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China's Revolution Is Bringing Change

4/24/2006 02:00:00 AM Eastern

The U.S. consumer electronics industry is in the throes of a revolution that has already dramatically changed the way products get to market. Now its hitting America's retail selling floors.

I'm talking about the changes being seen across the consumer electronics industry as a new China emerges, right before our eyes, on retail selling floors, through a multitude of new TV sales companies. Some of these companies have new unknown brands, while others have trusted, old U.S. names repurposed for new lines of goods.

As I found out on a recent trip to China, some of the factories backing a few of these upstart sales firms are also manufacturing products for first-tier flat-panel TV brands their sales companies compete against. This stands to counter any notions that the products these companies produce suffer from shoddy workmanship.

Where most of these companies trail their first-tier rivals today is in research and development. But by building products to the exacting specifications of their U.S., Japanese and European original design manufacturer (ODM) accounts, their managers say, they are learning quickly how to innovate for themselves.

Seemingly overnight, the economic transformation taking place in China has had an equally transforming impact on the consumer electronics industry.

The most obvious change has come from the stiff price declines we have seen over the last several years in flat-panel TV prices. Only a few years earlier, the same could be observed in DVD players and DVD recorders. For consumers, this has been a good change. For some manufacturers and retailers, it's forced new business strategies, downsizing efforts and shifts in global manufacturing bases.

Although price cutting is nothing new to the CE industry, its pace has certainly accelerated behind the entry of new Asian players. This is reducing market lifecycles, and enabling the entry of mass merchants the size of Wal-Mart, Target, Costco and Sam's Club into the launch of cutting-edge new technologies.

Whether this change can be judged as helpful of harmful to the industry will depend largely on your perspective. It certainly appears to be helping China. Seemingly, everywhere you look in the country is a new sky-rise apartment building going in, replacing the deteriorating old housing held over from leaner times.

On my recent trip to Fuqing (pronounced Foo-ching) and Beijing, China, I joined a group of U.S. and Latin American journalists as guests of Fremont, Calif.-based Envision Peripherals (EPI) and its China-based investor/supplier Top Victory China (TPV).

The latter is a subsidiary of Beijing-based BOE, one of the new Chinese and Taiwanese manufacturers of LCD panels. The purpose of the long journey was to see the powerful resources, alliances and capabilities that stand behind EPI — one of literally dozens of relatively anonymous new television sales and marketing companies trying to stake a claim here.

Although EPI has been around for 10 years, selling primarily PC monitors under the Envision and AOC brands, as well as serving as an ODM for a number of major U.S. PC brands, its TV business is virtually brand new. Still, the company has high aspirations in this market, which EPI sales director Luke Ouyang called “very difficult.”

EPI is banking on breaking into major retail stores behind the strength and quality of TPV, which EPI, naturally, touts as a world-class TV assembler.

Indeed, the production lines we were shown at TPV factories in Fuqing (primarily LCD TVs) and Beijing (plasma TVs and LCD and CRT PC monitors) were filled with products carrying the badges for Magnavox, Sony, Sharp, Dell, ViewSonic and HP, in addition to AOC and Envision.

TPV's factories are staffed by young men and women, most in their early to mid-20s, not unionized, but uniformed in the same navy blue jackets and worker-like jeans.

The company said young women make up most of its workers because they have proved to be more efficient than men at churning out the heavy volume of circuit boards and chassis on the company's multi-shift 24-hour schedule. TPV staffers declined to say what the workers were paid, although they were quick to point out the new corporate campus facilities are used to both house and feed workers and managers alike.

When the workers pass the age of usefulness (presumably somewhere close to thirty), they are encouraged to venture into new businesses, one manager told me, without giving specific details.

Successful as an ODM for other brands, Ouyang said TPV is taking what it has learned to build and market products for its own brands.

Similar to a number of other TV newcomers, Ouyang said EPI turned to TVs as a way to make up for expected compression in the PC monitor business. The company elected to use the AOC brand, which stands for “Admiral Overseas China,” on TVs, although it does not have the rights to the “Admiral” name, as such.

Ouyang said one of EPI's biggest challenges will be to build the brand, or to find another familiar brand name, to help the company reach 5 percent market share. He's also going to have to do it on a relative shoestring, since the low prices the company is asking for its LCD and plasma TV lines leaves a very lean margin.

Following a pattern reminiscent of competitor Westinghouse Digital, EPI is also negotiating for the rights to the GE brand for flat-panel TVs, Ouyang said. That brand, or one like it, should help the company achieve its 3 percent goal with considerably less advertising and promotional spending than its tier-one competitors.

EPI is typical of a number of the new Asian companies trying to get into the competitive U.S. television business. It had formerly sold PC monitors under the Envision and AOC brands to IT equipment resellers for 10 years before opting to launch a flat-panel television line two years ago, when the PC monitor business began showing signs of compression.

Not as typical, are the heavy manufacturing ties standing behind the brands, which EPI plans to leverage for longevity here, he said.

Ouyang said he hopes to convince new CE accounts that EPI will be around for the long haul to provide service and support to dealers and end-users, alike. EPI typically offers a one-year warranty on its products, opting to let retailers sell their own extended warranties and provide service, where possible, to allow them additional profit opportunities.

EPI will also work with TPV to provide private-label goods to retailers and buying groups looking for a competitive edge.

Larger retailers have been doing business with companies like EPI for several years now, and more recently, more and more specialty dealers, which are typically hesitant to take on unknown newcomers, have started adding new brands of inexpensive smaller-screen LCD TV sets. This has come as core first-tier manufacturers have trimmed their assortments due to eroding profitability. As margins compress further, those new brands are likely to be found on larger screen sizes.

Whether or not EPI and the dozens of other off-shore flat-panel vendors now trying to make a place in the market are able to survive ultimately will be determined by the American consumer, and judging by the growing electronics businesses of Wal-Mart, Costco and other mass merchants, their chances are getting better every day, bringing change here and in China.