Consumer Electronics:The clone wars

The plethora of flat-screen TVs, digital cameras and MP3 players at the 2005 International Consumer Electronics Show in January was nothing new. Attendees have seen various versions of such devices at the show for years. What was new, however, was the abundance of unfamiliar companies selling these products.

There?s a virtual stampede into the US market by Asian companies that are capitalizing on the fact that most consumer electronics devices are now built with standard digital components. Some of the largest manufacturers in China, such as TCL and Haier, are preparing to enter the US consumer market in a big way and are forming strategic relationships with key chip suppliers. At the same time, other, lesser-known but nonetheless powerful Asian companies are forming partnerships and testing various supply chain and retail marketing strategies, in search of the magic mix of low cost, good quality and brand-name recognition that will entice US consumers to buy their CE ?clones.? In many of these cases, original design manufacturers and/or the suppliers of key components are following the latter model to try to sell their products directly to US consumers, bypassing namebrand OEMs.ce of unfamiliar companies selling these products.

Some of these new players admit that they don?t yet know exactly what formula will work in the US market. ?Frankly, I don?t think any of them get it yet,? says one industry expert, who wished to remain anonymous. And with so many new entrants, each is trying to distinguish itself as not just another low-cost, no-name manufacturer. Yet eventually, three or four of these companies will be successful in the US market, predicts Thomas Harvey, senior vice president of sales and marketing at Norcent, one of the new entrants. ?Those who figure it out and get it right first will win.? What follows is a sampling of three such companies and their business models.

X2
X2, launched in November 2004, is 50 percent owned by Micro-Star International (MSI), a $2 billion Taiwanese original design manufacturer.

Rex Wong initially founded X2 along with partners who had developed sophisticated supply chain management software at Wong?s previous company. The software was designed to let server resellers connect directly to an Asian manufacturing facility to custom-order their systems.
X2 is now using the software to allow retailers to connect directly to MSI to order consumer electronics products such as audio players, portable multimedia players, media center PCs and notebooks. This prospect entices retailers, because they don?t have to carry inventory, and yet they can sell X2 products and still have a good profit margin, says Wong, president of X2. ?We?re giving these retailers a plug-and-play Dell model,? he says. ?We drop-ship the products directly to the customer. The retailer never touches it.? Online sites, such as Amazon.com and Buy.com, are the primary retailers of X2 products.





?Lesser-known Asian vendors might have a cost advantage, "but what these guys don't have is consumer trust.?
?Shyam Nagrani, iSuppli analyst

X2?s relationship with MSI keeps costs down. Wong notes that he doesn?t necessarily need to sell high volumes at retail to get a cost advantage, because MSI already manufactures high volumes through its OEM business. ?MSI is the largest graphics card manufacturer in the world,? he says ?This is how we can make MP3 players so inexpensively.?

In the past, MSI tried to launch consumer products in the US but failed, because the company was unfamiliar with the US market, says Wong. Now, X2 will be ?MSI?s eyes and ears in the American market.?

Norcent
Another company with a big presence at CES this year was Norcent, which is owned by Shanghai Hongsheng Technology Co. of China. Shanghai Hongsheng is 30 percent owned by the public in the form of stock sold on the Shanghai Exchange, 30 percent owned by the Chinese government and 30 percent owned by the Long family of China, according to a Norcent spokesperson. Kevin Long is chairman of Shanghai Hongsheng; his sister, Jennifer, is Norcent?s CEO.

?At one point last August, we were lowering our prices
every 30 days.?
?Douglas Woo, CEO, Westinghouse Digital Electronics

Shanghai Hongsheng, a supplier to OEMs since 1992, has four manufacturing facilities, where all of Norcent?s consumer electronics products are built, according to Harvey. Harvey is a former Sony Electronics executive who, along with several other American former Sony executives, was hired to help Norcent in the US retail channel. ?To Jennifer Long?s credit, she recognized that Norcent didn?t understand the US consumer electronics and distribution businesses,? he says. Shanghai Hongsheng has invested in several other Asian companies to ensure its supply of key components, including video processing chips, says Harvey.

Norcent started in the US in 2001, selling DVD players, but recently started selling plasma and LCD TVs, home theater systems and digital cameras through retailers such as Circuit City, Wal-Mart and Best Buy.
The company hopes to compete on more than low prices. ?We want to be the step down from the market leaders, not the step up from the bottom,? says Harvey.

Westinghouse Digital Electronics
Then there?s Westinghouse Digital Electronics, a privately owned company with strategic relationships with Chi Mei and Viacom. Exactly who owns Westinghouse Digital is confidential, says its CEO, Douglas Woo. Chi Mei, the third-largest LCD panel maker in the world, is the company?s exclusive supplier of panels for its TVs and monitors. Westinghouse?s relationship with Viacom is ?pretty complex,? says Woo. Viacom, a huge media conglomerate that owns the CBS network, MTV, Blockbuster and Paramount Pictures, has licensed the Westinghouse trade name to the company. Further, ?we make the hardware that shows their software [content, such as TV shows and movies],? notes Woo. ?Long-term, we intend to fully cooperate with the programming providers in TV, just as hardware providers work with software developers in the IT business,? he adds.

Westinghouse has a cost advantage, because of its relationship with Chi Mei. The LCD panel represents about 80 percent of the cost of an LCD TV, notes Woo. The company is using this relationship and its speedy supply chain to bring price reductions at the component level directly to consumers, says Woo, claiming that other companies, particularly those that are vertically integrated, take much longer to translate such cost reductions into lower retail prices. ?At one point in August 2004, we were lowering our prices every 30 days,? he says. ?The pricing of our retail products back in October is the pricing my competitors have today.?

Common characteristics
Although these new companies all have similar cost advantages, they also face similar barriers to the US market. For one thing, they have little credibility and brand recognition with American consumers. X2?s Wong says the company is trying to remedy that, by talking with the media, conducting promotions on e-tail sites such as Amazon and having its products prove their mettle in the marketplace. (G4techTV named the company?s portable multimedia player a finalist at CES in the best ?video-to-go? category.) Norcent is working at getting its products reviewed in the trade press and participating in public events, such as gaming expos, that will feature Norcent products, says Harvey. Woo believes that licensing the Westinghouse name helps his company get brand-name recognition in the States.

Then there?s the service-and-support issue. These companies claim they offer telephone support and easy returns or replacement if things go wrong, but it will take time in the marketplace before consumers will trust them. This past Christmas season, there was a lot of leftover inventory of LCD TVs. ?The ones that didn?t sell were the no-name TVs,? says Shyam Nagrani, an analyst at iSuppli. He questions how many Americans will buy from a vendor they?ve never heard of, even if the product is significantly cheaper than name-brand TVs. These companies might have cost advantages, but ?what these guys don?t have is consumer trust,? he says. ?Until they can build a brand and trust, they will always have a problem.?

Electronic Business, a sister publication of EM Asia