TCL came out of nowhere to capture the US TV market. Up next: cheap phones.
TCL's Roku partnership helped the company grow fast, but its margins remain thin.
After capturing the U.S. television market with aggressively priced Roku TVs, China's TCL wants to replicate that success with inexpensive phones, IoT devices and connected appliances — and in the process, turn its still relatively unknown brand into a household name.
In other words: TCL wants to be the next Samsung.
It won't be easy. The phone market, TCL's next target, is firmly dominated by Apple and Samsung and hard to penetrate for newcomers. The company also faces headwinds from the Trump administration's ongoing trade war with China, as well as political resistance to fellow Chinese tech companies like Huawei. And while TCL's partnership with Roku has been key to building its U.S. TV business, it has also forced the company to operate with razor-thin margins as Roku cashes in on a rapidly growing advertising business that's been a newfound source of revenue for other TV manufacturers.
Premium phones for $500 or less
TCL was founded as an audiotape manufacturer in China's Guangdong province in 1981. It has since become a growing force in the consumer electronics industry, manufacturing phones, TVs and appliances that are sold worldwide under a number of brands. In 2019, TCL sold 32 million TVs globally, it recently told investors. Across all of its businesses, TCL's 2018 revenue amounted to $16.3 billion, with a net profit of $586 million.
Two-thirds of TCL's TV revenue already comes from overseas, and the company is looking to grow its international business even further. TCL is set to officially enter the U.S. smartphone market under its own brand in the second quarter of this year. After spending the last few years slapping licensed names like BlackBerry on phones it manufactures, the company previewed its first line of TCL-branded handsets at CES in January. It's expected to reveal official launch dates, specs and carrier partnerships at Mobile World Congress in Barcelona later this month.
"This is a very important milestone for us," said TCL general manager of global marketing Stefan Streit.
TCL's phones, which use Google's Android operating system, are expected to offer many of the same features as other flagship phones this year. The TCL 10 Pro, for instance, will have four rear-facing cameras and an in-screen fingerprint reader, the same specs that have been rumored for Samsung's upcoming S20 line of phones.
A key differentiator: TCL will sell the 10 Pro for less than $500. The company is also aiming for a sub-$500 price tag for its first 5G phone. By comparison, 5G phones currently available from Samsung are priced $1,299 and up. These aggressive prices could be appealing to consumers, who often have to choose between $1,000 flagship phones and cheap $200 handsets geared toward the prepaid market. "The mid-end segment has been a little bit neglected," Streit said.
There are other companies vying for that midrange spot, including Chinese phone specialist OnePlus and Google with its cheaper Pixel 3a. However, carriers still steer most of their postpaid customers to high-end models, providing a potential opening for TCL. "There is this gap in the market," said Techsponential analyst Avi Greengart, who has been following the company closely for years, and is cautiously optimistic about its prospects. "TCL is well positioned," he said. "They have good carrier relationships. They make quality phones."
TCL's surprising rise as a TV giant
Selling quality hardware cheaper than brand-name competition was the key to TCL's success with TVs. When it entered the U.S. in 2014, the company's sets made up just 1% of TV sales in North America, with TCL ranking 13th among TV brands, according to IHS Markit data. To kickstart the market entry, it struck a deal with Roku, and it was among the first TV manufacturers to integrate Roku's operating system directly into TVs.
"They really jumped on it," recalled Roku Chief Marketing Officer Matthew Anderson. "We knew they were very, very efficient manufacturers who had ambitions to grow."
Roku gave TCL a functioning smart TV operating system that already ran apps for most of the major streaming services. It also lent the company brand recognition. Consumers may not have known what TCL was at the time, but they knew Roku for its streaming boxes.
That brand awareness was key to the partnership from day one and continues to this day. TCL Roku TVs ship with remote controls that look just like those of Roku's streaming devices, and the promotional art prominently features Roku's user interface, as opposed to glossy shots of football players and flowers used by other brands. "We redesigned all the packaging," Anderson. "We changed the marketplace."
TCL's partnership with Roku was accompanied by substantial investments into its manufacturing capabilities. While other TV brands buy screens and other components, TCL makes almost all of the hardware components in its own factories in Asia and Eastern Europe as well as Central and South America. "TCL is a vertically integrated manufacturer," Greengart said.
This allowed the company to gain market share by undercutting the competition. By the end of 2016, TCL was already the eighth-largest TV brand in North America. During the first nine months of 2019, it had shot up to No. 2, according to IHS Markit.
Cheap TVs don't make a lot of money
While aggressive pricing helped TCL surpass legacy brands like LG and Sony in the U.S., it also contributed to a notable downward trend in TV pricing: The average purchase price of a TV declined by around 60% between 2014 and 2019, according to Bureau of Labor Statistics Consumer Price Index data.
These days, consumers can walk into a store and buy a 55-inch 4K TV that runs all the popular streaming services for about one-third of what they would pay for a new iPhone. That leaves a very low profit margin for TV manufacturers like TCL. "We make up for it in volume," said Aaron Dew, TCL's North America director of product development.
Even so, TCL executives are aware that they will need to secure additional revenue streams. The company even admitted as much in a white paper shared at an industry event in 2018, warning that "high competition narrows profit margins," adding: "When solely relying on their 'core business' model, manufacturers leave monetization potential of smart TVs untapped."
