By JIN FAN

A huge billboard indicating Philips' confidence in the Chinese market. CNSphoto

FOREIGN-INVESTED enterprises are appreciated in China for their beneficial affect on economic development. A solid commercial foundation and enterprise managerial expertise do not, however, guarantee unconditional respect and ongoing co-operation. The Philips Group is an example of a foreign enterprise that fell from grace in China owing to shortsightedness and lack of respect for its local counterparts.

An Initial Show of Willing

On first entering China, Philips was an enthusiastic patron of Chinese soccer. During the 1990s the group sponsored FA Cup competitions and Football League Group A matches, and helped establish the Chinese university students' football league matches. The group funded training in Brazil for the National Youth Football Team, and the Philips lighting division made donations towards construction of the Shanghai 80,000-seat stadium and the Guangdong Olympic Stadium.

Philips mobile phones on the Chinese market. CNSphoto

Philips also sent its top managers to give lectures at Chinese universities, donated funds towards the training of teachers for Project Hope and was instrumental in bringing the Dutch Philips Royal Symphony Orchestra to perform in China. Its corporate culture ensured Philips a smooth entry into the Chinese market.

Sacrificing the Chinese Market

Philips did, however, feature largely in dumping accusations leveled at Chinese TV manufacturers in 1988. During the following 12 years of lawsuits, Philips was a main plaintiff. The EU imposed a 15.3 percent anti-dumping tax on sets imported from China. This rose to 25.6 percent in 1995 and 44.6 percent in 1998. China's color TV exports to Europe consequently decreased year by year until they were completely absent from the European TV market. China's market share was then divided among European firms headed by Philips.

Philips played a dual role in these cases. As plaintiff, it obstructed Chinese goods from entering the European market, but having joint ventures in China, it was also a respondent. The benefit it gained was that of zero tariffs.

Similar dumping accusations against Chinese energy-saving light producers occurred in 2000. The EU Commission announced its acceptance of a lawsuit from three European energy-saving light producers. One of them was the Philips Group, which gained extra profits of US $1.4 billion as a result of the lawsuit. Philips obviously regarded the potential Chinese market as low priority compared to the lucrative European market, where the group's annual sales account for one-third of its total sales volume.

Philips thus forfeited all the respect it had formerly commanded in China. This was evident on June 16, 2002, when a high-ranking Philips official took British lawyers to China, offering to help Chinese enterprises with their legal affairs, and also to act as procurator, free of charge, for the Chinese energy-saving light manufacturers involved in the dumping investigation. The Federation of Chinese Energy-saving Light Manufacturers unequivocally rejected the offer.

Lost Trust and Opportunities

Philips had plainly regarded China as a pawn to be sacrificed. The shortsightedness of this attitude was soon apparent in the huge profits subsequently raked in by the group's competitors. In its 20 years in China, the IBM Electronics Manufacturing Division has achieved an annual growth of over 20 percent, in some cases 30 percent. Its annual business volume increased from US $30 million in 1993 to US $2.4 bullion in 2002.

Motorola's business has increased eight-fold during its eight years in China. The board of directors recently made an additional US $1 billion investment in Motorola's Tianjin facilities.

In March 2002, the Chinese market took over the Japanese slot as Intel's second largest international market and largest market in Asia. Intel has since moved its encapsulation base from the Philippines to Shanghai's Pudong.

Its half-baked approach to CDMA technology was another indication of Philips' low confidence in the Chinese market. In 1998 the group began research into CDMA chips, as did Motorola, Samsung and Sony. Philips invested a total US $200 million in CDMA research and development, but in September 2001 sold its R&D department to the Zhejiang-based Huali Group. As the CDMA mobile telecommunications market in China was slow starting, Philips lost its volition, and took the Sino-US plane crash in June 2001 as a harbinger of poor marketing prospects. At the close of negotiations between Philips and Huali, however, China Unicom initiated the CDMA mobile market, and Philips lost its slot.

Regaining the Chinese Market

Philips' reaction to its huge blunder was an attempt to start afresh. In the latter half of 2002, the group reestablished its business orientation in China, with 3G communications technology, medical equipment and semi-conductor chips as its core. The group then embarked on a campaign to redeem the Philips brand image in China.

In early 2003 when China was fighting SARS, Philips promoted its public image as a humane and caring enterprise through donations of medical equipment. On May 12, International Nurses' Day, Philips presented portable monitors, mobile X-ray machines, lighting, and communications equipment and household electrical appliances valued at 3.3 million yuan to the Chinese Ministry of Health and the Red Cross Society of China, plus 1 million yuan in cash from its staff. "As a transnational enterprise taking roots in China, Philips is aware of its social responsibility, and is willing to make its contribution towards defeating SARS," said Zhang Yue, president of Philips Electronics (China) Group. This marked Philips' reinstatement in the Chinese market.

The group has now found new economic growth points, having shifted its strategic investment from IT to manufacturing. On July 30, the Philips semi-conductor joint venture in China -- the Advanced Semiconductor Manufacturing Corp. of Shanghai (ASMC) -- started a new semiconductor production line, at an investment of US $687 million.

Having regained some of its former good standing in China, Philips is unlikely to lose future opportunities.

JIN FAN works for the Shanghai University of Finance and Economics.