The Asian Business Case Centre, Nanyang Business School

Publication No: ABCC-2002-002

Print copy version: 5 Mar 2002

EMERGING CHINESE MNCS:

KONKA GROUP COMPANY LIMITED

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Case developed by Prof. Biswatosh Saha, currently teaching in Vinod Gupta School of Management at
Indian Institute of Technology Kharagpur, India. The major work for this case study was completed while
the author was a Visiting Fellow at Curtin University of Technology, Perth under an exchange programme
between Indian Institute of Management Calcutta and Curtin University.
Copyright 2001 Biswatosh Saha. Reproduced by The Asian Business Case Centre and AsiaCase.com
with the permission of Biswatosh Saha.
For copies, please write to The Asian Business Case Centre, Nanyang Business School, Nanyang
Technological University, Nanyang Avenue, Singapore 639798
Phone: +65-6790-4864/6552 Fax: +65-6791-6207 E-mail: asiacasecentre@ntu.edu.sg

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Konka Group Company Limited (Konka), a colour

television manufacturer, is one of the 'new age'
multinational corporations (MNCs) emerging in
recent years from the People's Republic of China
(PRC). Managing director Chen Wei Rong, who
presides over the initial phases of the
internationalization of Konka's operations, said
during one of his recent trips to Melbourne:
"My company is determined to double
its market share in Australia within the
next three years. Australia has been of
special significance to the Konka group.
It is Konka's first successful foreign
market and an important step in China's
globalisation plans. The group has made
a long-term commitment to the
Australian market and has chosen to set
up its headquarters and warehousing
infrastructure in Victoria. I have come
not just to examine the Australian
market, but to demonstrate that Konka
is an example of China's ability to make
value-for-money, high quality, high-tech
products. Konka is determined to correct
the unfavourable perception that
consumers may now have of Chinese
products. I stress that we build quality
products ".1

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Official statistics shows that outward foreign direct

investments (FDI) from China increased
substantially in the 1990s. Between 1985 and 1990,
the average level of outflow was about US$690
million a year. Between 1991 and 1996, outflows
averaged US$2.6 billion a year2. Cumulative outflow
during 1990-96 was US$16.3 billion.
However, it is important to note that official FDI
outflow figures of China are said to be gross
underestimates3. Analysts differ widely on the true
levels of outward FDI from China. Most agree,
though, that the actual outflows are substantially
higher than the official figures. A China expert at

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Konka is one of the pioneering Chinese firms to start

treading this new and exciting path of "globalization".
By 1999, Konka has emerged as the leader in the
Chinese colour television mark et and has
established footholds in several foreign markets,
selling with its own brand nam e. The new
millennium, however, would decide if Konka could
sustain its initial success.

CORPORATE HISTORY OF KONKA GROUP

Konka Group Com pany Ltd i was formed in
December 1979 as one of the first Sino-foreign joint
ventures in Mainland China. The initial investors
were Overseas Chinese Town Economic
Development Corporation and Hong Kong based
Kong Wah Electronic Group Company Ltd. The joint
venture set up its assembly plants in the Shenzhen
Special Economic Zoneii.

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In August 1991, Konka was reorganised as a SinoForeign Joint Stock Company. In 1992, it obtained
listing on the Shenzhen stock exchange with an
initial offer of 30 million 'A' group shares to domestic
investors. It also became one of the first Chinese
enterprises to offer shares to foreigners by issuing
10 million 'B' group shares to foreign institutional
investors in the same year (see Exhibit 1).

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Chinese firms have been known to accumulate

overseas assets since the 1980s. Large Chinese
firms, however, expanded overseas systematically
only since the mid-1990s.

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Harvard, for instance, estimated the outward

Chinese FDI in 1994 to be in the range of US$5-10
billion, while the official figure was only about US$2
billion4.

During 1995-1996, Kong Wah was acquired fully

by Akai Electric Companyiii(Akai) and became its
subsidiary.. Subsequently, Akai sold a 27.44% stake
in Konka to the Hong Kong based subsidiary of
Overseas Chinese Town Group Ltd and to China
Travel Service (Holdings) Hong Kong Co. Ltd. The
share transfer agreement was signed in December
1997 and the final transfer took place in 1998 (see
Exhibit 1 for Konka's recent shareholding structure)
Overseas Chinese Town Group Ltd, a State-owned
Chinese conglomerate, now has a direct stake of
36% in Konka, and an indirect stake of just under
16% through its 100%-owned Hong Kong subsidiary.
Konka's product lines include Color Television

Peter Familari, "Konka Comes, Sees and Conquers", Reuters Business Briefing, May 19, 1999.
United Nations Conference on Trade and Development (UNCTAD), World Investment Report (New York, 1997) p. 311.
N.K.Chandra, "FDI and Domestic Economy: Neoliberalism in China", Economic and Political Weekly, 6 November, 1999.
Nicholas R.Lardy, "The Role of Foreign Trade and Investment in China's Economic Transformation", The China Quarterly, December,
1995.

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(CTV), video recorders, compact disk players and

recorders, digital video disks (DVDs), audio
equipment, telephones, home appliances, fax
machines and cellular handsets. CTV constitutes
the main product line. In 1998, 90% of Konka's
profits was attributable to CTV sales.iv
To pursue diversified growth, the Company plans
to manufacture white goods by setting up a
refrigerator and a washing machine plant with
capacities of 2 lakhs and 1 lakh respectively. In
September 1999, it signed a technical collaboration
agreement with the microelectronics group of Lucent
Technologies to manufacture cellular mobile-phone
handsets for the Chinese market. Konka targets
selling a million cellular mobile-phone handsets in
the mainland market in the year 2000, in the
development of the Group's second most important
product line after CTV.

THE WORLD CTV MARKET

Exhibit 2 shows the annual sales of CTV in some
of the major markets globally. The US market is the
largest, accounting for more than 30% of worldwide
CTV sales. The mainland Chinese market comes
in second in terms of sales volume. As a region,
North America and Western Europe together
account for more than 50% of total CTV sales.
Production of CTV

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plants, in which Mexican workers process imported

parts into finished CTV sets for the US market.
Exhibit 4 shows the ten largest CTV manufacturing
nations in 1996.
China has become the world's single largest
manufacturer of CTVs, although most of its products
are for home consumption. Most of the other Asian
nations shown in Exhibit 4, with the exception of
Japan, manufacture televisions mainly for export,
either through subsidiaries of Japanese and Korean
firms or by Original Equipment Manufacturing
(OEM) arrangements with these firms. The UK is
also becoming a major export base for televisions,
as a number of manufacturers set up production
plants there to distribute to the European market.
Exhibit 5 shows the largest CTV-manufacturing
MNCs in 1995. Sony, Philips and Matsushita are
the only companies to command market share
greater than or close to 10%. Philips and Thomson
Multimedia are the only major non-Asian CTV
manufacturers. Japanese MNCs clearly dominate
the CTV industry. Although Asia (excluding Japan)
manufactures the most CTVs, very few Asian
companies, apart from the Japanese giants and the
three South Korean chaebols, wield a formidable
brand name and account for a significant share of
the world's CTV market.

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Asia has emerged in recent years as the largest

site for the production of CTV, with manufacturing
output of about 76 million sets (60% of Konka's
global production) in 1996 (see Exhibit 3). Outside
Japan, the rest of the Asian economies have seen
their share in Konka's CTV production rising. Asia
(excluding Japan) contributes more than 54% of
Konka's total CTV production. It is worth noting that
a significant portion of CTV produced in Asia is
exported to developed markets such as North
America and Europe.Over the last ten years Mexico
has also emerged as a key supplier and
manufacturer. The Mexican city of Tijuana claims
to be "the television assembly capital of the world",
with companies like Sony, Samsung, Matsushita and
several others setting up new assembly plants there.
Japanese companies have invested US$800 million
in Mexico since joining the North American Free
Trade Agreement (NAFTA). Tijuana manufactures
nearly 10 million television sets a year, equivalent
to about 30% of the annual CTVs sales in the US.
Tijuana accommodates at least 560 '"maquiladora"

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Thus, apart from Japan and South Korea, no other

Asian country has homegrown independent CTV
manufacturers. CTV manufacturers in these other
Asian countries rely on and are linked to the MNCs
that operate in their countries. However, this state
of affairs may well alter if and when the Chinese
CTV firms succeed in establishing their brands in
the international arena.

