Tet-a-tet. TCL Communication President speaks on TCL-Alcatel

After the merger of Alcatel’s mobile division with the Chinese company TCL, there were no in-depth overviews of what exactly the company was doing and which way it was planning to go, not to mention its vision of the Russian market. We thought that this gap had to be bridged and sat down with the CEO of TCL Communication, and a vice president of TCL Corporation, Fei Liu. It was his first visit to Russia. This one man has so many ranks, that we feel obliged to quote his short bio.

Dr. Liu Fei, is the CEO of the TCL Communication. He is also a vice president of TCL Corporation. He has over 13 years of experience in wireless industry in the USA. Dr. Liu was with TCL Mobile previously and rejoined the Company in January 2005. Prior to rejoining the Company, Dr. Liu was president and CEO of JCT Mobile, senior vice president and head of business and product strategy of TCL Mobile, wireless strategic business development manager of Texas Instruments, and chief scientist and application manager in Biomagnetic Technology Inc. Dr. Liu completed a PhD programme jointly run by The University of California and The University of Electronic Science and Technology where he obtained his doctorate degree of CDMA communication system analysis and design.

E.M. First of all, thanks for this interview, it is very interesting to learn about your company at first hand, about your plans in the Russian market, maybe in Europe as well. What do you think about current situation for TCL-Alcatel in Russia and maybe in Europe?

F.L. Yeah, thanks for the opportunity. I can tell the brand is currently run by TCL Communication Technology and we are actually running two brands now – TCL and Alcatel. TCL-Alcatel, the joint venture, is really a good integration between the French management team and the Chinese management team and actually there is substantial share of US management team as well. And overall the results of what we are doing in a global scale are very positive, because our position is very simple – we believe that putting European, Chinese and American teams together, eventually we should be able to create a China-based manufacturer serving the global market. And apart from this vision, we are doing everything on step-by-step approach, we are re-structuring the company, and have a long five-year plan, we really need to get profitable, because B-brands are really in trouble nowadays - we witness BenQ-Siemens getting into bankruptcy situation, we witness another B-brand losing more than a hundred million Euro even last year. And we actually maintain pretty low profitability, but in the current mobile industry environment we consider ourselves doing pretty well. Out of the 12 million units we produced, 5 millions were shipped to the North America, and 5 millions - to the EMEA market, a little more than 2 millions – to China. So we want to eventually balance out the shares, and get to 1/3 for the North American market, 1/3 to EMEA and 1/3 to the Chinese market. And we have been doing pretty well on the European market lately. Now back to the Russian market – it is actually my first time here and I really intend to understand how to position ourselves in the Russian market best. On the whole we are doing pretty well in Europe, as we are fundamentally engaging with the operators, while the Russian market is different, since most of the business here is done through distributors, we are simply trying to find what’s the best way to engage with distributors here, so that we could bring an alternative to the top three or the top five here, we simply want to create TCL-Alcatel brand, serving the Russian consumers with a very “French touch” with the price on the Chinese level. We don’t believe in quick leap, we really are looking at how to build up the Russian market step-by-step, so that’s why now we are looking at how to create brand value across Europe, North America and of course Asia and Pacific regions.

E.M. Most products by TCL-Alcatel are low-end solutions for the 100 Euro and less price-bracket. On the other hand, in Europe and Asia, Nokia, Sony Ericsson and Motorola are forgoing this kind of phones, having decided to move into the mid-tier market. What do you think about this decision?

F.L. Yeah, I have just mentioned the company positioning - we want to become a China-based company serving the global market. Now onto the product positioning, we believe the best place for us to start is mid-to-low end. Fundamentally because you will face tough competition with all these A-brands in mid-to-high or very high and of course everybody wants to get into mid-to-high, but based on our company’s current situation, our abilities, we position ourselves in the mid-to-low, which is less than 100 Euro price range. And while in this range as long as we can create economy of scale, I think it is still very sustainable business, and as we create a sustainable business we will eventually improve our position to a bit above the mid brand. It is really all about market competitiveness, in mid-to-high you have to face all the top players, but in the lower segments, the competition is less intensive.

