Sunday, January 02, 2005

Why are Chinese TV's so Cheap?

Changhong, China's largest TV producer will report a huge loss this quarter because Apex, its main client in North America, which supplies Wal-Mart with cheap electronic goods, might be unable to service its liabilities. This story has very interesting twists, depending on how you look at it.

According to the New York Times
, the reason Changhong extended so much credit is because its incentives are not to maximize profit, but rather to maximize volume, and thus tax revenues (the government is the largest shareholder in Changhong). "The Mianyang government is heavily dependent on tax revenues from Changhong, and those revenues are calculated on sales volume, not profits..." Apparently Changhong signed up with Apex because its strategy of selling TV's to the Chinese simply wasn't generating enough volume. These distorted incentives are also the reason behind the lack of due diligence in the deal.

According to the Chinese state's news agency, the credit difficulties arose because of protectionist policies in North America.


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