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Get Hassle Free Payday Loan

steve247 — Wed, 17 Aug 2011 02:38:22 CDT

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Payday Loan

steve247 — Wed, 17 Aug 2011 02:28:50 CDT

Payday Loan

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answer

Anonymous — Tue, 22 Jun 2010 01:49:27 CDT

There is no abstract available for this page revision.

Authors

Anonymous — Mon, 16 Jul 2007 00:22:43 CDT

The author(s) working on this book include:
初めまして。ここに記入してよいのかな。

Lucas van Grinsven is a writer/journalist who works for Reuters and worked at the Financial Times. He's currently based in Amsterdam, The Netherlands.

Joost van Grinsven is a graphics and web designer, also based in Amsterdam, who developed the logo and look and feel of this wiki. Contact him at: info@joostvangrinsven.nl

Chapter 2.2

gadgethell — Wed, 20 Jun 2007 05:45:19 CDT

Production, Business Process, Captive Systems, The Analogue Edge, Barriers To Entry

Hugh Brogan set up a mobile phone company in 1999. He did not do it in China, like dozens of his rivals, but in Birmingham, two hours on the train from London, where Brogan was brought up. By 2004, his company Sendo employed just over 300 staff and generated sales of $420 million, up from $120 million in 2003. It produced close to five million mobile phones in 2004, three times as many as the 1.6 million of 2003, selling to some of the largest mobile operators in the world, such as Vodafone and Telefonica. Three of its models were in the top five of best selling pre-paid models with Vodafone UK in early 2005, including the Numbers 1 and 2.

I first visited Brogan’s company in the spring of 2000, preparing a series of stories for the Financial Times that would take the wraps off the first British handset maker. At that point all major European countries had their own handset maker, except Britain. This was about to change. In the back of a large room was a modest workshop which looked like it had been hit by a fragmentation bomb. There were pieces of electronics scattered around the room. I saw Nokia and Ericsson with their guts exposed. I realised I was watching reverse engineering in full motion.

Brogan planned to tailor phones to operators, because he was convinced they wanted personalised phones that would be exclusive to the subscribers of their networks. Out of the ordinary were his targets. Not only did he intend to match the products of his much bigger rivals, but he claimed that his phone models would be 20 percent better than anyone else’s. In those days, when cell phones were still too fat and heavy to fit in a breast pocket, the most important features were weight, size and battery life. And price of course.

I looked around Brogan’s small workshop with a handful of engineers and wondered: “He wants to beat Nokia with this bunch of rapscallions?” I asked him if he was serious. Brogan did not blink an eye. He was convinced he could do a better job than Nokia with its 50,000 staff.

Fast forward five years and Brogan sits on the deck of a white yacht, overlooking the harbour in Cannes on the Cote d’Azur. It’s 11:30 AM and he woke up an hour ago. “We had a bit of a bash last night,” he smiles apologetically. It’s the annual mobile telecoms schmooze and trade fest called 3GSM and in the past three days he estimates that he sold some $50 or $60 million worth of products. At the other side of the harbour, across the water, is the trade show in the massive Palais des Festivals, basking in the warm February sun. An immense lounge café has been built on the roof by Motorola, exemplifying the power of of the big brands. Sendo is just one of the small guys and has a tiny booth somewhere inside the building. And it has this yacht. But it is rented. For a week. From a friend.

Brogan explains how he competes with companies that can buy half of Cannes. “Our differentiation is ‘how’ we do it. What we do is broadly similar to what the others are doing. But that’s when the efficiencies come in. Nokia has more secretaries than all the staff of our entire company. But like Nokia, we also produce smartphones, entry phones, mid phones, operators specific phones. The lot.”

“We fell on deaf ears for three years when we were talking to the big operators. They wanted Nokia. But the smaller operators were interested, because they needed something different to stand out. Wind in Italy, Bouygues in France, Virgin in Britain.” Eventually the big boys turned around and started shopping at Sendo. In 2005 Sendo was supplying handsets to Vodafone in eight markets and had a global distribution deal with Telefonica.

When I first met Brogan in the 1990s he appeared fierce, impenetrable. A tough corporate gun at Motorola. A self-made man. He went to work early, but then decided he needed an education. He was too late with his registration and a Scottish university was about to turn him down as an engineering student on a scholarship, when he promised to finish his three year studies in twelve months. That would earn the school two years of state subsidies. He kept his promise.

Brogan’s modus operandi has not changed much since his college days. He puts himself in a corner and then comes out fighting.

“Our clear cost advantage comes from design. We have fewer components, more integration. In fact, we don’t do integration, we do elimination.” He gives the example of chip makers integrating two chips into one. “That’s very difficult. It’s hard. You need to be skilled. But it’s not clever to do it.” What is clever, is to see you can engineer around the second chip, so that you don’t need any of the electronics on that chip. “It’s that kind of thinking.”

He is still on his 20 percent better, smaller, thinner strategy, and claims he “more or less” achieves it. “We’re getting better at doing it.” Take manufacturing. The first Sendo phones were designed in Birmingham, but assembled in China at factories of CCT which owned a minority chunk of the British start-up. No longer. Sendo phones are now assembled in the Czech Republic. Surely he is mistaken. All electronics manufacturing is moving to China. What about the labour costs that are double in eastern Europe? Brogan sits down and repeats the maths he must have done a few years ago. “We found it very difficult to manage China. We did not really find the cost advantage.”

A phone maker needs a big expensive machine to piece together a cell phone. The soldering of the tiny chips, capacitors, transistors and other advanced assembly of displays and buttons is all done by machines. Everything has to fit exactly and needs to stay put even when the phone is dropped on the floor once a day. These machines cost the same wherever you go.

In the final stages, when different plastic casings are slapped around the standard phone modules, the workers in one of the Czech factories can process 350 to 400 handsets every hour. This happens in four stages, and hence requires four employees. This means that per employee hour, Sendo produces almost 100 phones, more than 1.5 handsets every minute. “I pay $7 per hour in the Czech republic and about half as much in China. At 100 an hour, I save a few cents per phone. For those savings I need to ship it back and forth, deal with the callbacks of faulty phones, plus I need to hire 10 very expensive people in China to manage that process and the assembly line.”

“If going to China works for you, your designs are wrong. It means the phone is labour intensive.”

A few months after that meeting on the yacht, Brogan sold his company to Motorola. In the end he was unable to compete with the big guns. Not because his business model did not work, but because his modestly capitalised business was unable to cope with large order cancellations, full-scale legal battles and intellectual property arrangements that are geared against small cellular handset producers. If anything, he proved that there is a right business model for any situation, and not just one and the same for all businesses.

