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DVD Player Maker's Margins just $1
callipygian-showsyst writes "This news.com story tells how Chinese DVD player manufacturers are only making $1 margins per player! The story says that 'Commoditization is hitting China's DVD player manufacturers hard, according to researcher iSuppli, Between January and May, the average selling price of a DVD player exported out of the Guangdong province came to $40.80, leaving just about $1 in profit margins for the manufacturers.'
You wonder if other business, like low-end PCs hardware, are in similar trouble."
My last company was shopping around for various parts for one of our products. Wiring harnesses to be specific. We shopped a number of companies in the US, most of the harnesses were pricing out at around $16 each. When a board of director for the company called around to some of the smaller factories in his native land, we was able to get pricing on the harnesses in the $2 range. Why the big difference?
I asked the same question of him, and this was how he put it. Some of it is labor. A lot of it is greed by management. In the US, companies aren't content to break even. They feel they have to make profits every year, owners, management make more money than the previous year, and on and on. Pretty soon, they are priced at non-competative levels. In his country, a business is happy to be able to pay it's employees, sometimes employing an entire village, thereby keeping that entire village alive. They aren't concerned with profits. Just that everyone have a decent quality of life, and that the can stay open for years to come. They don't feel the need to be the next Microsoft or GE or HP.
Well, that's what told me.
Also, of course, it eventually allows the Chinese companies to gain a foothold in the US market, under their own names. That's how most Japanese and later the South Korean electronics firms slowly made a name for themselves and their countries in the US market.
First, they start by selling low-end stuff, usually under another manufacturer's brand, and often justifiably branded as crap. But they're cheap, and consumers don't care about quality, just price, so they buy them in droves.
Then, slowly move up the market towards the higher end once your distribution and manufacturing experience is honed, and you have more budget for R&D.
Now, China is posed to follow after Japan and South Korea's footsteps now. Already, you're strating to see Chinese brands marketed under their own names in the US, like Konka and Haier. It shows no signs of stopping.
There's 10 types of people in this world, those who understand binary and those who don't.
It is interesting how this works. GM just announced the "World Engine". Essentially, they will be manufacturing the parts in outsourced countries all over the world, shipping them back to the US, and doing final assembly here. Scary to think that it is more cost effective to ship parts thousands of miles from dozens of suppliers than to make them at home. Even then, GM's margin on autos is razor thin.
Perhaps we should start looking at why it is so expensive to manufacture here instead of gnashing our teeth about jobs going overseas.
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Most new DVD players at Wally World right now (using Wal-Mart as an example because their shit is cheap) are between $70 and $100. Thats a far cry from the $700 and $900 DVD players from 1998.
How low does a price have to drop for an item for it to be commoditized? $200? $100?
If that's the case, PCs certainly havent hit that commoditization point yet... unless you count those crappy Wal-Mart ones with no OS.
So, how long until we see PCs for $50?
There's a lot of clothing being made in Los Angeles. In the area where I grew up every available space seems to be housing a garment maker. It's very, very low pay, they cheat the workers, etc. My friend worked for an agency that essentially crashed these places looking for abuses. They always found them. I guess the question is, what's the point? even by cheating workers they're still paying fifty times for for thw labor than they would in China. I think these are small-rrun operations, where they just can't wait for the turnaround time in getting them made in China.
Those DVD players cost $40 only because the Chinese government keeps the Yuan artifically pegged at roughly 8 yuan to 1 US Dollar. Floating the currency will bring the ratio up to 4:1, maybe even 2:1.
That's pretty much what selling a commodity is all about: scraping by on pennies of profit and hoping for lots of volume. When your product is completely interchangable with somebody else's, it's very hard to compete on anything but price. That's why premium brands go to so much trouble to differentiate their products, even if the difference is as minor as a cosmetic flourish and a $100 million branding campaign. If you can't afford a $100 million branding campaign, you're stuck racing all your competitors to the bottom. It's awesome for the consumer, but sucks to be the manufacturer.
