FDIs, such as greenfield investment in the target foreign market, route the management efforts and the flow of financial capital from the home country to the foreign country. The investment volume becomes concentrated in the foreign market, and the corresponding risk increases due to the regional distance and environmental circumstances that are naturally unfamiliar compared to the home market surroundings. The foreign market environment has a direct impact on a firm’s entry mode strategy in terms of the desired control and the perceived financial risk. Political uncertainties are not conducive to the establishment of WOS. Uncertainties in a country regarding the protection of intellectual property rights, for example, reduce the attractiveness of license agreements (Delios & Beamish, 1999: 917).

3.4.3A two-step decision process approach towards an international market entry

The decision about how foreign markets should be entered naturally depends on the firm’s resource availability. Additionally, in light of globalized value-added activities and trade patterns, the management’s preference concerning target foreign markets and relevant market entry modes is often influenced by external stakeholders. For example, if an important customer of the firm establishes a factory in a foreign country, it may lead the supplying firm to ‘follow the customer’ in order to avoid another competitor’s entrance into the business relationship.

Foreign governments may insist for several reasons, such as control or access to modern technologies, on the establishment of an ‘equal joint venture’ with a local firm. In many Asian countries usually due to a lack of personal network relationships with relevant business stakeholders, it is difficult to initiate local business operations as a foreign firm. In these cases, it is advisable to search for a local partner. Once a partner is found and, for example, an international joint venture is agreed upon, the firm is confronted with the challenge of sharing technological and managerial knowledge. As time goes by, through assimilation and learning, the local partner may become a serious competitor – as many multinationals have experienced to their regret. As a consequence of the discussion above, a firm that seeks international business should carefully evaluate beforehand the possible outcomes of its selected market entry mode, which is a very complex management task. In order to facilitate the challenging decision-making process for an international market entry, a two-step approach is introduced in the following section.

3.4.3.1Step one – setting strategic priorities

As a first step, the management sets its strategic priorities in terms of the (1) degree of hierarchical control, (2) market entry timing, (3) proximity to the market, and (4) financial risk.

(1)Degree of hierarchical control of firm operations

The management should evaluate whether rather tight or loose control mechanisms concerning its operations in the target foreign country are required. The decisional process should consider elementary issues from the management’s perspective such as the following.

–Necessity to protect advanced technological or managerial knowledge

→If yes, tight control mechanisms, such as a WOS, are recommended, while cooperative (hybrid) forms, such as IJVs, are less appropriate.

–Strategic market importance in terms of volume and growth rates

→The more important these considerations are, the more desirable it is to be in the market throughaWOS instead of serving the market from a distance (e.g., exports).

–Degree of the firm’s international market experience

→The less experienced the management in international business, the higher the risk that, for example, an IJV partner may take advantage of the firm (opportunistic behavior).

–Foreign government regulation

→The foreign government may favor (e.g., an FDI) or restrict (e.g., export-related non-tariff barriers) a certain market entry mode. Environmental analysis of the target foreign country is of vital importance to make the most favorable decision.

–The firm’s resources (e.g., financial, human)

→The choice of a market entry strategy naturally depends on the firm’s resource assets. Building up and running a wholly owned sales and distribution network in the target foreign market comes along with the advantage of direct hierarchical control of the firm’s operations, which, however, requires considerable resource cushions.

(2)Market entry timing

The management needs to decide whether a fast or delayed foreign market entry is favorable to the firm. The decisional process on timing of the market entry should consider issues such as these.

–The need to follow an important customer or competitor abroad

→The decision depends on the firm’s integration in industry networks. The more important a bilateral relationship—for example, to a customer—the more desirable for the firm to follow the customer abroad.

–The threat of fast technological product substitution

→ The shorter the product and technology life cycles, the more advisable it is for the firm to enter various foreign countries simultaneously instead of an incremental (country by country) market entry, which is time consuming.

–First mover (technological leader) or latecomer advantages

→Fast entry in the global markets is desirable for firms offering technologically advanced products. It helps to develop a technological leadership positioning. Technological latecomers (for example, targeting a cost leadership positioning) may take advantage of a delayed market entry, using the time to learn from the mistakes of the first movers and make things better.

–Intensity of industry competition

→Competitive global markets may require fast market entry activities in order not to leave foreign market shares to the firm’s competitors.

