18th April, 2008
Why China Is No Longer Cheap | What That Means To You
Brent Butterworth
Any old hand can tell you that nothing has changed the CE industry like China. China is the reason we have $29 DVD players, $999 flat-panel TVs, and even the unprecedentedly gorgeous metalwork and woodwork on many of today’s high-end speakers.
However, recent reports from the Middle Kingdom tell us the party is over, that manufacturing in China offers much less of a cost advantage than it did just two years ago. It’s easy to figure out how rising prices in China might spell trouble for Wal-Mart. But how does this situation affect the integrator?
Recent economic changes in China haven’t received much attention in the press, so let’s do the numbers. So far in 2008, China’s currency, the renminbi, has risen against the dollar at a 16 percent annual rate. In July of last year, China’s government eliminated the value-added tax (VAT) refund for hundreds of commodities, and reduced the VAT refund for more than 2,000 types of manufactured products. Oil prices have risen dramatically worldwide, making plastic and transportation more expensive—and in turn making other commodities more expensive. Thanks to the one-child policy instituted in 1979, China’s labor force is dwindling, and wages are rising at low double-digit rates in the coastal manufacturing centers. Stricter environmental and labor laws have further raised costs. It all adds up to price hikes of 20 to 40 percent on many Chinese-made goods.
Many factories in the Guangdong region on China’s southern coast are closing for lack of work. Some production is being shifted to places with lower labor costs, such as China’s interior and less-developed countries like Vietnam. But with primitive infrastructure and a population that’s less than 7 percent of China’s, there’s no way that Vietnam (or any other small, undeveloped country) can take up the slack.
None of this will seem like good news when you see the rising prices on, say, kitchen doodads at Bed Bath & Beyond. But the decline of cheap goods from China may benefit your business.
In the CE industry, the vendors that will suffer most are the bottom-feeders specializing in generic plastic in-wall speakers and indistinguishable midsize flat-panel TVs. These companies have little or nothing to offer other than a low price, and now they’ll find it difficult to deliver even that.
Most important to you, though, is that these are the companies who inspire your customers to ask, “Why should I spend thousands to buy a Panasonic or Pioneer or Runco TV from you when I can get a 50-inch plasma at Costco for $1,200?” Yes, most of the major video brands get some of their TVs (or at least the components to build them) from China, but they’re not as dependent on cheap Chinese labor as the no-name brands are. So maybe, just maybe, the demise of some no-name TV companies will make it a little easier for you to hold your margins.
Higher product costs raise the bottom line on your invoices, too, but your customers will notice this rise much less than Wal-Mart’s will. After all, product cost is just one part of your invoices—you also charge for labor and design fees. Wal-Mart doesn’t.
Finally, some of the industry’s most storied brands may shift part of their production back to North America. Domestic factories that are underutilized or even mothballed may come back to life. As a result, companies won’t be paying for empty factory space as some are now, and profits might even improve a little. Whether or not your vendors make more money may not be your direct concern, but at least their expense accounts might expand. And that’s good news for all of us.
Posted at 1:53 pm | Comment (0)
4th April, 2008
Death of Distinctive Flat-Panel TVs Greatly Exaggerated
Brent Butterworth
A recent announcement by Pioneer had some bloggers predicting a miserable future. They claim that the day is coming—and perhaps even upon us—when flat-panel TVs will be differentiated only by brand name. They see a future of Best Buys filled with the video equivalent of 1970s Chrysler K-Cars.
In some ways, their dire predictions are already true. But they’ve been true for at least 50 years.
These commentaries emerged in response to Pioneer’s recent announcement that it would outsource production of the panels in its award-winning Kuro plasma TVs to Matsushita, parent company of Panasonic. Pioneer says that while it will likely share with Matsushita some of the trade secrets that made its Kuros so good, it will retain much of the Kuro technology for itself. The panel, after all, is only one part of a flat-panel TV. There’s also a video processing section, a panel driver section, an input section, a filter screen, an ATSC tuner, etc., etc., etc. All of these components work together to deliver a certain level of performance. Contrary to what seems to be popular belief, no one component is totally or even primarily responsible for a flat-panel TV’s picture quality.
Some bloggers seem to be under the impression that Pioneer will simply “rebadge” Panasonic sets as its own, but that idea is at odds with Pioneer’s own statements and with basic business sense. Sure, Pioneer could produce a cheap TV, slap the Kuro name on it, and hope its brand name will help it take a chunk out of Samsung and Vizio. But the Kuro name is known and revered mostly by enthusiasts, who wouldn’t be fooled for long. And why would Pioneer abandon its product philosophy and marketing spin to try to catch Vizio in a race to the bottom? Vizio’s already won the race, grabbed the trophy, and headed off to Disneyland.
The truth is, Pioneer was an exception to what has been the rule for decades. TV companies—even behemoths like Samsung and LG—buy components and sometimes even completed sets from other companies whenever it makes good business sense. They routinely procure PDP and LCD panels from each other. And why not? Back in the day, they bought picture tubes from each other.
Sony is a great example. The company has always outsourced its large flat-panel displays, whether plasma or LCD. None of this means a Sony isn’t a Sony. That Sony TV that rolls off a Samsung production line differs substantially from Samsung’s product—it’s a Sony design with technology that’s exclusive to Sony. Sony’s upcoming joint venture with Sharp will undoubtedly result in Sharps and Sonys emerging from the same factory but bearing different designs, different features, and different technologies.
Sure, it’s possible to procure flat-panel TVs that possess nothing proprietary except their brand name, and some off-brand companies have followed that strategy. But none of the major players appear to be headed that way. Why would they? Anyone who’s ever worked in or studied marketing knows that differentiation is the key to survival for Panasonic, Philips, Pioneer, Samsung, Sharp, Sony, and every other name-brand TV company. Otherwise, their only weapons are price and distribution—and they probably can’t win that battle, because there’s always someone who’ll do things a penny cheaper.
The bloggers may be crushed to learn that the real world doesn’t conform to their fantasies, and that TV companies rarely build every major component of their products in-house. We hope for their sake that their tantrum will pass. Meanwhile, the rest of us can enjoy choosing from the greatest variety of video displays ever offered to mankind.
Posted at 1:52 pm | Comment (0)
