHINT” as a trademark in 1999 in France, Russia, Brazil, and other countries. In 2005, Schneider filed a lawsuit against CHINT for patent violation, this time in a German court; CHINT countered that the Schneider patent had expired. After two years’ investigation, the Federal Patent Court found the Schneider patent no longer valid, and Schneider withdrew the case.
In August 2006, CHINT decided to take Schneider to court, alleging that Schneider had encroached on a CHINT utility model patent. On April 15, 2009, Schneider and CHINT agreed to settle ten minutes before the case was scheduled to start, with Schneider paying just over $23 million (half of the original sum CHINT was asking for). The two companies also reached a global compromise on patent infringement cases.
In 2007, Schneider bought 50 percent of Delixi, CHINT’s direct competitor, which was started by Nan’s friend Hu Chengzhong after the decision to divide Qiujing Switches. CHINT and Delixi had been competing for the top position ever since 1990, when Nan and Hu had gone their separate ways. CHINT had gradually edged into the No. 1 slot, and by 2008, Delixi was half the size of CHINT. With its investment in Delixi, Schneider was able to effectively compete directly with CHINT in the M3 market.
But Nan was not only concerned about competition from Schneider. Other multinationals were also moving into the mid-tier markets. The competition promised to be fierce.
COMPETITION FROM LOCAL PLAYERS
In Wenzhou alone, CHINT faced competition from Tengen and from People Electrical Apparatus Group, and across China, from a multitude of niche players. These companies were managing to improve the quality of their products while remaining competitive on pricing. Some had even placed advertising billboards in front of CHINT’s factories.
By the beginning of 2009, CHINT was beginning to feel pressure from the multinationals in the top tier as well as from local manufacturers that were moving up from the lower-tier markets into CHINT’s M3 territory. It was beginning to look as though the days of CHINT’s leadership in China’s low-voltage business might be numbered.
MOVING UP TO THE PREMIUM SEGMENTS
As Nan saw it, a solution was to move up to the premium segments of the market. As CHINT gained more knowledge about the market and improved its products, processes, and technology, it was natural for it to begin looking toward the M2 or even M1 markets. Customers in the M1 and M2 markets, however, are very different from those in M3.
In M3, customers tend to be small and medium-size companies serving local markets and individual consumers. They were mainly served by CHINT’s regional distributors. Some local utility companies and real estate developers also buy large quantities from distributors. The customers in M1 and M2 are mostly foreign multinationals, big Chinese state utility companies, and high-end real estate developers. The products are often used in big projects. Professional designers and systems integrators choose which products to include.
If CHINT entered M1 and M2, it would have to compete directly with multinationals with strong reputations, technology, and a broad range of products, as well as with branded niche players that had long track records. None of CHINT’s attempts to move up the value chain had been successful before.
Launching the N-Series
In 1998, CHINT launched its low-voltage N-series products with energy-saving features and a more aesthetically appealing look. The N-series added desirable features and accommodated clients’ needs. For example, when a client suggested smoothing the plastic edges on a product so that it could be repaired without scratching one’s hands, CHINT was prepared to change its design to accommodate them.
The N-series greatly improved CHINT’s image by introducing innovative design features and technology, some of which was patented. However, the CHINT brand continued to be known best for its mid- and low-tier pricing, and clients were likely to choose other brands if the product quality and design were roughly similar. From the customer’s perspective, the N-series was not perceived to be clearly positioned. After ten years, the N-series had some success, but it failed to reach the sales level CHINT had hoped for.
A Joint Venture with GE
In February 2005, CHINT and General Electric entered a joint venture (GE 51 percent and CHINT 49 percent) in Wenzhou, producing a circuit breaker sold under the GE brand. GE was responsible for management and production, and CHINT was in charge of selling via its channels. The circuit breaker was priced at $1.99 to $2.11, much higher than CHINT’s original pricing of $0.87 per piece. The product improvement over CHINT’s existing product was not perceived to be significant enough by the customers. The product line was also too narrow, so clients had to complement their purchases with other brands. The circuit breaker did not sell as well as expected, and after a two-year trial, management decided to pull the plug on the joint venture.