THE CHINESE CTV MARKET

China's domestic CTV market, in terms of volume
sales, is second only to the US. The size of the
Chinese mainland market in 1998 was estimated to
be more than 16 million units in annual sales (see
Exhibit 2). China's Ministry of Information Industries'
estimate was over 18 million units, set to reach 20
million by Year 2000.
In the 1990s, the market has been ringing in, on
average, high single-digit growth. What is notable
is that the mainland market is not considered
saturated, unlike the US market. Television
penetration (defined as televisions per 100
households) is about 93% in urban areas but only

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22% in rural regions, leaving much scope for further

growth5.
The monochrome (black and white, or B&W) TV
market, in volume terms, was 12.5 million in 1993,
and has been declining since then. In 1998, it was
8.9 million6. B&W TV owners have been switching
to the CTV, hence keeping the CTV market buoyant.
As the largest B&W TV market in the world, China
can expect to see further boost to the demand for
CTV domestically.

restructuring trend within the domestic industry. As

the market expanded, the leading manufacturers
took advantage of economies of scale to reduce
unit production cost. The cost savings was passed
on to consumers.
Industry observers believe that operation scale lower
than a million units has become unviable within the
present industry structure in China. The smaller
firms, as a result, have either gone bankrupt or been
taken over by one of the four leading manufacturers
- Konka, Chang Hong, Panda and TCL.

Excess capacity in the domestic industry

However, the Chinese CTV industry has been
plagued by chronic problems of over-capacity. The
extent of over-capacity is not exactly known, but it
is believed that the total CTV capacity in 1995 was
about 30-35 million units, which was far in excess
of the domestic demand of 15-16 million units and
exports of about 4 million units.
Over-capacity started in the mid-1980s, when a
number of CTV manufacturers imported technology
from Japan, Germany and the US. Close to 100
different production lines were set up 7. Overcapacity led to a fierce price war initiated by the
leading manufacturers. The then leading CTV
manufacturer, Chang Hong, (market share of 18%
in 1996) sparked the first of these moves in March
1996, cutting unit prices of its existing models by 818%. Other manufacturers, including Konka,
followed suit within a few months8. In June 1996,
Konka reduced prices of its television sets by as
much as 1200 Yuan and up to 20% (Konka Annual
Report, 1996).

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These staggering price cuts rendered the smaller

manufacturers unprofitable, hence triggering a huge

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The Government, on its part, has been exhorting

the TV manufacturers to merge in order to increase
the scales of operation to international levels.
Successful firms like Konka are offered fiscal
incentives and access to loans from domestic
commercial banks, to take over ailing firms and
increase its capacity. The State Development
Planning Commission and the Ministry of
Information Industries also plan to impose price
floors for 21-inch and 25-inch CTV in order to contain
the adverse effects of the price war and avoid sales
at levels below production costs10. For some time,
the Government also refused to grant permission
to set up new ventures in CTV assembly, either in
green-field projects or as expansion of existing
plants11.

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The latest in the long series of price cuts (the 7th

major price cut since the first move by Chang Hong
in 1996) took place in April 1999, when Chang Hong
again cut prices by 10% across a broad range of
products after it was laden with a large inventory
that reportedly reached a staggering 5 million units
at the end of 19989.

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Of the ninety TV manufacturers that were reported

to be operational in China in 1995, only 12 have
developed scale larger than 0.5 million units; many
manufacture merely a few thousand units a year. A
shakeout and re-concentration in the industry is
therefore inevitable. The restructuring will see most
of the smaller firms being eliminated or absorbed
into the larger groups. The price reduction has also
led to a decline in profit margins (see Exhibit 6 for
Konka's profit margins).

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The glut in the CTV market also affected the colour

picture tube manufacturers adversely. In June-July
1999, for instance, eight major colour picture tube
manufacturers (who together accounted for 90% of
Chinese colour picture tube output) voluntarily
suspended production for a month in order to set a

"Rising Sales Lift Konka Interim", Reuters Business Briefing (12 August, 1998).
Global Market Information Database [Electronic], Euromonitor, October, 1999.
J. Xiaojuan, "Chinese Government Policy towards Science & Technology and its Influence on the Technical Development of Industrial
Enterprises", Chinese Technology Transfer in the 1990s, (Edward Elgar, London, 1993).
8 "China Television Price War Hurts Listed Firms", Reuters Business Briefing (29 August, 1996).
9 "Where is China's Colour TV Industry Heading?", China Securities Bulletin 5 (May, 1999).
10 Chen Zhiming, "
ChanghongSpar
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Business Weekly, May 2, 1999.
11 "China Calls for Mergers of Lagging CTV Firms", China Securities Bulletin, (August 14, 1997).

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floor to the prices of picture tubes 12. This is yet

another indication of the extent of the over-capacity
problem and the intense competition that enveloped
the CTV industry in China.

Konka's CTV production volume expanded from 1.3

million units in 1994 to 4.77 million units in 1998,
i.e. a cumulative annual growth rate (CAGR) of 38%
(see Exhibit 8). It also produced more than a million
VCDs and DVDs in 1998. It targeted manufacturing
more than 6.5 million CTV sets in 1999.

KONKA IN THE DOMESTIC MARKET

In its initial years back in the 1980s, Konka started
as an export-oriented venture, with 85% of its
production earmarked under the SEZ's joint venture
laws for export. Most of the exports were sent to
Konka's Hong Kong based partner, Kong Wah.
Konka's production facilities in mainland China
constituted the major part (more than 50%) of Kong
Wah's total CTV assembly capacity. Kong Wah's
production was carried out mainly for private labels
(about 50%), OEM assembly for brands like RCA,
Emerson, General Electric and Akai (35%) and only
the rest (15%) was for sales in mainland China under
the Konka, Onwa, Great Wall and Kawa brand
names 13. Konka's manufacturing facilities were
therefore used primarily for OEM assembly of
foreign brands.

Konka started its acquisition spree by taking a 60%

stake in Heilongjiang based Mudanjiang Television
factory in 1993 for about 18 million Yuan. In 1995,
it took a 25% stake in Shaanxi Ruji Television
Factory, in which it has since consolidated its holding
by taking a further 15% stake through its 100%owned subsidiary in Hong Kong.
Konka also set up Anhui Konka Electronic Ltd as a
joint-venture in Chuzhou town with 65% equity
participation in 1996-97, and Dongguan Konka
Electronic Company in 1997 (Konka Annual Report,
1997). It thus established a triangular production
network straddling across the South, North-East and
the Eastern regions of the mainland. Its growth in
capacity between 1992 and 1996 was almost wholly
accounted for by its access to the new production
lines of the acquired companies.

Rapid growth of Konka in the 1990s

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Nevertheless. margin in the OEM export market was

a low 3-4%, compared to the healthy 10-15% in
direct sales to the domestic Chinese market14. From
1994 to 1995, Konka blazed a trail of rapid growth
in the domestic mainland market, helped by a series
of acquisition of ailing CTV firms in the mainland, a
process that culminated in its emergence as the
largest CTV player in the mainland market, with the
Konka brand finally coming of age.
Total turnover surged from 2.18 billion Yuan in 1993
to 8.57 billion Yuan in 1998 - an almost four-fold
growth in five years with an average annual
compounded growth rate of 31.5% (see Exhibit 6).

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In 1996, Konka was still looking at acquisition

options. It sought a 300 million Yuan loan from the
Bank of China (BoC) to fund the acquisition of
another troubled television maker. The Chinese
Vice-Premier Zhu Rongji pledged personal support
for the loan application, attesting to the active
Government support for Konka's expansion plans15.
Konka now operates five manufacturing facilities
to assemble CTV throughout China. It has also
invested in facilities manufacturing critical
components like "deflection yokes" and "tuners".
One of its subsidiaries moulds the plastic cabinets
used in its sets. (Konka's Interim Annual Report,
1999).

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From an export-oriented manufacturer, Konka

became more oriented to the domestic Chinese
market, which grew rapidly in the 1990s. As late as
1992, Konka exported more than 80% of its
production, and almost none under its own brand
name. Only a small part of its production, which it
sold in the mainland market, was sold under its own
brand.

