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Cover story: DVD players
Hong Kong confident of potential of no-frills DVD
Hong Kong makers are bullish about the prospects of DVD, and see it as a growth engine for the future. Most vendors began their DVD program about two years ago, and typically started shipping products in the first quarter this year.
"We realized [two years ago] that DVD was going to be the future, and that it would eventually replace all existing formats," said Sam Ho, marketing director of Yanion Co. Ltd. Tumbling prices have enabled the rapid growth of the market, Ho said. The current retail price of a low-end model in the key US market is $249, and is likely to fall below $200 early next year, he said.
Where that price cut will come from remains to be seen, however, with most of the Hong Kong makers interviewed here expecting to reduce their FOB prices by only 5 percent in the next six months.
Falling component costs and improved economies of scale as output increases should provide some room to maneuver. Although prices of key components from vendors in Japan and the United States appear to have bottomed out, the rapid acceptance of DVD players has encouraged other component suppliers to move into the line. The additional competition will inevitably bring new cost reductions.
The increasing scale of production should also enable costdowns. Hong Kong's OEM makers generally focus on low-end models that have downmix two-channel audio, Ho says, but some are nonetheless already shipping 10,000 units a month, despite the high-profile competition from the Japanese market leaders.
"Some countries don't need a high-end model. Surprisingly, there is a huge demand for the basic model in the United States," said Tony Mak, senior marketing manager of Skyworth (Group) Co. Ltd.
Much depends on the target market, agrees sales and marketing manager Andy Lulla of Thakral Electronics. The United States is price-conscious, Europe quality-conscious, and Asia features-conscious, Lulla said. "Buyers from mainland China want all the bells and whistles, whether the end user will use them or not," he said.
Hong Kong irons out the early wrinkles
The newness of DVD technology means the supply market is fractured and confusing. Hong Kong's vendors are still feeling their way, and the buyer should be cautioned to move carefully, too.
A basic DVD player typically has only two-channel stereo sound. A high-end model for home theater use can have six-channel Dolby Digital and DTS audio, with RGB video output and the ability to access software features such as user-selectable storyline and camera angle. The cost to the manufacturer of moving from a low-end to a high-end player is about $50 per unit, Skyworth's Mak said, with much of that $50 going to the purchase of licenses.
For some vendors, that is too much -? according to Ho of Yanion, most Hong Kong companies are not Dolby licensees, and therefore cannot provide surround sound audio. Others have turned a blind eye to licensing requirements, with the inevitable result: "There are companies in Hong Kong that are being sued by Dolby," Thakral's Lulla said.
Getting licenses is not easy but it is not impossible, Lulla said. Obtaining a license for Matsushita's CSS encryption protocol takes about six months, but is a one-time affair. Obtaining a Dolby license is more time-consuming. "Every new model has to be sent to Dolby for them to certify, which takes around three months," Ho said. Makers typically set aside 15 percent of their FOB price to cover license costs.
The cost of putting up a DVD production line is also prohibitive, Lulla said. There are firms that have been successful in producing VCD players that now think they can easily manufacture DVD players, Lulla said. "This is not the case. Manufacturing DVD players is a different ball game," he said. He revealed that some companies are using technology upgraded from VCD players, and are now manufacturing DVD players without getting a proper DVD license.
Key components
Hong Kong's makers, more so than their counterparts in Taiwan and Korea, are also dependent on overseas suppliers for critical parts and components. Most DVD mechanisms are sourced from Panasonic, Hitachi and Sanyo in Japan, and these suppliers are controlling prices, Ho said. With prices falling by about 5 percent every two or three months, the SAR's makers are reluctant to buy in large quantities, Ho said, and are therefore unable to take full advantage of volume discounts. Even OEM customers are cautious, he said. Nobody can afford to risk losing money through overstocking, Ho said.
Even the terminology is confusing. For example, there is no such thing as a first-, second-, or third-generation DVD player, Ho said. "Basically, the DVD standard has not changed," he said. What has changed is the way that functions are integrated onboard the main IC chips. The latest DVD players -- some vendors term them the fourth generation ? incorporate a single-chip solution. "Basically, you just have the mainboard, the loader and the power supply now," Lulla said.
But while some areas of manufacturing are becoming simpler, others remain as infuriating as ever. There are six main target regions worldwide for DVD players, and six different software standards. As the manufacturer is not permitted to sell a multisystem DVD player, that means six different players are needed -- and that is costly.
A compromise solution is to produce a single model that can be used in all six regions, and fix the settings for the target market, Skyworth's Mak said. The end user cannot change the settings. The result is built-in but unused capability, which is still cheaper than developing six entirely different machines.
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