Super VCD on hold..................................
November 24, 1997, Issue: 982
Section: News
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Builds intellectual-property war chest for key technologies -- China flexes standards muscle
By Junko Yoshida and Mark Carroll
Beijing - China's government is setting systems standards in 10 targeted areas and gathering intellectual property through patent pools in an effort to increase the clout of its huge market and production prowess.
In nearly all cases, the standards being drafted by the Ministry of Electronics Industry (MEI) are expected to differ from existing international standards, whose intellectual property is often tightly controlled by companies based outside of the People's Republic. Emerging electronics-trade policies in China are also more restrictive than in most-if not all-other countries: Sales within the country will be limited to government-approved products.
The intent, as expressed by various Chinese officials, is to level the playing field for Chinese manufacturers. And the massive size of China's market may prove a powerful impetus for compliance among foreign companies that otherwise might not be willing to play by another's rules.
But industry and government officials in the United States and elsewhere have expressed some concern that Beijing is looking for more than a home-field advantage and that it may seek to propel China to dominance on the world electronics stage.
"The various committees inside the MEI as well as the Ministry of Post and Telecommunications [MPT] will develop standards for all electronic consumer goods and components," said Chang Fong Chow, director for the China National Standardization of Technology Committee on Recording, which oversees China's video-CD standards activity. "If a company wants to sell an electronics product in China, it must conform to our standards."
In addition to VCD players, the MEI committees are drafting standards for hybrid PC/VCD machines, digital cameras, TV broadcast equipment, DVD players, laser-disk players, digital VCRs, digital-audio tape (DAT) players and set-top boxes. The MPT handles standards for analog and digital telephones.
A United States Trade Representative (USTR) official, who asked not to be named, acknowledged that the U.S. government-run Foreign Broadcast Information Service (FBIS) recently reported on China's plan to establish its own standards in certain product areas. Yet she warned against reading too much into the plan until more is known about it.
"China sometimes makes great proclamations, which sometimes it follows up and sometimes it doesn't," the official said. "We have to run it by the U.S. Embassy in China to get more details."
In a recent speech that was translated and broadcast by FBIS, Chinese electronics-industry minister Hu Qili said China has made "significant breakthroughs in key scientific research projects such as very large-scale integrated circuits, smart cards, CAD systems, large-scale software development systems, digital broadcasts and microwave-telecommunications systems and new display devices." Some of those developments, he said, "not only represent a breakthrough in the situation in which foreign products dominate everything in China but also mean that we are [prepared] to participate in the world market."
Video CDs
The minister singled out video CD as indicative of those accomplishments, noting, "It only took something over three years to achieve large-scale production
of independent-copyright VCD videodisk players. . . . After they were put on the market, they made their way into myriad [Chinese] households, becoming one of the mainstream electronic products of the day."
Little appears to be known about the patent-pooling aspects of China's initiative, even among China experts in the U.S. State Department and USTR. According to some U.S. industry sources, the Chinese government is aggressively collecting and pooling essential patents from its own agencies and from foreign and domestic companies, universities and research institutes to kick-start the domestic high-tech industry.
"If that's true," said the USTR official "it is alarming. It almost looks like China is following the footsteps of what Japan did decades ago."
Regardless of its intent, China's standards initiative has gotten off to a strong start with its VCD 3.0 standards effort, which was revealed in September (see Oct. 6, page 1). MEI officials have been tight-lipped about the details, but it is known that the ministry has selected tiny software concern EnReach Technology Inc. (San Jose, Calif.) as a supplier of authoring tools based on HTML conversion and that it has apparently adopted a joint technology proposal put together by EnReach and ESS Technology (Fremont, Calif.). The China-specific VCD spec aims to accommodate more interactive features than standards adopted elsewhere.
Ten-person EnReach found China's business so compelling a lure that it agreed to share several of its patents with the Chinese government. "China has already proven that it has great manufacturing capabilities," said Bo Wu, EnReach chief executive officer. "What's missing has been its ability to develop new technologies. Only a year ago, 'China standards' meant something straight out of a Chinese translation of ISO standards."
Thanks to Beijing's new initiatives, including the purported patent-sharing plan, that's no longer the case. Having become much more savvy about technology issues, the MEI wants its domestic electronics industry in the driver's seat, rather than having future products and royalty terms dictated by foreign companies. Wu said EnReach is confident the pros of patent pooling with China outweigh the cons. "If we could be the first to market by making [some] patents open," he said, "we thought we would greatly benefit from the decision."
Other companies jumping into the patent pool with China include Taiwan-based equipment vendor Acer Inc. "Acer's chairman, Stan Shih, thinks that patent pooling with the Chinese is a good idea," said Acer general manager Rick Lei. "Next quarter, we will offer the Chinese a hybrid VCD/PC as a new 'Chinese product.' "
The device will be multifunctional and inexpensive. Since most Chinese can't afford even a sub-$1,000 PC, multifunctionality is critical.
The Chinese government's plans for patent pooling and targeting specific product areas for their own standards definition will have far-reaching implications for many OEMs queuing up to do business in China.