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Exhibit 8 also shows Konka's growing share in the

mainland CTV market. Its share of the domestic
CTV market in 1993 was a mere 4.4%. By 1998,
the share had gone up to 25%. In 1995, it became
the second best selling CTV brand in the mainland.
In the second half of 1998, Konka emerged as the
top selling CTV brand in the mainland, ahead of
Chang Hong, till then the leading Chinese brand.
(Konka Annual Report, 1996 and 1998).

"Chinese Television Tube Makers Resume Production", China Securities Bulletin, (July 15, 1999).
"TV Maker Kong Wah Plans Bigger Picture", South China Morning Post (November 23, 1992).
"Shenzhen Konka Lists Foreign 'B' Shares", South China Morning Post (March 29, 1992).
"Shenzhen Konka gets Support from Vice-Premier Zhu for Funding Needs", China Securities Bulletin (June 12, 1996).

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This rapid expansion in the domestic market

necessitated huge investments by Konka to build
manufacturing facilities as well as the distribution
and sales/service infrastructure. From being a
Shenzhen based company, it has now expanded with
factories all over the country. It has also set up sales
and distribution companies to cover all the cities in
mainland China.

Foreign brand CTV sets are also marketed by the

subsidiaries of the MNCs that have established
assembly units in China. Sony, Matsushita,
Toshiba, Shar p and Sanyo together boas t
production capacities of close to 5 million units in
China. In 1994, such locally assembled foreign
brands commanded almost 25% share of the CTV
market.

In its drive to establish its brand in the domestic

market, Konka emphasized after sales service.
Konka has been one of the first CTV makers in China
to attempt differentiation on the basis of excellent
after sales service.

Since the rapid expansion of the domestic CTV

makers in 1995-96, the foreign brands' share of the
domestic market has fallen sharply. In 1999, for
instance, ChangHong and Konka, the two largest
Chinese brands, are expected to command close
to 50% of the domestic market combined, with
Konka accounting for more than 25%.

It has set up toll-free lines for sales/service

enquiries. Customers are assured of a service
response within 24 hours of lodging a complaint on
any Konka product. Konka has also put into
operation mobile service vehicles in the major cities.
Konka products come with complete warranty and
free after sales service for three years post purchase
(Konka Annual Report, 1996). It has a policy of
having one service engineer to every 1000 CTV
sets that it sells in a year in China16 .

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COMPETITION AGAINST FOREIGN BRANDS IN

CHINA

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In the mainland market, Konka faces competition

not only from Chinese brands like Chang Hong,
Panda, TCL, but also from foreign brands, most of
which have a presence in China. According to the
Chinese Ministry of Information Industry, in 1994,
40% of the CTV sets sold in the mainland were either
smuggled or legally imported, (breakdown of
imported and smuggled sets is not available). 24%
of the CTV sets sold in the mainland were foreign
brands assembled by the foreign firms' subsidiaries
in China and 36% were by local brands.

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Reports also indicate that the sales of Chinese

brands has been on the rise in the departmental
stores of affluent coastal areas like Guangzhou,
where foreign brands dominated traditionally. The
Chinese brands' market share rose because the
leading Chinese manufacturers priced their products
aggressively and upgraded the technical soundness
of their product portfolio. (The technological aspect
will be discussed in a separate sub-section).

Imports into China were not widespread, due to the

high import duties, 55% on completely built-up units
as of 199617. Imports are feasible only in the case
of some high-end models that are yet to be
assembled in the country. Import duties are
expected to fall and keep decreasing, though the
larger Chinese firms do not see this as a major
threat. However, smuggling of CTV sets into the
country is quite common, creating a large grey
market.

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Brand marketing of CTVs in China, by domestic and

foreign manufacturers, was a problem because of
the existence of a grey market of counterfeits and
fake products. The Chinese Government has been
sponsoring a consumer rights movement as an
means to tackle this scourge. It passed the
Consumer Rights Protection Law in 1993. The
Government's efforts to protect branded products
from low priced fakes and counterfeits, through laws
and propaganda, have helped firms like Konka
expand their market share as the grey market
shrank.
Similar efforts were made, though in a less overt
fashion, to promote indigenous brands over the
foreign competitors. In 1997, for instance, a twohour documentary on the World Consumer Rights
Day was telecast over the official Chinese Central
Television channel on 15th March. The footage
praised the famous domestic brands for attaining
international standards of product quality and
excellent after-sales service. Foreign brands were
castigated for failing to provide comparable levels
of after-sales service. The quality of foreign products
was also questionedV.

16 "Konka Gears up for 2000 Gameplan", Financial Express (21 December, 1999).
17 China Securities Bulletin (12 June, 1996).

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W hile the Chinese brands like Konka were

establishing themselves in the domestic market,
export of Chinese TV sets was facing problems. The
total export of Chinese TV sets in 1997, valued at
US$654 million, was a 12% decline from 1996 in
volume terms and 18% in value terms 18. This
phenomenon is seen in the context of tremendous
build-up of excess capacity in the domestic industry,
creating pressures for expansion into overseas
markets as a vent. At the same time, the export
market through the OEM route was shrinking.

GOVERNMENT SUPPORT FOR EXPORT AND

OUTWARD INVESTMENT BY CHINESE FIRMS
It was under the backdrop of excess capacity,
aggressive competition among domestic firms,
industry-wide restructuring and declining export
markets that the Chinese Government drew up plans
for the expansion of Chinese CTV firms into
overseas markets. This was true across many light
manufacturing sectors, in which the Chinese had
emerged as major manufacturers.
Nevertheless, outside China, there was hardly any
brand recognition for Chinese products. It should
be noted that the problem of excess capacity has
been dogging the Chinese TV industry for more than
a decade. But in the 1980s the local industry was
fragmented. It was only in the 1990s that significant
moves towards consolidation led to international
level of operational scale among the leading players,
hence enabling aggressive overseas expansion
through the promotion of Chinese brands.

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The Government also granted many manufacturers

(including Konka and appliance manufacturer Haier)
permission to set up manufacturing and assembly
facilities abroad in order to promote exports from
the mainland and to extend the reach of famous
Chinese brands in the international market.
MoFTEC and the People's Bank of China (PBoC)
drew up the blueprint jointly to help finance the
overseas expansion of these firms19. Beijing has, in
fact, made it clear that it wanted large multinational
conglomerates to form the backbone of China's
industrial development in the 21st century.
An important component of the package of
supportive measures from the Government has
been preferential access to large loans from one of
the five major domestic commercial banks. Konka
has been one of the firms to benefit from the
Government supported financial packages. BoC, for
instance, has been offering large financial packages
to Konka to fund its aggressive expansion
programme in the domestic as well as overseas
markets.

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The lower margins and inability to further expand

through the OEM route in many light manufacturing
segments prompted the Chinese Government to
champion the promotion of famous Chinese brands
in the international market. The Ministry of Foreign
Trade and Economic Co-operation (MoFTEC)
started declaring, every year, a list of industries that
it deemed fit to be promoted in the international
market. The leading firms in these industries enjoy
privileged access to loans from domestic banks and
financial institutions to fund their overseas ventures,
apart from other forms of assistance from various
government agencies (Exhibit 9 shows a list of such

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21

brands in 1999). Sectors under that list, in 1999,

included motorcycles, small farm machinery and
implements, television sets, refrigerators, washing
machines and electrical fans.

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Ac c or ding to the Co- oper ation Agr eem ent

between Bank and Enterprise, in 1997-98, BoC
granted Konka a preferential loan of 3.8 billion
Yuan (US$458 million), part of which was routed
thr ough the overs eas branc hes of BoC in
Australia, Malaysia and Singapore, to finance the
expansion of Konka's overseas subsidiaries. In
1998-99, a loan of 4.2 billion yuan was granted20
and in 1999-2000, the package was slated to go
up to 5 billion yuan21.
Part of the loan package was in the form of term
loans; but the bulk of it was in the form of trade
credits and short-term working capital loans. (More
than 80% of BoC's loan portfolio was of maturity
not exceeding a yearvi). In 1996-97, BoC funded the
Chang Hong Group, Konka's main competitor in the
domestic CTV industry, to the tune of 1 billion Yuan.
Similar packages had also been arranged for other
big Chinese firms expanding abroad.