E.M. I want to ask you about Sagem - another French brand, which used to be a real competitor to Alcatel’s mobile phones, and now Sagem will be producing low-end models for Sony Ericsson. What do you think of such cooperation? Will it be interesting for TCL-Alcatel to produce ODM products for some A-brands or you are focusing on own products, promoted solely by TCL Alcatel?

F.L. I think Sagem and TCL-Alcatel are fundamentally different - it is obvious if you look purely at the financial reports. Sagem mobile phones last year, in 2006, produced 12-18 million handsets at the cost of losing about 100 million Euro I don’t believe it is a sustainable business, just like I don’t believe BenQ-Siemens is a sustainable player. Yes, you can do some business in the low-end, but at the cost of a hundred million Euro – that doesn’t make sense to me as businessman. And we are producing 12 million handsets, but we are breaking even, so Sagem sustainability is in question. Now Sagem is helping Sony Ericsson in the mid-to-low end, but you have to find out whether the industry allows high R&D budget, as no matter how they do it, someone has to pay to bill, it doesn’t matter whether it is under Sagem brand or Sony Ericsson. So now, for TCL-Alcatel we are intending the ODM model, we’re serving both TCL and Alcatel brands, and we can’t rule out the possibility of serving strategic operators, for example, because at the end of the day, economy of scale is what matters the most for us. Fundamentally, I think T&A today enjoys solely financial performance, we have core competency, that’s in R&D and operation. And of course in the Sales and Marketing department we are trying to increase scale, but our cost structure is what separates us from the competitors, not the brand. Our cost structure, which we proved, is why we are different from Sagem, or Siemens, or other players including Philips. That’s why I still strongly believe that as long as we can build up our cost structure, good product portfolio, I think eventually the core competency will prove that we are a sustainable player.

E.M. You mentioned R&D center of TCL-Alcatel, and in this regard I would like to ask you about design, another important constituent these days. As I see it, you have invested a lot of money into design, how your handsets look, and their touch-and-feel qualities. Will you maintain this position in future, or you will prioritize hardware platform, like sound department, displays, etc?

F.L. We definitely care a lot about our design, particularly look-and-feel, as the technology has become more mature and product design does make a huge difference in how people feel about our product. So touch-and-feel is very important for us and we are trying to come up with devices that would be competitive in this field. We definitely invest heavily into new technologies, because I believe in the future of product differentiation, including 3G, WiMAX and GPS, NFC and now when we come up with these innovative products, our cost efficiency should be even better than that of our competitors, so we are not reducing our investment into touch-and-feel.

E.M. How many 3G-enabled products are you planning for the next year? Today you don’t have any handsets for UMTS networks.

F.L. At the end of Q4 we will introduce two WCDMA products, and one TD-CDMA solution, and WCDMA is really to follow the European standard, at the same time we will introduce the TD-CDMA product for the Chinese market, in 2008 we will introduce another batch of 3G products, 2/3 will be for WCDMA, 1/3 - for TD-CDMA. Our total product portfolio for 2008 comprises 24 models for Alcatel brand. Out of 24, roughly a quarter will be 3G-enabled.

E.M. Which TCL-Alcatel’s products are most popular on the market today?

F.L. Right now I think based on the results of 2006, our differentiated low-end is the most profitable and best volume-generators, and in 2007 we are trying to elevate that multimedia-end, there are few models that have been very well received particularly in Europe and North America, and we think we could be successful in Russia as well. So now I think it is really all up to the Russian market, whether it will allow another brand to flourish and exist, and there are challenges we are facing, but as a new French-Chinese joint venture, we have to overcome this.

E.M. Which of the EMEA markets is most important for TCL-Alcatel?

F.L. The most important region for us is China and we definitely have to perform well on this market. Then the North American market and the European market, which are equally important to us, particularly due to Alcatel’s French origin and I have strong will and determination to make sure that our brand is well-positioned in Europe.

