The DVD news from Milpitas (and China).............
techweb.cmp.com
Posted: 8:45 p.m. EST, 2/13/98
DVD suppliers work on a jump-start from China
By Junko Yoshida
MILPITAS, Calif. -- A handful of component
makers are betting on the wild card of the vast
but unproven Chinese market to jump-start DVD
sales, which have been slow to take off in the
West. If the gambit proves successful, China
would become not only a key consumer of DVD
but also a production engine for exported
players. That could accelerate the downward
price curve for players and jeopardize the ability
of the technology's Japanese and European
pioneers to recoup their investments.
LSI Logic Corp. executives toured China this
week, meeting with three to four potential
DVD-player manufacturers and distributors per
day. LSI Logic and partner Sanyo Electric Co.
have readied OEM kits that provide all
the required DVD-player specs, components,
test and validation software, and tools to
customize features. The two are sharing the cost
of establishing a distribution network in China
and a technical-support infrastructure both in
China and in Japan.
Also offering DVD OEM kits in China is
C-Cube Microsystems, the dominant supplier to
China's booming video-CD OEM market.
Michael Wood, senior director of the consumer
division, said C-Cube has completed "a
reasonably good, selective rollout" of the
kit--offered for a one-time fee of $100,000--to
five to 10 local manufacturers so far, and that it
will target a like number of local companies via a
second selective rollout later this year.
The China moves come as worldwide shipments,
including inventories, of DVD players reached
only 700,000 units last year, according to figures
from market-research firm InfoTech
(Woodstock, Vt.). More than a dozen
manufacturers currently compete for slices of that
meager pie.
"Are DVD-player vendors getting desperate?"
C-Cube's Wood asked rhetorically. "Yes, some
guys are getting a little desperate. Let's not kid
ourselves: In the digital-video world, there is no
20-million-unit market anywhere in the world
outside China."
On the other hand, LSI Logic, Sanyo and
C-Cube may be playing the China card to grab
and develop new business in a fledgling market
otherwise dominated by such top-tier players as
Sony and Toshiba, which appear to be moving
more cautiously in China. The hunch is that
Chinese consumers, who have accounted for the
vast majority of the world's video-CD
consumption, are primed for a digital-video
upgrade.
"China has a potential to become a stopgap
market for DVD-component and -hardware
manufacturers," said Michael Gold, senior
research engineer at SRI Consulting (Menlo
Park, Calif.) "It could literally absorb units that
were expected to go to the Western market but
failed" to do so.
Some market watchers are going as far as to
predict that China will become the source for the
world's lowest-cost DVD players within the next
few years. Asked when China will start exporting
DVD players, C-Cube's Wood said, "I'm willing
to bet that the lowest-cost DVD player will be
made in China by 2000 or 2001.
"I've seen a VCD player factory in China with
four floors, with 20 lines on each floor, capable
of running three shifts a day. It's an entirely
feasible scenario."
Before that scenario plays out, market
participants acknowledge, the bill of materials for
DVD will have to come down dramatically.
Cost is a driving factor in the LSI/Sanyo alliance.
"We are ensuring that our customers in China can
get a steady flow of cost-effective DVD drives,"
said Alain Bismuth, director of marketing for
Consumer DVD products at LSI Logic.
Today, more than 50 percent of a DVD player's
cost comes from the drive's optics, drive
mechanism and chip set, Bismuth noted. The
partnership with Sanyo is critical to driving the
DVD player's bill of materials to $150 by year's
end. That would enable the retail price to come
down to $200 to $250--a price point Bismuth
believes is essential "in order for the DVD-player
market to happen in China. We are up against a
huge video-CD market in China, where a VCD
player is sold at $100 to $150."
Wood of C-Cube said Chinese manufacturers,
keen on getting the latest technologies, had asked
his company to get them "ready for DVD,"
though so far none of those Chinese
manufacturers "is actually selling DVD players
yet."
A $300 DVD player is still "a tremendous
market limiter," Wood observed. But when the
drive cost drops to $80 to $100 per unit--half of
what it is today--Chinese OEMs that have a
manufacturing kit in hand will be positioned to
grab an early lead in their home market, he said.
It could be a straightforward hop from there to
Chinese exports. "When China begins to export
DVD players, that's the Japanese [companies']
worst nightmare coming true," said Martin
Levine, a partner at Digital Technology
Consulting (Dallas). "Even though they may not
want to give up control over the technology,
they'd have to see the end game."
