Guangdong Kelon Electrical, a giant Chinese electronics firm selling mainly aircon and fridges has announced massive losses. In countries experiencing as much change as China, strategy is even more crucial, but in this case, they got it wrong.

Local auditors express 'great uncertainty' that the company will be able to continue operating.

Key to the problems is the ongoing fridge price war, one of the cases outlined in Piset's Awakening Dragon article several months back, where competitive companies built up massive unsold inventories and needed to unload them fast, slashing profit margins. One would think that such a basic consumer item as the humble fridge would be one of the first to sell as Chinese wages increase leading to better affordability. Add to this the company's targeting of the massive rural market with a mass consumer item, and you would have thought they had it made.

Not so.

According to Mario Zhu of ABN Amro in Shanghai, "...The company focused on the rural market and believed it would grow the fastest... They actually got it wrong..."

Kelon has also been characterised by bad management in the past, as well as a complicated set of ownership and partner relationships. This is still a major problem, expecially in traditional Chinese companies built on patronage and exchange of favours.

The great Chinese consumer revolution in the heartlands has been overspun. As government factories become privatised the usual result is increased levels of employment in the affected provincial areas and villages. Shanghai, Guangzhou and Beijing city dwellers may be the consumer kings at present, but the heartland is bleeding. Marketing to the middle class may make sense in these places, but as we have noted before several times, a mass working class consumer market in China ala the USA will take years to develop.