October 06, 1997, Issue: 974
Section: News
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China carves a role in consumer design -- Initiative on Video CD 3.0 signals country's intention to leverage its market clout
By Junko Yoshida
Zhung Jiang, China - As the sleeping giant that is China's consumer-electronics market awakens to its potential, the country is leveraging its enormous clout as a buyer and producer to influence and define architectures for future consumer-electronics products.
Carving a new role in design, China's Ministry of Electronics Industry held an industry-wide meeting here late last month to unveil plans for extensions to the Video CD 2.0 standard that would add Internet connectivity and interactive features to the current format. The meeting was China's signal to the global electronics industry that it intends to exploit the video CD player-the nation's most popular consumer device-as a gateway platform for emerging Internet, interactive-game and educational applications.
Joining Chinese video-CD-player vendors at the meeting were such U.S. silicon suppliers as C-Cube Microsystems (Milpitas, Calif.) and ESS Technology (Fremont, Calif.). The electron-ics ministry appears anxious to foster closer collaborations with foreign chip vendors; Rick Lei, general manager of Acer Inc.'s Consumer Products Group, said a mid-October announcement will reveal a joint venture between the agency and an unnamed foreign chip vendor to pursue the so-called Video CD 3.0 extensions.
C-Cube and Philips, meanwhile, are pitching a separate solution they're calling Super VCD. While sources said the ministry opted at the meeting to forestall a decision on that proposal until it has been more closely scrutinized, a number of OEMs here are said to be enthusiastic about the C-Cube/Philips spec.
Industry sources would relate few details of last month's format deliberations, saying the Chinese officials had asked the U.S. contingent to keep the technological specifics of the proposal under wraps for now. That leaves unanswered questions on the proposed platform's browser, OS for interactive applications and memory requirements.
Dataquest Inc. (San Jose, Calif.) estimates that the final tally for 1997 video-CD-player sales in China will come in at more than double last year's total, with 15 million units expected to be sold by year's end, compared with the 7 million units sold in 1996. Of those products, 90 percent will have been produced and marketed by domestic manufacturers. In a country where TV programs are heavily censored and audio CD players have been largely inaccessible, the video CD is the combo entertainment system of choice, serving as VCR, hi-fi audio system and karaoke machine.
The popularity of the platform here puts China in the enviable position of being able to call the shots with respect to extensions. The video CD's originators-Sony Corp., Philips Electronics, Matsushita Electric Industrial Co. and JVC-are left with little choice but to cater to the demands of the world's biggest video-CD market.
Increasingly, that market is looking beyond its borders. More than 300 mainland companies now make video CD players, and the country is expected to launch an export campaign for the products in 1998, said Patty Chang, general manager of Philips Key Modules (Shanghai) Co. The proposed platform extensions may be rooted in home-market requirements, but officials see the potential for the specs to become a de facto global standard for video CD players as the domestic industry set its sights on the rest of Asia.
"People in China already know how to press disks, how to put together video CD players and how to sell them," said Wen Hsu, director of the imaging business unit at Oak Technology (Sunnyvale, Calif.). The next logical step is "to create new value by integrating more functions and increasing performance."
The production battle may already have been won. "No Japanese or even Taiwanese vendor can compete with Chinese manufacturers any longer in cost-effective video-CD-player production," said Billy Yung, group managing director of Shell Electric Mfg. (Holdings) Co. (Hong Kong). Yung's company makes video CD players under the brand name SMC and is ranked among the country's top 10 suppliers of such products.
Foreign support
Acer's Lei acknowledged that Japanese and Taiwanese consumer companies have had limited success in selling video CD players in China, but blamed it on the vagaries of doing business in this vast country. "Even we Taiwanese companies can't penetrate the Chinese market very well. The problem with importation, distribution and marketing are just too much for us," Lei said. "Instead, we concentrate on being component suppliers."
That has also been the role of U.S. industry, as chip companies have aggressively sought to position themselves as key technology partners of Chinese OEMs. C-Cube, ESS and Oak are the three major suppliers of video-CD silicon, offering MPEG-1 audio/video decoder ICs and reference designs as well as manufacturing kits. The chip partners have even provided input on system design, with an eye toward differentiation of the OEM product in a crowded market.
Fred Chan, chief executive officer and president of ESS Technology, described China's CD-player industry as "almost like the PC business" in the way it differentiates products. A company's ability to grab market share has depended on its skill in defining a platform and then marshalling the most flexible and cost-effective chips, daughtercards and motherboards to support it.