Well that is good news, because all of those unemployed people can get jobs making even more things efficiently and we can have more choice and variety. There is no shortage of things to discover, invent or build.
Efficiency isn't a bad thing in itself, it actually leans more to the good side of things. What is bad is when the upper strata of society dominates the gains from our newfound technological wonders and keeps the standard of living for everyone else in a different ballpark to theirs.
When it only takes 10 workers to make something where it used to take 1000, those 10 workers should be well paid and have decent benefits.
Liberty.
The labor is much cheaper but a lot of other expenses make up much of the difference. Despite Mexican wages being 10% that of US workers, a $500 US refrigerator still costs about $470 when made in Mexico.
If your currency is weak, in relation to another, it's easy to export to them, hard to import from them. Strong currecny goes opposite.
So let's say I'm an American manufacturer and I have something I want to sell to China, like maybe Intel. Well, if they fix their exchange rate artifically low, I have trouble competing since that makes my prices (from their view) artifically high.
With currencies there's no right or wrong way, strong and weak currencies both have advantages. If they get too strong or weak it can be problematic (Europe is warning money traders about runing up the Euro as it could hurt Europe's export market) however in general, there is a good and a bad side to currency moves in either direction.
Artifical fixing can be problematic, however, and China may find that they have to stop it if they wish to deal in the WTO. Fixed exchange rates are largely a thing of the past.
According to this post the patent fees for a DVD player work out to be about $20. The author is effectively anonymous, so hard to verify, but the DVD 6c fees are listed here and they are only part of the picture, so $20 may be the real deal.
Given that half the cost of the system goes to the patent holders (remind anyone of Microsoft?), it is no wonder that China has licensed On2 Technology's VP6 codec for a reported flat $2 a player for there own hi-def video disc standard.
That should get them out from under the thumb of the big-corp licensing fees at home and lead to a flood of DVD players in the USA that also support VP6. In fact, I wouldn't be surprised if within a year or so we start seeing asian bootleggers who currently do VCDs and SVCDs switch over to bootleg VP6 discs that are higher quality than even any DVD.
Wouldn't that be some global karma for the pigopolists in hollywood? I, for one, am actually rooting for China on this.
When information is power, privacy is freedom.
Nice vague comment, with nothing to back it up. There is higher demand for home computers than 25 years ago. Same for DVD players, MPG players, music CDs, etc. You know why? They didn't exist.
You can't judge future demand for products that do not exist yet. That is the point. Once again, the "glass is half empty" crowd predicts the demise of the human race because of terrible, horrible, job threatening productivity.
My guess is that had you lived 100 years ago, you would have been anti-refrigeration, since it means the end of the ice block industry. This would ignore, of course, how it increased the average lifespan more than any other product ever invented.
Tequila: It's not just for breakfast anymore!
Increasingly over the next ten yearts currency won't be as important in international trade as commdoities, especially energy. Soon china will have a large enough domestic market that it won't need US dollars or us as a market, they will only need massive amounts of raw materials and energy sources, which we can't supply much of. Our dollar has been dropping steadily the past several years. that makes our exports cheaper, but we are exporting less, and what we have been exporting is more in the line of factories/machine tools, etc, things to make manufacturing easier to china. They are also heavy into double digits into force-projection styled military buildup, and a buck there goes a lot further than here. A million bucks in china actually gets stuff done, here it forms a few committess to decide if more committes are necessary to study the project at hand. They are also pumping out engineers like we pump out wannabe pro sports starts and musicians.
It's gonna get ugly sometime, and we stand a good chance of losing.
This is the old razors vs. blades argument, but Apple seems to be making money reversing the equation: selling songs (software) for near cost while making money on the iPod.
to err is human, to forgive is divine, to forget is... umm...
The owners of the DVD patents have been battling the Chinese makers to extract very high royalties. They have succeeded in harming this industrial sector. Here's one story. This is a great example of how all the value is moving to IP, and what the stakes are in today's IP wars.
Just think - of the $50 purchase price, $27 goes to patent owners and only $1 in profit goes to the factory owners!