Guangzhou Pearl River Piano Group Ltd. Business Information, Profile, and History

Company Perspectives:

Our mission is to pursue development at the highest quality in the industry. Our promise is to deliver to you, our customer, an heirloom quality instrument for you and for the generations to follow. You will find that our fine pianos, orchestra instruments, guitars and percussion instruments, from entry-level to professional, are of the best value for the dollar. If you wish to invest in a world class musical instrument, we sincerely hope you will consider a quality product from the Pearl River Piano Group!

History of Guangzhou Pearl River Piano Group Ltd.

Guangzhou Pearl River Piano Group Ltd. emerged in the 1990s as a leading manufacturer of upright and grand pianos under the Pearl River brand name. The state-owned company operates a massive 3.1 million-square-foot factory, the world's largest, that stretches along the banks of the Pearl River in the southern Chinese city of Guangzhou. In the center of the complex is a huge lumberyard and wood processing center; surrounding buildings contain the machinery necessary to fashion raw materials into soundboards, key actions, and cabinets. Although founded in 1956, Pearl River began to grow quickly only in the mid-1980s, after social and economic reforms in China created an environment more conducive to free enterprise. The company benefited from a surge in domestic piano purchases in the early 1990s, and began to focus heavily on Western markets by the end of the decade. Of the 85,000 pianos produced in Guangzhou in 2001, about 20 percent have been sold overseas. In addition to pianos, the company owns factories that make guitars, violins, and traditional Chinese percussion instruments. Pearl River President Tong Zhi Cheng has been instrumental in implementing the changes that gained the company a reputation for well-made pianos. His openness to advice from outside experts and willingness to invest heavily in up-to-date machinery has won the respect of the music industry. The company's combination of value and quality make it a formidable competitor for more established Japanese and Korean manufacturers.

Economic Reform and the Beginning of Growth: 1956-92

When founded in 1956, the Guangzhou Piano Factory consisted of six shops and about 100 employees. The company was organized by a group of reed organ dealers who decided to try their hand at producing pianos. After many tests and trials, the group put together a model that was purchased by a customer in Hong Kong. About 13 more pianos carrying the Pearl River brand name were sold over the next year. The Pearl River group was breaking new ground in China with the manufacture of pianos. Aside from a Shanghai company that had been started decades earlier by an English businessman, the country had no experience with the instrument. Consequently, Pearl River's early products were fairly rough in design and quality. In its first ten years of business, the factory imported components such as plates, actions, keyboards, and hardware from overseas companies. Production stood at about four units a month. The Chinese Cultural Revolution, beginning in 1966, prevented any substantial development at Pearl River, and production remained at less than 1,000 units per year into the mid-1970s.

In 1978 China initiated a series of economic reforms that paved the way for rapid sales growth at the Guangzhou factory. Production grew to 800 units per month in 1985. Meanwhile, interest in pianos was growing among the populace. As a result of China's one-child policy, parents tended to invest considerable resources in their child's cultural and personal development. Piano lessons seemed to be a good way to raise a cultivated, well-behaved child, and as China's relaxed export policy generated more disposable income in some families, national sales of pianos grew from 20,000 a year in the early 1980s to 60,000 a year in 1992.

Responding to growing demand, the Pearl River factory began to gear up for higher production levels. The construction of a new five-story, one million-square-foot factory in 1987 marked the beginning of a period of intensive capital investment. Tong Zhi Cheng, who took over as general manager in 1992, was a key figure in turning Pearl River from a mediocre domestic supplier to a respected manufacturer capable of winning customers in competitive Western markets. Tong had decades of experience with the company. He had joined Pearl River in 1959 on the recommendation of his father, who was one of the company's first employees. Now in the head management position, Tong made it clear that quality, up-to-date production would be Pearl River's number one goal. As he told Music Trades magazine in February 2001, "Fifteen years ago, dealers would come to the NAMM (National Association of Music Merchants) show, sit down and play our pianos, and then leave. Rather than continue in our ways, we took these criticisms to heart and set out to build a piano that could compete with other fine pianos of the world."

Pursuing Quality Production: 1992-98

A hallmark of Tong's approach was a willingness to learn from outside experts. He engaged Bud Corey, a onetime production manager for Wurlitzer piano, to evaluate Pearl River's production methods. Corey's suggestions prompted large investments in automated equipment and climate control systems. The entire department in charge of key and action production, for example, needed to be air conditioned in order to regulate humidity and eliminate the warping of keys. Numerically controlled machines were installed to cut keys, jacks, and hammers. Other foreign experts, brought in from Japan and Germany, evaluated Pearl River's cabinet finishing process. They recommended installing an Italian-built polyester finishing line, in which a computer-controlled machine applied the correct amount of polyester finish, which was then sanded and buffed by machine to a smooth glossy shine.

Such extensive investment in automated equipment was unusual for a company in China, where the price of labor was relatively low. Although Pearl River offered its workers such benefits as transportation to the factory, subsidized housing, free lunch, and medical and retirement payments, individual salaries were small, keeping the cost of labor much lower than in the United States or Japan. The company could have relied on more labor-intensive production methods, but Tong's goal was to implement the best production methods regardless of cost. When a job was best done by a machine, the machine was bought; those jobs best done by hand were left to workers. The final finishing and sanding of the piano plate, for example, was still done by hand by a team of dozens of workers.