Business processes; Do a Dell

Michael Dell has it all figured out: first he asks his customers for their money, and then he pieces together their personal computer. As long as Dell is fast, reliable and direct (i.e. no middleman involved), consumers have proved to be prepared to part with their money before receiving the goodies. It's the retail model put on its head. Nice business, if you can get it.

With no working capital and no debt, Dell doesn't need to make a big fat profit margin to please investors because there is little capital tied up in his business. Interestingly however, he has made an industry-exceptional average operating profit margin of an average 8 percent over the last decade (see graphic in Prologue). His business model not only allows him to save on the cost of capital, but because he has no inventory he is also protected against sudden price drops which are common among computer components. Dell's financial performance earned the stock a market capitalisation of more than $100 billion in early 2005 on sales of less than half that amount.

Dell's business model -- which resembles the dormitory workshop approach from when he pieced together his first computers -- works because Dell recognised early on that his task was to buy standard components and glue them together. There was, and still is, hardly any research required from a PC manufacturer. The research and large capital investments are done by the component makers, such as chip makers Intel and Samsung.

Dell did not change the way a PC is produced. Dell assembles its machines in a clever way that allows it to be more efficient than its rivals, but under the hood its products are not much different from those of Fujitsu Siemens, Toshiba or Acer. The rest of the pack has just not yet figured out how to copy Dell’s business model. If, or rather when they do, they too will be able to produce their products more cheaply, and nobody will make any money anymore, not even Dell.

Investors have their doubts too, otherwise Dell’s market capitalization would be even higher. After all, the company which owns the money printing machine is priceless, isn't it? Since 2005, Dell's market value has declined severely. In April 2007 Dell was valued at $57 billion, $43 billion less than two years before, as Dell's growth has stumbled and profitability is slowly declining. Hewlett-Packard has regained the title of world's biggest PC maker and is becoming successful in its attempt to create a new image of creative communication gadgets, against Dell's wearing position as manufacturer of cheap, utalitarian work horses with quality issues. (eloquently described by jeff jarvis on www.buzzmachine.com).

The marketing director at Fujitsu Siemens describes Dell's strategy as a price race to the bottom, a dead-end street in which Dell is currently hitting the brick wall. The potential efficiencies have all been squeezed out of the production system and in such a model there is nothing left to compete with. Barbara Schaedler (at the Reuters Technology, Media and Telecoms Summit in Paris in May 2007) is not accidentally the marketing director at Europe's biggest maker of personal computers. She believes that the next battle front is marketing: the black art of convincing consumers to buy a product even if they don't need it. More about marketing in the next chapter, but even if Schaedler is right, it should be evident that the right business model can do wonders for a company's profitability. If not for ever, then at least for a decade or two. In some cases it has become a condition sine qua non to compete.

Dell's business model has been nothing short of inspirational for other electronics manufacturers. They too found in the 1980s and 1990s that the guts of a television set were starting to look alike, and that the components were mostly identical. But how do you cut out the middle man if you used the first 100 years of your existence to elevate them to a position of power?

That was the question facing Frans van Houten and Rudy Provoost in the late 1990s. The Dutch-Belgian management pair was put in charge of Philips Consumer Electronics, Europe's biggest consumer electronics business with 10 billion euros in annual sales, most of that from television sets.

Hailed even by its competitors for its innovative strength and very long-term fundamental research, the consumer electronics group appeared to be past its prime. It had been more than 15 years since the last major invention of the compact disk and even the royalties from hundreds of millions of CD and DVD players and disks were not enough to shield the company against the increasing competition. The business was bouncing in and out of losses and was all but a liability.

In the management speak of then Chief Executive Cor Boonstra it was a "bleeder" that needed to be fixed, sold or closed down. Obviously, the Consumer Electronics business was much too large to be closed down without public outcry, and luckily here were two young managers eager to prove themselves and their management theories -- quite a contrast with one of their predecessors who drank so much wine during one evening dinner in 1995 that I could barely understand his slurred speech about the fashionable concept of tailoring a television set to the personal taste of individual consumers, which was a brief yet popular idea fixe in a sector which was beginning to understand that the good old days were over. You want a teak wooden casing with copper buttons on your set? Or would you rather have a piano black cover studded with crystals? That was how Philips thought it could bring its consumer electronics business into the computer age.

Provoost and Van Houten quickly killed that train of thought. Televisions are no computers and do not need any last-minute configuration of memory capacity and processor speed. Consumers did not care about personalising their set with bespoke details, either. And so the company took its plans back to the drawing board.

In general the TV production process is designed around efficiencies coming from huge scale and attention to the smallest detail, and there's not much that anyone can do about that business model. “Manufacturing is about saving cents," says Domingo Jaumandreu Ros, vice president Home Electronics Marketing Europe for Sony. "I come from aeronautics where it about saving grammes, and in luxury goods the rationale of manufacturing is the same. You set up a standard of quality, and the responsibility of the engineers is to make it as cheap as possible.”

One example illustrates this quite clearly. In the 1990s, Sony was still painting the back cover of its TV sets. It added to the cost of the set, because the paint has a price. Sony also needed a machine to put the paint on the cover, and then the paint needed to dry which also carries a cost. There was a good reason to paint the cover, because in an earlier re-design Sony had switched to a cheap plastic that was prone to discolouring when exposed to sunlight. The paint was needed to prevent any discolouring of the back cover.

After a while however, Sony found out that most people don't watch the backside of their TV set very often. The company did some more field research and concluded that very few people put their set in front of a window where the rear is exposed to the sun's UV radiation. It concluded that it was probably okay to skip the painting process. "All the design processes are constantly being re-assessed. So we eliminated the painting at the back cover of the sets,” Jaumandreu Ros says.

That's not the end of the story, however, because the paint had a second purpose, which was to cover up any irregularities in the plastic mould. In those days, the process to mould plastics was less sophisticated and slight discolourings and irregularities were visible in the rear cover. "If you paint, you can accept certain dies in plastic,” Jaumandreu Ros says. But without the paint, the irregularities suddenly became very visible -- if you care to look at the the rear of the TV set, that is. A premium brand like Sony can't afford to have its products look, well, cheap, and it needed to come up with a solution. Instead of trying to smooth over the irregularities, Sony did the exact opposite. It gave the entire rear cover a quasi-stylish relief. It effectively drowned out the irregularities by making it the standard.

Jaumandreu Ros recalls that the whole process was partly initiated to make the TV more enviromentally friendly -- this was in the days when solvent-free paint was not very well developed. "But it did help to save costs. Cost down, value added. That’s what we say," Jaumandreu Ros says.

