Chengdu VCD card makers...........................................
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Chengdu offers determined buyers unexpected benefits
Sichuan's provincial capital is home to some of China's biggest makers of capacitors, resistors and potentiometers, some of whom still depend on middlemen or "indirect" exports.
By Bruce Humes
<Picture>Partly because of its isolated location in the interior of China-far from both a hostile Soviet Union and the highly populated eastern seacoast-Chengdu was designated as a center for military electronics in the 1960s. Official policy called for total self-sufficiency in design and manufacture of defense-related raw materials, components and finished products.
Sichuan's Chengdu, Mianyang and Chongqing, all benefited from massive state investment in the electronics industry. Factories with 1,500 or more staff, a high proportion of well-educated engineers, were commonplace. When I first visited them in the mid-1980s, some sites were so large and green that their courtyards looked more like college campuses than factories.
The party ended in the mid-1980s when official policy called for dependence on military contracts to end, and for factories to achieve profitability. But with most of the industry's factories still reporting to the state in the 1980s and early 1990s-some 80 companies were administered by the Chengdu Bureau of Electronics until just a few years ago-Chengdu's electronics industry continued to be dominated by goals outlined in the National Five-Year Plans. Under them, the emphasis switched, sometimes abruptly, from increasing output of home appliances like refrigerators and washing machines, to radio-cassette recorders, B/W and color TV receivers, VCRs and more recently, wide-screen TV receivers and VCD players.
<Picture>The legacy of these policies and the manufacturing infrastructure they spawned are still very visible in Chengdu and surrounding areas. Several hours north of Chengdu is Mianyang, home to China's largest TV-receiver maker, Changhong. Chengdu itself hosts Hongguang Electron Tube, a long-time industry heavyweight that has signed an agreement with Toshiba to upgrade production to make wide-screen CRTs. Chengdu's Jinjiang Electric Machinery, once designated by the Ministry of Electronics as a key assembler for China-made VCRs, has dropped those plans to concentrate on VCD players instead.
More importantly, several decades of heavy investment has made Chengdu into a center for components used in these finished consumer products. At the same time, many of these factories had or have military clients, so one would assume quality control consciousness is high. The city and its surroundings are home to manufacturers like Xuguang Instrument Plant, one of the top three makers of TV tuners in the country, according to a competitor in Chongqing Yongxin Radio Components Fty, reportedly the nation's largest maker of resistors; and Hongming Electronic Components Fty, arguably the biggest combined source of resistors, potentiometers and capacitors nationwide; and Chengdu No.7 Radio Fty, China's only manufacturer of VCR audio heads. And according to the Service Center for Foreign Investment Administration, there are over 200 electronics-related companies in the city, which are officially foreign-invested.
Star in the state-run sector
No doubt about it: It's impressive. Founded in the 1950s under the first Five-Year Plan with help from Soviet advisors, Hongming Electronics is still beautifully landscaped, big and productive. Occupying 320,000 square meters, it employs 4,000 and obtained ISO 9002 certification for sites making ceramic capacitors, potentiometers, light contact switches, plastic film capacitors and thermistors back in 1994 when many Chinese factory managers hadn't even heard of such qualifications.
Deputy Director Yang Zong-Fu says the mammoth state-run complex is China's largest integrated components maker, claiming the highest output for items such as potentiometers, PTC/NTC thermistors and ceramic powder. Given the official financial support that Hongming has had over the years, and its reputation within China, I have no reason to doubt these claims. During the 1980s, state-of-the-art lines were imported from industry leaders like TDK (thermistors) and Alps (potentiometers), as well as MLC production equipment from the United States and precision die machinery from Swiss and German suppliers.
The latest feather in Hongming's cap is the official opening of its Ceramic Materials Center, establishing the company as the nation's largest research center and producer of ceramic powder. Current annual capacity is 300 tons, and Yang hopes to double that figure by 2000. He estimated investment in the center to date totals over $2.7 million.