–Investment volume

→Large investments—for example, in product developments or operations—naturally demand higher sales volumes, which can be realized through global market entries that help reduce the return-on-investment time framework.

–Monitoring

→The management needs to evaluate the risk of losing control due to hasty entry activity or poor partner selection against the potential advantages and drawbacks related to a delayed market entry.

(3)Proximity to the market

Concerning the firm’s market proximity, the management should evaluate whether its foreign engagements should be located rather close or distant to its customers abroad. The decision is influenced by the following.

–Product and service

→Standardized products and services favor contractual market entry modes, such as exports. Different customer expectations in the target foreign market in terms of product features, design, and service often require a local presence of the firm (e.g., its own distribution and sales network). Particularly in markets where customers’ behavior and attitudes are difficult to evaluate from a distance, the firm may prefer FDI.

–Strategic importance of the foreign target market

→Attractive forecasts for a foreign market, identified by market volumes and promising growth rates, recommend a local presence instead of serving the market from a distance.

–Logistics

→Flexible order management, transportation lead times, and logistics costs influence the firm’s market entry. For example, heavy and bulky products may favor local assembly activities in the target foreign market.

–Reputation

→A firm may want to build up a local brand in the target foreign market, which helps to attract customers. Particularly in markets where customers favor domestic companies, the management may decide to launch its own operations in order to develop a local image.

–Foreign government

→Export-related trade barriers are avoided if, instead, the management considers local assembly activities (e.g., OEM or joint venture partners). The management may also consider whether there are FDI incentives granted in the target local market.

(4)Financial risk

Concerning the financial risk, the firm’s decisional process should consider the following facets.

–Financial cash and debt-to-equity ratio

→Market entry through FDI is naturally more costly than contractual market entry modes (e.g., licensing). Firms with low debt-to-equity ratios and available financial cushions can better manage FDI -related uncertainties, which usually happen in the course of time. Smaller firms and firms with less financial potential should favor market entry strategies through contracting or cooperation.

–Product and industry margins

→In industries indicating rather low margins, the firm’s management may favor contractual forms, such as franchising, licensing or OEM, because fixed costs are lower than with FDIs.

–Time horizon of expected return on investment

→The longer the time period needed for the investment to be paid back, the higher the firm’s uncertainty and corresponding financial risk. Cooperative forms of market entry, such as joint ventures, may serve as an alternative to reduce the financial burden of the firm.

–Expected reactions of local competitors

→Local competitors may reduce the average prices in their home market hoping to create an entry barrier for foreign firms. Cooperative forms of market entry, such as a strategic alliance with a local partner, help to gain better access to information about local competitors’ activities in the target foreign market.

After reviewing the discussion above, the next step for the management is to make the decision about which of the market entry strategy alternatives should be selected.

3.4.3.2Step two – selection of the appropriate market entry mode

Each foreign market entry mode has different implications for a firm’s degree of hierarchical control, the financial resources the management has to commit, its market proximity, and the market entry timing framework (compare Figure 60).

It is of vital importance that the firm’s management be aware of the opportunities and challenges of business expansion into a foreign country. Advantages and drawbacks result from the selection of the market entry mode, taking into account the firm’s internal resources and external environmental conditions. The firm’s management chooses its market entry mode, which depends on the strategic priorities outlined in phase one (setting strategic priorities), and are categorized as (1) contracting modes (market mechanisms), (2) cooperative modes (hybrid forms), and (3) FDI (hierarchical organization).

3.4.3.2.1Contracting modes (market mechanisms)

Generally, a market transaction through contracting (for example, indirect exports via a commissioner) allows a fast foreign market entry but does not provide the management with sufficient hierarchical control mechanisms. From a historical perspective, exports belong to the most common entry mode, practiced by merchants and later by manufacturing firms. Firms with less international business experience or limited resources may choose contracting forms such as exports because the financial risk tends to be relatively lower than, for example, in the case of FDI. Figure 61 summarizes the relevant contracting forms for an international market entry and the corresponding suitable business categories.

Within the group of contracting modes, indirect exports tend to be realized faster than, as an example, OEM because of the necessity of increased local involvement for OEM (e.g., search for suitable firm abroad, quality assurance activities). The main disadvantages derive from the distance to the foreign markets and their customers. Figure 62 summarizes relevant strategic decision determinants in terms of market entry rapidity, the degree of hierarchical control, financial risk, and proximity to the market from the exporter’s point of view. The illustration also provides checkpoints that indicate when an export strategy is advisable and what potential strategic risks – from the exporter’s perspective – are involved.

