Poor reception

The China Business Information Centre under the State Domestic Trade Bureau has recently predicted a worsening of over-supply in the second half of this year. According to its statistics, 484 of the 605 main goods categories will face a market glut, up 7.8 percentage points from the first half of this year. The list includes 440 categories of industrial goods, ranging from textile products, chemicals, hardware and consumer goods. Some goods have been overproduced for years, according to the information centre, including video-cassette recorders and colour televisions.

Earlier this year, the State Economic and Trade Commission banned the manufacture of 114 products in 10 industrial sectors and indicated that foreign-funded enterprises must also abide by the directive and limit their production accordingly.

In June the government announced that it would clamp down on a new oversupplied sector, paging services. More than 1,700 such companies have sprung up in recent years, some posing a serious threat to aviation navigation systems, according to the announcement.

However, each industry contains its own complexities, as a look at the television manufacturing sector illustrates.

Saturated market
China's television market is quickly reaching maturity in China, yet long-term prospects remain good for those manufacturers which can survive the intense competition. Average household ownership in urban areas is 100 percent, yet more than 70m colour television sets will be replaced in the next few years. Demand for colour television sets by newly-weds alone is five million each year. In rural areas, fewer than 30 percent of the 210m households own colour sets. Meanwhile, government authorities aim to raise television transmission coverage to 90 percent of the population by next year, which in turn will pave the way for manufacturers to access new markets.

Despite these encouraging statistics, over-supply in the television manufacturing sector is chronic. Annual demand is about 20m sets, while production capacity is double that figure. Last year output hit 35m, up nearly 30 percent over the previous year. Output in the first quarter of this year grew at a staggering 46 percent to exceed 10m sets. Inventories nationwide reached 15m at the end of last year. Sales during the spring festival, usually the peak spending season, merely reduced stocks to 10m.

Exports have been hit by the Asian financial crisis. Regional demand plunged and the devaluation of most Asian currencies brought down the prices of television sets made in Japan and South Korea, while the yuan remained stable.

Commercial decisions
Chinese producers were forced to respond to remain competitive. In April a new price war was initiated by Sichuan Changhong Electric, the largest television maker in China, which cut its prices by 10 to 33 percent.

Sichuan Changhong, an A-share company listed on the Shanghai stock exchange, started a similar price war 10 years ago which propelled this small, former military-controlled plant into a major national producer. Faced with stagnant domestic demand then, all other manufacturers reduced their production of the prevailing standard 36cm colour sets, leaving tube sup-pliers with massive inventories.

Mr. Ni Rufeng, now chairman of the listed company, took the bold step of buying all surplus 36cm tubes from the country's largest producer at bargain prices and expanded production with imported Japanese technology. The company then began to sell sets to the fast-growing rural market and soon tubes were in short supply and prices soared.

Changhong, which accounts for 30 percent of the national market share, is vulnerable in the current deflationary environment. Last year its output totalled 6.68m sets. By the end of December its inventories of tubes and sets stood at five million units worth Yn7bn (US$854m) and the volume grew in the first quarter of this year.

Despite announcing drastic price cuts across the whole range of its products in April, the company still predicts a profit rise for the current financial year. In June the chairman told shareholders that turnover should increase by nearly 50 percent to Yn20bn and net profits by 7.3 percent to Yn2.l5bn. This compares with last year when total sales fell by 26 percent to Yn11.6bn and net profits plunged 23 percent to Yn2bn.

The cuts sparked anger among the 100 or so manufacturers in China. Konka, the country's second largest producer, was forced into matching the reductions. Xiahua Electronic, another manufacturer in Xiamen, Fujian province, responded by writing to the State Development Planning Commission (SDPC), accusing Changhong of selling below cost and dumping television sets.

The eight major manufacturers, which account for about 90 percent of the market, have a common problem – their products are similar in design and quality. Each year they chum out vast quantities of sets with 36cm, 43cm, 46cm and 51 cm tubes. However, the most popular sizes now are the 74cm and 86cm tubes. No domestic tube producers currently make these larger sizes, so they have to be imported to meet consumer demand.

