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HONG KONG, Mar 16 (Reuters) As rising costs and cut-throat competition put pressure on small and medium-sized companies in China, forward-looking manufacturers are looking to develop their own brands to maintain profit margins.

Their aim is to tackle China's conspicuous failure so far to emulate the likes of South Korea's Samsung Electronics and LG Electronics, which have followed the lead of Japan's consumer electronics giants and carved out lucrative global names for themselves.

''We're a factory, we're not Sony, but the world is changing and we'll do whatever retailers require,'' said Thomas Lam, president of marketing at Starlight International Holdings Ltd.

Generating HK$1.9 billion (US$244 million) in annual turnover, the company makes small TV sets and other audio-visual products in southern Guangdong province for retailers such as Wal-Mart Stores Inc.

Shifting away from producing for other companies -- known as original equipment manufacturing (OEM) -- to designing more goods in-house and selling them as its own brands has helped Starlight's average net profit margin recover to 6 per cent.

A year ago it slumped to 1 per cent as the company was unable to pass surging raw material costs on to customers.

Investors have applauded the strategy switch, sending Starlight's stock price up 36 per cent in the past year.

However, consumer electronics makers in China face continuing challenges as an expanding choice of suppliers enables big retailers to squeeze them on pricing.

''It's really tough,'' said Linda Jackson, who works on overseas marketing with privately owned Shenzhen Godwing Electronics Co Ltd.

''Every year, the big retailers want cheaper, cheaper, cheaper and will go somewhere else.'' Competition and rising rents on high streets at home are adding pressure on retailers to slash costs, she said. As a small producer of high-quality goods, Shenzhen Godwing can no longer compete on price and this year stopped supplying Wal-Mart.

Instead it is developing its Pixvers brand -- featuring 7-inch liquid crystal display TVs for the car and waterproof television sets for the bathroom -- aiming to launch it in Europe before this summer's World Cup soccer tournament.

''We're selling a concept,'' said Jackson.

LONG SLOG In brand development, smaller manufacturers in China are following big players like Haier Group, whose mini-fridges are a hit in the United States.

The Chinese government is encouraging the trend as a way to boost corporate profits and promote China Inc. as a value-added, not just the lowest-cost, producer.

Results have been mixed so far though. Even Haier said recently that it is not yet an international brand because overseas sales contribute less than a third of its profits.

Among small and medium-sized firms, Hong Kong-owned companies like Starlight have had a head start in manufacturing in China in the past two decades. But few have gone on to build brand names.

Esprit Holdings Ltd., the world's fifth-biggest clothing retailer by value, is probably the best known.

''Hong Kong companies have been good at manufacturing but not so good at developing an overseas sales strategy,'' said Howard Tsang, a partner at lawyers Wilkinson&Grist in Beijing.

''Developing your own brand is the way to expand long-term because as a small company it's not easy if everyone is producing the same product. But branding is not easy. It requires an investment in strategy and marketing.'' Chinese companies' biggest failing in marketing overseas has been a lack of local knowledge, says Starlight's Lam.

With its Koncepts brand, established a year ago, Starlight is targeting young professionals in the United States and Europe, supported by a consumer research centre it set up in Minnesota staffed by former buyers from Wal-Mart and other retailers.

The centre comes up with new product ideas and advises customers like Wal-Mart on what to sell, including recently Starlight's 21-inch TV incorporating a DVD player and decorated with the SpongeBob SquarePants cartoon character.

Different markets, however, require different brands, especially in China, and a long-term commitment.

Starlight has developed its Audiologic brand of audio-visual products for the mainland but is not yet making money. The firm reckons it could be 10 years before the China market is ready.

''At the moment there is no middle class in China,'' said Yat-tung Lau, a Starlight executive. ''Chinese buy either the best they can find or the cheapest. There's not much room for in-between.'' (US$=HK$7.8) REUTERS SD SSC1556