Market entry through contractual forms, such as license and franchising agreements, can be also realized within a relatively short period of time compared to FDI. Worldwide markets can be penetrated efficiently through the transfer of knowledge (license) or an entire business concept (franchising) to local contract partners. Both methods are suitable for firms with limited resources (e.g., to build up manufacturing or service network facilities) because the major part of investments in operations is done by the contracted firm (e.g., franchisee), which also takes on the entrepreneurial risk of running the business in the foreign markets. Licensing is often desirable in industries driven by rapidly changing technologies. The major disadvantage of licensing and franchising derives from limited hierarchical control of the contracted firm, which involves the potential risks of harming the business concept or damaging the reputation of the licensor or franchisor. Moreover, the contracted partner abroad may develop its own knowledge and expertise through learning and collecting experiences during the course of the contractual relationship. Efficient absorptive capabilities of the contract partner may result in the development of a new competitor.

Figure 63 summarizes relevant strategic decision determinants in terms of market entry rapidity, the degree of hierarchical control, financial risk, and proximity to the market from the licensor’s and franchisor’s point of view. The illustration also provides checkpoints that indicate when a licensing and franchising strategy is desirable and what potential strategic risks – from the licensor’s and franchisor’s perspective – is involved.

The contractual market entry strategy of original equipment manufacturing (OEM) is particularly applied by larger firms and multinational enterprises (MNEs) aiming to increase their global capacities, which usually comes along with the attempt to reduce production costs. Major drawbacks of OEM come from the limited hierarchical control of the contracted partner firm abroad, which produces the product in its own facilities under the name of the OEM brand. Through managerial learning and technological assimilation from the OEM, there is a risk that a new competitor is developed abroad. Figure 64 summarizes relevant strategic decision determinants in terms of market entry rapidity, the degree of hierarchical control, financial risk, and the market proximity from OEM’s point of view. The illustration also provides checkpoints that indicate when an OEM strategy is advisable and what potential strategic risks – from the OEM’s perspective – are involved.

Management contracts mainly target the delivery of services to a business partner located in the target foreign country. Due to the fact that consulting, training, and education are naturally connected with the language capabilities, communication skills, behaviors, and attitudes of the people involved, a management contract business can be challenging. The more diversified the socio-cultural environment in the target foreign country relative to the home market, the more efforts are necessary to make sure that activities are done as planned and processes are implemented appropriately and efficiently.

Turnkey contracts serve as a suitable entry mode for firms with a specific technology, project management, and engineering expertise. On the one hand, turnkey contracts provide an opportunity to enter rather fragile political-legal markets that simultaneously contain a risky momentum. On the other hand, margins can be above average because competition in these emerging target markets is often marginal. The right partner selection – which, in many larger projects, is the government – is of vital importance and requires appropriate international business experience for the management. The direct involvement abroad (e.g., construction and start-up of a plant, education of local staff) during the course of incrementally transferring the operations to locals usually requires considerable firm resources to be reserved over a longer period time. Figure 65 summarizes relevant strategic decision determinants in terms of market entry rapidity, the degree of hierarchical control, financial risk, and proximity to the market from the perspective of the firm providing the management and turnkey contract. The illustration also provides checkpoints that indicate when a management contract and a turnkey contract strategy is desirable and what potential strategic risks are involved.

3.4.3.2.2Cooperation (hybrid forms of foreign market entry)

Cooperative market entry modes – realized, for example, in an international equity joint venture – share the financial risk and earnings as well as the hierarchical control of operations between the cooperating partners. Firms sometimes are also confronted with foreign government regulations that require the establishment of a joint venture with a local firm in the target foreign country. Both international joint ventures and international strategic alliances with a local organization usually increase the proximity to the market due to the partner’s local presence. However, considerable time should be reserved for the right partner selection and organization of the bundled activities. As many firms experienced to their regret, synergy effects tend to be overestimated in the course of running the bilateral cooperation. The realization of cooperative market entry activities tends to be more time consuming than in the case of license agreements, but entry usually is realized faster than in cases of establishing wholly owned operations.

Figure 66 summarizes relevant strategic decision determinants in terms of market entry rapidity, the degree of hierarchical control, financial risk, and proximity to the market from the perspective of the management seeking to establish an international strategic alliance or an international joint venture. The illustration also provides checkpoints that indicate when a cooperative strategy is advisable and what potential strategic risks are involved.