Given the group's resources, its export track record is surprising: around $800,000 in 1996, and only $1.5 million in the third quarter of 1997. PTC thermistors and ceramic capacitors account for much of that, and there are high hopes for the maker's glass potentiometers to be exported in 1998. Monthly output is "several tens of millions."
"Japan's Hokuriku opened an office in Chengdu and slashed prices," recounts Song Yan, technical director of Hongming's No.2 Fty. "They won a lot of business that way, but in the last few months we've won back some orders because they found that HKD's quality just wasn't up to snuff."
I would assume the group's meager exports to date are due firstly to concentrating on the domestic market, and secondly to a lack of promotion. It does have a separate I/E firm, but has no offices abroad or in Hong Kong, hasn't yet begun to attend foreign exhibitions, and boasts no Web site. Nonetheless, Yang aims to double exports in 1998.
I also visited a "spin-off" of Hongming's, Chengdu Boda Electronic Devices, which set up independently in 1991-after 25 years under its mother factory-in order to focus on manufacturing piezoelectric ceramic devices for consumer electronics. Current key product types are ceramic discriminators, surface-mount ceramic filters and ceramic resonators. With 100 staff, it has achieved modest success with $360,000 in exports in the first to second quarters of 1997, according to Factory Manager Wei Dou-Xiang.
Wei seemed confident that things are looking up, despite the state of the site (sharing a courtyard with an elementary school), which I found pleasant but rather antiquated. He plans to invest $120,000 to raise capacity for ceramic discriminators, used in portable telecom products, from 500,000 monthly to 800,000 pieces. Meanwhile, sampling of the LTG455E/D/F series of chip ceramic filters has begun, and he expects export orders in the first quarter of 1998. Yearly capacity is 1 million pieces. The chip ceramic filters, measuring 6.5-by-6-by-4mm, are quoted at 41 cents per piece based on a minimum order of 10,000.
Life in the "market economy"
I visited a further four makers, which are, each in its own way, experiencing the pain of adjusting to global competition without the "cushion" they formerly enjoyed under the planned economy. But each has something unique to offer to foreign buyers of products such as magnetic audio heads, resistors, micromotors and batteries.
With Chengdu Radio Fty 7 having a 15-year track record of exporting tape-recorder audio heads, plus earnings of $1.5 million from sales to Hong Kong in the first half of 1997, Deputy Factory Manager Long Zhi-Hua should be fairly satisfied. But he's concerned: "Audio head prices have dropped 15 percent this year alone. There are nine main makers in China, and it would be impossible for us to cut costs further."
Annual production capacity is 12 million tape recorder heads. Among those most in demand are the S-201 stereo record/playback head for hand-carried players, the PS-4208 for stereo playback in toys and the A-372 mini auto-reverse head.
An earlier plan to reduce reliance on tape recorder heads has not really panned out. In 1994, $4 million was invested to buy a VCR audio head line from Japan's TDK, making it the only source for VCR heads in China. Quality appears to be up to snuff, as Matsushita's VCR joint venture in Dalian (Hualu) incorporates them in its overseas-bound VCR players. Long is keen to win export orders direct from buyers abroad, since output is only 25 percent of the 3-million-piece annual capacity.
But Long is not simply waiting for business. His factory also possesses a 120-staff R&D institute, as well as a testing center with $60,000 worth of equipment. Research projects include developing hard disk heads based on magnetic resistance (MR) technology, and magnetic card readers.
Another company burdened with a lack of export orders following the purchase of imported production equipment is Chengdu No.4 Radio Fty.
"In 1996, we spent $240,000 on Japanese and Taiwan machinery to make carbon-film resistors," recounts Director Wang Jia-Qi. "But there are already two other big makers, one in Chaozhou [bordering Fujian province], and the other in Fujian proper. Supply exceeds demand in China, so we are turning out only a few million pieces monthly instead, far from our capacity of 25 million."
Founded in 1968 under the Chengdu Electronics Bureau, Chengdu No.4 Radio Fty specializes in producing resistors and capacitors. In an attempt to rationalize production, it has downsized from 800 to 500, but Wang admits many of the company's outdated products have no market outside China.
