TV's Mr. Big Li Dongsheng bought RCA and in the process became the world's largest TV maker. Now can he create China's first global megabrand?
By Clay Chandler Reporter Associates Helen Kim, Annie Wang

(FORTUNE Magazine) – Li Dongsheng, chairman of TCL, China's most ambitious consumer electronics maker, has been holding forth for nearly two hours on the future of global manufacturing when his can-do patter stumbles--over a dog. Li, 47, is in the product showroom at TCL's headquarters in the gritty southern Chinese city of Huizhou, surrounded by widescreen televisions and flat-panel displays. He is remembering how, when he joined TCL in 1982, the company was a tiny cassette-tape assembler, financed by the Huizhou government and run out of a ramshackle warehouse. Today TCL employs more than 40,000 workers in factories in China, Vietnam, the Philippines, and Germany, making televisions, mobile phones, notebook PCs, refrigerators, and air conditioners. What's more, Li is weeks away from assuming command of the largest television manufacturing operation the world has ever seen. So what are his plans for Nipper?

"Nipper?" Li asks. "Who's Nipper?"

You know...Nipper. The little RCA dog? The terrier sitting in front of the antique phonograph with one ear cocked to show he recognizes the sound of "His Master's Voice"? Li cocks his own ear, clearly baffled.

Well, you wouldn't call him baffled now. He has, in fact, a special interest in old Nipper. In November his company struck a $560 million deal to merge its television manufacturing facilities with those of French consumer electronics giant Thomson. The resulting venture, in which TCL will hold a 67% stake, is expected to have sales of $3.5 billion and ship more than 18 million televisions this year--at least six million more sets than anyone else. The agreement constitutes one of the biggest deals in which a Chinese company has taken control of a Western enterprise. It gives Li effective control of Thomson's television plants in France, Poland, and Thailand, and also of its subsidiary based in Bloomington, Ind.--RCA, proud proprietor of the Nipper trademark.

TCL's investment in Thomson is the latest and most dramatic example of China's determination to put its own stamp on the global marketplace--and there's no company that has a better chance of becoming China's first truly global corporation than TCL. Over the past decade, foreign giants like Motorola, Nokia, Toyota, and General Motors have poured hundreds of billions of dollars into China, taking advantage of the nation's booming consumer market and cheap labor. Only a few Chinese companies, however, have ventured overseas.

Haier, China's biggest appliance maker, has nearly half the U.S. market for small refrigerators and wine coolers, and a plant in South Carolina. Legend, the world's third-largest maker of desktop PCs, changed its name last April to Lenovo to pave the way for growth in non-English-speaking markets. Huawei Technologies, China's largest maker of telecommunications equipment, earned more than $1 billion from exports last year and has forged alliances with 3Com, Microsoft, Qualcomm, and Matsushita.

Even the best of China's global wannabes, though, are lacking in key areas such as distribution, service, and marketing, according to a study by consultants at McKinsey. China's planners and executives want to change that and move the country down the path blazed by Japan and South Korea, in which once-obscure domestic companies like Toyota and Samsung became influential global brands. The hope is that Chinese corporations, like basketball player Yao Ming, will learn how to mix it up with the world's best overseas.

It won't be a slam-dunk, but TCL has a good shot. For one thing, it has cash: In the first three quarters of last year, it earned $169 million on sales of $4.2 billion. For another, its home operations are in good shape. In 2002, TCL claimed a 19% domestic market share, and it is the only Chinese TV producer to consistently gain market share and show a profit over the past five years. But what really sets TCL apart is strategy. Haier and Lenovo are venturing abroad cautiously. Li is bulking up fast. In 2002 the company secured a beachhead in the European market by purchasing a bankrupt German television manufacturer, Schneider Technologies. As for the Thomson deal, Li explains, "I get direct penetration of the world's two richest markets, North America and Europe, right away."

That advantage could boomerang. Joseph Ho, an analyst at DBS Vickers Securities in Hong Kong, lauds TCL as "fast, aggressive, and smart." But he frets that the source of TCL's competitive edge in China--its sales and service network--won't help the company overseas, and that Thomson's technology and quality are not in the same league as those of Sony and Philips: The French company's TV and DVD operations lost more than $100 million in 2003. "I hate to pour cold water on the strategy," he says, "but it seems to me that TCL has taken on a very big challenge."

