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Electronics -- China Spins A New Disc:
The EVD is Beijing's attempt to set an industry standard for the next generation of DVD players; It's a bold and risky proposition

By Anthony Kuhn in Changzhou

1,373 words

26 February 2004

Far Eastern Economic Review

(c) 2004 Dow Jones & Company, Inc.



FOR ALL THE HYPE about the trail-blazing potential of the Enhanced Versatile

Disc, the roll-out of EVD players on appliance-store shelves across China

since December has been remarkably quiet. Probably its makers are only too

aware of the high stakes they face in promoting China's first home-grown

standard for the video industry.

Developed as a successor to the Digital Versatile Disc, the EVD offers

better picture and sound quality than the DVD when used with high-definition

televisions. If the EVD establishes itself as a popular video format, China

could exceed its role as a manufacturing powerhouse and become a more

competitive player in the electronics industry. But analysts say that

achieving dominance in China, let alone internationally, will be difficult

for the new format, given the multinational race to make the next generation

of laser-video systems, and the scarcity of movie titles available on EVD.



The consortium of Chinese government agencies and electronics companies that

developed the EVD "faces a lot of commercial hurdles before it can put an

EVD in every home," says Scott Kennedy, a political economist at Indiana

University, who studies China's electronics industry. "In digital

technologies it's hard for companies to move up the value-added chain."

But that's precisely what the Chinese government is determined to do. It

wants to create globally competitive Chinese companies capable of original

design, not just assembly. Despite its manufacturing muscle, China's

electronics industry holds little proprietary technology. Along with mobile

telecommunications and wireless data transmission, the EVD is part of

Beijing's drive to establish its own technical standards in key industries.



In 1999, the State Economic and Trade Commission approved $1.2 million for

the EVD's development by a 13-member consortium led by Shinco, China's

leading DVD maker. The members then became stockholders in Beijing E-World,

the consortium's corporate identity, charged with conducting core research,

holding the EVD's patents and collecting royalties. "The government feels

that domestic companies don't have the development capabilities of foreign

firms, and only by banding together can the firms be competitive," explains

E-World's president, Hao Jie.

For Chinese electronics companies, developing proprietary technology is also

becoming a matter of survival. "The manufacturing cost of this kind of

consumer electronics product is now so low that they're getting down to

shaving off the intellectual-property value," says Julie Schwerin, CEO of

InfoTech, a research firm based in Vermont in the United States.

Intellectual-property value means the royalties that manufacturers have to

pay patent-holders.

Although the bulk of the world's DVD players are made in China,

DVD-technology patents are owned by foreign giants, such as Hitachi,

Matsushita, Toshiba and Time Warner, to which Chinese manufacturers pay

hefty fees. For instance, Shinco, which claims nearly a third of China's

DVD-player market, no longer sells DVD players in the U.S., where they were

retailing for $60 each -- of which as much as a third went on royalty

payments to DVD-patent holders. "The more we sell, the more we lose,"

laments Fan Wenjian, the company's spokesman, at its head office in

Changzhou, in Jiangsu province.

Makers of the new EVD players must still pay royalties to DVD-patent holders

so that EVD machines can play DVDs -- though the Chinese Electronics

Industry Association has managed to bargain down the fee from $22 per player

to $15. But if EVD takes off as a video standard, shareholders in Beijing

E-World will own a dominant technology for which they don't have to pay

royalties -- and indeed will be able to charge others who want to join the

standard.

Shinco still imports two key components for its EVD players: The lasers that

read DVD discs are mostly made by Japanese firms, and the silicon chips that

decode the EVD's digital data come from an American company, though E-World

owns the chip technology. Fan says the company is confident that it can

eventually source all its components domestically. Shinco, which spent $3

million to help develop the EVD, now distributes the players through several

electronics chain stores in China, and Fan says they are selling 100 players

a day nationwide. Sales of EVD players are estimated to peak in two years,

he says, by which time it will become Shinco's flagship product.

Before that happens, though, it will have to overcome some serious hurdles.

Unlike other key technologies, the EVD is a voluntary standard that can only

succeed if it's embraced by consumers. For national-security reasons,

Beijing is forcing foreign companies that want to sell certain kinds of

wireless devices in China to use Chinese-made encryption software. But

Beijing E-World can't force consumers to buy EVD players, which are double

the price of DVD players.

Wealth of content holds the key to the EVD's success, analysts say. Some

1,600 American and Asian movie titles on EVD will begin to hit retail stores

by April, according to Hao Jie of Beijing E-World. Hong Kong-based

publishers have bought the rights to the movies, and negotiations for the

rights to new movies from major Hollywood studios including MGM and 20th

Century Fox are under way, says Hao. For now, Shinco is giving away five

movies with each machine it sells.

Infotech's Schwerin reckons that other major studios will monitor the EVD's

sales and acceptance before committing their movies to the new format.

Intellectual-property protection is key to persuading studios to release

their movies on EVD. Shinco's Fan says that each EVD disc will have its own

code key, making the counterfeiting of titles much harder. Of course DVD

makers, too, thought that their products would be piracy-resistant, but

China is now awash in pirated DVDs.

That begs another question: Will consumers buy an EVD player and genuine EVD

movies, when they can buy a DVD player and pirated DVD movies at less than

half the price? The answer depends partly on their willingness to replace

analogue TV sets with digital high-definition TV sets. The EVD's superior

quality can be seen only on HDTVs, which provide sharper pictures; China

plans to begin broadcasting in HDTV in time for the 2008 Beijing Olympics.

Shinco is betting that consumers who can afford at least $400 for a HDTV set

will not be fazed by the $240 price of an EVD player or $2.50 for a genuine

disc. Sales of HDTV sets have doubled in recent years and now account for

around 20% of the market for TV sets, according to the China Audio

Industries Association.

But a further challenge looms: In the next few years, consumers will have a

choice between the EVD and a new generation of high-definition DVD systems.

Big multinationals like Sony and Philips Electronics are developing a new

format called Blu-ray, using blue lasers, while Toshiba and NEC are backing

a competing standard called high-definition DVD, or HD-DVD. By launching

their format first, the EVD makers hope that their technology will become

the standard in China, and the size of the Chinese market will then force

the international giants to support it.

And then there's the question of whether the EVD consortium can hold

together in the face of these hurdles. Indiana University's Kennedy points

out that "very few governments are successful in getting corporations to

cooperate in developing new products. The companies just don't want to

cooperate." A previous Chinese consortium to develop the Super VCD, a

successor to the VCD, split into feuding camps of manufacturers, some of

which rejected government involvement.

Kennedy further cites the Beta videotape, which, despite Japanese government

support in the 1970s, lost in market competition to the less expensive VHS

standard. Unless it can prove an exception to this pattern, the EVD could

end up as just another digital artefact in China's video evolution.