He is keen, however, to use the new imported equipment to make carbon-film resistors for overseas buyers. He gave a quote of $1.95 per 1,000 pieces, FOB Chengdu, for the RT-13 model. The minimum monthly order is 10 million pieces.
<Picture>The third of these companies reflecting the struggle to move from the command economy to the market economy is Chengdu Electric Mfg Co. Ltd, founded in 1958. The maker's rather dated brochure shows a very large and well-landscaped enclosure shot from the air. Looking at it, it's not hard to believe that it still employs 2,000, and makes just about every motor under the sun: AC and DC servomotors, tachogenerators, torque motors, transducers, axial fans, and many more. Mechnical parts are made on-site. Sales totaled $7.8 million in 1996.
"Our strength is our ability to design and manufacture motors to our customers' specifications," emphasizes chief engineer Dong Zhao-Hua. "We needn't rely on copying existing models."
That may indeed be so, given the factory's history of serving the needs of a host of demanding state-run customers, including the military, all of which had very different needs. Output can be divided into three large categories: motors/compressors for home appliances, 50 percent; computer-use (mainly power supplies), 15 percent; and 35 percent "other."
Chengdu Electric has not been particularly successful in developing business for motors used in high-precision applications like VCD players, although such a project is on the cards. But director Ye Zu-Xun did give quotes for several products used in consumer electronics: 94 cents, FOB Chengdu for each 26XY1245 DC servo motor used in applications such as a VCR loading mechanism, based on an order of 100,000 units; 54 cents, FOB Chengdu for each 24ZL0227 DC servo motor used in hand-carried cassette players; and 75 cents, FOB Chengdu for the 8025 brushless axial fan, measuring 80-by-80-by-25mm and used in power supplies. Sales are through traders in Hong Kong, Taiwan and South Korea, and Ye believes "end-users" include Samsung and Panasonic.
The only company covered in this report, which does not make the products it exports is the Battery Branch under Sichuan CEIEC. I visited with General Manager Ren Zhi-Min, whom I first met in the mid-1980s in Chengdu. He explained how things have changed since the company was hived off from the provincial I/E corporation. "We were created in 1993 to specialize in the battery business. In the recent past we sourced from eight factories or so, but we are focusing on just three right now. One source lost to us is Wuzhou Power Source in Mianyang, which has been bought out by the Changhong TV group there. They imported a nickel cadmium AA battery line from Germany's Varta in the 1980s, but never succeeded in marketing their goods. Our export sales are down from $11 million in 1996 to $7 million through the third quarter in 1997, mainly because of the price wars."
In some ways, however, the company seems more competitive than many state I/E firms, which used to survive by charging a set fee for their 'services,' often meaning little more than handling customs clearance. This was particularly inefficient because many makers didn't have I/E rights, and were forced to do their business with the local CEIEC.
The Battery Branch is now dealing with makers nationwide, mainly in Shandong, Jiangsu and Guangxi provinces, and taking a very proactive role. One current contract requires staff to provide production technology, and oversee QC and testing for nickel cadmium batteries used in power hand tools exported by a Shanghai firm. Ren's colleague, Liu Ming-Dong is the man with the know-how, having worked for Wuzhou Power Source before. Production is normally 500,000 units monthly, but has reached 1.5 million in the past. Ren quoted one such model, the FL1101, at 71 cents, CIF Hong Kong.
Ren was also enthusiastic about a factory in Zhuhai for which he hopes to win the agency. According to him, its Ni-MH batteries for portable phones well exceed the generally recognized standard of 400 recharges, and its process for MH processing have reportedly been patented abroad.
"Home theater" in Chengdu?
Indeed. While consumers in the West await DVD technology with bated breath, China has become a hot market ¤ and major international supplier-for the"working man's" version, the VCD player. Not so surprising, then, that I came across two suppliers of VCD decoder cards in Chengdu.