3.4.3.2.3Wholly owned subsidiary (hierarchical forms of foreign market entry)

The foundation of a wholly owned subsidiary through FDI represents one of the most challenging market entry modes. Time is needed for the evaluation and selection of a suitable location (e.g., infrastructure, availability and qualification of staff, operational costs, etc.). Therefore, FDI is rather recommended for internationally experienced firms. The proximity to the market provides direct communication channels to the local customers, which is an important advantage. The integration into the firm’s organization provides direct hierarchical control mechanisms and avoids loss of often strategically valuable knowledge to another firm. Major forms of FDI – whether realized through greenfield investment, equity participation, merger or acquisitions – are either the establishment of a sales branch and distribution network and/or research and development labs and/or wholly owned manufacturing subsidiaries. Figure 67 summarizes relevant strategic decision determinants in terms of market entry rapidity, the degree of hierarchical control, financial risk, and market proximity from the investor’s point of view. The illustration also provides checkpoints that indicate when a FDI strategy is advisable and what potential strategic risks – from the investor’s perspective – are involved.

Resource-rich firms may take advantage of market proximity through the establishment of a sales and distribution network, which is of particular value for a service-oriented pre- and after sales where prompt reactions to the customers’ requirements are required. Heavy and bulky products, the regional availability of raw materials, trade barriers, culturally diverse customer behaviors, or long transportation lead times encourage direct investment in a foreign target market instead of distant-to-the-market business forms, such as exports. However, in some countries foreign acquisitions are banned in some sectors or are made difficult by legal restrictions on voting rights or a firm’s cross-holdings – as is the case in Japan (Hennart & Reddy, 1997: 3).

On the other hand, Japanese firms, when they go abroad, tend to opt for high-control modes when the risk of doing business in the host country is perceived as high or the quality consciousness of the partner is perceived as less strict. Instead of attempting to reduce the resource commitment by using a lower control mode (e.g., OEM or franchising), which firms in the western hemisphere often opt for (e.g., Philips, Apple, DELL), Japanese firms favor long-term orientated engagements that secure hierarchical control of their operations (Taylor, Zou, & Osland, 2000: 146, 158–159).

In various cases, we can witness in high-technology industries that Chinese firms also follow the market entry pattern indicating high control mechanisms as practiced by Japanese and Korean firms. Therefore, in the next chapter, the case study of TCL (China) is introduced with the aim of figuring out how the Chinese firm organized, particularly in terms of their control mechanisms, when entering Western markets.

Chapter review questions

3.5Case Study: Market Entry Strategies of TCL (China)

These markets are more mature and are already dominated by other brands. To develop our brands (TCL and Rowa) there involves higher investment and more risk. That’s why we have acquired companies. This has lowered our cost, and the risk is lower. Whether the third model will be successful, we do not know yet. But we have seen other companies from Taiwan and South Korea that have not been very successful. Two examples are Acer and LG, both of which lost a lot of money going overseas. There are really successful examples like Samsung, but most companies are not like them. TCL’s strategy is that we want to find strategic partners. We do not want to work alone and have to bear all the risk. That’s because in these mature countries, the growth is relatively stable; and entry barriers are higher. Being the No. 1 player in TVs is very important in reaching our goal of being a global company (Businessweek_Beijing, 2003).

The international expansion started in September 2002, when TCL China purchased the traditional German firm that went bankrupt, Schneider Electronics GmbH, at a price of Euro 8.2 million. At the time, besides audio and conventional television set production, Schneider had a particular technological expertise in the laser technology used for television sets. Unfortunately, the laser technology standard later failed in the markets. Commenting on the acquisition, Mr. Tomson Li, at that time chairman of TCL International said,

The acquisition of assets from Schneider marks an important step in TCL International’s overseas expansion. It will accelerate our access to the European market. The Tuerkheim plant will be our first production base in Europe for televisions and other home entertainment products targeting the European market. While various brand names under Schneider are well established, we will initially focus on the SCHNEIDER and DUAL brands, particularly for the high-end market, as we see enormous market potential in the European consumer electronics market. We have full confidence in our overseas business in the years ahead (TCL, 2002).