Li insists his plan can work, but only if TCL is permitted to re-invent itself as a truly market-oriented concern. To that end, he has lobbied tirelessly to minimize government ownership. Incredibly, he's getting his way. As recently as 1996, TCL was 80% owned by the city of Huizhou. But Li has persuaded authorities to allow steady dilution of that stake by minting new shares. After a complex restructuring in January that raised $330 million, the Huizhou government's stake is down to 25%. The general public now owns 38% of the company, while 14% is owned by foreign partners, including Philips, Toshiba, and three consumer electronics companies from Hong Kong. Li owns 6%.

Arthur Kroeber, editor of the Beijing-based China Economic Quarterly, says TCL is the first large and competitive Chinese corporation in which Beijing has allowed state ownership to fall below 50%. It is, in effect, a lab rat in an experiment in what he calls "stealth privatization." If Li can prove his claim that smaller state ownership means faster growth and fatter profits, argues Kroeber, regulators may cut other Chinese companies loose as well.

Li seems up to the test. He's clearly a tough survivor, part of the generation whose lives were thrown into turmoil by Mao's 1966--76 Cultural Revolution. As a teenager, Li was banished for two years to an agricultural cooperative. He remembers toiling on a fish farm, reading books in secret, and battling boredom. (He says he bears no grudges against the Communist Party, though he's much more likely to cite the wisdom of Jack Welch or former IBMer Lou Gerstner than that of Mao or Marx.)

After escaping the cooperative, Li finagled admission to a technical college in Guangdong, his home province, where he excelled as an electrical engineer. In 1982, the year he graduated, he and a few other engineers founded a cassette-tape assembly venture in Huizhou with the help of a $600 loan from the city government.

Sales boomed, and as China's economy expanded, Li and his colleagues opted to shift production into telephones; this was the impetus to build a nationwide sales and service network. TCL produced its first television set in 1992. Last year, prior to the alliance with Thomson, it shipped 11.5 million televisions, up 43% from 2002. Of that total, 3.8 million were sold overseas, mostly under brand names like Philips, Thomson, and Panasonic. In recent years TCL has begun wooing Asian customers with products sold under its own brand. TCL products claim a 14% share in Vietnam, 8% in the Philippines, and wide name recognition in India and Pakistan. The business has diversified into consumer electronics products, but televisions and mobile phones are the mainstays, accounting for 44% and 38% of sales, respectively, in 2003.

Li, who has spent his entire career at TCL and has led it since 1997, is widely credited as the force behind the company's expansion. He is known for aggressive marketing and a relentless focus on cost control. And he is very, very ambitious: At the FORTUNE Global Forum in Shanghai in 1999, Li vowed that over the following decade TCL would increase sales tenfold and vault into the Global 500 as a "world-class enterprise."

The alliance with Thomson is designed to help TCL keep that pledge. The merged company will be able to shift production easily to less expensive facilities in China and to realize greater economies of scale. Thomson's plants also provide cover against trade actions directed at China. Li promises the new venture will be profitable by the end of 2004, although that seems unlikely. As part of the deal, Thomson can swap its third of the venture after 18 months for shares in TCL's Hong Kong--listed arm, which have gained 16% since the deal was announced on Nov. 3. The provision was widely interpreted as evidence that the French company wants out of the television business.

Li, who by coincidence has used "Tomson" as his English name for decades, urges a longer view. "The chance to purchase a truly global color-television company just doesn't come along every day," he says. "We looked at the risks, but it seemed to me that this was a unique opportunity."

For Li Dongsheng, the question is whether jumping at that opportunity will help TCL get better rather than just bigger--and in the process create that first global Chinese brand. But the success of TCL means so much more. For China, and the Chinese business community, the question is this: If TCL falters--with its advantages of cash, independence, and a strong overseas partner--will the country ever become more than a workshop for other people's products? Don't touch that dial.