According to customs statistics, about 125,000 foreign-made tubes were imported through Jiangsu ports alone in the first four months of this year, up 77 percent over the same period last year.

Market forces
Shortly after the outbreak of the latest price war, the eight major producers convened and agreed to a one-month halt in production so as to reduce inventories. They also agreed to set minimum prices for their products, hoping to reverse a price slide.

The Ministry of Information Industry has lent its support by reportedly promising to suspend the issue of import licenses for colour tubes.

After receiving the complaint from Xiahua Electronic, the SDPC is currently investigating Changhong for the alleged dumping. Changhong has already denied the charge. In June the commission issued strict rules, imposing penalties on manufacturers and distributors in all sectors which sell below cost. The commission is also said to be drafting a new regulation on discount criteria for the colour television market.

Mr. Guo Zeli, general manager of Xiahua Electronic, lays much of the blame on the government and its inability to regulate the market. "Since the last quarter of last year, five new producers have entered the market without official approval. The government should close these firms and be brave enough to expose them," he was quoted as saying. He called the long-running price war "a vicious cycle of competition" and insists that the government should take to court those producers which sell below cost in order to ensure a level playing field.

Xiahua says domestic colour television Finns should expand business through exports rather than `kill each other at home.' Changhong has already taken up the challenge by starting a Yn2bn project in March to produce digital television sets for export. However Chinese television manufacturers face even tougher competition in the global market.

In Europe, for example, Xiahua Electronic has taken legal action to defend itself against dumping charges. Chinese companies have been accused of the practice since 1988. High levies were imposed as a result to block the export of Chinese colour television sets to the EU. At the end of July, the European Commission announced new plans to investigate imports of cathode-ray television picture tubes from China, South Korea, Mexico. India, Malaysia and Lithuania.

Xiahua Electronic has recently sent a delegation of senior managers to Brussels to refute allegations of dumping. Meanwhile, the company has broadened its export target from Southeast Asia to other areas such as Africa, South America, the Middle East and Eastern Europe.

Back home, the competition from foreign manufacturers is increasing. Matsushita of Japan announced in mid-June that it would invest Yn300m in Shandong Matsushita TV.

Corporation, to produce 74cm and 84cm flatscreen colour sets. It will double its annual production capacity to 800,000 sets.

At the end of July, Sony launched a US$410m joint venture in China to manufacture television sets and computer monitors for export to the US and Japan. The joint venture, funded by Sony, Shanghai Radio and Television Holding Company and Shanghai Vacuum Electronics, has four television production lines with an annual capacity of 500,000 sets. Capacity will be expanded to one million sets in 2001.

Industry experts believe other China-based foreign giants, such as Toshiba and Philips, will match these aggressive plans.

The core technology of making television tubes is still beyond the reach of most Chinese companies, according to Mr. Li Dongsheng, president of TCL, another leading television manufacturer based in Huizhou, Guangdong province. He called on all manufacturers to abandon the tactic of cutting prices and concentrate instead on achieving a breakthrough in tube and digital technology. Companies need to rebuild, he says, "to adapt to a wider and fiercer competitive area where price is not the only important element".

Herd instinct
Ms. Wang Hongsheng, a Shanghai-based media consultant, says oversupply has been brought about by the herd instinct of company managers. "If someone is doing particularly well with one model, everybody follows. Then the only way to fight for a share of the market seems to be cutting prices," she says.

There is consensus that there are too many television manufacturers in the country, and Wang says it is quite likely the sector will eventually consolidate to about 10 big producers. "The question is whether the managers of these small manufacturers are able to find a market niche" she says. "Meanwhile, the government will be wary about the unemployment figure if many of them have to be shut down."

One thing the saga reveals is the government's ambivalence towards market forces in the consumer products sector. On the one hand, it has quickly opened the market to foreign competition and this process will accelerate after China's eventual admission to the World Trade Organisation. On the other hand, it is ready to resort to administrative means to protect the interest of manufacturers instead of allowing them to sink or swim.

By adopting this muddled approach, the government is not going to solve the problem of oversupply in the near future.