Back to the future

Making a smart comeback?

In its advertising campaigns, the television maker Hisense invites customers to “stimulate their senses”. The commercial hasn’t been having the same effect on its investors.

The Qingdao-based firm is a long-established manufacturer, principally of white goods like fridges and washing machines. Televisions are another major part of its business, although declining demand has hurt its profits.

Data from IHS Markit shows that TV sales worldwide fell 3.4% in 2017 and sales in China fell even further by 8.1%. Hisense’s net profits were down 46% year-on-year in the fourth quarter of last year. Profit growth moved back into positive territory in the most recent quarter, although the Shanghai-listed firm’s share price has dropped almost 20% over the last month.

Hisense wants to boost TV sales in overseas markets to more than 30% of its total revenues for that product. It has had successes in countries like South Africa and Australia, but it has found it harder going in larger markets, despite acquisitions of more respected marques. As we reported in WiC390, it acquired the 40-year rights to make Toshiba televisions for Rmb763 million ($120.22 million) last year. Before that, it also signed a five-year licence to make televisions under the Sharp brand for US consumers, although this led to a legal wrangle with the Japanese brand – now owned by Taiwan’s Foxconn – which sued Hisense for putting its name on what it said were low-quality products. Sharp only dropped the legal challenge in February.

Hisense now says that it wants to broaden its reach into display devices in general and, as part of the strategy, it plans to launch its first 5G phone offering next year, around the same time as Huawei.

At first sight this approach might seem self-defeating. Smartphone sales in China have just suffered their biggest decline ever, dropping more than 21% in the first quarter of 2018 compared with the same period last year, according to research firm Canalys. That spells particular trouble for the lowest-margin, second-tier vendors which differentiate themselves mainly on price.

For example, Caixin Weekly has described Gionee’s recent challenges as “China’s smartphone canary in the coalmine”. It grabbed sixth place in the sales rankings in 2017, with a 6% share, but overstretched itself after splashing out more than Rmb9 billion in marketing and investment over the past three years (see WiC402). In January a Shenzhen court froze founder Liu Lirong’s 41.4% stake for two years and Gionee has just laid off half the staff at its main production plant in Dongguan.

The Chinese press has now reported that Hisense is buying out some of Gionee’s distributors, primarily in southwestern provinces like Yunnan, Guizhou and Guangxi.

But Hisense is no newcomer to the sector. It first began to make mobile phones in 2001, releasing China’s first CDMA colour-screen phones and manufacturing a majority of the motherboards relied upon by other phonemakers.

However, it lost traction during the smartphone era as newer brands came into the sector. Now it wants to re-establish itself at the dawn of 5G, despite warnings from Huawei’s rotating CEO Eric Xu last month that operators will struggle to make money from implementing the new standard.

Hisense founder and chairman Zhou Houjian isn’t put off by the dog-eat-dog mentality in the sector, seeing it more as a signal that newcomers can have an impact. And Huawei will be one of the brands in his sights. Zhou says that Hisense generates enough cash from its current business to fund the drive into 5G and he thinks that smartphones have strategic significance as control centres for home appliances – many of which his company still manufactures.

Most of all, he backs his product development teams to come up with a competitive offering, arguing that Hisense is well-positioned as a research-driven firm, and not as a lower-end manufacturer.

“R&D determines the quality of products, which in turn holds the key to the development of manufacturing,” Zhou told reporters earlier this year.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.