Back at Philips, the two new managers had figured out that they could not simply copy the business model pioneered by Dell, because television sets were not -- and are not -- sold directly to consumers. Retail chains have been selling consumer electronics products for over a hundred years, and have been commanding fat 30 percent profit margins ever since. Back in the days when selling a TV actually required some service, such margins were more than reasonable. In the 1950s and 1960s retailers specifically told consumers they could try out the products for many months and still return it if they weren't happy. Attempts to trim the resellers' margin to a more reasonable 15 percent, which is common amongst computer retailers, have so far been successfully blocked by the powerful retail chains such as MediaMarkt in Germany and BestBuy in North America. Internet merchants indeed accept lower margins, but even by early 2007 the powerful retailers were looking to win the argument that Web shops should not be offered the same low sell-in prices as the High Street stores, although even in Europe most of those stores are today located in malls and business parks on the edges of towns.

Amid all those limitations, the Van Houten/Provoost combo at Philips needed to rethink how they could cut the capital requirements of the business. What they came up with was simple genius: instead of having to bother with complicated arrangements with supply chains, and having component manufacturers keep stock next to the assembly site -- which is what Dell negotiated with its main suppliers such as Intel -- Philips did something much more radical. It sold the whole lot. End of headache.

You read it correctly. Most of the Philips-branded TVs that you see in the shops are not actually produced by Philips, but by little known electronics contract manufacturers that go by names like Jabil, TPV, HTC, Inventec and Flextronics. They are the ones that worry about the inventories, the logistics, the necessary investments in new factories. And of course, they do this at the usual wafer thin profit margin of 2 to 3 percent. Philips, on the other hand, just tells its suppliers how exactly it wants its products to look, and how many it needs in any given week, month or quarter. It does its bit of advertising in order to convince consumers they are to buy a top quality product from a trusted and well-established brand.

Development, design and marketing is all that essentially remains of Philips' consumer electronics activities. In fact, even more and more of the product development is taken over by the contract manufacturer -- for which it is awarded an extra sum. This practice, although pioneered out of necessity by Philips, is becoming more common by the day. Apple's popular iPod music players do not pass through the hands of anyone employed by Apple, unless you happen to buy one in an Apple flagship store. They're shipped straight from the contract manufacturers in Taiwan and China to retailers and individuals around the world.

The beauty of this business model is that there's hardly any risk for the premier brand like Philips. Without any assets such as factories and stock -- which is the reason the company is referring to this business model as an "asset light" strategy -- it can much better control its expenses. Whenever the market disappoints, Philips no longer has to write down the value of large amounts of components. Similarly, Philips no longer needs to take hundreds of millions of restructuring charges for closing factories that can no longer compete with Asian rivals. All that risk has been outsourced to its suppliers of which there are many -- and in markets with many suppliers, the customer always gets a very competitive price.

While this strategy in itself worked wonders, Philips did something else that really marked its turn into the "Dell" of the consumer electronics industry. It stopped paying its customers and suppliers. Well,... sort-of. Philips used to be known as a reliable business partner which paid quickly and on time. While Philips had delivered the goods, it could be waiting for months to receive its money, while it had already promptly paid its own bills to its suppliers. Although this behaviour, typical of North-West European and American companies, can be laudable, it also meant that it was the sector financier. As we know, financing costs money; that's the way how banking works. In this case, however, Philips forgot to demand interest. Not a very good strategy for a bank. At any given time, hundreds of millions of euros were locked up in credit lines.

Philips Chief Financial Officer Jan Hommen then realised that Philips had a much more valuable reputation than most of its business partners. It has an excellent credit rating, which means it is a very reputable borrower of money with a very small chance of going bankrupt -- at least according to the credit rating agencies such as Moody's and Standard & Poors. Such a company can afford to pay late, because customers know that the money is there. It is akin to the position of most governments, which are popular customers for many companies because they always pay.

Philips took the logical next step and went to its suppliers with a simple message: "if you want our business, you'll need to wait at least three months until we pay you." From then on, Philips consumer electronics business worked with negative working capital. Its suppliers were now financing Philips, rather than the other way around.

Jan Oosterveld, Chief Strategy Officer at the time, points out that "the return on capital can be good if you run low or negative working capital." Indeed. It was running a business with out having to invest its own money.

The downside, on the the other hand, is that your margin is only as good as your marketing. G

Today, overcapacity is the base line.

(And you can try to adjust capacity to demand (Dell), or outsource (Philips) but it will not take away the fundamental fact that there’s more supply than demand which puts pressure on prices)

Here's another interesting trend borne out of the "asset light" strategy: the number of CE players is...rising.
At the Consumer Electronics Show in Las Vegas in January 2007, I spoke to Frans van Houten again, now in charge of semiconductor maker NXP, and he saw a trend reversal: "We have new customers. Companies like Polaroid and others, which were dormant brands that have been revived by companies that do a pure marketing play," Frans van Houten, the chief executive of NXP -- one of the main chip suppliers to the electronics industry -- said in an interview at the Consumer Electronics Show.
These businesses can run a consumer electronics company because they outsource almost all of their manufacturing and rely on component suppliers to deliver the power chips and software for their products.
"They leverage an OEM (original equipment manufacturer) business model where they outsource everything. A handful of people can run a successful company. So a rework of the Consumer Electronics industry seems to be in the works," Van Houten said.
Because of the familiar brand names, these companies can still ask premium prices for their products, even though they do not contain exclusive technology or components.
"Brands always have value, and then you have to find a new business model for a low-margin business," van Houten said.