Ministry of Foreign Trade & Economic Co-operation (MoFTEC) of The People's Republic of China, http://www.moftec.gov.cn.
"New Policies Aim to Encourage Processing Abroad", Reuters Business Briefing (August 21, 1999).
"Bank of China Backs Konka Group", Reuters Business Briefing (May 29, 1998).
"Konka Gets Expansion Facility", South China Morning Post (July 2, 1999).

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The cost of debt financing has been low for Chinese

enterprises. Real rates of interest in China have
largely been low throughout much of the 1990s due
to double-digit inflation rates (see Exhibit 12 for
inflation rates). Current inflation rate is tame, as
China has been experiencing deflation since 199899. Nominal interest rates were reduced drastically
to about 5.8% for a one-year term loan in 1999.
Real interest rates were slightly higher at about 67%, given negative inflation ratevii. Access to
financial resources, mostly in the form of low cost
debt support, has helped Konka grow so rapidly.

KONKA'S OVERSEAS EXPANSION

Konka's efforts in promoting its brand in the foreign
markets began in 1995-96, when it set up a
subsidiary in Australia to market Konka CTV sets. It
eventually formed subsidiaries in Russia, South
Africa, Indonesia. In December 1998 Konka entered
the crowded and extremely competitive US market
(see Exhibit 10). Konka entered India in mid-1999
and plans to set up its first overseas manufacturing
(assembly) facility in India. Konka's overseas
investments till now has been centered on creating
marketing and distribution assets in the foreign
markets.
Konka in Australia

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Konka in USA
Konka shipped its first lot of branded CTVs to the
US market, considered to be the toughest and the
most competitive, in October 1998. It debuted its
products at the annual Consumer Electronics Show
at Las Vegas in January 1999.

Konka adopted a low price strategy to penetrate the

market. Prices are at least 25% lower than
competing models. Consumers could buy a 68cm
stereo TV for AU$995, a 34cm model for AU$279
and a 48cm set for AU$489 at any one of the more
than 130 retailers around Australia. It also offered a

n
o
ti

The company set a highly achievable sales target

of around 2.5 lakhs CTV sets, mostly small screen
analog sets, in its first year of operation in the US.
It put in place a nation-wide service network and
offered customers a free replacement Konka set in
case of any problem within a year of purchase. It
plans to achieve annual sales of 1 million sets in
three years and to become one of the top 10 CTV
brands in the US in five years23. Konka views itself
as a '2nd-tier' supplier below firms like Matsushita
& Sony, relying mostly on the price point to sell its
products (also see Exhibit 11 for a price comparison
of Konka models & other brands in the US).

e
R
r

Konka entered the Australian market in late 1995

through a subsidiary called Konka Pacific Pty Ltd,
with its headquarters and warehousing facilities in
Victoria, near Sydney. In just three years, the biggest
television manufacturer in China succeeded in
grabbing close to five percent of the CTV market in
Australia. Industry analysts agreed that the
aggressive Chinese brand could double those
figures soon. Imports and local assembly of the
leading international brands dominated the
Australian CTV market; apart from some small
private label sales, there were no significant
domestic firms marketing CTV in Australia.

No

higher margin to the retailers and a three-year

warranty when most other brands carry only a 12month warranty. It also planned to introduce the first
HDTV models in Australia by the end of December
1999. Of the approximately 900,000 sets worth
about $650 million that will be sold by retailers in
Australia in 1999, Konka's share was expected to
be close to 40,000 sets, up from 1998 sales of just
10,000 sets. Konka aims to double its market share
by 200122.

o
r
p

c
u
d

Konka designed DTV and HDTV models and

launched them in the US market in June 1999,
pricing them significantly below competing brands
(see Exhibit 11). Currently, the CTVs sold in the
US are shipped from Chinese assembly plants, but
as volumes increase, Konka plans to set up an
assembly unit at Tijuana in Mexico.
Konka also claims to have captured a 7% share in
the CTV market in Russia and 5% of the Middle
East market in 199824.
Konka in India
Konka planned to enter the Indian market in early
1999 via a 3-way joint venture in which Konka would
have a 51% stake and Hotline Group of India and
Hong Kong based tuner manufacturer Wittis would

22 Familari, May 19, 1999.

23 G. Tarr, "Konka Aims at US Market", http://beta.cdad.com/twice/article, November 1999.
24 "Konka Targets US Market", Reuters Business Briefing (January 18, 1999).

AsiaCase.com

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have 25% and 24% stakes respectively. However,

Hotline backed out of the venture, thereby delaying
Konka's entry.
Konka finally set up Konka India with an investment
of Rs.50 crores and 70% equity stake. Konka sets
have been available throughout North India and by
June 2000, the company planned to make Konka
sets available throughout the country. The sets are
currently being imported or assembled through OEM
arrangements. A manufacturing facility, which would
be Konka's first overseas assembly plant, was on
the anvil in 2000.
Emphasis on after sales service would remain a
priority in India. The company is looking at having
an after-sales service staff to sales volume ratio of
1 in every 2000 units sold. The advertising budget
for 2001 was slated to be Rs.40 crores in an
anticipated sales turnover of about Rs.300 crores
(working out to 5% market share). Average monthly
sales, till end-1999, was about 11,000 units after
the launch in August 1999 (Financial Express,
December 21, 1999).
Konka has clearly achieved some initial success in
its overseas expansion. Whether it can build on it is
a different question. Nonetheless, Konka's success
brings out something that was known to observers
of international business for a long time.

o
f
t

Product development and technology acquisition

Access to advanced technology is often a problem
for firms from late industrializing economies. To
understand how Konka dealt with the challenges,
we first take a look at the product and some of its
technological parameters, in order to better
understand what the technology means in the
television industry.
CTV - The Product

In 1998, Konka's total exports exceeded 3 lakh units

- a substantial improvement over its 1997
performance. In the first half of 1999, it had already
exported 13% more CTV units than what it did in
the whole of 1998 (Konka's Interim Annual Report,
1999). Considering that in most markets the second
half of the year is the main buying season, total
exports by Konka in 1999 was very likely to exceed
its 1998 performance a few fold. Konka intends to
raise its export volume to 2 million units by Year
2000.
It may be worthwhile to observe Konka's choice of
foreign markets to expand to. Both Australia and
the US, unlike the European Union, do not have
any major domestic firm in the industry. Therefore,

n
o
ti

The CTV is a product of the mid-1950s, when the

first CTV broadcast was started simultaneously with
the existing B&W broadcast. In a sense, the CTV
was a second-generation television, a colourful
improvement over the first generation B&W set.

o
r
p

c
u
d

The CTV consists of a color picture tube (CPT), on

which the image is formed, and the 'chassis', which
receives the 'broadcast signal' and feeds it to the
CPT after processing it to eliminate 'noises'. The
basic product has remained almost unchanged till
very recently; technological changes have been
mainly incremental in nature.

e
R
r

Konka's outward investments have so far been

centered on creating marketing and distribution
assets in foreign markets. Konka has been a low
cost manufacturer of CTVs for a long time. But
expansion of its exports, through the OEM route,
faced bottlenecks. Exhibit 8 shows the decline in
its export volume in the mid-1990s. Overseas
investment and promotion of its own brand has
helped Konka reverse the trend.

No

in neither market did Konka face any protectionist

tariff or non-tariff barriers. Whether the choice of
foreign markets for initial entry was indeed based
upon these considerations is not known. But the
choice has definitely eased the process of Konka's
initial push into foreign markets.

