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Subject:  O/T New paradigm in Electronic Devices Date:  12/16/2003  8:12 AM
Author:  redfox444444 Number:  21081 of 41740

Comment: See Sharp on LCD strategy, PaRA.17
remember that Sharp is said to be
working with cree on LED backlighting
of LCD's

Off-the-Shelf Parts
Create New Order
In TVs, Electronics

Global Upstarts Buy Guts
Of Gadgets and Cut Costs;
Threat to Industry Giants

For most of its 19 years in business, Xoceco Inc. occupied a stable but unexceptional niche near the bottom of the electronics food chain, churning out low-cost color TVs from its base in southeast China.

But this fall, Xoceco found a formula that will let it challenge the heavyweights in its industry. Using inexpensive, standardized parts from South Korea and the U.S., Xoceco started mass-producing flat-screen TVs -- a product that even electronics giants such as Sony Corp. are just starting to roll out in volume. So far, Xoceco is manufacturing only for the Chinese market. But both Dell Inc. and Hewlett-Packard Co. have approached Xoceco about building TVs that they would sell under their names in the U.S. and elsewhere.

"We are doing the necessary preparation this year so that next year we can have a big program for flat-panel TVs, not just here but overseas," says Xoceco President Guo Ze Li.

From China to Eastern Europe to Central America, companies such as Xoceco -- with limited technical skills, resources and experience -- are reshaping the consumer-electronics business. Instead of spending millions of dollars to design chips and software to power their gadgets, they're simply buying those components from other manufacturers and then heavily undercutting the industry leaders' prices.

Across the industry, profit margins are down and big-name companies are struggling to adapt. Many have decided to swim with the tide rather than struggle against it: Brand names such as Sony, Philips Electronics NV and Motorola Inc. are pouring resources into developing key components that can be sold to rivals as well as put in their own products.

This sea change resembles the upheaval in the computer industry 20 years ago -- and is driven by the same technological force. As more consumer gadgets are based on digital chips and software, standard designs are emerging, just as the personal computer took shape around Intel Corp. microchips and Microsoft Corp. software. Now, new players are using those designs to shake up the older order and push down prices. While it took three years for DVD players to go from $1,000 to under $300, the same drop took just two years for DVD recorders.

The result: Today's consumer-electronics industry leaders, chiefly Japan-based multinationals such as Sony and Matsushita Electric Industrial Co., are threatened the way computer leader International Business Machines Corp. was threatened by the rise of the PC clone.

With so many competitors making components for such a diverse array of gadgets, it's unlikely that a few companies will come to control the consumer-electronics market the way Intel and Microsoft dominate PCs. But established manufacturers can no longer assume, as they used to, that it will be years before rivals can match their products.

The upstarts range from green entrepreneurs to well-heeled manufacturers that have achieved success in products such as computers or washing machines and are finding it easy to move into other consumer electronics.

Upstart cellphone manufacturers in China, relying heavily on chip sets and designs from companies in other countries, grabbed 40% of domestic cellphone sales in just two years. Gateway Inc., the PC company, is likely to end up the year as the U.S.'s No. 1 seller of 42-inch plasma TVs, the most popular model. Motorola this fall said it would return to the TV business after a 29-year absence by joining forces with a Hong Kong-based assembler that gets flat-screen-TV components from Taiwan and Korea.

Meanwhile, stiff competition from low-price rivals has contributed to a steep drop in Sony's profit margin in electronics, to 0.8% at the end of March from almost 7% six years before. Sony announced a broad restructuring this fall, saying it will trim 13% of its staff and 30% of its factory space by 2006. Philips trimmed $466 million from the spending of its electronics unit this year, aiming to return it to profitability. Other companies are closing high-wage manufacturing plants and moving production to cheaper locations such as China.

Best Defense

Many of those companies think the best defense against the low-cost competitors is to use them as a source of revenue. Consumer-electronics giants have sold components to other manufacturers for years, but now they've begun selling whole packages of parts -- essentially, the complete "guts" of a gadget -- to rival manufacturers. This way, they can aspire to the lucrative role of Microsoft or Intel in the PC industry, as opposed to the hardware makers cranking out lookalike commodities with shrinking profit margins.

Philips supplies the electronic circuitry for nearly one-third of the DVD recorder models that will be sold world-wide this year. Sony has become the world's biggest supplier of a key microchip at the heart of most digital cameras, with more than a 60% share.

Motorola, the world's second-largest maker of cellphones, sells the entire electronic innards of a phone to 13 other manufacturers, most of them in China. It licensed the design of its most advanced third-generation cellphone earlier this year to a major rival, Siemens AG of Germany.

By selling such technology, Motorola can rely on something other than its own product revenue to pay for research and development. That means it can cut prices for its products more quickly, says Bob Schukai, chief of Motorola's 3G business development.

Many of the Japanese consumer-electronics giants are trying to compete with the upstarts by developing products that can't be easily duplicated.