A neat example came in on April 24, 2007, when Reliance of India announced it would start selling its own brand of consumer electronics products in its stores. Here's a story from the Economic Times: Reliance Retail, the subsidiary of petrochemicals giant Reliance Industries, will soon launch its own label of consumer electronics goods to complement its retail appliance stores - Reliance Digital - for tapping the country's $ 5.6 billion durables market.
The company would be investing over Rs 1,000 crore over the next 3-4 years for setting up 150 such stores, the first of which was unveiled in the National Capital Region on Tuesday.
"Reliance will come out with its private label of consumer durables products... that is definitely in the strategy after we open 4-5 stores," said Reliance Retail Ltd President and Chief Executive (Consumer Durables, IT and Telecom) Ajay Baijal.
Reliance Digital stores would sell everything from TV sets, home theatre, refrigerator, cooking range, dishwasher to computers and mobile phones from across brands.
"The stores, typically spread over 15,000-30,000 sq ft, will have a wide assortment of products to cater to the tastes and requirement of customers," Baijal said.
The domestic consumer electronics market, which is expanding by 10 per cent annually, is dominated by South Korean brands such LG and Samsung and Japan's Sony. But they have tough competition from homegrown names like Videocon and BPL.
The first store, located at Shipra Mall in Ghaziabad, would be followed by another pilot outlet in NCR and 3-4 more in the country's south in the coming days.
Baijal said the stores, which would be set up at an investment of Rs 4-7 crore each, would also offer post-sales services.
"The prices would be most competitive and if any customer finds a cheaper product in the market within 30 days of purchase, we would not hesitate to match that offer," Reliance Retail Mentor Kamal Nanawati said.
Reliance Digital store, which comes five months after the company unveiled its fresh food format outlets, would function as a one-stop-shop for all electronic and IT needs, Baijal said.
He, however, did not elaborate on the plans for the private label -- whether it would be manufactured or sourced.
Notably, Reliance Fresh that was launched last year stocks the shelves with its own label of groceries - Reliance Staple.
"We would offer a host of value-added services like software downloads for our IT customers and airtime and accessories for mobile users," Baijal said.
When fully rolled out, the stores would be spread across 70 cities and all of them would offer 'RelianceresQ' pre-sales and post-sales support services.
Reliance Digital will also be offering customers RelianceOne, a common membership and loyalty programme across all its formats, which means users would be able to redeem points earned on purchases.
Other formats of Reliance Retail like supermarkets and hypermarkets are due for launch in the April-June quarter.
Reliance Industries had last year announced an investment of Rs 25,000 crore for the retail business, which it hopes would help the company earn over Rs 90,000 crore revenues in the next five years.
Industry estimates suggest India's retail market is worth $ 320 billion, of which organised retail accounts for USD 7.5 billion and expected to grow to 21.5 billion by 2010.

Here's another Danish example: Kirk Telecom (http://www.kirktelecom.com/company/ukstart.asp)
Is more than 100 years old, produces DECT phones in Denmark and exports to China. High-end dect phones for hospitals and hotels (rugged, robust, base station solutions). Sales in 2004 200 mln crowns (approx 40 mln euros) and 5 mln (euros) profit. 98 percent of production is for export.
In March 2005 it just sold a system to a hotel in China. “If you go for the niche and focus, you can make money.” It claims 25 pct of its market.
“All our competitors produce in China. We buy some components in China, assemble in Denmark and export finished product… to China.”
“It’s like the bumble bee. It’s too big for its wings too fly, but it does not know it can’t fly. So it flies.”

Vertical chain, captive systems

PlayStation games consoles

Senseo coffee machine pads

Hewlett Packard printers

Petrol

Fujio Nishida (Sony): “For the last 5 years we’ve had this problem of commoditisation and the Chinese. Will we return to high profits in hardware? No. I don’t think so. But if we can build a solutions business, yes. We will have another profitable business. Look at HP printers. They make the money with cartridges. That’s why we say: we have converge hardware and software. The question is: how do we bring them together? This is our struggle.”

“We like another PlayStation, but it’s not easy. And you have to invest a lot”

“B2B business solutions, perhaps?”

“PlayStation wasn not invented by Sony. We improved the quality and did very well.”

Chris Deering (president Sony Europe and ex-Atari): “With PlayStation we exploited the weaknesses in consoles of the time, which had long lead times. We were the first to launch a CD based consoled on a global scale as a result of our massive production capacity. We offered good, full sound and good graphics.”

“Compare that wth Philips CD-i. They didn’t hire people who knew how to do games. It was a big, clunky under the TV device that came with no portfolio of games (well, it had a decent golf game)”

“In March 2000 we launched PS2 in japan, Nov 2000 in the US (at $299) and Dec 2000 in Europe (at more than 400 euros, as a result of stronger dollar, then).”

So was PS2 with built in DVD a big mistake, because consumers bought it as DVD player instead of a games device?

“That’s a bit of folklore.”

“There was some debate whether to take advantage of the low cost DVD player. The studios said: Don’t do it. You’ll turn off the hard core games.”

“Our Spanish company, from day one, positioned it as movie and games device. A full entertainment device. It was the most successful after the UK, before Germany and France. The games/console ratio was the same as the PS 1, and also appealed to a young population.”

“As far as Spain was concerned, local management was right. In hindsight, may be we should have done it in Germany. In Germany and Scandinavia parents don’t want their kids to play on a console. In Germany, Scandinavia and Korea PC adoption rates are highest. The kids still play games of course, but on their PCs in their rooms. But the parents pretend they’re upstairs, so they must be working.”

“Historically, if you have an after market of games, you can afford to acquire the user. It’s like the razor and blade – and I worked at Gilette. Contrary to popular folklore, they didn’t lose money on the razor.”

But do we sell them at a loss?

“We try to recover manufacturing and shipping. The variable costs are usually recovered, unless there’s a specific attack, or an unexpected problem in manufacturing. And there are years when it’s slightly under recovered.

“Do we recover the cost. If you want an honest answer, you might also want to include advertising and R&D. If you include R&D, capital fixtureand exclude income from games, then definitely we’re losing money on the console. But it’s a holistic business model.

Deering: “I think it’s realistic that the games business can generate, on an ongoing basis, profits that are significantly above consumer electronic margins.”

“But it’s an extremely risky strategy, and if you fail you can lose significantly more than the minus 3 percent CE makers typically lose in bad times.”

“Microsoft has invested $2.5 billion in Xbox and I don’t believe they have recovered that yet. Go ask Philips what CDi cost them (a billion guilders).”

“There’s a big R&D upfront investment over quite a long period and that’s all money out.”

Roger Ehrenberg at Seeking Alpha did the maths in April 2007:
"Let's first consider Microsoft's Home & Entertainment Division ["H&E"], which includes Xbox 360, Xbox, Xbox Live, Consumer Software and Hardware Products and IPTV. I have used a set of numbers from historical annuals that seem to change by $100 million or so year-to-year; I'm not sure why this is, but the numbers are close. Regardless, it is not a pretty picture from a financial perspective. Making money, e.g., the creation of long-term shareholder value, has got to be the ultimate driver of Microsoft's gaming (and H&E) strategy, right? Well, after five years and over $21 billion invested all they've got to show for it is $5.4 billion of cumulative operating losses, and Xbox 360 doesn't appear to be the silver bullet to turn things around."
His conclusion: Gaming has been a disastrous endeavor for Microsoft, particularly from an investment perspective.