Changes in the 'chassis' include incorporation of

features like multi-channel memory, picture-inpicture (PIP), automatic volume control and remote
user control. Improvements in CPT include increase
in the screen size and designing flat screens.
Another improvement in the CPT is the designing
of plasma models that are flat and thin and hence
wall mountable. It uses plasma technology instead
of the conventional electron guns to produce the
image. Technological improvements have mainly
been concentrated on incorporating new features.
Designing such new models and upgrading the
product is the key challenge for CTV manufacturers.
However, the arrival of DTV and HDTV in the 1990s
is expected to affect the CTV industry substantially.
Many believe that DTV and HDTV would emerge
as the next generation of televisions and all the
major manufacturers have developed design
capabilities in these (see Appendix 1 for discussion
on DTV & HDTV).
The CTV industry is what economists would call a
mature industry. In such an industry, manufacturing

AsiaCase.com

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technology is not a source of entry barrier. The

technology of manufacturing is either diffused, even
among firms in developing countries, or it can be
acquired through arms-length transactions without
giving up managerial independence.
Yet, the CTV industry continue to exhibit an
oligopolistic structure, setting high entry barriers to
new entrants.. An example of these entry barriers is
the entrenched players' marketing and distribution
assets, such as brand equity. Entrenched players
could exercise a strategic choice to compete by
differentiating and positioning themselves on the
basis of price or product features. Positioning of the
product portfolio is strengthened and buttressed
through investments in marketing assets.
A new entrant has to invest in marketing assets (like
'brand building') swiftly and substantially so as to
surmount the entry barriers effectively. Entrant firms
also need to be capable of absorbing the financial
costs of entry: for example, tolerating a prolonged
period of low or even negative returns, in order to
build up market share. Access to financial resources
could therefore be crucial in enabling the entrant
firm to pursue its entry strategy successfully.
Konka's technology acquisition efforts

No

Selling CTVs under one's own brand name,

however, required the capability to design the
models in-house. Designing small screen models
(up to 25-inch measured diagonally) posedlittle
problem, as the design knowledge was fairly
diffused. Small screen models also constituted the
major segment of Konka's CTV market. In 1996,
Konka sold about 1.7 million small screen sets and

25
26
27
28

Designing larger sized models and incorporating

new features were the real technological challenge
facing Konka engineers. In the 1990s, Konka spent
large amounts of money on new product
development. It currently spends 3% of its revenues
on product research and development (R&D). Global
industry leaders, like Sony, spend about 6-7% of
their sales revenue on R&D. Do note, however, that
with access to much cheaper skilled R&D personnel
in mainland China, Konka can engage in R&D of
the same level as the likes of Sony with much lower
financial resources. Currently, Konka renovates 30%
of the models in its product line every year25.
Konka's product development was particularly
successful when it developed its own model of large
screen CTVs in 1997-98: a 34-inch (87-cm) model
in March, 199726 and a 97-cm super large screen
model in March 1998 and put them into production27.
This was the first indigenous large screen CTV
model wholly designed in China.

o
r
p

c
u
d

n
o
ti

In 1999, Konka introduced the world's first colour

cabinet in its CTV models in the US market. Called
the "ART TV" series, this product line was available
in stylish steel blue, silver and wood-tone exteriors28
. This marketing innovation in part modelled after
the domestic appliance industry, which has for some
years introduced coloured appliances as an
aesthetic improvement over the traditional white
exteriors proved to be a success. Many other firms
emulated Konka's feat. Onida, a TV manufacturer
in India, was an example.

e
R
r

CTV manufacturers doing OEM production for other

brands do not usually design the product
themselves. They are supplied with the detailed
instructions on assembly and design. The
components are also supplied, either as semi
knocked down kits (i.e. where the chassis is already
assembled and the OEM manufacturer takes over
by putting the chassis and CPT together in the
cabinet and make the necessary soldering
connections) or completely knocked down kits
(where the chassis is to be assembled too), the type
of OEM assembly Konka was used to.

o
f
t

only 0.6 million large screen sets in the Chinese

market (Konka Annual Report, 1996).

Acquiring HDTV & DTV capabilities

HDTV and DTV are the two major technological
innovations that could potentially impact the CTV
market significantly. As discussed in the Appendix,
though the market is still in its infancy, it is
expected to drive the future growth of the industry,
at least in the US, the largest CTV market in the
world. All the major manufacturers have lined up
models in anticipation of substantial growth in
HDTV demand.

Xiao Wang, "Konka Emphasizes Digital Side", China Daily, 29 July, 1998.
China Economic Times,5 April, 1997, p.5.
"Konka 97-cm Large Screen Colour TV Born", Asia Info Services Inc, 27 March, 1998.
"
Konk
a'
sI
ni
t
i
al
Suc
c
es
si
nt
heUSPr
ov
est
hat
Ther
e'
sRoomf
orNewc
omer
si
nt
heCons
umerEl
ec
t
r
oni
c
sBus
i
nes
s

,
Business-Wire,
19 July, 1999.

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Develop its own model of HDTV was a challenge to

Konka. It became a member of the ATSC, (see
Appendix 1 for details) the association that
formulated the standard for the new age digital
broadcast. It also set up the US$10 million Konka
Technology Development Centre Co. Ltd in the
Silicon Valley in December, 1997, where part of the
development work for the new HDTV model was
carried out. W hile Konka owned 51% of the
development centre; the local technicians involved
in the development process owned the rest29.
Such a practice of setting up R&D centres in foreign
countries to gain access to available expertise is
not uncommon in international business. LG, the
South Korean chaebol, also set up its HDTV
development centre in the US30.
Konka's HDTV effort was successful. In the January
1999 Las Vegas Consumer Electronics Show, Konka
demonstrated its HDTV model and finally launched
it commercially in June 1999. It has planned to
market HDTV sets at US$3,000 each, about half
the price of currently available brands31. In fact,
some observers believe that Konka's HDTV is
certain to play a leading role in the digital revolution
re-shaping the US television industry. In order to
design sets compatible with the European standard
of digital telecast, Konka has also planned to start a
R&D unit in the European Union very soon.

o
f
t

LOOKING INTO THE FUTURE

Konka has already emerged as the best selling CTV
brand in China. Selling under its own brand and
employing a low price entry strategy, Konka has
succeeded in getting an initial toehold in many
foreign markets. Its exports have increased
significantly as a result.
Evaluating the experience of the emerging Chinese
MNCs, like Konka, at this point, it may be premature
to conclude whether they would become the new
giants, like some of the Japanese and Korean MNCs
have been or used to be; or whether their outward
investment thrust might peter out, resembling the
more modest experience of many Latin American
and Asian firms.What is interesting though, is the
fact that the story of firms like Konka looks so
uncannily similar to the story of the Koreans in the
1980s and the Japanese still earlier. Exceptional
financial support from the domestic banks and
financial institutions, strategic intervention by the
Government through sector specific industrial policy
and rapid expansion into world markets, reliance
on swift assimilation of imported technologies, were
the cornerstones of that model. The Chinese story
bears all these elements too.

e
R
r

W hat has helped Konka is the fact that the

development of HDTV has been a process that has
involved a lot of collaborative research among
leading electronics firms, the Government and
television broadcasting companies. As a result, the
new capabilities were not really proprietary to
Konk a's more technologically advanced
competitors.

No

would require some time, effort and substantial

financial investments in building up its brand. Its
success in the Chinese market against competition
from MNCs like Sony, Matsushita and Sharp, and
its initial success in the foreign markets, do indicate
that Konka has achieved some success in its product
and market development efforts.

Konka seems to have narrowed the technological

gap with the leaders in the industry. But convincing
customers that its products are of the highest quality

o
r
p

c
u
d

n
o
ti

In the aftermath of Asia's financial crisis and Japan's

ongoing economic woes, too many scholars have
written the epitaph of their growth model. Will they
be proved wrong again? Will the world look eastward
again to witness the emergence of the next
economic dynamo?