The DVD moves of LSI and others hearken
back to a similar strategy Philips's Key Modules
unit employed several years ago with
CD-ROMs. Philips seeded several
manufacturers in Asia with CD-ROM modules,
boosting its component business, though many of
those manufacturers ultimately quit the business
as prices of CD-ROM drives plummeted.
Indeed, Japan's consumer-system vendors,
which traditionally are reluctant to transfer
cutting-edge technologies overseas, are closely
watching developments in China and have moved
to establish relationships with the country's
consumer manufacturers, though they are
approaching the market with reserve.
Toshiba Corp.'s DVD division recognizes China
"as a huge DVD market," a spokeswoman said.
The Japanese company moved last summer to
extend an existing business relationship with
Sichuan Changhong Electronics Group Corp.,
China's largest color-TV manufacturer, and has
been providing the Chinese company with TV
kits, color picture tubes and semiconductors. The
spokeswoman confirmed that "DVD could be
included in future collaborations" between the
companies but added that "no specifics have
been decided."
Sony Corp. recently established a manufacturing
joint venture in Shanghai with Shanghai Video &
Audio Electronics Co. Sony holds a 70
percent stake in Shanghai Suoguang Electronics
Co. and its partner holds the rest. The new
company has been turning out video-CD players
since December. But a Sony official, asked
whether the facility might be upgraded at some
point to DVD production, said there are "no
plans for DVD at the moment."
Victor Co. of Japan (JVC) held a technology fair
here a few months ago to show off its DVD and
other advanced consumer-electronics
technologies. The list of attendees included
high-ranking officials of China's central
government, directors of the country's Ministry of
Electronics Industry, executives from
manufacturing and distribution companies,
students and consumers.
All the activity targets a market that's expected to
be huge but has yet to materialize in any
significant way, and the various companies
positioning to compete here don't necessarily
agree on when the floodgates will open.
LSI Logic predicts 20 million DVD-player units
will be consumed in China in 2000; this year, LSI
believes, DVD-player sales may match the
video-CD player's expected unit sales of 10
million. The switchover from VCD to DVD as
the dominant digital-video format will occur next
year, LSI predicts, with DVD unit sales rising to
15 million and VCD unit sales dwindling to 5
million.
C-Cube expects a flat market this year for digital
video, with unit sales of 22 million to 24 million
units in China. DVD players won't account for
more than percent of that total and are more
likely to come in at 3 to 5 percent, Wood said.
But C-Cube does predict a crossover to DVD
dominance by 2000, with the newer technology
commanding 80 percent of total
digital-video-equipment sales in China by 2000
or 2001.
C-Cube and LSI differ in strategy as well.
C-Cube is betting on the so-called SuperVCD
technology to protect and possibly expand the
digital-video-market dominance it has achieved
in China via its VCD products. When
reproduced on a 20- to 25-inch screen, Super
VCD's digital-video images are so clear as to be
indistinguishable from DVD-reproduced images,
even to an expert's eye, Wood said.
A Super VCD player is believed to improve
picture quality by using a disk that's encoded at a
far higher bit rate. Triple VCD loaders will be
required for Super VCD players, since storing a
full-length movie requires the use of multiple
disks, encoded at the higher bit rate. But the
typical cost of a multiple VCD loader is only $25
a piece, compared with about $174 for the
typical DVD loader, Wood said. The Super
VCD player is expected to debut at a
substantially lower price than is charged for the
DVD equivalent.
Pricing isn't the only barrier DVD faces in China.
LSI Logic's Bismuth said backward compatibility
with VCD is "a done deal" but added that the
limited availability of DVD titles is a concern.
"The good news is that legitimate DVD Chinese
titles are now being pressed in China, priced at
$6 to $8," he said. Four to five
disk-manufacturing lines for DVD have been
installed in China over the past 12 months, and
six to seven more are expected to come online
soon.
"I understand that each line can handle pressing
of 3 million to 5 million disks per year," Bismuth
said.
DVD's odds of establishing a solid market may
be better in China than in the United States,
where SRI's Gold said DVD has "three strikes
against it: the lack of recordability; the format
war between DVD and DiVX, an incompatible,
rental DVD format; and the lack of HDTV
compatibility."
But some analysts wonder whether too much is
being made of DVD's slow takeoff in the U.S.
market, where roughly 350,000 DVD units were
sold last year. William Zinsmeister, a senior
research analyst at International Data Corp.,
considers that figure a respectable showing,
"especially when you consider that the product
only went to the national market last August."
But Zinsmeister also warned that the next 12
months are critical. "In the United States, too
many entertainment media are competing for the
same disposable income," he said.
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