Microsoft CEO Steve Ballmer (at presentation at SAS Raddison Schiphol Rijk, April 23 2007), when asked about Microsoft's ambition to enter hardware:
Basically the answer is no, but if it's necessary.... There may be niches where the only way to deliver in software is to deliver in hardware. Why did we build Xbox? Because we wanted to build hardware? No. But the business model that Sony and Nintendo pioneered really integrated the business models to the hardware and the software. They designed the hardware to make no profit so all the profit is in the follow-up software, so you can't separate the two. That's why we got into that (gaming hardware) business.
In case of the Zune, we did the hardware because basically the level of integration the competition Apple achieves, was higher than what we were achieving with out hardware partners.
In the case of PC is see no reason why it adds value to have us start making PCs. There are literally thousands of PC manufacturers. You want them big, you want them small, you want them little, you want them fast, you want them slow, you want them expensive, you want them cheap, there are some people who make them for any purpose.

“Sony has been quite well managed in this area. But in general it’s a bit adventuresome to dangle out that there’s a money machine called the games industry.”

Captive system doesn’t have to be totally controlled. Other disk manufacturers could make UMD (disks for PSP) and pay a small royalty. You need volume if you want to go for that market. (But if you want to build a business model that way you need size.) A movie company that wants to make a DVD disc to sell to a consumer, pays 10-20 cents. You need volume if you want to go for that market alone. For a PS2 game it can be 6-8 dollars.”

PSP, as the next generation of captive systems Sony has launched, it was not the first either. Nintendo has that market sown up, with Nokia doing pretty miserably with its N-Gage. So what convinced Sony that it could better and why so late?

Deering: “PSP is the first time you have a TV in your hand. We waited because there was lack of sufficient capacity media and battery life was too short for a higher power processor. Sega tried it but died because of 30 minute battery life.”

So what was the spec for PSP. How high did it put the bar for itself?

“The original spec was to meet PS1, which would still be acceptable. But in fact, along the way to developing it we found out it was closer to PS2 as a result of the smaller screen.” (due to smaller screen you need less detail in the picture).

Games developers found processor does not need to be cranked up to full power for good result, which means headway is built in for upgrades.

Here's an example of what a well executed game console strategy can do for you:
(Adds fund manager comments, details)
By Kiyoshi Takenaka and Nathan Layne
TOKYO, June 20 (Reuters) - Nintendo Co. Ltd. <7974.OS> shot past Panasonic maker Matsushita <6752.T> in market value on Wednesday and closed in on Sony Corp. <6758.T> as investors watched it unseat Sony as unrivalled king of the game industry.
Nintendo's Wii has been outselling Sony's PlayStation 3 game console 3-1 in Japan and more than 2-1 in the United States so far this year, according to game magazine publisher Enterbrain and research firm NPD.
Demand for its DS handheld game players also far outstripped that for Sony's PlayStation Portable (PSP).
Nintendo shares closed up 1.4 percent at 44,500 yen, increasing its market capitalisation to 6.30 trillion yen ($51 billion).
That compares with Matsushita Electric Industrial Co. Ltd.'s 6.23 trillion yen and 6.64 trillion yen for Sony -- the world's largest and second-largest consumer electronics makers, each having sales more than eight times as big as Nintendo's.
"Nintendo is a market leader in everything it does now, which is basically the handheld as well as console gaming market. We haven't seen Nintendo being a market leader in both products for over a decade," said KBC Securities analyst Hiroshi Kamide.
Shares in Nintendo, known for such game characters as Mario, Donkey Kong and Pokemon, have been on an uptrend over the past two years, driven initially by strong sales of its DS handheld players, and recently by growing popularity of the Wii console.
Nintendo launched the Wii in November. The device features a motion-sensitive controller that allows users to direct on-screen play by swinging it like a tennis racket or wielding it like a sword, opening a new avenue of game playing.
Sony also started selling its PlayStation 3 late last year, but it has seen slow demand so far due to its high price tag and limited availability of attractive software titles.
"One thing about Nintendo is that it has killer products and they represent a big portion of its overall business, offering investors a very clear reason to buy," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
"I think Nintendo is bound to overtake Sony (in market capitalisation)."
Shares in Sony have gained 72 percent during the past two years, outperforming the benchmark Nikkei average's <.N225> 59 percent rise. But the performance is outshone by Nintendo shares, which jumped nearly four-fold over the same period.
Matsushita shares have put on 52 percent.
($1=123.36 Yen)
((Editing by Michael Watson; Reuters Messaging: kiyoshi.takenaka.reuters.com@reuters.net; +81-3-3432-8837; kiyoshi.takenaka@reuters.com)) Keywords: NINTENDO SONY/

Digital camera makers are also looking for ways to create a way to keep generating income, also after a customer has left.

Kodak, which had a nice business from film development systems and paper used by retail outlets around the world, tried with digital printing kiosks and printers.

Sony has also taken its first steps in photo printing systems. Luecke: “There are 2 ways for viewing pleasure. 1 is the electronic way, like with a TV, a projector or by displaying on a camera (which is why new Sony cameras have large 2.5 inch displays). Which is we’re trying to do a better job for the consumer.

“The other is print out. The printing industry is a fast growing business. We’re building consumer photo printing experience with dice-up printers (not ink jet laser printers) and kiosks.”

Partnerships:

“Partnerships with content providers are a key issue,” says David Steel, (March 10, 2005) Vice President Marketing Team Samsung’s Digital Media Business. He points at Matrix marketing, in which Samsung delivered a special phone for the futuristic movie. “We had a lot of benefit, in our targeted youth segment.”

“We also have more partnerships with cable and satellite carriers. (Versatel and Samsung set top boxes springs to mind). They need the hardware, and we need the content provider to facilitate our stuff.”

Philips has said similar things, that technological partnerships with distributors and content providers are not as easy to copy for low cost manufacturers.

Sony’s electronics marketing chief Fujio Nishida: “We’re afraid to dilute the brand by partnering with some other brand. Perhaps only with Louis Vuitton. Idei was crazy about that brand.”

The analogue edge

Han van Splunter:

“DAP is the wrong name for the division. DAP is really about personal care. Over time it wll become the lifestyle division of Philips.”

Why is it successful?

Take electric shavers. “In money terms it’s a relatively small market which is being managed perfectly by just two companies: Philips and Braun. And they do that with a lot of marketing pressure. The market pressure is so high and the products are so technically perfect, that that market is no longer accessible to others. They have all tried it: the Chinese and all the Japanese, in particular Panasonic, but they failed.”

“The metallurgic precision of our tools delivers extremely high quality blades. We use incredibly expensive machines, but we sell millions of products, so we have the scale. We make all the components ourselves, except for the batteries, because there are no other customers for the components.”