Outsiders observed that cultural collisions between the two companies might have been the source of the early termination. Others suspected that CHINT’s distributors had no experience handling more expensive products with recognizable brands.
Attempting the Acquisition Route
In 2007, the Moeller Group, a German supplier of electrical components for commercial and residential buildings, was up for sale. Based in Bonn, the company sold its products primarily to customers in Western and Eastern Europe and Asia-Pacific. It had annual sales of about €1 billion and had 8,700 employees.
CHINT was interested in acquiring the company, but Moeller was too big and the deal fell through, partly because CHINT did not want to settle for only part of Moeller’s assets. Eventually, the Moeller Group was acquired by Eaton Electric Systems, a company based in the United States, at the end of 2007 for €1.55 billion.
Creating a Brand
In 2007, the profit margins in the mid-tier market continued to be eroded, and the pressure to expand was becoming intense. CHINT decided to go ahead with a €100 million expansion. Lily Zhang, a 32-year-old general manager at CHINT, was delegated to manage the expansion. Zhang had joined CHINT in 1998 and had worked in various departments within the company, including finance, accounting, and strategy. In 2002, at the age of 27, she became the general manager in charge of global sales for CHINT’s low-voltage business.
Zhang hired a team of consultants from A.T. Kearney to design a strategy for entering the M2 market. The recommendation was to launch a new brand called Noark that could easily be distinguished from the N-series.
Going Global
Another avenue in response to the competition was to go global. In 1994, CHINT exhibited its products at the Canton Fair, which opened the company to international markets. Exports soon reached €1 million in annual sales, but they were limited to a few countries such as Argentina and Greece. All exports were sold under distributors’ brands in the relevant country.
In 1998, CHINT registered its trademark in 66 countries worldwide. International sales surged, with annual growth of more than 70 percent. Most products were sold under CHINT’s brand. CHINT had set up an international sales network, comprising eight international offices, 30 sole agents, and more than 80 local partners who were Chinese by origin but living in foreign countries. CHINT had three ways to reach global markets: contract manufacturing, exports to dealers, and direct exports.
CHINT also manufactured electric meters and instruments and other products for international companies based on their specifications. In these relationships, CHINT’s main role was to handle manufacturing. In 1994, CHINT was working with 30 OEMs; by 2008, the number had declined to five OEMs.
CHINT had set up long-term relationships with local dealers in other countries. In 1999, CHINT started to sell products abroad under its own brand name. The company helped dealers with promotions and by attending trade exhibitions. In 2007, at the Hanover Fair in Germany, CHINT was the only independent exhibitor from China, and it had a stand of some 2,000 square feet. Thanks to yet another dispute with Schneider, CHINT was barred from entering the Belgian market and had to rely on dealers in Spain and Greece to tap into the neighboring countries.
About 70 percent of CHINT’s international sales were made through exports to local dealers. This had slowed down in recent years, and CHINT noticed that the main drawback of working with local dealers was that they supplied almost no information about customers, channels, and pricing. There was no transparency. CHINT had no control over this channel, and feedback usually came too late to be of any use. It was hard to tell whether the dealers were protecting their own interests or simply being driven by market conditions. By some estimates, the dealers were able to make as much as 100 percent profit, leaving CHINT with only 10 percent of the wholesale price that it had charged the dealers. CHINT realized that it needed a new approach.
Direct Export
One answer was to begin establishing strategic partnerships with China’s big machinery import and export companies, international engineering contractors, and energy companies. CHINT could join them as bidding partners for energy projects in international markets. In 2006, CHINT outbid established foreign rivals, including Schneider and ABB, to supply €60 million worth of equipment to Italy’s national electricity company. CHINT also won energy contracts in Saudi Arabia, Cuba, Kenya, and Greece.
