Meanwhile, DVD came to China from everywhere. And by the year 2000 will make a big dent in VCD..........................
techweb.com
February 16, 1998, Issue: 993
Section: News
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But price of success could be steep for some -- DVD suppliers bet on China wild card
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 last week, meeting with three to four potential DVD-player manufacturers and distributors per day. LSI 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 here and in Japan.
Also offering DVD OEM kits there 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 to10 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, 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."
Price of admission
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.
Awaiting the flood
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
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