Through the purchase, in addition to obtaining a well-established but only regionally (mainly in Germany) known brand such as Schneider and production facilities in Bavaria, TCL gained access to management knowledge concerning the European markets. Dr. Michael Jaffe, the insolvency administrator of Schneider, said,

The acquisition marked an important step for both TCL and us. TCL has not only acquired the production facilities, but also the trademarks and distribution network as well as the technical know-how of the former employees of Schneider. This will form a solid base for TCL’s entry into the European market. As for us, in addition to the renewed employment for some former staff of Schneider, new job opportunities will be created along with TCL’s business expansion (Schneider, 2003; TCL, 2002).

The bright future for Schneider, as forecast after its acquisition, did not turn out to be true. Of course, TCL used the newly acquired trademark rights of Schneider as well as Dual and learned, through the former Schneider management, about local market conditions. However, in November 2004, Schneider announced the shutdown of the factory in Tuerkheim, Germany, and further restructuring activities. The offices of Schneider moved to Mindelheim, where distribution, marketing, and service activities were continued. Finally, all operations at Mindelheimwere stopped; and the location shut down in December 2005, just two years after TCL became the owner. Manufacturing has continued at TCL’s facilities in Asia, and the products are sold under the Schneider brand in Europe (Schneider, 2005a, b).

3.5.2TCL-Thomson Electronics (TTE) international joint venture

The acquisition of Schneider in 2002 was not the first and only market entry activity of TCL China in Europe. The Schneider brand was well known in Germany but comparatively unknown in other European countries. Additionally, Schneider’s manufacturing and research capacities were limited relative to the size and the strategic plans of TCL for its European market entry.

The traditional French company, Thomson, along with Philips one of the leading European brands in the 1990s and owner of several patents plus exclusive brands, also aroused the interest of the Chinese firm. On the one hand, TCL had production cost advantages due to reasonable labor costs and relatively less social security standards in China compared to France. On the other hand, TCL’s weaknesses were its almost unknown brand name outside Asia, limited access to the European market, and the lack of patents and advanced technological know-how. In 2003, Thomson faced increasing difficulties regarding competitive manufacturing of television sets in comparison to firms from Turkey (e.g., Vestel, Beko) and the Far East, which resulted in the television set operations realizing a loss. Moreover, Thomson did not pay enough attention to the development of flat panel technologies, which enjoyed a significant market breakthrough in 2004 and provoked an even higher price competition in Europe in conventional television set sales. Finally, TCL China and Thomson, France, seemed to be ideal joint venture partners with significant mutual synergy potentials (Thomson, 2003, 2004).

In June 2004, TCL and Thomson agreed to combine their activities in order to establish a major player in the television set business with an annual production capacity of approximately 21 million units. The international joint venture of TCL-Thomson Electronics (TTE) started its operations in July 2004 (TCL, 2004b). TTE represented the largest agreement ever made until that time in which a Chinese company had taken control of a Western counterpart in an international joint venture (Deng, 2006: 76). The newly created firm, TTE, enabled TCL to access Thomson’s distribution channels in the US and Europe; research and development laboratories (Singapore, Mexico, Germany, and France); and the main manufacturing capacities in France, Poland, Mexico, China, and Thailand. From the Chinese point of view, the brands of ‘RCA’ (American market) and ‘Thomson’ (European market) were of particular interest for TCL’s marketing and sales in order to compensate for its own almost unknown brand initials ‘TCL’ in its overseas markets. The development of the Chinese brand ‘TCL’ would have been difficult and time consuming and consequently costly due to its unfamiliar initials in the minds of European and North American customers. As a TCL senior manager described the venture benefit for the Chinese,

Leveraging the strengths of Thomson, we have a firm foothold in the R&D of main stream TV products and strong capabilities in high-end digital offerings. We deploy a multi-brand product strategy, spearheaded by established household brands, including TCL, Thomson, and RCA, which are immediately recognizable to consumers worldwide (Deng, 2006).

At the beginning of the negotiations in 2003, before the final joint venture contract was signed, it was announced that TCL and Thomson would each invest 33 percent (for a total of 66 percent), and the remaining 34 percent would be launched at the Hong Kong stock exchange (Glowik, 2004b). This smart approach, initiated by the Chinese, was psychologically, with respect to French public opinion, well conceived. It did not appear to be a takeover by the Chinese firm but rather a partnership. The promotion of a joint venture transaction was easier to launch than, for example, an acquisition; and it avoided unfriendly reactions in the French public as well as potential barriers from French politicians, who tend to protect ‘their industry’. If desired, Thomson had the chance to buy shares at the Hong Kong stock exchange in order to increase its joint venture decision power. Theoretically, the company ranked as an equal partner. However, industry insiders were convinced that Thomson might not have the financial resources to buy additional shares via the Hong Kong stock exchange.