“Our marketing strategy allows us not to aim for maximum profitability, but to keep the keep communication pressure to consumers.”

Marketing efforts have been boosted further with new products like the Senseo coffee machine maker, a budget espresso machine which Philips has brought to market with coffee vendor Douwe Egberts, a Sara Lee unit, which sells the coffee pads. “Then you get a marketing push from two companies. We were the first to launch that model. It’s tough, because you’re in each other’s money streams and have to agree on investments. It was also difficult to pull off because consumable companies were not used to giving up some of their profits.” (Philips gets a slice from the profits on sold coffee pads, in return for offering its coffee machines at a low price)

The reason for the exception is the idea itself, which was put in by Philips, but more importantly its global presence.

An idea like Senseo is easily copied, and the technology itself is more than 100 years old, unprotected by patents, and, unlike the shavers, not very difficult to master.

“The big retail chains like Aldi and Wal-Mart, when they see a product like this, they immediately go to China and ask for something similar. But that’s not so easy, because you have to accompany it with a lot of marketing. We spend 80 to 100 million euros a year on marketing. That’s something you need to have the balls for. The coverage from that comes partly from the coffee machines, but mainly from the coffee pads. It becomes unattainable for dozens of competitors which have to recoup that money from machines alone.”

“In addition, we make the coffee machines very cheaply. There’s not a big margin on the machines. That’s a conscious price strategy.

Access to global markets is vital to achieve scale, and that is impossible to achieve for most Chinese manufacturers. “We make millions a year for the world market. The competition makes hundreds of thousands. The series (made by Chinese) are not big enough. They don’t have a world market at their disposal. But it will come, though. They will get that international strength.”

At a very early stage, Philips moved production to low wage countries in eastern Europe and China. “Earlier than others, DAP started moving production to eastern Europe and China in the 1980s.”

In Germany, where Philips sells 200,000 Senseos every month, it has over 50 percent of the market, despite stiff competition from local brands like Tchibo and Jacobs. “Columns of trucks drive from Poland into Germany every day.”

For the coffee vendors, the trick is to come up with better tasting coffee than the white brand competition who are also offering pads that fit into Senseo.

That does not mean all home appliances generate healthy profits. There are plenty of products where differentiation and scale play no role. “For toasters and other less differentiated products, it’s almost impossible to make a profit.”

Barriers to entry

Sony runs a very profitable business in digital camcorders. In the 9 months of fiscal 2004/2005 sales were up +10.4 percent to $8.1 billion globally. Profits from digital imaging slipped 42 percent but still at a healthy 451 million euros. Most of the profit from that unit, which includes digital still which deals with huge competition, is from camcorders. Why is camcorder so profitable, or more to the point: why are there so few competitors?

Sony’s Digital camcorder manager Nicolas Barendson:

“Camcorder is a relatively calm market. There are no Chinese competitors. Newcomers must invest so much to get started. They need knowledge of the optical port, mechanical parts, media, recording, compactness, autonomy.”

“The return on investment is a big question mark for newcomers. Sony has 40 percent of the European camcorder market, with a household penetration of just 20 percent.”

“Would you risk to invest billions of dollars in a market with only 20 percent penetration?”

“One of the reasons for low household penetration is that the products are expensive.

Digital still however is one of the most competitive segments in the world. There are some 450 products in the market, says Christian Luecke, marketing manager digital still cameras in Europe for Sony

Luecke: “In analogue cameras, a nice lens and film determine the quality of the picture. But you don’t have to be an analogue producer to make digital camera products. The new players make OK products. The components come are easy to get.

Continue with Chapter 2.3 here

What's new?

gadgethell — Sun, 17 Jun 2007 14:10:13 CDT

Sunday, 17 June, 2007
Two weeks ago I started my new job at ASML, one of the best kept secrets in the high tech industry. It is the world's biggest maker of lithography equipment for semiconductor manufacturing, with a global market share of around 64 percent by the end of 2006. Moore's Law, named after the Intel co-founder who prophecised that the cost per function on a chip halves every 18-24 months, is driven almost entirely by ASML and its two smaller rivals Nikon and Canon from Japan. This is rocket science at a nano level, because these guys are imaging electronics circuits as small as 45 millionths of a millimetre on silicon wafers, and they do it at a speed of 6 centimetres per second. The fault tolerance is 6 nanometres, or 6 millionths of a millimetre, and they get it right almost all the time. I'm their director of corporate communications, and have the sweet job to spread this story a little wider. Lots of touch points with companies in the Gadget Hell, to which ASML supplies, but this Dutch blue chip company is doing very well itself.

Friday, 25 May 2007
I'm updating the site with some recent input from executives. Also have some excellent sound bites which i'll include on the site. Working on chapter 2.2 today

Thursday, 17 May 2007
Three incredibly inspiring days in Paris at the Reuters Technology, Media and Telecoms Summit. We had some very insightful, high-level conversations with CEOs and CFOs of companies such as Nokia, Sony Ericsson, Fujitsu-Siemens, Samsung SDI, LG Electronics, Texas Instruments, Cisco, Intel, Microsoft and many others. Very soon, I'll update you on some of the comments relevant to the Gadget Hell.

Monday, 14 May 2007

Often, it takes a journalist to tell you what the story is really all about. My Reuters TV colleague Matt Cowan has just aired a piece about the project you are visiting, Check out: An invitation to Gadget Hell

Sunday, 13 May 2007
I'm off to Paris in a few hours, for a three day Technology Media and Telecoms Summit which Reuters organises every year. I've invited the president of Sony Ericsson, Miles Flint, who will speak on Wednesday plus a few others. We have simulateneous events in New York and Seoul, so in all we'll have dozens CEOs and CFOs exclusively speaking to Reuters over the next few days. Hopefully it'll be as much fun as it was in previous years.

Sunday, 6 May 2007
What is bugging the citizens of the French Cevennes? I just returned from a week in a very remote "gite" (French for: holiday cottage) in this rugged region in southern France (it takes an hour just to get bread, and Internet is something altogether alien to the area). Apparently, there are only 600 permanent residents in the national park Cevennes, which is almost the size of Luxembourg. Life must be tough, because I didn't see a single smiling face all week. Most people looked like they had swallowed a dead mouse. Even the service industry has trouble putting on a friendly performance. Restaurant owners turned us away at lunch hour because we showed up at 1330 o'clock ("tss, tss, don't you know lunch is served at 1230?"), shop keepers shouted at us for asking impertinent questions such as: "do you have bread?". It makes you wonder why "joy de vivre" is a French phrase, because the British, Italian and Spanish have muchmuch more of it. A strange but beautiful place, this France.