AsiaCase.com

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EXHIBIT 1
TOP 10 SHAREHOLDERS OF KONKA GROUP CO. LTD
(AS OF DECEMBER 1998)
Listed on Shenzhen Stock Exchange on March 27, 1992.
Company formed on December 1, 1979; reorganized on July 31, 1991.
Chairman: Zeng Ke-Lei; President: Chen Wei-Rong

Top 10 Shareholders
Overseas Chinese Town Group Co.
Overseas Chinese Town (HK) Co. Ltd
China Travel Service (Holdings) Hong Kong Co. Ltd
HK Kong Wah Electronics Group Co. Ltd
Templeton Dragon Fund, Inc
Guangjing Investment Co. Ltd
Taiji Investment Co. Ltd
Ever Crown Industrial Co. Ltd
Guangda Securities Co.
Haoda Industry Co. Ltd

Total Issued Shares

Equity Holdings

Holdings

(Yuan)

(% of total issued)

132,537,687
56,430,682
43,900,000
6,762,220
5,898,381
2,965,558
2,836,200
2,783,250
2,517,866
1,811,720
258,443,564

o
r
p

c
u
d

365,572,641

e
R
r

36.25%
15.44%
12.01%
1.85%
1.61%
0.81%
0.78%
0.76%
0.69%
0.50%
70.70%

n
o
ti

100.00%

Notes: Facev
al
ueofeachs
har
ei
s1Yuan.
Agr
oupshar
esar
ei
s
suedt
odomes
t
i
cChi
neser
esi
dent
sand
Inst
i
t
ut
i
ons
.
B
gr
oups
har
esar
ei
s
suedt
of
or
ei
gni
nv
est
or
s.

o
f
t

Ex
ceptOv
er
seas Chi
nes
e Town Gr
oup,ot
hershar
ehol
der
ss
hown i
n Tabl
e hav
e
Bgr
oup shar
es
.
Overseas Chinese Town (HK) Co.Ltd. is a 100% subsidiary of Overseas Chinese Town Group.

No

Shares can be
l
i
st
edor
unl
i
st
ed
.Unl
i
s
t
edshar
esar
enott
r
adabl
ei
nt
hes
econdar
ymar
ket
.TheKonk
a
shares held by Overseas Chinese Town Group and its Hong Kong subsidiary are unlisted. Transactions in
l
i
st
ed
Bgr
oupshar
esar
es
et
t
l
edi
nf
or
ei
gncur
r
ency
.
As ofDecember1998,61% ofal
lKonkashar
es,consi
s
t
i
ngof34%
Agr
oupand27%
Bgr
oupshar
es,
were unlisted. lListed shares -- making up 38.9% of all shares -- compr
i
sed26.
5% i
n
Agr
oupand12.
4% i
n

Bgr
oup.
Source: Annual Report of Konka Group Co. Ltd, 1998

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EXHIBIT 2
COLOR TV SALES IN THE LARGEST MARKETS
(BY VOLUME, IN '000 UNITS)
Country

1992

1993

1994

1995

1996

Argentina

1600

1800

1500

800

Australia

835

792

807

820

Austria

NA

410

418

416

NA

339.3

331.1

342.5

355

368

393

2654

3854

5630

6650

8787

7835.924

7950.48

Belgium
Brazil

1997

1998

960

1089

1148.54

833

845.25

856.91

414.5

408.5

405.3

Bulgaria

145

161

173

177

70.8

162

162.04

Canada

1497

1517

1538

1564

1591

1620

1648.65

Chile

501

543

525

753

790

829.5

864.59

China

16267.52

13916

14118

14260

14800

15100

15580

Czech Republic

354

371

382

396

415

439.9

Denmark

NA

300

320

345

370

345

Finland

NA

139

188

230

265

260

France

NA

3883

3695

3856

3829.01

Germany

NA

5420

5490

5490

Greece

NA

310.5

353.7

380.2

Hong Kong

402

415

430

India

1029

1200

1500

Indonesia

1130

1235

1343.2

Ireland

NA

143.7819

158

Italy

NA

2778

3100

Malaysia

461

504

Mexico

1097

1234

647.577

ot

r
o
f

pr

444

od
5510

415.7

uc

3857.087

n
o
ti
466.29
346
265

3904

5510.8

5525

368.3

369

470

475

467.32

2000

2280

2364.91

1460

1570

1599

1494.98

Re

1613
165

192.5

215

243.53

3240

3346

3402

3458.96

552

590

658

632.5

629.69

1445

1011.5

867

890.25

917.97

648

625

616

599

591

201.5

205.9

209

212

208

213.04

Norway

NA

196

231

217

226

252

267

Poland

503

501

515

770

874

1020

1070.54

Portugal

NA

507

507

550

530

550

539

Romania

516

529

539

489

384

297

290.63

Russia

3427

3616

3915

3366

2665

2505.1

2580.25

Singapore

460

465

469

479

490

497

505.76

Slovakia

161

173

181

210

230

246.1

265.79

South Africa

390

388

515

644

702

848.7835

874.36

South Korea

Netherlands
New Zealand

NA

210

2025

2099

2122

2153

2160

2095

2040.96

Spain

NA

1870

1584

1331

1463

1520

1555

Sweden

NA

450

465

445

420

440

481

Switzerland

NA

410.4726

410

377

373.23

369

366.786

Taiwan

886

895

903

899

850

818.8

845.82

Thailand

1448

1586

1720

1860

1941

1985

1928.74

Turkey

2354

1908

1495

1841

2455

4633

4856.1

NA

2821.4

2863.8

2884.5

3175

3245

3288.3

UK

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EXHIBIT 3
CLASSIFICATION OF GLOBAL CTV PRODUCTION: 1994-1996
(%, BY VOLUME)
Asia
Western Europe
North America
Latin America
Eastern Europe
Rest of world
WORLD TOTAL
Asia (excl. Japan)

1994
60.5
15.8
11.3
8.3
3.5
0.7
100(115 million units)
52.9

1995
60.1
15.9
11.2
8.7
3.4
0.7
100(118 million units)
52.7

1996
60.3
15.9
10.8
8.9
3.3
0.8
100(125 million units)
54.6

EXHIBIT 4

n
o
ti

THE WORLD'S TEN LARGEST CTV MANUFACTURING NATIONS IN 1996

China
South Korea
Malaysia
Mexico
US
Thailand
Brazil
Japan
UK
Indonesia

Million units
21.0
14.6
13.9
11.0
10.7
8.1
7.5
7.2
5.3
4.4

No

o
f
t

% of world total
16.8
11.7
11.1
8.8
8.5
6.5
6.0
5.7
4.2
3.5

e
R
r

o
r
p

c
u
d

EXHIBIT 5

THE LEADING MANUFACTURERS OF CTV IN 1995

Company
Sony Corp
Philips Electronics
Matsushita
Thomson Multimedia
Sharp
Toshiba
LG Electronics
Daewoo Electronics
Samsung Electronics
Hitachi
Mitsubishi Electric
Pioneer
Sanyo Electric
Others
World Total

% share of world market

12.4
10.6
9.8
8.4
7.9
6.9
5.6
5.4
5.3
5.1
3.1
2.9
1.4
15.2
100

Source: Global Market Information Database [Electronic], Euromonitor, January, 1997.

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EXHIBIT 6
CONSOLIDATED INCOME STATEMENT OF KONKA GROUP CO. LTD
(IN MILLION YUAN)
(IAS CONSOLIDATED)
1999/06 1998/06 1998/12 1997/12 1996/12 1995/12

1994/12 1993/12

Net Sales

3580

Net Profit

206.04 170

3059

8,574

6,343

5,006

3610

2400

429

348

346

265

226

2180
1
188

EXHIBIT 7
CONSOLIDATED BALANCE SHEET: KONKA GROUP CO. LTD
(
UNI
T
000YUAN)
Fixed Assets
Deferred Expenditure
Interests in associated companies
Long Term Investments
Current Assets
Cash and bank balances
Bills receivable
Accounts receivable
Inventories
Prepayments, deposits and other receivables
Current Liabilities
Net Current Assets
Total Assets less Current Liabilities
Long Term Portion of Finance lease Payable
Long term Bank Loans
Other Long Term Liabilities
Shareholders equity
Share Capital
Reserves
Minority Interests 1

No

o
f
t

1998
902,464
10,056
31,707
22,726
6,209,033
1,154,208
5
942,749
3,297,595
244,369
4,488,457
1,720,576
2,687,529
1,434
408,519
4,229
2,273,347
389,384
1,766,356
117,607

e
R
r

1997
798,266
13,530
28,047
22,726
4,457,657
464,602
827,836
308,149
2,626,278
230,792
3,328,292
1,129,365
1,991,934
7,558
296,878
2,415
1,685,083
365,573
1,232,636
86,874

o
r
p

1996
612,619
8,025
24,980
19,301
3,536,215
----------2,634,165
902,050
1,566,975
--46,000
846
1,520,129
365,573
1,094,520
60,036

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1995
529,770
3,155
80,008
19,531
1,846,193
----------1,734,002
112,191
831,080
--18,000
-813,080
281,210
500,828
31,042