U.S. chip companies as well as Asian and European VCD systems makers are anxious for more details on the VCD specification, which MEI has yet to publish. Sources close to the proceedings said, however, that small software changes to existing chip sets will likely accommodate the China-specific standard.
The new China VCD standard for drives that play movies, audio CDs and interactive educational titles, and provide additional features like karaoke, however, is said to require hardware vendors to make only small software changes to existing chip sets.
VCD 3.0 appears to be the tip of an envisioned iceberg. While the videodisk standard is the first "China standard" to have made headlines, the first such document addressed analog-phone specifications. China's 45/48-MHz analog cordless phone standard parts ways with the 46/49-MHz specs adopted virtually everywhere else.
China is also working on a digital cordless phone standard, which is similarly expected to differ from prevailing standards for such products in the rest of the world. An MPT working group is said to be investigating a number of established digital phone specs, including the Digital European Cordless Telephone (DECT)and the Personal Handy System (PHS), as it seeks to draft the China Digital Cordless Telephone (CDCT) standard.
Royalty dodge?
There has been some speculation that VCD 3.0 represents an attempt by China to avoid paying royalties to the four foreign electronics companies that hold most of the existing patents for VCD technology. Sony, Philips, Matsushita and JVC control the original VCD technologies specified in the White Book standard for VCD 1.0 and 2.0., and they've been taking the initiatives to upgrade their own standards. None of the four has collected royalties thus far from any of the more than 300 mainland companies that now make VCD players within China, sources said.
Michael Wood, VCD-product marketing director at C-Cube Microsystems (Milpitas, Calif.), sees no cause for alarm in China's handling of its VCD specs. "You have to remember that China is the world's single-biggest digital-video market," he said. Yet "the key IPs are all owned by four consumer-electronics companies."
That places an undue burden on Chinese manufacturers hoping to compete in their home market, Wood said.
C-Cube thus believes the industry should let the royalty matter slide, Wood said. Its intent is not purely altruistic, of course: Removal of the royalty burden could free more Chinese vendors to manufacture VCD players based on C-Cube silicon.
Yet even some of the original VCD-player-technology developers may be willing to forgive the purported royalty debt.
Industry observers pointed out that Philips and Sony have a huge cash cow in the CD-drive market in China; 1x CD-ROM drives-essentially a 10-year-old technology-sell in China at $25 to $35 apiece. That's more than some newer drives cost here, and it might not be a market the vendors would want to jeopardize, sources said. Philips officials were approached for comment but had not returned calls by press time.
Meanwhile, though China's extension of the CD format gives the country control over its domestic market, the move may have little impact outside the People's Republic.
"Exports are a trade-off," said Bob Abraham, vice president at Freeman Associates (Santa Barbara, Calif.). A China-specific standard, he said, could make it difficult for Chinese vendors to sell their products outside China or import titles from elsewhere.
"With DVD so close, it seems strange that they are messing around with this older technology," Abraham said. On the other hand, "with that large a potential market, they would be remiss not to look at having their own format.
"If they are trying to gain an edge, this is one way to do it. There are substantial time delays and costs associated with developing your own standard and then building an infrastructure, but maybe that's the right decision for them."
Several Chinese industry insiders noted that Chinese are not totally oblivious to IP issues. In fact, well aware of its consequences, they are in the midst of establishing a consortium in which certain key patents will be pooled, explained Wu. For example, in exchange of having its authoring technology embraced by the Chinese government, "Our company [EnReach] agreed to give up some of our own patents, though not all of our patents, of course," said Wu.
EnReach's Wu, a Chinese national who came to the United States seven years ago, received his master of science degree at Western Michigan University and then founded his own company in 1995, firmly believes it's possible to do a royalty-based business in China. "You just have to think like the Chinese," said Wu. "First, you can't charge them too much. If it is a small amount, they're willing to pay."
Wu added that the Chinese government has come down hard on pirating of video CDs. "If you are caught, you lose your factory or your store. Big corporations are not going to take that risk."
Acer's Lei noted that infighting could delay VCD 3.0's implementation for months after its release and that private companies may deviate somewhat from the standard in the interest of product differentiation. Lei further said he suspects the software specifics for the VCD standard are not completely ironed out.
"We have a [VCD-player] prototype, but we don't expect to be shipping product until at least early 1998, due to a lack of software," he said.
Alternative efforts
In the meantime, alternative standards efforts to VCD 3.0 may be afoot in China. C-Cube, for one, has teamed with Philips on a proposed China-specific format called Super VCD. The format is claimed to achieve higher-resolution video while maintaining backward compatibility with VCD 2.0. Super VCD encoding reportedly occurs at two to three times the bit rate of the current standard, which specifies encoding at 1.2 to 1.5 Mbit/second.
C-Cube's Wood said MEI officials visited Milpitas in August for a demonstration of the format. But reports from China are that MEI has decided to put the Super VCD on hold for further study.
-Terry Costlow and George Leopold contributed to this story.
Copyright (c) 1997 CMP Media Inc.
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