While CHINT’s international sales had increased steadily, they were still only a small portion of its total sales. Beginning in 1995, CHINT started to establish international offices in Spain, the United States, Greece, and other countries. To expand its own sales forces abroad, CHINT needed to decide whether it really wanted to have its own exclusive sales force and, if so, how to staff it. On the one hand, it could send its own salespeople abroad to staff the sales offices. The advantage of this approach was that these people would know the products and could be counted on to be loyal to the company. The overseas sales offices would be an integral part of CHINT. On the other hand, it was difficult to find salespeople who were proficient in a foreign language, and even more difficult to find people who knew the local culture well enough to develop a sales channel. Hiring local professionals already working in the field promised to solve the language and cultural issues but proved to be very expensive. An even greater challenge was how to manage, coordinate, and work with these people. Would they be receptive to the Chinese way of working? After all, CHINT was a Chinese company. The third option was to hire overseas Chinese, including Chinese nationals studying abroad. These people could understand Chinese culture, but they lacked technical knowledge. They might not be as familiar with the local market and local laws as the local professionals. A minor issue was their legal status working in a foreign country. In the end, the company decided on a mixture of these options. It expanded its product line and expanded into the international market, hiring the best qualified people it could find. Today the company has clients in 70 countries and 2,000 worldwide distribution points.
Moving Down to Related Products
Another way for CHINT to deal with the growing competition was to extend the company’s product line. In 2000, CHINT became the largest producer of low-voltage electrical products in China, claiming about 30 percent of market share. Low-voltage products made in Wenzhou accounted for more than 50 percent of total sales in China. CHINT would have to win market share from local companies to grow further. The most likely scenario would be a price war, which would drive the already thin margin into negative territory for all the players.
Nan faced a dilemma: Should he diversify into other lucrative businesses, such as real estate and pharmaceuticals, or should he upgrade his product line to medium- and high-voltage electrical products?
In 2003, CHINT finally made the decision to expand from low-voltage products to the whole range of electrical products, including power transmission and distribution (T&D). The same year, an opportunity presented itself. Shenyang Transformer Works, a state-owned enterprise with a long history of producing medium- and high-voltage transformers, was for sale. CHINT wanted to acquire it but was outbid by Tebian Electric Apparatus.
CHINT decided on a different line of attack. In July, it invested nearly $423 million in launching a T&D project in Shanghai to produce power transformers, power wires and cables, and power automation equipment. The creation of CHINT T&D made it clear that the company intended to transform itself from a low-voltage equipment producer to a company that could also manufacture medium- and high-voltage products, as well as providing related electrical engineering and installation.
The power T&D business differed greatly from CHINT’s traditional market. While CHINT’s low-voltage products were sold through its 2,000 distributors, power transformers and equipment were sold mainly through electrical design centers or direct sales to customers. Initially, the company had some success domestically selling transformers to small and regional utility companies and some industrial users for whom price was important. At an international level, CHINT’s manufacturing flexibility—with lead times of six to 12 months—stood it in good stead. Although well-known global brands were often the preferred choice as transformer suppliers, demand for their products far exceeded supply. Many companies had a backlog of 18 to 24 months, which was simply too long for most projects. As a result, CHINT got some of these contracts. By 2006, its T&D sales amounted to RMB 1.7 billion, increasing to RMB 2.7 billion the following year. CHINT T&D was ranked first in the Power Transmission & Distribution and Controlling Devices Sector at the China Machinery Summit in 2008.
In order to expand to the next level, CHINT needed to attract larger clients. Some of the big state-owned utility companies handled very big projects and qualified as perfect candidates. For these potential customers, price was important but not the major concern. Instead, they needed to be sure that the high-voltage equipment they purchased would not fail, and so their managers preferred to rely on the top global brands in order to avoid blame if things went wrong. On the international stage, in order to ensure quality, larger utility companies normally required a five-year track record for the relevant product before buying from a manufacturer. They might also insist on certification of the production process and final assembly, as well as of suppliers of critical components. CHINT also needed to decide whether domestic customers and international customers should be approached differently.
Lessons Learned
Private enterprises such as CHINT received little government support and grew through tough competition in both domestic and international markets. The experience turned the survivors into formidable competitors. One of the advantages of growing up in China’s fast evolving economy is that the notion of change and the need for flexibility as well as sensitivity and quick adaptation to customers’ demands are literally built into the DNA of these companies. China’s cultural history also helped guide Nan to the right decisions—first to insist on quality in his company’s products, and then to sense the importance of making his employees feel that they also were owners of the enterprise. In the end, Nan realized that survival ultimately required confronting the global market. The experience and insights that Nan had obtained in China’s overheated, highly competitive domestic market promised to make CHINT a formidable competitor on the global stage.