Therefore, even though it was officially called an equal partnership at the beginning, TCL secured the majority control; and it can be assumed that a gradual takeover of the Thomson television set business by TCL may have been planned from the beginning of the joint venture operation. In January 2004, it was discussed that in the initial phase of the venture, TCL would hold 67 percent (and not 1/3 as proposed in 2003) and Thomson only 33 percent of the shares of TCL-Thomson Electronics (TTE). Thomson agreed to the venture because its television set division faced increasing financial difficulties before it was transferred to the joint venture. Finally, the French firm contributed the following TV manufacturing units to the venture (TCL, 2004a):

In addition to the manufacturing capacities mentioned above, three research and development centers located in Villingen (Germany), Indianapolis (USA), and India were contributed to the TTE joint venture by the French partner Thomson (TCL, 2004a). Thus, through the venture with Thomson, TCL absorbed technological know-how, research and development resources, a wide range of patents, and valuable brands. Since the start of international venture operations, the television sets have been sold globally under three key brands: ‘TCL’ (Asia, Australia, Russia, and South America), ‘THOMSON’ (Europe, Russia, Ukraine, and Kazakhstan), and ‘RCA’ (North America) (TCL, 2007b, 2008a). According to the final ‘Shareholders Covenants Agreement’ with Thomson, TCL secured the position of the ‘ultimate, controlling shareholding’, with 38.74 percent of TTE’s capital. The remaining share portion of 31.94 percent was placed before the public at the Hong Kong stock exchange. Thomson was entitled to nominate two out of eleven directors to the board as long as it held at least a 13.25 percent interest in TTE. Thomson finally decided to invest 29.32 percent of the issued share capital of TCL-Thomson Electronics. The Chinese venture parent partner, TCL, guaranteed its control of the board (TCL, 2005).

The newly formed venture TTE helped to expand the turnover and the international ambitions of TCL. However, the operating activities of TCL’s strategic business, called TCL Multimedia, which included the joint venture operations of TEE, resulted in a loss in the subsequent years 2005 through 2008 as illustrated in Figure 69 (TCL_China, 2004, 2006, 2008, 2010, 2012, 2013a).

During the course of worsening business, the joint venture partner Thomson decided to incrementally reduce its engagement of the issued venture capital share. In parallel, the Chinese venture parent, TCL, strengthened its alliance network with other firms. In February 2006, a memorandum of understanding was signed with LG.Philips LCD. Under its framework, it was agreed that LG.Philips LCD would supply LCD-TFT panels to TCL, which guaranteed a stable purchase demand. Mr. Gary Yu, president of TTE Global Operation Center, commented concerning this partnership,

TTE intends to increase the sales of LCD TVs globally. As LG.Philips LCD will take into consideration TTE’s product designs in developing high-quality TFT-LCD products, this cooperation will enable both companies to boost their presence in the fast-growing LCD TV market with fruitful results (TCL, 2006e).

In 2008, after the decision of Philips’ top management to outsource 70 percent of its LCD television set operations, the Dutch company further intensified its business relations with TCL, based on an original equipment manufacturing (OEM) agreement that was signed for the first time in 2007. TTE became one of the major OEM partners for Philips. The OEM contract, from the perspective of Philips, had the goal of lower manufacturing costs relative to its European operations. The television sets were manufactured, with attention to technical specifications and quality standards approved by Philips, at TCL factories in the Far East. These TV sets were globally distributed and labelled with the Philips brand in the European market, among other markets (Digitimes.com, 2008).

On April 15, 2008, TCL started construction of its own liquid crystal display (LCD) module plant in China’s southern Guangdong province. The commencement of operations strengthened TCL’s competitiveness in the LCD television set sector. The project was financed by TCL Corporation, with LCD panels and major technological support provided by TCL’s project partner, Samsung (TCL, 2008b). Samsung intended to subcontract parts of its LCD manufacturing to the Chinese television maker after the plant’s opening in 2009 (TCL, 2008c).