Wednesday, 25 April 2007
Another player kicks the bucket. BenQ from Taiwan just announced it is giving up its efforts to establish a global brand, and will become a contract manufacturer. It's not exiting the electronics industry altogether, but it's another sign of rot.

Monday, 23 April 2007
The look and feel of the site has just been adjusted. All thanks to Joost van Grinsven, who deserves megapraise and kudos. With some 15 years of experience under his belt, including co-ownership of the funky Van Gog studios in Amsterdam, this talented graphics and web designer recently started out for himself.

I've created an "authors" chapter where authors can put their profile. My suggestion is to add your name and a link to your profile each time you contribute something.

In last weekend's Dutch nupes (journo speak for newspapers) an interview with Antoine van Agtmaal, author of The Emerging Markets Century, which points to the innovative strength of companies in emerging economies. He mentions IT services group Tata from India, and computer devices makers HTC (Taiwan) and Lenovo (China). Samsung R&D budget (bigger than Intel's) is also mentioned. I keep wondering: the examples refer to commodotised products and innovation. Most of the strength of these companies is built on innovative production and process technologies. Let's not generalise R&D.
---
Wednesday, 18 april 2007
Traffic to this site is picking up. Not many people are playing with the text. Let me know what is holding you back, if anything.
I also welcome suggestions how to best credit people for their contributions. Is the best solution to add a page with the names and profiles of contributors.
Lucas

Why and How to contribute

gadgethell — Sun, 17 Jun 2007 14:00:58 CDT

Gadget Hell is a collaborative project, which means anyone can edit and contribute. This work is available under a Creative Commons (CC) license, which means you are permitted to use, adapt and distribute this work, but you have to name the source. (This wiki does not yet permit HTML code, which means that the CC logo cannot yet be published on this site, but it will be posted as soon as HTML code is allowed)

Many chapters are open to edit directly. Simply click on the "easy edit" button and adjust the text.

At one point (not now) some chapters may be locked, because they are considered finished -- there comes a point when you stop writing ;-) However, if you feel adjustments are needed, you can add a comment.

Sourcing: if you write or edit: be specific where information was obtained. And your profile should give your real name, location and contact details, so that everyone knows who to credit.

If, however, you want your contribution to be treated confidentially you can email to lucas@gadgethell.org and your identity shall not be disclosed (but please remember to give Lucas your credentials).

12 Strategies To Escape The Gadget Hell of Consumer Electronics And Reach The Gadget Heaven

gadgethell — Sun, 17 Jun 2007 13:59:44 CDT

Read why it is easier to make a profit in brewing beer than in manufacturing of a high-tech flat television

Find out how Bang & Olufsen makes more profit than Sony, which is 100 times bigger

Discover why Philips doesn't care about its profit margin

Will Nokia be the next marginally proftibable consumer electronics maker?

Producing a low-tech coffee machine can be more appealing than making a semiconductor

For all the glory of Apple’s iPod and Nokia’s mobile phones, the consumers electronics industry is not a land of milk and honey. The consumer electronics industry has brought us world transforming inventions such as the radio, the television, the personal computer and the cell phone, yet the companies producing these gadgets are mostly fighting a bloody struggle for survival. Even the biggest names such as Sony and Samsung have a hard time making a profit in the Gadget Hell. (start reading the Prologue)

This site looks for the causes of the crisis and it lists the strategies to reach Gadget Heaven. In the navigation bar on the left you will find the chapters. You are invited to contribute, either as a writer or a source, to the chapters that are still under construction. (read here how)

Who is behind Gadget Hell?
Lucas van Grinsven is a writer/journalist who worked for Reuters and at the Financial Times. He is currently based in Amsterdam, The Netherlands. (more here)

Why Gadget Hell?
As a technology reporter I talked to hundreds of executives of technology companies around the world. As the European Technology Correspondent at news agency Reuters, between July 2000 and June 2007, I became intrigued by the often very weak financial performance of electronics companies but persistent optimism of its managers. I started asking for explanations. What I ended up with was a lot more than I could work into a typical 600 word story for the news wire. Hence project: “Gadget Hell”. (more here)

Gadget Hell is a collaborative project
Gadget Hell is a collaborative project, which means anyone can edit and contribute. This work is available under a flexible Creative Commons license, which means you are permitted to use, adapt and distribute this work, but you have to name the source. (more here)

Have fun
Lucas van Grinsven

Chapter 1.6

jeremy_wetpaint — Fri, 01 Jun 2007 16:34:22 CDT

Hony or Sony, what’s in a name

If you want to know how far China has come along, go to Starbucks in the POS building in Pudong, the new business centre east of the river Huangpu in Shanghai. As you sip on your grande skinny capucino, admire the curvaceous counter, the soft greens and browns in the shop design and let the different stages of roasted coffee beans run through your fingers. No matter how far you travel, Starbucks makes you feel right at home. Except, this is no Starbucks.

The coffee shop in the POS building is intellectual property violation in action, and there is no place like China to witness it.

Auto parts, lamps, coffee machines, watches, sporting goods, shampoo, footwear, designer apparel, medicine and medical devices, leather goods, toys and batteries are just some of the counterfeit products that are manufactured and distributed within China, or exported to other countries. China was the number one source of counterfeit products that were seized at the United States border. Interpol estimates that 7 percent of global trade now involves counterfeited goods, or $512 billion in 2004.

Not a week goes by without the seizure of counterfeit products made in China. $400 million worth of fakes in 100 containers from a Chinese-Middle Eastern ring were seized by the U.S. in 2004. Containers destined for Saint Petersburg were captured by Rotterdam customs authorities in November 2005, containing one million pieces of counterfeit sports apparel and shoes. The number of fakes seized in the European Union has increased 10-fold over the past 5 years. The gallows joke among Western businessmen is that research and development in China doesn't stand for “research and development” but for “receive and duplicate”.

It is one thing to seize fakes in the European Union and North America, but it is something else to clamp down on violation of copyright, patents and trademarks in China itself. On average, 20 percent of all consumer products in the Chinese market are counterfeit (U.S. Department of Commerce, the U.S. embassy in China). The number is even higher for software: 90 percent of software programmes in China are illegally copied. (IDC, BSA). Film publisher 20th Century Fox offers its DVDs at a sharply reduced $4.99 in China, and still sells only a total 20,000 copies a year. “We do it just to prove a point,” says Andy Setos, president of engineering at the studio.

What 20th Century Fox is selling is not a DVD, but a “master” from which to make millions of perfect copies.

