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by Clay Chandler

TCL's Li Dongsheng pulled off a deal that makes him the world's largest TV manufacturer - and Asia's Businessman of the Year.

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 wide-screen 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 is that 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 recognised the sound of "His Master's Voice"? Li cocks his own ear, clearly baffled.

The canine icon wouldn't register with most Chinese executives. But Li has a special interest. 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 $3.6 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 its Bloomington, Ind.-based subsidiary, 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. No company has a better chance of becoming China's first truly global corporation than TCL.

That is why Li is fortune's choice for Asia's Businessman of the Year. This is a risky pick. Acquisitions often don't work out as intended, and this one in particular is fraught with uncertainty. But Li gets the nod for his daring - and for what he has accomplished so far.

While foreign giants like Motorrola, Nokia, Toyota and General Motors have poured hundreds of billions of dollars into China, only a few Chinese companies have ventured overseas. Haier has nearly half the US 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, which makes 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. But what really sets TCL apart is strategy.

Haier and Lenovo are venturing abroad cautiously. Li is bulking up fast. With the Thomson deal, he 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 Phillips:

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 reinvent itself as a truly market-oriented concern. To that end, he has lobbied tirelessly to minimise 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 foreign partners own 14%. 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 privatisation. "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 is a 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. Still he says he bears no grudges gains the Communist Party. Feted as an "outstanding youth" and "model worker" he recently became delegate to the National People's Congress.

In conversation, though, he is more apt to cite the wisdom of Jack Welch or former IBM boss Louis Gerstner than that of Marx or Mao.

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 economic 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 television, up 43% from 2002. Of that total, 3.8 million were sold overseas, mostly under brand names like Phillips, 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 Shanhai in 1999, Li vowed that over the following decade TCL would increase sales tenfold and vault into the Global 500 as a "worldclass 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 realise greater economies of scale.

Thomson's plants also give 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 "Thomson" as his English name for decades, urges a longer view. "The chance to purchase a truly global colour television company just doesn't come along every day," he says.

"We looked at the risks, but it seems to me that this was a unique opportunity. "For Li, the question is whether jumping at that opportunity will help TCL get better, rather than just bigger. And for China, the question is, 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? As an announcer speaking on a TCL television might say, stay tuned.

(Courtesy: Fortune Magazine)

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