E.M. There has been a lot of discussion on which brand you are going to use on the market: TCL-Alcatel, or Alcatel. But even today we find only Alcatel brand on the phones. When are you going to put TCL brand for the European market?

F.L. Actually the heritage of the “French touch” is something we want to keep, that doesn’t only mean the name, we also want to maintain the design. Our management team has 1/3 of French managers, 1/3 of Chinese and the other third is actually Western, including from the USA. So TCL-Alcatel joint venture today is actually not a simple Chinese company, it is really a China-based company serving the global wireless market, it is just like Motorola – it is not a purely American company, 99% of its staff is in China. And in the next 3 years we want to use Alcatel for everywhere outside China.

E.M. If we are talking about organization of TCL-Alcatel today – its headquarters are based on headquarters that previously belonged to Alcatel. Will it change in future? As far as I understand, you don’t have a local storage in Russia and you deliver products on CIF Moscow terms only. With Samsung and Nokia opening storages in the near term, will you establish such kind of business here as well?

F.L. That’s why I am here – I need to understand the market requirements, and if the market wants us to have a local storage, we will really have to take care of DDP and we will have to do what the market asks us to do. Today we are still sharing the offices but at the end of the year we will have our own offices, physically maybe they will be located together, but legally we have established our offices everywhere in the world, including Russia.

E.M. What about Chinese phones produced by small companies? In the Russian market there are loads of no-names phones made in China, that try to follow up models by Nokia or Sony Ericsson. Do you care about some kind of competition between TCL-Alcatel and these products in Russia or maybe in Europe?

F.L. This issue will always be around, and even when we become successful I am sure there will be copies of our products as well. I think we have to separate these two markets, because in Russia, where the ASP is very high we will always attract people copying sought-after, and this environment will exist for a while because of purely financial reasons. Our products sway more towards the mid-to-low end, and people replicating these phones have less incentive, while companies like Nokia, Motorola, Samsung, face a little bit different issue with this.

E.M. Which companies TCL-Alcatel recognizes as competition in China and Russia?

F.L. I think in the Russian market we are being positioned as a complementary brand to the top brands, so our chief competitors in mid-to-low end are Nokia and Samsung, and maybe Motorola, if it will stick to the low-end. Of course Sony Ericsson’s Sagem, but still, we have to wait and see how they position themselves. For the Russian market we are really dealing with top four. However the Chinese market is very different and TCL-Alcatel is really facing both ends there, on the top we are struggling against really tough competition, and at the bottom it is all another challenge, because there are at least, if not more, 50 local Chinese players all competing for huge numbers, as China annually has 140 million handsets per year with the top five having approximately 60-70 million, and there are 60-70 million more for people to grab. It is a different thing in Russia – market volume makes up 30 million with 25 million already taken by the top five, which leaves only 5 million for the rest. It is a different competitive situation.

E.M. Is it the price issue that makes for this situation on the Chinese market when no-name or B-brands control such huge market share?

F.L. In China the price issues are very different from Russia, based on what I know today, I think the top five has to be facing a very tough price competition in China, and ASP in China of Nokia, Motorola, Sony Ericsson, Samsung, LG is squeezed a lot by the Chinese local brands regardless of their top positions on the market. And in Russia 90-95% share is occupied by the top four. ASP is much better here.

E.M. Each manufacturer promotes some kind of specific feature in its phones – for Sony Ericsson it is Walkman, for Motorola – design and style and Nokia runs with the smartphone concept. Which kind of technology or concept does TCL-Alcatel promote?

F.L. Our key focus is fashion and music and we still believe in fashion and multimedia capabilities. That’s our product strategy.

E.M. The market has already seen several generations of the ELLE-phone. Are you going to roll out different variations of the ELLE in future, or there will be other fashion solutions?

F.L. We will continue with the ELLE-phone strategy and we will introduce ELLE 3 in the market in the second half of 2007, I think we have learned a lot from ELLE 1 and ELLE 2. I suppose the ELLE 3 will bring value and attraction to the market and particularly this phone should be a very good combination between technology and fashion design.

