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Cablegate: Sw China Electronics Giant Sets Sights On U.S. Market, Seeks

VZCZCXRO1152
PP RUEHGH RUEHVC
DE RUEHCN #0262/01 3220748
ZNR UUUUU ZZH
P 180748Z NOV 09
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC PRIORITY 3525
INFO RUCPDOC/USDOC WASHDC PRIORITY 0023
RUEHOO/CHINA POSTS COLLECTIVE
RUEHCN/AMCONSUL CHENGDU 4229

UNCLAS SECTION 01 OF 02 CHENGDU 000262

SIPDIS

DEPT FOR EAP/CM
SENSITIVE

E.O. 12958: N/A
TAGS: ETRD EINV PGOV KIPR KNNP CH
SUBJECT: SW CHINA ELECTRONICS GIANT SETS SIGHTS ON U.S. MARKET, SEEKS
TO BECOME A GLOBAL PLAYER IN 10-20 YEARS

CHENGDU 00000262 001.2 OF 002


1. (U) This cable contains sensitive but unclassified
information - not for distribution on the Internet.

2. (SBU) Summary and Comment: Sichuan electronics giant
Changhong recently told us success in the U.S. market, elusive
up to now, would be a litmus test of its arrival as a major
global player. The company's long-term strategy includes
building a single worldwide brand name, and strengthening
quality control so that it is able to compete on more than just
price. Changhong's chairman frankly compared his firm's
relatively weak position in overseas markets to that of Korean
companies such as Samsung in the 1980s; at the same time, he
boldly predicted Changhong would become a world-class
electronics firm in 10-20 years.

3. (SBU) Comment: Changhong noted it is resolving unspecified
"patent issues" in Europe and the United States. These
difficulties may be helping Chongqing, like some other Chinese
companies, slowly realize that it will be impossible to operate
successfully as a world-class multinational without showing more
respect for intellectual property rights. End Summary and
Comment.

International Partnerships, Domestic Base, One Brand

--------------------------------------------- -------

4. (SBU) Changhong Chairman Zhao Yong told Consul General
November 12 that his company already enjoyed a number of
successful partnerships with international corporations such as
General Electric, IBM, Dell, Intel, and Samsung. He said that
his company's products, which include flat-panel televisions,
mobile phones, and an array of other consumer electronics, were
selling better in Australia and Europe. Changhong, which is
based in Sichuan Province's second largest city, Mianyang
(septel), already enjoys a sizeable share of China's domestic
market for LCD and plasma televisions.

5. (SBU) Zhao stressed that the company would concentrate on
building a single worldwide brand name: "Changhong" (i.e. a
strategy similar to that of Japan's "Sony"). The company had
struggled with its branding strategy for 10 years, and in 2005
even hired a U.S. firm to explore the idea of selling Changhong
products under different names in different markets. While some
executives were still concerned that that Western markets might
not respond well to the Changhong name, recent stronger sales in
Europe (300 million Euros) have allayed their doubts, he said.

U.S. Market the Highest Goal, Despite Previous Problems

--------------------------------------------- ----------

6. (SBU) The United States is Changhong's largest potential
market, Zhao stressed, adding that his firm could never truly be
a global company without a major U.S. presence. Changhong's
international sales currently account for USD 700 million, or
roughly 10 percent of total sales. Ambitiously, Zhao hopes to
grow this number to 30 percent over in the next three years.

7. (SBU) Changhong previously encountered patent problems in the
United States, and in Europe, Zhao said. It had resolved these
problems in Europe, and soon hoped to negotiate settlements of
them in the United States as well, he added. (Note: Press
reports indicate that U.S.-based TV maker Zenith sued Changhong
in 2004 for violating two of its patents. Changhong reportedly
agreed to pay a patent fee to Zenith, but has not paid it so
far, according to Changhong former U.S. distributor, APEX, which
has had its own legal problems with Changhong. End Note.)

Expanding Foreign Manufacturing,

CHENGDU 00000262 002.2 OF 002

But Still Lack International Competitiveness

--------------------------------------------

8. (SBU) Changhong has established manufacturing bases outside
China, and company officials seek to staff these operations, at
least in part, with relocated Chinese managers and engineers.
Zhao said his company had already invested USD 130 million in
two factories in South Korea, and also had factories in the
Czech Republic and Indonesia.

9. (SBU) Unprompted, Zhao frankly acknowledged that Changhong
products were weak competitors when compared to major Korean and
Japanese brands, and needed to compete mainly on price. He
compared Changhong's weak, current market position to that of
Korean brands in the 1980s (which were then just starting to
compete, mainly against the Japanese majors). He confidently
asserted, however, that Changhong would be a global player
within 10-20 years. (Note: According to press reports, the high
rejection rate by U.S. consumers of Changhong products --
reaching double digits -- was a source of contention between it
and former U.S. distributor, APEX -- suggesting that poor
quality has been a major problem. End Note.)

10. (SBU) Comment: Changhong flat panel televisions are among
the least expensive brands available locally in Chengdu, and
appear to sell well. One ConGen LES said that the most Sichuan
homes have a Changhong television. A visual comparison of
picture quality between Changhong and other major brands of
televisions from Samsung, Sony, and Philips, reveals that
Changhong's picture quality appears to lag behind the more
expensive foreign brands. As with pirated DVD movies -- many of
which have lower picture quality than legitimate copies -- most
consumers in southwest China currently rank price above quality
in their electronics and other consumer purchasing decisions.
End Comment.
BROWN

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