Chip vendors have actively sought a role in shaping China's platform extensions. C-Cube has teamed with Dutch consumer-electronics giant Philips-a leading supplier of video-CD drives-to recommend the pair's Super VCD format. ESS Technology and others have provided cost analyses of Super VCD as well as input on the Chinese electronics ministry's plan.
Super VCD reportedly would provide higher resolution video while maintaining backward compatibility with Video CD 2.0. It is said to be encoded at a much higher bit rate-approximately two to three times the current, 1.2- to 1.5-Mbits/second. C-Cube officials have acknowledged that Philips is its strategy ally on the technology front, but declined to comment on details of the Super VCD specifications.
Chan of ESS claimed that the Chinese electronics ministry decided at last month's meeting "to put the Super VCD on hold for further study" and "approved new extensions to the Video CD standard." Key component suppliers hope to get more details on the new specs over the next month. The first products based on the extensions could hit the market by mid-1998, according to Chan.
But more than a few Chinese OEMs, in interviews held before the recent industry-wide meeting, expressed keen interest in Super VCD. One source claimed that its picture quality would be "almost as good as that of DVD" digital video, and that, "possibly, Super VCD could even make DVD obsolete, at least in China."
Some industry sources noted that no decisions on the format extensions have yet been finalized, and that there are ways to work around the decisions made at the September meeting. "It doesn't really matter who the Ministry of Electronics Industry supports," said Acer's Lei. "Other Chinese government agencies will see the money in this and throw their support to other foreign chip makers . . . The market will decide."
C-Cube, which claims to hold about a 70 percent share of the Chinese market for video-CD silicon, is standing firm in its confidence that Super VCD will find acceptance here. Alex Daly, vice president of marketing at the company, cited its close working relationship with China's leading video-CD-player manufacturers.
"We are betting big on the top 10 Chinese manufacturers of video CD players," he said. The company runs a "C-Cube inside" campaign and has 16 video-CD branding partners, including Idall, Malata, SMC, Panda, SAST, Gyonco, Changhong and Acer.
According to Yael Zheng, manager of China marketing at C-Cube, the company routinely checks the quality, compatibility and reliability of video-CD players in China by testing the players themselves. Units for test are directly submitted by Chinese manufacturers, as well as randomly selected from stock available on the market.
After putting the units themselves through rigorous tests-covering 70 different categories-at its Milpitas, Calif.-based testing lab, C-Cube evaluates the Chinese vendors' manufacturing strengths, quality control and management philosophies, Zheng said. OEMs that are accepted as branding partners can put the C-Cube logo on their players, and C-Cube helps the companies promote their players through various advertising media. At a time when a major industrial consolidation is taking place in the fast growing video-CD-player market, such branding partnerships can prove valuable in helping system vendors and key component suppliers maintain their leadership positions.
Consolidation may be inevitable in this industry. Only a few years ago, according to Philips's Chang, roughly half of the current crop of 300 or so video-CD manufacturers were farmers by occupation. The entrepreneurs got started by assembling their machines at home, spending virtually nothing on R&D and incurring nearly no overheard expenses.
Disappearing act
Chan of ESS predicted that the number of video-CD manufacturers will soon shake out to perhaps 30 percent to 50 percent of those now in business. "As the brand names and channels are getting established, big guys are growing even bigger, and smaller operations are disappearing," he said.
In many cases, apparently, the "big guys" have gotten as big as they are by playing by a vastly different set of rules from those that govern the consumer-electronics business in the West. In China, consumer electronics is anything but a low-margin business. Chen Tian Nan, director of video-CD giant Idall, notes that the company earned a whopping $36 million in its first 10 months, thanks in large part to the 40 percent margin it was able to command for its products. Prices are now down to $100 to $120 for the company's players, but Nan said the company still maintains a 20 percent to 35 percent margin.
The Western perception continues to be that $100 is a prohibitively hefty chunk of change for the average Chinese household. But Chang of Philips sought to dispel that notion.
The "video CD player is affordable," she said. At 1,000 yuan-about $120-the video CD player "is equivalent to the cost of a pig."
Further, the cost of living is low here; the average household spends only $5 a month on rent.
"The Chinese family tucks away, on average, about 35 percent of its monthly income into savings," said Chang. "They have lots of cash. The video CD player is a check-off item for wedding gifts in China. "And 18 million people get married every year."
It is no secret that the popularity of video CDs in China is predicated on the fact they are a cheap medium based on pirated movies. While the government is getting tougher with those who replicate illegal copies, consumers have begun to get a taste for the high quality that legal video CDs offer, observed Chang. -Additional reporting by Mark Carroll.
Copyright (c) 1997 CMP Media Inc. |