E.M. If we are talking about your future products, you mentioned that there will be more mid- and high-tier products like UMTS solutions in 2008. What audience are you targeting with these products? Will you aim at the same demographic as Nokia and Sony Ericsson, or you are plotting to position them as low-end 3G devices in each segment?

F.L. For generic products we are still targeting the mid-to-low end, even with 3G we will follow the same strategy. But we are definitely looking to differentiate our products, elevate our ASP, and create a niche market. Our main business will still focus on the mid-to-low end, as the major volume driver. But we will introduce niche products until 2008, to create new space for ourselves. We still compete with the top players in the mid-to-low segment, but in the mid-to-high market we are still a very niche player.

E.M. And what about smartphones – powered by Symbian or Windows Mobile – will we see these devices coming from TCL-Alcatel?

F.L. We will only introduce Windows-based smartphones, but we are not going to roll out only generic smartphones - we will come up Windows Mobile devices with advanced features, such as WiMAX connectivity or GPS, Near Field Communication.

E.M. When we are talking about generic devices, almost all Windows Mobile solutions share the same interface. Your products, with GPS, WiMAX and NFC connectivity options, will come with this default interface or you will try to come up with something different?

F.L. For Windows Mobile devices we are trying to follow the generic approach.

E.M. Why do you prefer Windows Mobile over Symbian platform? Is it easier to implement some features in these devices or there is another reason?

F.L. Fundamentally, it is because of the past investments we have put into Windows Mobile and we believe that the standardization of Windows Mobile makes development and field trials easier.

E.M. Could you describe TCL-Alcatel’s philosophy on the market, products, what are you offering to the consumers?

F.L. TCL-Alcatel is a China-based company, but if you look at the management team, it won’t look too different from many other companies and our philosophy is all about three words: We want to build a China-based company, We can be trusted and We are sustainable. Now, we are not going for short-term development, we really want to build a brand that can be respected. We take our time to do the right thing. The quality is number one concern to us toady. This is the foundation of any brand – we are proving it with low-end solutions, so now our challenge is to elevate ourselves to the next level, we need new brand features and of course we need to solve the fundamental issue – brand acceptance. But it is much like the sixties, when Japanese products were not accepted in the US or anywhere else, and 30 years later it is the dominant brand. It is a matter of when the technology and technical capabilities are ready in China, so that we can be a China-based brand serving the global market. It will take some time, of course.

E.M. Sounds interesting. And what about brand loyalty for TCL-Alcatel today?

F.L. So far we have been facing a mixed response. We have a decent level of loyalty in Europe because we are a European brand, and of course Russia is the area where we still need to establish ourselves, I think we are working hard on this. With the “French touch”, which is the Alcatel brand, as long as we put the right ingredients, good design, quality, features, I think TCL-Alcatel brand can be really successful. The fact of the matter is that the market definitely needs a player like us. All major operators we are talking to are facing a fundamental issue – the suppliers are very limited, and operators are working with us and working with ODM directly, because it is inconceivable that the world of wireless phones would be down only to three players, if that’s the case, the consumers, operators, all will be at the mercy of these players.

E.M. Speaking of B-brands on the Russian market, there are several of them and today. With Voxtel knocked out of the business, LG shifting into this category as well (since they sold just about the same number of phones as Alcatel) BenQ Mobile and Sagem gone, there is only a bunch of companies like Fly and TCL-Alcatel. Do you believe that it is enough for Russia, or some companies will invade the market soon?

F.L. With such big market in CIS area, and I pay attention to the local brands, because with the technology matured, a Russian brand teaming up with a Chinese-based manufacturer maybe one possibility. Now, as for a Chinese brand, whether it will come into Russia and be successful, basing on the track record, I think we are in the best position to achieve that. We are not here to sell some phone and walk away. We have come to establish ourselves as a really sustainable brand. We are here to understand to what it takes to create this sustainable business, and as you mentioned above, whether we will need to take car of local storages and DDP and then again, will the market allow for another brand. I mean you never know – I think three years ago nobody could imagine that Motorola would be in such shape in Russia, you don’t even mention Motorola anymore when talking about top 3. But that’s also the beauty about the mobile phone industry – it is such a big business.