Pearl River's capital investment programs paid off in numbers of pianos produced. Production quintupled to 4,000 units a month between 1985 and 1995. In addition, a 1995 joint venture agreement with Yamaha Corporation of Japan bolstered Pearl River's status as one of the world's major piano manufacturers. Under the agreement, the two factories would build a 200,000-square-foot piano factory in Guangzhou. The factory would be, in large part, an assembly plant, using parts supplied by both Yamaha and Pearl River. Pearl River would get 40 percent of the plant's output, with the remainder going to Yamaha. The venture was an opportunity for Yamaha to gain a foothold in the Chinese market, while also helping it make more competitively priced pianos for export around the world. In addition, it allowed Pearl River to observe firsthand the management techniques of a more experienced competitor. By 2000, the factory employed 250 people and was making 9,000 upright pianos a year. Each unit was labeled as a product of Guangzhou Yamaha Pearl River Piano Inc.

An event of ceremonial significance for Pearl River was a celebration of Hong Kong's return to China on July 11, 1997. In an event organized jointly with the municipal Party Committee, 97 Pearl River grand pianos were played together, accompanied by a 1,997-person chorus. The ensemble performed national favorites and newly commissioned songs for live broadcast. The event won widespread recognition for Pearl River pianos. The company declared that the advancement of Chinese culture would remain one of its most important goals.

The Chinese government recognized Pearl River as a valuable part of the evolving national economy and urged that several smaller city-owned instrument manufacturers, which had been losing money in the mid-1990s, become part of the successful piano manufacturer. Later in 1997, a guitar factory, a percussion factory, and a violin factory fell under Pearl River management. The companies returned to profitability after improvements in organization and productivity.

Another milestone for international credibility was reached in 1998. That year Pearl River was granted International Standard Organization ISO 9001 certification for its complete line of upright and grand pianos. The certificate was awarded after an independent audit team examined and approved all aspects of production, assembly, and service at the company.

Winning Over Western Markets: 1999-2002

The ISO approval would be helpful in marketing pianos abroad. Although domestic consumption of pianos was up to about 100,000 units a year, total production in China was around 130,000 in 1997. Smaller enterprises were struggling in the oversupplied market, but Pearl River hoped to retain solid profits through exports. In October 1999 the company opened its first foreign subsidiary in Ontario, California, ending about ten years of selling abroad solely through independent distributors. The Ontario, California facility consisted of a showroom and a distribution center. Once again, Tong followed his policy of seeking outside expertise to conquer unfamiliar territory. He hired Al Rich, an American with long experience in the piano industry, to manage the U.S. subsidiary. After two years, Rich succeeded in getting Pearl River pianos into about one-third of specialized U.S. piano retail shops. Sales in the United States increased every month for the next two years, despite an overall downturn in the U.S. piano market.

Also in 1999, Pearl River bought the German brand name Ritmüller. Pearl River planned to use scale designs based on earlier Ritmüller models to produce the pianos in a special section of the Guangzhou factory. Tong pledged that his company would use only the finest materials to produce world-class pianos that would preserve the European heritage of the brand, which had been founded in Germany in 1795.

The demand for pianos in China remained strong despite the Asian economic crisis. Some dealers reported that they hardly had to advertise or train sales people, since passersby would come in and buy an instrument for their children. Pearl River set a record of 64,000 domestic shipments in 2001, representing about a 60 percent market share in China. Nevertheless, domestic competition confirmed the company in a longer-term orientation toward export sales. Pearl River's U.S. market share, at 5 percent in 2001, was small but growing. The company exported 13,000 pianos that year, amounting to about 20 percent of company sales.

The vast majority of the pianos sold at home and abroad were uprights, but Pearl River hoped to increase its sales of grand pianos with the completion of a 500,000-square-foot addition to the grand piano production area. The new facility was designed based on ambition estimates for future expansion. Only 2,000 grand pianos were produced in 2001, with double that amount planned for 2002. The new facility, however, was designed to accommodate the production of 30,000 grands per year.

An increased focus on research and development activities was expected to support expansion. The R&D team grew from a staff of three in 1999 to 25 in 2001, and worked on designing new pianos as well as ensuring quality procedures for existing models. In addition, David R. Campbell, an American with decades of experience in executive positions at U.S. piano manufacturers, came to Pearl River as Director of Technical Services in September 2001. His task was to improve quality standards and production methods, particularly with respect to the planned export of grand pianos to the United States. Campbell evaluated Pearl River's existing grand pianos and came up with 22 points for improvement, all of which were implemented in less than six months in an effort to bring the company's grands up to world-class standards.

U.S. Sales Manager Al Rich explained Pearl River's dual focus on quality and value to Music Trades in April 2002: "We are very cognizant that our pricing provides a strong incentive to buy. But $6,000 for a grand is still a lot of money, and when you ask someone to part with that kind of money, the quality has to be there. A good selling price isn't enough." President Tong Zhi Cheng continued to be extremely responsive to the demands of the market and the requirements of quality production. He oversaw expenditures of $6 million in 2001 for new polyester finishing equipment, an automated cutting machine for soundboard ribs, and other woodworking machinery. Tong foresaw a continuance of Pearl River's rapid growth. He set the goal of being the world's number one producer of acoustic pianos by 2005, with 100,000 vertical pianos and 20,000 grands to be made each year.

Principal Subsidiaries: Pearl River Piano Group America Ltd.; Guangzhou Yamaha Pearl River Piano Inc.

Principal Competitors: Yamaha Corporation; Young Chang; Samick Musical Instruments; Baldwin Piano & Organ Company.

Chronology

• Key Dates:
• 1956: Guangzhou Piano Factory produces its first Pearl River piano.
• 1978: China implements economic reforms, and sales at Pearl River begin to grow.
• 1987: A new one million-square-foot factory is completed.
• 1992: Tong Zhi Cheng takes over as general manager.
• 1995: A joint venture agreement is formed to build a factory with Yamaha of Japan.
• 1999: Pearl River opens its first foreign subsidiary in Ontario, California.