Sharp Corp., one of the world's leading makers of flat-panel TVs, is pouring about two-thirds of its $2 billion in capital investments this year into liquid crystal display, or LCD, technology, and is taking draconian measures to make sure it can keep that technological lead. Sharp is withholding key information, such as operating temperature or run time, about the manufacturing equipment it uses at its newest factory, to prevent rival display makers from copying its success on the cheap by buying the same machines. For some equipment, Sharp ordered parts from different makers and then put them together. It even stopped patenting some factory processes. "Patents can be hints," says Zempei Tani, a vice president at Sharp.

But Sharp too will next year contribute to the trend of assembling TVs from parts: Its newest factory will produce more flat screens than the company needs, and it will sell excess production to lower-tech companies like Xoceco.

At the same time, big manufacturers aren't giving up on selling products that bear their own brand names. Many executives argue that simply buying the right components isn't enough to make a winning gadget. Unlike PC buyers, they say, electronics customers look for diversity in style, design and function -- features that big, experienced companies are better at designing than small upstarts.

"I don't think you win or lose based on the chip set. I think you win or lose based on what the customer's experience is with your product," says Motorola's Mr. Schukai.

Besides, executives say, if they weren't selling components to their competitors, there are a host of chip makers and consulting firms that would. In the past five years, many chip makers moved beyond the sale of discrete components and began to offer the complete circuitry of products as a way to retain customers and capture a greater portion of the value of a finished product. Consulting firms have also moved beyond their initial specialties -- such as helping a phone maker meet national regulations -- into broader product-design work.

New Rules

The new rules of the game are letting unknown companies race into increasingly advanced markets. China's TCL Corp. until this year chiefly purchased phones from Korean manufacturers, relabeled them with its brand and sold them in China. In recent months, Britain's TTPCom Inc. and France's Wavecom Inc. provided software and chip sets that allowed TCL to create not only its own phones but ones with built-in cameras, unveiled last month. Richard Fry, sales and marketing director for TTPCom, says a manufacturer with some electronics background can jump into production of basic cellphones for a mere $10 million.

Xoceco was one of several manufacturers formed by the Chinese government in 1984 when it turned the city of Xiamen, on a small island off the country's southeast coast, into a special economic zone. Xoceco (pronounced ZO-say-co) is an acronym for the company's full name in English, Xiamen Overseas Chinese Electronic Inc. It grew slowly to $350 million in annual revenue and production of two million TVs a year. While that makes the company China's sixth-largest TV-set producer, it's far below the size of rivals Sichuan Changhong Electric Co. and TCL, which each churn out around 10 million units.

To stand out from China's giants, Xoceco's leaders in April decided the company should develop an LCD TV and two bigger plasma TVs. With an annual research budget of about $10 million, the company couldn't do much of the technical work itself. It turned to Pixelworks Inc. of Tualatin, Ore., for help.

Started in 1997, Pixelworks is one of the component makers enabling the broader change in electronics production. While the giants moved into selling component technology because costs and market conditions forced them to, Pixelworks' founders started the company with the very idea of taking advantage of this change. Its founders believed that its chips would someday be used in TVs and they positioned Pixelworks to influence TV design similar to the way Intel influences PCs. "We looked at the business model for computers and said if the model works for computers, the model should work for TVs," says Allen Alley, co-founder and chief executive officer of Pixelworks.

Last year, Pixelworks put together a complete design for the electronics inside LCD and plasma TVs. When Xoceco decided to use the design as the base for its first flat-screen TVs, Pixelworks' engineers taught the company how it works and how it could be modified via software.

This fall, Pixelworks finished work on a new video-processing chip, code-named Photopia, that integrates many functions onto one chip, saving space and cost. Mr. Alley decided to take the product first to his customers in China, the fastest-growing market for the company's fastest-growing product line. At Konka Group Ltd., China's third-largest TV maker, engineers asked him if Pixelworks could make sure the platform containing the Photopia chip would work in regular TVs, not just flat-screen models. That would simplify production and save money for Konka.

Motivated by its prospective work with computer giants H-P and Dell, Xoceco is looking for a different payoff from Pixelworks' technical advance. Both computer giants sent teams of auditors this fall to inspect the company's factory processes, quality controls and inventory management, a preliminary step to starting a supplier relationship. Though neither company has promised it business, Xoceco is getting ready in several ways. Dell's crew pointed out that the lip on stairs in a factory could pose a hazard -- and Xoceco hired laborers to chisel them flat. More important, Xoceco is trying to anticipate their product needs and wants to design TVs that can play a role with PCs and other gadgets in a home network. For example, consumers might hook their PCs and stereos into the network and control the functions of these gadgets through their TV's onscreen guide and remote control.

Wang Yu Liang, Xoceco's chief technical officer, asked Mr. Alley if his new chip could be modified to do just that. Mr. Alley said the chip wouldn't be able to do that all by itself. A number of manufacturers are working on ways to get a home's various gadgets to work together.

The Pixelworks executives and engineers were surprised to hold such a discussion at Xoceco, says Damon Hess, a technical marketer who accompanied Mr. Alley to China. "We thought the people who would be most interested in this sort of a system would be the big giants," he says.

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