E.M. It means that if someone comes to TCL tomorrow, for instance, and ask for private label phones without TCL-Alctatel signature on them, will you refuse such offer or run with it?

F.L. For strategic players we will consider ODM, which is, Original Designed Manufacturers models. Today we are serving TCL and Alcatel brand, for strategic players we will consider ODM business model for sure, and for example, let's say, for a major distributor or operator we will certainly consider it. Because we need to reach economy of scale. We need to get to the 25 million quickly.

E.M. What about plant capacity? How many phones could you produce today and how many phones you are actually producing?

F.L. We're are currently at 15 million capacity, our realization is a little over 80% so this year our production plan will 13 million. Because manufacturing is not really a core competency of a mobile phone company anymore, it's really about design, it's really about operation, it's really about the marketing.

E.M. Where you are making finalization of software before shipping mobile phones? At your plants or in some other countries?

F.L. We currently have two customization centers; one is in China and one in Mexico. So we use Mexico as a base to serve American Market, and China - to serve European and Chinese market.

E.M. And who makes localization for you products for the European market, for the Russian market? It's a local team in China or some companies in different countries?

F.L. Today we centralize everything in China, so in other words we customize the phones before we ship. For the European market, because the size of business, local customization does not justify itself yet.

E.M. Getting back to cost effective solutions, where do you reduce the cost of your own phones, because I see the plastic is really good, but on the other hand you have to sacrifice something?

F.L. The company has 4 key components in terms of costs. The first is the BOM cost, Bill of Materials, I think the bill of materials is where we don't necessarily have an advantage because our volume is not there. However we now have two key areas, one is R&D, one is Sales and Marketing. We believe our current Sales and Marketing is running as efficient as anyone else. And our R&D budget is at least 5% less than the top guys, but it is still around 30 million Euro a year, not a small amount of R&D. So now our operation efficiency, our operation resource, compared to other competitors so should also have a couple of percent. So if we add in the key areas, we should be looking at a double digit advantage in our pure cost. Then we're adding to our flexibility, our time to market, those two key core competencies will allow us to move very, very flexibly in the current environment, which is very, very import. But then again, the Russian market is also the most difficult market so far as I see, because the brand effect in Russian market is such a big deal and we are facing a very interesting situation here in Russia, that's why the copycats, I believe, could be doing pretty well.

E.M. When we're talking about price reduction for TCL, I have to mention marketing - you need to communicate with customers. You don’t have any big activities like outdoor advertisements, or TV ads like some other brands have. How do you make up for that, as when people enter a shop, be it in China or Russian, they see at least 100 different phones. Why should they look for Alcatel phones in particular?

F.L. I think it's a very interesting situation, and that's the reason I'm here. The brand awareness and marketing are very important in the Russian market particularly. At the same time we're facing, you know, like LG did a huge amount of marketing, and you know what happened to LG sales, at the end of the day, the bottom line is not there. At the end of the day, in the mid-to-low end we have very low profitability, and we do need to spend on marketing for sure, no question about that, it's just about how to do that effectively. We could use it in shops, billboards, or even plan a marketing campaign of some form. As we introduce mid level phones, particularly our multimedia phones, we are working closely with our distributors to put up marketing packages for the mid-level phones. For the ultra low end, and actually the products we had the last year we didn't spend much money on this.

E.M. Thank you for the interview. I'd like to ask you for some words for our readers, may be some wishes?

F.L. I'm personally fascinated by Russia, actually I did read a lot of books about Russia when I was a kid. It’s my first time here; I think Russia and China share a lot of common history. I think patience and persistence is the key for us to build up a brand, I truly believe with the proper planning and good execution by the local teams, and as long as we manage this brand building patiently and persistently I think we'll eventually get to the Russian customer's heart. At the end of the day it's about a good product at a reasonable price. I think it will just take time.

Eldar Murtazin ([email protected])
Translated by Oleg Kononosov ([email protected])

Published — 18 July 2007

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