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EXHIBIT 8
VOLUME OF PRODUCTION BY KONKA AND ITS SHARE IN
CHINESE CTV MARKET

CTV production

1993

1994

1995

1996

1997

1998

---

1.3

1.77

2.5

3.2

4.77

Export (in lakh units)

---

---

2.5

1.5

---

Market share in
Chinese CTV market

4.39

5.8

13

18

3.0

25

CTV production in million units

Konka Annual report, 1998 stated that exports in 1998 were more than 3 lakh units
3
Annual report 1997 stated that there was significant increase in exports over the 1996 levels
Source: Compiled from Konka's Annual Reports.
2

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EXHIBIT 9
LIST OF CHINESE FIRMS GRANTED NEW EXPORT PRIVILEGES
List of companies entitled to preferential policies, including the use of state funds for export promotion:
Sector
Appliances

Bicycles
Motorcycles
Garments
Others

BRAND (Corporate name in parenthesis)

Haier (Haier Group), Chunlan (Chunlan Group), Meidi (Meidi Holdings), Changhong
(Changhong Group), TCL (TCL Group), Kelon (Guangdong Kelon Co. Ltd), Konka
(Konka Group Co Ltd), Haixin (Haixin Group), Gree (Zhuhai Gree Group), Panda
(Nanjing Panda Group), Little Swan (Wuxi Little Swan Co. Ltd)
Forever (Shanghai Forever), Phoenix (Phoenix Co Ltd)
Qinqi (Jinan Qinqi Group), Jialing (Jialing Group Co Ltd)
Erdos (Inner Mongolia Erdos Cashmere Co. Ltd), Dawn (Dawn Garments Group),
Youngor (Youngor Group Co. Ltd), Three Gun (Three Gun Group)
Double Star (Double Star Group), Hero (Hero Gold Pen Co.), China (China First
Pencil Co. Ltd)

Note: Only companies with Shanghai or Shenzhen listed operations are shown. Full names in some cases
are corporate parent or affiliate of a listed vehicle.
Source: Reuters Business Briefings, April 19, 1999

EXHIBIT 10

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KONKA'S LIST OF SUBSIDIARIES

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Overseas subsidiaries: Konka India Ltd, Konka Indonesia Ltd, Konka (Hong Kong) Co. Ltd, Konka (USA)
Co. Ltd, Khabarovsk Konka Co. Ltd (RUSSIA), Konka Pacific Pty Ltd (Australia), Konka Technology
Development Center Co. Ltd.

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Chinese subsidiaries: Mudanjiang Konka Industrial Co. Ltd, Shaanxi Konka Electronic Co. Ltd, Dongguan
Konka Electronic Co. Ltd, Anhui Konka Electronic Co. Ltd, Changshu Konka Electronic Co. Ltd, Konka
Video Equipment Factory, Konka Communication Equipment Factory, Konka Precision Mould Factory,
Konka Plastic Factory, Konka Packing Material Factory, Konka Sales Company.

No

Source: Konka Internet site http://www.konka.com.

EXHIBIT 11
COMPARATIVE PRICES OF KONKA MODELS AND
COMPETING BRANDS IN THE US
Model
42 inch Plasma wall mountable
1
IDTV, 32-36 inch
32 inch wide HDTV
2
Set-top decoder SDTV
Set-top decoder HDTV

Konka price
US$ 8000
US$ 1200-1600
US$ 3000
US$ 500
US$ 1000

Price of competing model

Above US$ 10,000
Lowest US$ 2500 Panasonic
US$ 5000 10,000
NA
Lowest US$1400 Panasonic

IDTV is the Konka model that is compatible with VGA PC Signal input and therefore multimedia
compatible. It can also work with conventional analog signals
2

Set-top decoders are used to convert digital transmission signals to make them compatible with
conventional analog NTSC compatible TVs.
Source: TobiEl
ki
n,"
Chi
na
s Konka TV Tar
get
s Est
abl
i
s
hed SetMaker
s
,,http://www.konka.com, 19
February, 1999.

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EXHIBIT 12
BASIC ECONOMIC INDICATORS OF CHINA

1992
1993
1994
1995
1996
1997
1998

Growth rate
14.2
13.5
12.6
10.5
9.6
8.8
---

Inflation
5.4
13.2
21.7
14.8
6.1
0.8
---

Inflation
6.4
14.7
24.1
17.1
8.3
2.8
---

Exchange rate
---5.8
8.57
8.35
8.31
8.28
8.28

Growth rate of GDP at comparable prices.

Based on retail price index.
3
Based on General Consumer price index that covers all consumer goods and services.
2

Yuan was devalued from 5.8 yuan per US $ to 8.69 in January 1994. It has remained stable since then, with
the range of fluctuation being very small.

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Source: National Bureau of Statistics of China, China Statistical Yearbook 1998, http://www.stats.gov.cn.

No

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APPENDIX 1
BRIEF DISCUSSION ON DTV AND HDTV
DIGITAL TELEVISION (DTV)

Television broadcasts are made frame by frame. Each picture frame is scanned horizontally, and the
scanned signal is telecast. Conventional television broadcast consists of analog signals. A digital TV
(DTV), in contrast, uses digital broadcast signals. Digital broadcast requires much lesser bandwidth for
transmission than conventional analog signals.
In one of its crucial decisions, the Federal Communications Commission (FCC , which regulates the use
of the frequency spectrum in the US), set out a timetable for the rollout of digital television broadcast in
the US. According to the plan, starting from December 1998, all TV broadcast shall convert, in a phased
manner, to digital transmission. By Year 2006, analog transmission of TV signals shall be phased out in
the US. (For details refer to FCC Internet site http://www.fcc.gov/oet/faqs/dtvfaqs.html) Digital television
can be either HDTV (High Definition) or SDTV (Standard Definition).
High Definition Television (HDTV)

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HDTV is a form of transmission that provides greater picture clarity and higher resolution. HDTV picture
frames have an aspect ratio of 16:9, compared to 4:3 for conventional or Standard Definition television
(SDTV). HDTV frames have about double the horizontal scan lines (more than 1000 compared to 525 for
NTSC or the US SDTV Standard and 625 for PAL or European SDTV Standard) of SDTV picture frames,
hence the better resolution. HDTV signals also carry six track Dolby Digital Sound, which is expected to
improve the user's audio experience significantly1.

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The first HDTV Standard was developed in Japan, where satellite based HDTV transmission began as
early as 1989. The Japanese system, however, was based on analog signals and its high bandwidth
requirement was unsuitable as a standard for terrestrial transmission.

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US efforts to build up a HDTV Standard began in the late 1980s, amidst apprehension that Japan's lead
would translate into a disadvantage for US broadcasters. In December 1996, the FCC adopted the ATSC
(Advanced Television Systems Committee, which is an association of major consumer electronics
manufacturers and television broadcasters in US) Standard for Digital transmission (called A/53) - that
included standards for digital SDTV as well as digital HDTV. Some more countries like Argentina, S.Korea,
Canada and Taiwan have adopted the ATSC standard. (http://www.atsc.org).

No

The European Union has meanwhile developed an alternative standard called DVB-T. Many countries like
China and Australia are in the process of evaluating the American and European standards before adopting
it as the national standard for digital television transmission.
The first HDTV broadcast in the US started in December 1998. Though the rollout of HDTV till date has
exceeded the FCC mandated targets, doubts continue to linger about the viability of the new system. A
major problem with HDTV has been the fact that existing models of analog TVs cannot function with the
digital signals of HDTV broadcast. So, migration to a DTV or HDTV regime would necessitate not only
costly investment in equipment by broadcasters but also by the users, in new DTV or HDTV compatible
TV sets.
When CTV transmission began in the mid-1950s, the new transmission standard, at least in the US, was
compatible with the existing B&W TVs. So old set owners could continue to receive the transmission in
their old sets, albeit without the color. That made the transition to the new regime of color transmission
very smooth.

K.J. Kuhn, "HDTV: An introduction", http://www.ee.washington.edu/conselec/CE/kuhn/hdtv/95x5.htm, October 1999.