That same presentation held up its partner Roku as a prime example of a diversified business model. Roku has long used cheap prices to grow its user base and monetized those users through advertising and services revenues. In Q3 of 2019, 69% of Roku's revenues came from its non-hardware businesses, which at the time had a gross profit margin of around 62%, compared to a hardware profit margin of less than 8%. Roku could be seen as "a role model" for smart TV manufacturers looking for new revenue streams, TCL's white paper concluded.
A complicated love affair with Roku
There's only one problem: Roku doesn't share its advertising and services revenue with TV manufacturers like TCL, Protocol learned from multiple industry insiders with knowledge of these relationships. What's more, Roku controls virtually all aspects of its operating system on TVs manufactured by partners, making it much harder for TCL to promote its own services.
That's very different from the way other TV platform providers engage with hardware manufacturers. Google, for instance, gives TV makers a dedicated section on the Android TV home screen to highlight apps or content of their choosing, which some device makers have been using for paid promotions.
Amazon is said to offer partners financial incentives as well. Amazon's general manager and vice president, Marc Whitten, declined to comment on specific deals with hardware manufacturers during a recent conversation with Protocol but acknowledged that there is an industry-wide shift toward recurring revenues. "It would be rare to find a hardware company that's not thinking about downstream revenue these days," he said.
TCL is said to have pushed for a change to the terms of the deal, but Roku rebuffed those efforts, according to one of our sources, who spoke on the condition of anonymity. It's very unlikely that TCL would abandon Roku for the U.S. market, but the company has been using other TV operating systems, including Google's Android TV, in other markets, as well as for some of the white-labeled TVs it sells stateside.
TCL's Dew declined to comment on the financial relationship between the two companies. "All I can say is: It's been a good relationship," he said, calling it a "win-win" for both companies.
Roku's Anderson also declined to comment on specifics, but pointed out that it was cheaper for a TV manufacturer to use his company's operating system than the one on other smart TV systems due to lower hardware requirements. He also pointed to higher customer satisfaction ratings for Roku's system, which led to fewer product returns. "We bring a lot to the party," he said. "It's a really great partnership."
A different kind of Chinese company
TCL is not the first Chinese consumer electronics company that has tried to take on North America, but previous attempts have largely failed. Phone upstart Xiaomi circled the U.S. for a number of years, and even at one point hired former Google Vice President Hugo Barra, who had been the face of Android. However, Xiaomi's phone business has always heavily relied on online sales, bypassing the carriers that still have a stronghold on phone sales in the U.S. Ultimately, Xiaomi decided to focus on developing markets.
Chinese conglomerate LeEco made headlines in 2016 when it tried to acquire TV manufacturer Vizio for $2 billion to accelerate its U.S. expansion. In addition to TVs, LeEco also aimed to sell phones, services and even electric cars. Its lofty plans included the proposed construction of a San Jose office park with room for up to 12,000 employees. In the end, the company's ambitions were much grander than its financial resources, leading to an implosion of its U.S. operations.
Chinese electronics giant Huawei was ready to launch a significant partnership with AT&T two years ago, but the carrier pulled the plug at the 11th hour following pushback from members of Congress, who alleged security risks due to the company's close alignment with the Chinese government. Huawei has since found itself targeted by regulators who have deemed the company a foreign adversary, and aim to stop U.S. corporations from doing business with it.
Streit argued that TCL is in a very different position than its peers. For one thing, it doesn't manufacture the kind of backbone wireless infrastructure that's been at the core of allegations against Huawei. He added that the company also doesn't supply chips to others, a reference to a disputed Bloomberg report about Chinese vendors adding hardware backdoors to servers used by Apple and Amazon. "We are not targeted for the same reasons," he said. "We are a bit the white knight."
What's more, TCL is not entering North America cluelessly. The company has been producing budget phones for U.S. carriers under the Alcatel brand, which launched in 2004, for years. In 2017, TCL also began releasing phones under the BlackBerry Mobile brand, a partnership that is slated to end this summer as the company shifts its focus to its own brand. "We have a very good understanding of this market," Streit said. "It's not new to us."
"They have shown that they know how to build a business in the United States," said Greengart, who argued that TCL's use of its own brand for its new phones is significant as well. "The company is confident in these products."
Phones, TVs are just the beginning for TCL
Still, there are plenty of challenges ahead for TCL. One of them is the threat of tariffs, which still aren't completely off the table despite an initial trade agreement between China and the U.S. Streit argued that TCL will be able to mitigate such risks due to its global manufacturing footprint, but also admitted: "We are not a fan of these taxes."
The company also has yet to announce carrier partnerships, which will be key to making inroads with consumers. "The challenge is marketing and distribution, and getting to change consumer behavior," Greengart said.
Most consumers still buy their phones directly from carriers, effectively financing them over multiple years. And while a $500 phone may look like a much better deal than a $900 phone, paying a few more bucks per month doesn't hurt nearly as much, he warned. "I think that they can succeed, but it's going to be a tremendous challenge."
Then again, TCL doesn't have to rely on its phones alone to kickstart other businesses. Instead, it can use the growing brand awareness for TCL TVs to launch new product categories and even services down the line. And there are signs that the company has already started to experiment in that field. Dew didn't want to comment on any plans for services around the company's TV business during the interview for this story, but the company recently began testing two video apps, including one dubbed Zoom that's geared toward children, on Roku TVs.
Streit said that his company was looking at North America strategically. "For TCL, it is a long-term play," he said. Over time, this could include many more devices. TCL has already started selling devices for the connected home, including smart locks and air conditioners, in other markets. And at CES, the company previewed bendable and foldable phone screens, as well as a prototype for a VR headset optimized for media consumption.
"This is just the beginning," Streit said.