By Bob O'Brien
China has been the workshop of the worldwide electronics industry for years, but up to now Chinese brands have been minor players on the global stage. In terms of its national economy, China has followed the Asian path of export-oriented growth first established by Japan and later copied by Korea, Taiwan and others. Japan’s national economic growth was accompanied by emergence of major electronics giants in the 1970s and 1980s – Sony, Toshiba, Sharp, Panasonic, and many others. Similarly, Korean brands
Samsung and LG emerged in the 1990s and 2000s to become the global powerhouses we see today. So it’s worth asking whether (or when) we will see Chinese brands following the same path.
For the most part, these Asian brands followed a similar formula to become successful globally:
First, let me describe the major players in this brand battle:
Now here’s the data for the 12 months ending February 2016:
Source: Global GfK/NPD Brand Report
This chart shows how successful the global brands have become, dominating nearly every market. The notable exception, of course, is China, where the domestic brands have pre-eminence. Chinese brands have also established a respectable position in a few other markets, including Australia, South Africa, and Mexico.
Now, how about the approach of these Chinese brands to the marketplace? Are they using their low-cost position to gain a foothold at the low end of the market? Here’s a chart with 32” TV prices in the G20 countries. 32” is a good example because it has the highest volume of any screen size, roughly 25% of the TV market, and is a highly competitive, commoditized product available by nearly every brand in every country.
While the global brands are consistently priced at a premium, and regional brands are usually close to the industry average, the China brands are usually selling at a discount compared to the industry average. Two exceptions worth noting: in the US and Canada, China brands sell at prices above the industry average, because the 32” category has a large presence of “house” brands like Insignia, Emerson, and Dynex. These house brands typically sell at a deep discount to the industry average, and take away the “opening price point” opportunity, which makes it more difficult for the China brands to establish a share position, and indeed the China brands have only a limited presence in the US and Canada.
In contrast to the US & Canada, the Chinese brands have achieved some success down under in Australia. That country represents a great case study, because as noted in a previous blog (DSCC, July 5th), Australia has the highest average TV prices among the G20. Further, it’s worth noting that these are not intrinsically high prices due to an uncompetitive retail or brand landscape: the average price of a 32” TV in Australia is close to the G20 average. Rather, Australia has a very high “product factor”, i.e. a high proportion of sales of big screen sizes and premium features.
Ultra-High Definition (UHD) or 4K resolution TV sets are one of the most significant trends in the TV market, and in Australia 4K sets have grown rapidly in the last few years, comprising 26% of all TV in the latest 12-month period. The popularity of 4K in Australia has been driven at least in part by the aggressive discounting applied by Chinese brands, as shown in these charts:
By offering 4K at nearly a 50% discount to global brands, the China brands have taken an 18% share of the 4K segment in Australia, and a 27% share overall, their best performance outside of their home market. Although the discounting is clearly similar to step 1 of the globalizing strategy outlined above, the China brands are choosing to discount most steeply on premium 4K products: note that their discount to global brands’ prices on the low-end sub-1080p products was only 25%. So in Australia at least the Chinese brands seem to be trying a combination of step 1 and step 3. Can this work? Will we see the rise of Chinese brands to leadership in the electronics space?
First, it’s worth noting that in comparison to the Japanese brands in the 1970s (competing against US companies like RCA and Zenith and European companies like Philips) or the Korean brands in the 1990s (competing against the Japanese), the Chinese brands today may not have a substantial cost advantage compared to their global competitors. All of the global players today have TV assembly in China or other low-cost areas (Mexico, Eastern Europe, etc.) rather than the home countries. Furthermore, the purchasing power of global brands (especially Samsung) allows them to source key components at lower prices than smaller players. Whereas their Japanese and Korean forerunners could price at a discount and still be profitable, the Chinese brands will find this more difficult.
Second, as noted above the emergence of house brands, sourced through contract manufacturers in China, has taken away the opportunity of new brands to enter the market at low price points. This has clearly constrained their success in the US and Canada, and very likely in other markets.
Third, and perhaps most important, with one exception the big 6 Chinese brands have not invested in display technology to compete as fully integrated electronics players. Japanese companies started investing in CRT technology in the 1960s, and Sony’s introduction of the Trinitron allowed them to capture the premium TV market for a generation. Samsung grew to one of the largest CRT companies in the world, and by establishing a joint venture with Corning in CRT glass became the most vertically integrated CRT player, before repeating the same trick to become the largest and most profitable player in LCD TV. In contrast, most of the Chinese brands have not backward-integrated to displays (nor semiconductors, nor other key components) and therefore rely on their suppliers to provide picture quality innovation.
The exception to this is TCL, the main investor (aside from government sources) in panel maker CSOT, whose Gen 8.5 fab in Shenzhen, China, established a benchmark for the fastest ramp-up in the industry. We understand that CSOT now plans to build a Gen 11 fab, which would allow them to efficiently produce 65” and 75” sizes (or larger; the precise size of Gen 11 is not yet fixed), thus surpassing the capabilities of the Gen 8.5 fabs of Samsung and LG. TCL recently surpassed Sony as the #3 seller of TVs in unit terms, although they still trail in dollar terms, so it looks like they have the inside track toward becoming a truly global player.
Although the other top 5 brands in China have not been investing, display companies have leveraged government support to make China the center of gravity for LCD investment in this decade. By 2019, China may have 12 G8.5 and larger fabs, including two G10.5 and larger, and will have the largest LCD capacity. It’s likely that one or more of the emerging display makers in China (BOE, CEC, HKC) will seek a more secure path to market and partner with a top China brand to create an integrated company.
The rising importance of China in the display and electronics industries cannot be overstated. China has become indispensable in the assembly stages of production, as well as a growing presence in both display capacity and as an end market. However, at a brand level the top Chinese brands lag far behind the global leaders, and given the structural changes in the industry, it is far from certain that any of them will be capable of achieving global leadership.