Kodi Ind. Co. Ltd not only assembles VCD and karaoke players, but in 1996 it also sold 200,000 add-on control cards designed to enable a CD or laser disc player to play VCDs. Founded in 1992, the privately owned company employs six hardware engineers and five software developers. Production takes place in its plant in Shekou (Shenzhen), which employs 150.
According to Deputy Marketing Manager Ding Ai-Min, there are only 4 to 5 large-scale suppliers of the VCD upgrade card in China. It is interesting to note that C-Cube's China offices number four in China, one of them in Chengdu.
Kodi now uses C-Cube chips and is authorized to use that company's logo on its boards. The KD-9B VCD upgrade card is based on C-Cube's CL484 chip, upgrades CD and LD players, is exported to Hong Kong, Malaysia and Indonesia, and has an FOB Shenzhen price of $31. The KD-680 is based on the CL680 chip, the same applications, and is quoted at $32 FOB Shenzhen. The KD-680RF, aimed at Japanese-made laser disc players and incorporating Matsushita's DSP MN6626 chip, is quoted at $40, FOB Shenzhen.
According to International Marketing Manager Sun Zi-Hui, Sichuan Dingtian actually developed China's first "CD-basedΠVCD player and VCD evaluation disk, and played a leading role in formulating the China VCD standard. It uses its own VCD MPEG cards in its finished VCD players, but also offers the cards to interested foreign buyers at $40, FOB Chengdu for a CL680-based card (for Philips 1- or 3-drive mechanisms), or $45, FOB Chengdu for a CL484-based card (for Sony or Samsung mechanisms).
But the VCD MPEG card is a secondary product for Sichuan Dingtian, which launched its innovative Home Multimedia System at CeBit '97. Based around the DST586DC ASIC incorporating a Pentium-level CPU (co-developed with SGS-Thomson), the console with full-size remote keyboard offers CD/VCD/DVD playback, AC-3 audio, Internet and full PC functions including fax/modem/voice transmission. Sun expects volume exports of the system (console and keyboard only), priced around $1,400 FOB Chengdu, to begin in the second quarter of 1998. The DST586DC ASIC, made in France, is available separately at $50, FOB Hong Kong, based on a monthly volume of 10,000 pieces.
Sichuan Dingtian is an exceptionally "international" company by Chengdu standards, with its own English Web page and nine subsidiaries, including one in San Jose, California.
Chengdu score-card
Chengdu has come a long way from the mid-1980s when the electronics industry was a core part of China's inefficient, secretive and bloated "military-industrial complex." The city itself has developed into the center of cultural and economic activity within western China, and this was reflected among some executives I interviewed. They were friendly and more open about their organization's activities and weaknesses than those in Changsha, Hunan, for instance.
However, the components industry is still dominated by large state-run enterprises with a long history of manufacturing to meet national targets, and little export know-how. Although I was informed that there are 120 foreign-invested electronics companies in Chengdu, one-fifth of which are in the components field, during my pre-interview research and interviews in Chengdu, only 1 to 2 were mentioned in passing. Although 27 percent of the 209 manufacturing enterprises in the Chengdu Hi-Tech Zone deal in electronics, I found only a handful worth interviewing. All of this is in marked contrast to what I've found in other key industrial cities, where the hi-tech zone tends to concentrate most of the city's electronics production-much of it due to joint ventures with Japanese, Hong Kong, Taiwan and U.S. companies.
Nonetheless, there are plenty of opportunities for component buyers to source items such as ceramic materials, capacitors, resistors, potentiometers, thermistors, audio heads and batteries, as well as consumer electronics add-ons like VCD "upgrade" cards. Capacities are very large, and much of the equipment was imported in the late 1980s or within this decade. Makers are very keen to grow their export business.
Obstacles to initial business include a relative lack of export experience, a certain amount of secrecy due to past or ongoing business with Chinese military clientele, and of course, inconvenient transport due to Chengdu's location far in China's interior.
You may reach Bruce Humes by e-mail in China at kitai@nenpub.szptt.net.cn
Electronic Components - February 1998 |
