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  Digital renaissance and China opportunity   

  

 

David Steel has travelled to China at least four times a year the past several years, but he has not had much time to enjoy the scenery. He had to focus on his business: the digital media unit of South Korean giant Samsung Electronics.

But this year, he spent his weekend visiting Qingdao, a coastal city in East China's Shandong Province, in April, and Xi'an, an ancient Chinese capital, in May.

Steel has every reason to enjoy his travel: a "digital renaissance" a goal that he himself, his company and even the industry have been pushing in the past several years seems to have arrived.

Three years ago, Gee-Sung Choi, president of Samsung, said at the IFA show in Berlin that a "digital renaissance" was coming. That is, a migration of electronics from analog to digital and tube TV sets to flat panel ones.

"Now, we are entering the next step of the digital renaissance: rich digital experiences," said Choi in a keynote speech at this year's IFA show on September 1.

This essentially means the focus of the consumer electronics industry has shifted from technology to user experience.

Since the beginning of this century, new technologies have kept popping up: LCD TV sets; high-definition TV; mobile TV; large-capacity laser-disc storage Blue Ray; interconnection between digital cameras, TV sets, computers, and mobile phones.

TV sets are not only bigger in size, but also have much better picture quality with high-definition functions and better connections with other consumer electronics devices, such as Blue Ray DVD. Game fans of Microsoft Xbox also use TV screens, which give a much better experience than a handheld game console.

Li Dongsheng, chairman and CEO of the Chinese TV giant and the world's largest TV maker, TCL Group, also believes the digital transition is accelerating.

He says heavy losses of US$95 million in TCL's European TV business in the first half was due to underestimation of the shift from analog to digital TV.

"We were still managing our business in the way we managed our tube business, so we suffered a lot in that shift," Li says.

Bringing it to the public

However, bringing technology to people's daily life is a long and difficult process.

Different technology groups compete for industry standards, technologies are immature, and consumers need to be educated.

In the process, Samsung's digital media business, which groups products from TV sets, computers, MP3 players, and printers, has seen its profits eroded by competitors, as new technologies did not come into large-scale adoption and competition was mainly focused on prices.

In 2003, the operating profit margin of the digital media unit was 2 per cent, but the numbers were -0.3 per cent in 2004 and -5 per cent in 2005.

"In the digital transition, sales were down, profits were down, but the industry has begun to recover and we are very optimistic about the situation," says Sang-Heung Shin, senior vice-president of Samsung's Digital Media Business, in an interview with China Business Weekly.

One telling example is the flat panel TV business, mainly including LCD TV and plasma TV.

In 2003, nine million LCD TV sets were sold worldwide, but that jumped to 26 million in 2005 and Steel estimates the shipment will almost double to 40 million units this year.

A widespread adoption of digital technologies also means higher profits.

At present, the shipment of flat panel TV sets is only 40 per cent of total shipments of TV sets, but the sales are 70 per cent.

Shin says Samsung, the world's largest flat panel TV maker, is well-positioned to take a big piece of the pie in the digital renaissance and enjoy a big cost advantage. It already has the world's largest production of flat panels, key components to LCD and plasma TV sets and the biggest flash memory production capacity.

He believes that with the coming of the digital renaissance, the operating profit margin of Samsung's digital media business can reach 5 to 10 per cent this year.

However, Samsung should also increase its competitiveness through increasing the compatibility and interconnectivity of its products.

China opportunity

Despite its glamorous number one position in the US and European markets, Samsung ranks second in China's flat panel market and its position in the total TV market is far behind Chinese makers TCL, HiSense, and Changhong, mostly known as price butchers.

While the US market accounts for 23 per cent of Samsung's digital media sales and Europe contributes 13 per cent, only 5 per cent of sales are from China, although it has the world's largest TV population with almost 400 million TV sets in use.

"Our main challenge in China are the many strong local players, which have a big cost advantage," Shin says.

To avoid brutal price wars with Chinese makers, Samsung has decided to stop competing in the tube projection TV segment, where local brands take the lion's share, but make meagre profits.

In China, the penetration rate of flat panel TV sets among urban families was only 4 per cent in 2005. Considering the huge amount of existing tube TVs, there is an enormous demand to meet.

Besides maintaining its popularity among metropolitan consumers, Samsung Electronics has already cast its eyes on medium-sized cities, where there is no clear market leader.

Jong-Yong Yun, vice-chairman and CEO of the South Korean electronics company, has a habit of visiting retail outlets and dealers in every market. But different from his trip in March when he went to stores in Beijing, he chose to go to cities like Yanji in Northeast China's Jilin Province, Qingdao and Suzhou in East China, and Urumuqi in Northwest Xinjiang Uygur Autonomous Region, which is a signal of the firm's ambition to develop medium-sized markets.

 

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