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APPENDIX 1
(CONTIUNED)
BRIEF DISCUSSION ON DTV AND HDTV
DIGITAL TELEVISION (DTV)

The new regime of 'next generation' DTV and HDTV broadcast, in contrast, is almost being forced upon
the consumers. HDTV sets are also much costlier than existing analog models. HDTV models, now available
in the US, cost between US$3000 and over US$10,000, while analog sets are available for as little as
US$500.
The FCC mandate for conversion to the new digital regime is, moreover, limited to terrestrial broadcasts.
The FCC has no purview over cable operators. Migration to the new regime would reduce cable operators'
ability to carry multiple channels, and they have therefore opposed any attempt to force a compulsory
migration to the new system.
Other technical glitches also remain in the new HDTV standards that would take some time to resolve and
stabilize. Thus, there are a number of imponderables that might affect the future course of development
of DTV & HDTV.

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It is perhaps in recognition of this that the US Congress recently introduced a condition that a withdrawal
of the analog transmission service from a region can be effected only when 85% of the viewing public has
access to digital transmission. Many are skeptical about the feasibility of the FCC target of completely
phasing out analog transmission by Year 2006. (A more detailed discussion on the problems of HDTV can
be accessed at http://coverage.cnet.com/Content/Gadgets/Special/HDTV/index.html)

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The manufacturers of TV sets, however, are optimistic about the growth of DTV & HDTV market in the
US. The Consumer Electronics Manufacturers Association (CEMA) of US estimated that by 1999, 1.2
lakh DTV sets would be sold in the US. Till November 1999, 1 lakh factory-to-dealer sales were recorded.
CEMA estimates show that more than 30 million DTV sets would be sold by 2006. Many consumer
electronics companies like Sony, Matsushita, Philips, Thomson, Hitachi and Konka have developed DTV
and HDTV models for the US market. There are about 15 brands of DTV available in retail stores in the
US2.

No

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t

"DTV sales top 100,000", Consumer Electronics Manufacturers Association (CEMA), http://www.dtvweb.org, 16 December, 2001.

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REFERENCES
(in the order of citation)
Peter Familari, "Konka Comes, Sees and Conquers", Reuters Business Briefings, May 19, 1999.
United Nations Conference on Trade and Development (UNCTAD), World Investment Report (New York, 1997) p. 311.
N.K.Chandra, "FDI and Domestic Economy: Neoliberalism in China", Economic and Political Weekly, November 6, 1999.
Nicholas R.Lardy, "The Role of Foreign Trade and Investment in China's Economic Transformation", The China Quarterly,
December, 1995.
"Rising Sales Lift Konka Interim", Reuters Business Briefings (August 12, 1998).
Global Market Information Database [Electronic], Euromonitor, October, 1999.
J. Xiaojuan, "Chinese Government Policy towards Science & Technology and its Influence on the Technical
Development of Industrial Enterprises", , Chinese Technology Transfer in the 1990s, (Edward Elgar, London, 1993).
"China Television Price War Hurts Listed Firms", Reuters Business Briefings (August 29, 1996).
"Where is China's Colour TV Industry Heading?", China Securities Bulletin (May 5, 1999).
Chen Zhiming, "Changhong Sparks New Television Price War', Business Weekly, May 2, 1999.
"China Calls for Mergers of Lagging CTV Firms", China Securities Bulletin (August 14, 1997).

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ti

"Chinese Television Tube Makers Resume Production", China Securities Bulletin (July 15, 1999).

c
u
d

"TV Maker Kong Wah Plans Bigger Picture", South China Morning Post (November 23, 1992).
"Shenzhen Konka Lists Foreign 'B' Shares", South China Morning Post (March 29, 1992).

o
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p

"Shenzhen Konka gets Support from Vice-Premier Zhu for Funding Needs", China Securities Bulletin (June 12, 1996).
"Konka Gears up for 2000 Gameplan", Financial Express (December 21, 1999).
China Securities Bulletin (June 12, 1996).

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Ministry of Foreign Trade & Economic Co-operation (MoFTEC) of The People's Republic of China, http://www.moftec.gov.cn.

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t

"New Policies Aim to Encourage Processing Abroad", Reuters Business Briefing (August 21, 1999).

No

"Bank of China Backs Konka Group", Reuters Business Briefing (May 29, 1998).
"Konka Gets Expansion Facility", South China Morning Post (July 2, 1999).
Familari, May 19, 1999.

G. Tarr, "Konka Aims at US Market", http://beta.cdad.com/twice/article, November 1999.

"Konka Targets US Market", Reuters Business Briefing (January 18, 1999).
Xiao Wang, "Konka Emphasizes Digital Side', China Daily, July 29, 1998.
China Economic Times, April 5, 1997, p.5."Konka 97-cm Large Screen Colour TV Born", Asia Info Services Inc, March 27, 1998.
"Konka's Initial Success in the US Proves that There's Room for Newcomers in the Consumer Electronics Business', BusinessWire, July 19, 1999.
Ren Kan, "Financial Package Supports TV Giant", China Daily, May 25, 1998.
L. Kim, "Imitation to Innovation: the Dynamics of Korea's Technological Learning", Harvard Business School Press,
Boston, Massachusetts, 1997.
"Refrigerator Plant Heralds Boost for US-China Trade Links", Financial Times, May 6, 1999.
P.M.S.Hameed, "China's Special Economic Zones", China's Economic Reforms - Role of Special Economic Zones and Economic
and Technology Development Zones, (Allied Publishers, New Delhi, 1996).
"China: A Double-Edged Sword', Reuters Business Briefing (April 18, 1997).
K.J. Kuhn, "HDTV: An introduction", http://www.ee.washington.edu/conselec/CE/kuhn/hdtv/95x5.htm , October 1999.
"DTV sales top 100,000", Consumer Electronics Manufacturers Association (CEMA), http://www.dtvweb.org, December 16,
2001.

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ENDNOTES

Konka Group Company Ltd was initially known as Shenzhen SEZ Konka Electronic Group Company
Ltd before changing its name in August 1995.

ii

Shenzhen Special Economic Zone (SEZ) is one of the first four SEZs set up by the Chinese Government
in 1979-80 as part of the post-Mao economic reform process. It is an area covering about 328 sq. km.
in the Guandong province. From Shenzhen, Hong Kong is just across a straits that separates the
Chinese mainland and Hong Kong. The importance of Hong Kong to Shenzhen is evident from the fact
that more than 85% of the contractual foreign investments into the Shenzhen SEZ till 1992 had originated
from Hong Kong. The SEZs are designed as enclaves where the new economic policy of encouraging
private enterprise and the workings of the market mechanism are experimented. They also serve as
outposts of the economy, more open to the outside world in terms of freer trade and investment norms.
Foreign investments are also promoted in these zones. Incentives include lower income tax rate of
15% compared to 30% (in respect of foreign funded enterprises) outside the SEZs. Enterprises exporting
more than 70% of their produce enjoy a still lower income tax rate of 10% in the relevant year. SEZ
firms also enjoy freer access to imports (source see footnote 3).

iii

Akai Electric is a 71%-owned subsidiary of Bermuda incorporated Semi-Tech Global, owned by the
Ting family. Akai also owns Sansui Electric Co.

iv

Summaries of Konka's Annual Reports are available at http://www.china-stock.net and http://

www.konka.com/cn/Financial/nb.asp.

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v The footage showed a consumer from the remote Guizhou province having to carry his Samsung CTV
to Beijing just to have it repaired. Another consumer in Guangxi province decided to give away his
Samsung VCD to his cousin in Beijing, as he was unable to get a minor fault repaired. The footage also
showed a consumer in Beijing calling up the after-sales service department of several refrigerator
manufacturers. Haier, the Chinese firm, immediately sent maintenance personnel to attend to the
complaint; two foreign firms did not even bother to reply to the call. The documentary also showed the
results of an official survey, which found the famous Chinese brands outperforming the foreign competitors
[see footnote 4].

No

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vi

Data from BoC's Internet site http://www.bank-of-china.com.

vii

Data from BoC's Internet site http://www.bank-of-china.com.

3
4

P.M.S.Hameed, "China's Special Economic Zones", China's Economic Reforms - Role of Special Economic Zones and Economic and
Technology Development Zones, (Allied Publishers, New Delhi, 1996).
"China: A Double-Edged Sword', Reuters Business Briefing (18 April, 1997).