3.5.3The gradual process towards the liquidation of TTE Europe

In Paris on November 3, 2006, the French joint venture partner, Thomson, announced that it would reduce its stake in TCL Multimedia from 29.3 percent to 19.3 percent of its share capital. Thomson’s management said it intended to continue its business relationship with TCL. However, following the divestment, Thomson’s interest in TTE would no longer have the status of a joint venture partner. The residual stake of Thomson in the TTE joint venture would be rather a financial participation (TCL, 2006b; Thomson, 2006).

In Hong Kong on May 24, 2007, approximately six months later, the chairman of TCL, Li Dongsheng, announced on behalf of the board the insolvency of all European operations. At the time of this announcement, who had the managerial decision power at TTE? Besides Li Dongsheng, the board was comprised of Lu Zhongli, Wang Kangping, Shi Wanwen, and Yuan Bing as executive directors. Albert Thomas da Rosa, Jr., ranked as nonexecutive director and Tang Guliang, Wang Bing, and Robert Maarten Westerhof as independent nonexecutive directors of the board (TCL, 2007a, c, d). According to the corresponding press release,

The company expects that the French court will appoint a judicial liquidator to take control of TTE Europe. TTE Europe still faces a number of outstanding claims that it is unable to settle. As the operations of TTE Europe have caused significant losses for the Group in recent years, TTE Europe’s insolvency filing will provide closure to the Group’s involvement in TTE Europe, especially with respect to the settlement of claims (TCL, 2007c).

To maintain the European business from that time onward, TTE was organized as a platform for all television set-related activities and became a wholly owned subsidiary of TCL. It was agreed with Thomson that the OEM business would be expanded (assembly of television sets in China that are sold with the Thomson label around the world). Under the trademark license agreement, Thomson granted a twenty-year license to use Thomson’s registered trademarks (RCA, RCA Scenium, and Thomson) for manufacture and sales of television products in certain countries in North America, Europe, and other regions in return for a royalty fee based on net sales. According to the agreement, TCL was allowed to use the Thomson trademark in Europe until 2008 without paying a royalty fee. In Russia, Ukraine, and Kazakhstan, TCL’s subsidiary TTE could use the Thomson trademark until 2013 with payment of a royalty fee (TCL, 2006a; Thomson, 2007a, b).

As stated in TCL’s official press release with respect to President Li Dongsheng’s participation at the ‘Caijing Chinese Business Forum on the road to internationalization’ held in June 2008 in London,

In January 2004, TCL acquired the color TV business of the French company Thomson; three months later, TCL also acquired mobile phone businesses operating under the Alcatel brand, causing unprecedented overseas interest in Chinese firms’ international mergers and acquisitions. However, TCL’s road to internationalization has been far from smooth as the restructuring of the company’s European business in 2006 led to the company incurring losses.

I hope that the international community will maintain an objective and tolerant attitude towards Chinese businesses that ‘step outside China’, viewing them as colleagues in areas such as market access, investment and mergers, and acquisitions, and that it will not overly politicize the economic vitality of Chinese business (TCL, 2008d).

TCL strengthened its international expertise and access to overseas operations with the TTE joint venture. The competitive advantage of the Chinese firm still remained in its Asian cost manufacturing platform. Consequently, its television manufacturing plants have been expanded in China (Huizhou, Henan, Wuxi), Mongolia, Thailand, and Vietnam. These plants produce a full range of products covering CRT, LCD, plasma, and projection TVs. Minor manufacturing locations (previously contributed by Thomson) survived in Poland (Zyrardow) and Mexico (Juarez). TCL’s manufacturing activities for audio-visual products are based in China (Shenzhen) and include, for example, DVD player assembly. Research and development activities are concentrated in Shenzhen as well. Meanwhile, TCL belongs to the world’s largest TV companies, with a relatively broad line of TV products as well as a growing AV (audio-video) line of business. In 2007, the Chinese firm launched an image campaign to strengthen its brand value from TCL China to ‘TCL’—‘The Creative Life’ (TCL, 2007a, 2008a).

Are there any drawbacks, from the Chinese point of view, when considering the joint venture operations with Thomson? First of all, there were operating losses between 2005 and 2008 that had a significant negative impact on the overall firm records. At the time that the joint venture contract was signed in 2004, Thomson’s cost competitiveness in the television set market was comparatively weak; and its potential might have been overestimated by TCL’s management. Instead of paying attention to the new flat technologies like LCD and plasma, Thomson concentrated its efforts on projection TV products, which were in 2004 significantly cheaper to produce and, therefore, price attractive on the markets. However, the picture performance of projection TVs was relatively poor in comparison with the upcoming LCD and plasma television sets. Consequently, the forecast for the European market regarding projection TVs was rather pessimistic. Quality issues and increasing price competition in the cathode ray tube-based segments caused an even more difficult situation for Thomson, particularly in its core market, Europe.

