Tokyo finds big trouble in China

Cheap Sino labor shifts manufacturing epicenter and biz plans for new technologies

If you’ve profited off the DVD business in the past five years, thank China.

Chinese factories assemble nine out of 10 of the world’s DVD players, with the country’s electronic engineers receiving annual average salaries of about $7,700, according to Hong Kong research firm Global Sources.

That massive base of cheap manufacturing wherewithal made it possible for the world’s top-tier consumer electronics brands to market DVD players Stateside for less than $100. Accordingly, there are more than 73 million DVD households in the U.S.

Now, as the DVD business cools, the likes of Sony and Apple are tapping Chinese manufacturing for everything from MP3 players to flat-panel HDTVs. The nice prices of these new products aren’t going unnoticed by U.S. consumers, with some retailers recording triple-digit sales gains this fall. That translates into big opportunities for content providers in hi-def video and digital media.

But with China’s rise as a go-to assembly center comes a new class of lean-and-mean consumer electronics labels challenging the world’s household names for market share, and changing how new technologies are introduced.

San Dimas, Calif.-based Norcent is one of those companies. With manufacturing bases for its products in China and Taiwan, Norcent is aggressively vying to become “at least a Tier-2” consumer electronics brand, says Tom Harvey, VP of sales and marketing for the company.

An OEM supplier since 1992, Norcent came onto the scene with its own brand in 2001, marketing $70 DVD players and high-value home-theater-in-a-box systems at retail outlets like Wal-Mart.

In the coming months, Norcent will debut a 42-inch plasma TV with features that rival top-brand models. Harvey expects the TV to sell for less than $2,500 — about $1,000 less than a high-end Japanese-brand model.

“Our goal is not to be the cheapest guy in town,” Harvey explains. “It’s to supply an outstanding consumer value — the features that people want, and the performance they expect, at a price they can afford.”

Even big-box chains are using Chinese support to grab a piece of the consumer electronics pie.

Among the China-sourced products Best Buy marketed this holiday season under its own Insignia line was a portable DVD player for $119.99.

Remaining profitable in a market that demands more advanced technologies at ever-lower costs is proving to be a challenge for the world’s most entrenched hardware designers.

Japanese CE giants “face a large dilemma,” says Larry Lueck, president of Honolulu-based industry consultancy MMIS. Companies like Sony and Panasonic, which foot the huge R&D bill for technologies like DVD, have historically recouped their costs in the early years of consumer adoption, when devices made in their own factories could retail with a high profit margin.

But in today’s market, Lueck explains, “You’ve got to use (Chinese manufacturing) if you’re going to be competitive.” Toshiba, which is preparing the HD DVD format to battle Sony and Matsushita’s Blu-ray this year, reportedly is having its players made in China right off the bat.

Indeed, the business model for next-gen DVD hardware could very well shift for Japanese companies from one of “small-production, high-profit, to one of high-production, next-to-zero profit in five years,” Lueck says. That doesn’t leave much time for the format developers to cover their significant overhead.

A stigma surrounding goods made in China still exists in the U.S. But Harvey — who prior to joining Norcent spent 18 years at sales and marketing roles at Sony — expects the image of Chinese-made goods to improve.

“I clearly remember when ‘made in Japan’ meant ‘cheap junk,’ ” he says. “Now, whether it’s a television, a computer or an automobile, ‘made in Japan’ means high quality, and maybe even a higher price.

Analysts muse that it may not be long before a Chinese company transforms itself from a no-name original equipment manufacturer (OEM) into a top-tier gadget developer. South Korea-based Samsung, Lueck notes, “was a name that no one recognized 10 years ago. Now, it’s one of the three largest electronics manufacturers in the world.”

“The Japanese, 40 years ago, figured out how to make products cheaper, smaller and better,” Harvey adds. “Then they figured out that they couldn’t just be (the world’s) assembly point — they had to invent new products and bring them to the marketplace in order to make money. I think the Chinese understand that, and they’re past the introductory stage of making it cheaper.”

Filed Under:

Want to read more articles like this one? SUBSCRIBE TO VARIETY TODAY.
Post A Comment 0

Leave a Reply

No Comments

Comments are moderated. They may be edited for clarity and reprinting in whole or in part in Variety publications.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

More Digital News from Variety