The weakness of Thomson was temporarily ameliorated by TCL’s main and most important strength: its low-cost production facilities for conventional CRT-based television sets in China. However, both TCL and Thomson so far had not gained significant technological expertise in flat panel technology nor did they have LCD or plasma module production capacities built up. Thus, the TTE main business segment had to focus on the mature and price competitive CRT markets, which were increasingly being replaced by LCD and plasma TVs in Europe.

No doubt, Chinese firms such as TCL have strong learning and absorptive capabilities. Thus, the tendency for them to continue their investments to acquire strategic resources around the globe is very high. The case study of TCL illustrates the firm’s efforts to gain, within the shortest possible time period, resources in areas where the company has current weaknesses (Bacani, 2005; Deng, 2006: 77). Trademarks such as Schneider, Thomson, and REA, used for its European and US market entry, as well as intellectual property rights (RCA patents), R&D centers (e.g., Villingen in Germany), and access to European distribution channels were the most important resources TCL gained through the joint venture with Thomson. These acquired resources helped overcome market entry barriers for TCL in Europe. The management of TCL, until recent times relatively inexperienced in business operations outside China, gained stepwise managerial, technological, and cultural experience from its global business networks (TCL, 2004b).

3.5.4TCL and Alcatel international joint venture

The case of TTE demonstrates that international joint ventures indicate a high rate of failure, which is in many cases not narrowly caused by ‘cultural reasons’ of the venture partners. The mobile phone joint venture between TCL and Alcatel developed in a pattern similar to that of TTE. In 2005, TCL acquired a 55 percent share in the French Alcatel’s mobile phone manufacturing enterprise in order to establish TCL and Alcatel Mobile Phone Limited (T&A), which was worth 1 billion yuan (USD 121 million) in assets. By the end of the first quarter of 2005, T&A had lost over 660 million yuan (USD 79.71 million), more than TCL’s original investment of USD 68.15 million (Yuxin, 2005). The development of the joint venture negatively contributed to a loss for TCL’s strategic business unit, called TCL Communication Technology Holdings Limited, in 2005. Despite a sharp increase since 2009, profits have remained at a relatively marginal level (compare Figure 70) (TCL_China, 2005, 2007, 2011, 2014).

Within just a couple of months after the establishment of the joint venture, TCL was under pressure to undertake a substantial restructuring of its mobile phone venture with Alcatel of France, after admitting the business had failed to keep up with competitors on pricing and new technology. The restructuring included the transfer of research and development resources from France to China. French research and development staff were redeployed within Alcatel’s organization. In May 2005, Alcatel announced it would switch its 45 percent holding in the joint venture to a 5 percent holding in TCL Communication Technology, listed separately on the Hong Kong stock exchange. Li Dongsheng, chairman of TCL, said,

The company had originally planned to combine the two businesses within three years but now realized it needed to act more quickly. He further commented he was confident the changes would result in a ‘major improvement’ in the fourth quarter. TCL Group, has been dragged into a loss by the ailing mobile phone business and a similarly troubled TV venture (Palmer, 2005).

The international market entry strategy of TCL, as indicated by Schneider, TTE, and T&A, followed a certain pattern: first, in the case Schneider, it was announced at the beginning (when TCL acquired the firm) that the German facilities would continue operations. However, after a relatively short time, Schneider activities were terminated; and manufacturing as well as the complete research and development operation, including several patents and the trademark rights, had been transferred to China. Second, in the case of the joint venture with Thomson, agreed to as a ‘venture of equals’, TCL secured majority control right after the joint venture was established. And in the third case, TCL took over Alcatel’s joint venture shares within just one year. However, these market entry strategies were costly for TCL. According to TCL’s former and current chairman, Li Dongsheng, TCL’s relationship with Alcatel and Thomson remained good; but he admitted working with the company’s new foreign acquisitions had been more difficult than anticipated.

TCLwas the first Chinese company to make a major European acquisition, so we are facing a lot of new difficulties and problems. The overall integration will take longer than expected (Palmer, 2005).

Chapter review questions

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