To get a feel for the magnitude of the “industry of fake”, amble down the Xiangyang street market in Shanghai. On the packed sidewalks leading up to the market you will be hassled by aggressive peddlers of DVDs offered to you for $1 or $2 apiece. On the market itself you will find big team soccer jerseys, Oakley sunglasses and Armani suits. These days, after a few formal police clampdowns, a lot of it is hidden under the table and salesmen will hiss famous brands into your ears. It feels very much like being approached to buy drugs, and in a way it is exactly the same. Unless you can manage a very determined look that you're just here for a little stroll in the sun (hey, who are you kidding?) they will not stop until you get your fix.

Within China, counterfeiters have also started to explore the grey area of “99 percent” copies. Starsbuck instead of Starbucks, a Hony radio which looks remarkably like a Sony, an Arsenal football shirt with a slightly tweaked club logo, a Golo rather than a Volkswagen Polo, a Philoshave and Filoshave razer next to a Philipshave, Lacoste shirts with the crocodile facing to the right instead of the left. And there is nothing criminal in selling suits from Armania or Calvin Klenin, is there? Some of these cases are brought to court – throughout the country there are now special IP courts – but in many cases these Chinese “pirates-but-not-quite” are vindicated.

Counterfeits are just one part of intellectual property rights violation. The guts of consumer electronics are protected by patents, but from the outside no one can see if the royalties have been paid. Electronics companies have had to set up large offices in the region to do the policing themselves, all the while trying to convince the Chinese government about the just cause.

Rob Westerhof, who was in charge of Philips’ Asia operations for years recalls how the Chinese government initially rebuffed. “Their story was: ‘We’re unfamiliar with the concept of intellectual property rights.’ Then the story developed into: ‘If the technology is already here, why should we pay for it?’ Between 1998 and 2000 we had countless meetings with the Economics Ministry. After we explained that without protection there would be no investments in new technology they said that if they recognized intellectual property and violations, they would not be able to afford all the overdue royalties.”

In 2004, an agreement was reached that Chinese companies would have to pay reduced royalties for CD and DVD technology, in return for which some long overdue royalty payments were made. Fundamentally, however, the Chinese feel that the Confucian principle of balance should be reached before they will fully comply.

“They have told us that they want to start paying royalties when they have enough intellectual property of their own that it balances out. That’s a very Chinese thing: there should be a balance. And that could take a while,” Westerhof says.
China’s half-hearted approach was also expressed by the highest authority, Wu Yi, vice premier of the State Council and head of the National Intelluctual Property Right Protection Working Group at a symposium in Xiamen in September 2004. After saying that China attached great importance to intellectual property protection, she added that Western and Japanese enterprises should appreciate that China is still developing and that advanced technology should not be monopolized but instead be introduced in China.

Several years ago the Chief Technology Officer at Sony Electronics, Katsuaki Tsurushima, had a meeting with the highest government official for technology about intellectual property of CD Video. “They had copied CD technology, but they said it was not from Sony and Philips.” The argument was that China had contributed its own technology by adding translation with Chinese characters. Tsurushima was not amused and pointed out the argument was nonsensical, after which the Chinese official ended the conversation with a dismissive joke: “Even if we took something now, we gave you Kinzo,” referring to the Chinese characters which are also used in Japanese scripture.

“They will grow up, but it will take a long time. Because they have 4,000 years of history,” Tsurushima says.

Despite the clampdowns on some of the most blatant and visible infringements, the daily practice of piracy has hardly changed. U.S. Trade Representative Peter Allgeier said in April 2005 that infringement levels remain unacceptably high throughout China, in spite of Beijing's efforts to reduce them. What seems perfectly reasonable to China flies in the face of Western logic. Stealing is wrong, and that is all there is to say about it, according to the protestant value set.

Western politicians often complain China and other emerging Asian superstates like India are only interested in their own development, and ignore transnational responsibilities that come with the position of power. (Dutch Foreign Minister Ben Bot) Five of the 10 most polluted cities in the world are in China, and the country needs 5 times more energy to produce $1 of GDP compared with Western Europe (Appendix; and Energy intensity for GDP decreased by 50 per cent from 5.32 tce in 1990 to 2.68 tce in 2002 for per 10,000 Yuan GDP at 1990 constant price; Energy Research Institute China). But China argues it is a developing nation and first needs to give all its citizens a base level of wealth, before it can start caring about the environment. Didn’t the West do the same?

Continue with Chapter 1.7 here

A Prologue

gadgethell — Thu, 31 May 2007 06:19:36 CDT

My first assignment to cover a major story in the glitzy world of consumer electronics should have been a warning signal. It was January 1997 when the Lufthansa plane hit the tarmac in Nuernberg (Nuremberg) in southern Germany, on my way to nearby Fuerth to write about the demise of the once mighty electronics firm Grundig.

It was one of those miserable weeks that define the depressing north-western European winter, with temperatures around zero and ashen skies that could not decide between being clouds or mist. In a tired Mercedes cab with peeling leather upholstery and the smell of old cigarettes, we ploughed through the sleet on the autobahn. It did not feel very glitzy to me.

This was the home of Grundig, and the weather chart symbolised the crisis that was facing a company which only three decades earlier was synonymous with the German Wirtschaftswunder of post-war economic recovery. The first TV many Germans could afford was made by the company founded by Max Grundig.

At its heyday, Grundig employed over 40,000 staff, but that number had dropped to less than 7,000 in 1997 when I arrived in the Bavarian town. Standing at a vast and desolate car park, a security guard pretended to flatten two office blocks and several manufacturing sites with a sweeping gesture. Those had been sold. I had just been inside one of those grey buildings dating back to the 1950s and 1960s. The design furniture was the same age as the buildings and had once been ultrachic. Now, though, it was faded and worn.

At one the sites where Grundig was still producing video recorders and TV sets, the car park was nearly empty at 2:30 in the afternoon. “Working hours have been cut by two hours. We need to produce less, because we cannot sell enough of our TVs,” said Robert Schmidt, a 37-year veteran on the production lines. Within a year, he told me, he would lose his job. By the end of that year, Grundig would employ only 6,100 staff.

The unions, which have powerful positions in post-war German enterprise and take seats on the board, were “stinksauer”. They blamed the downfall on Philips Electronics, the big rival from the smaller neighbouring country of the Netherlands which had taken a 32 percent stake in the company in 1984 plus an obligation to buy the rest 20 years later.

Philips’s consumer electronics chief Joop van Tilburg had indeed accelerated the problems at Grundig. Instead of reading the tea leaves of the global economy and the transition to low cost production sites, Van Tilburg had decided to augment production capacity in Germany at the end of the 1980s and early 1990s. Enthused by the political whirlwinds after the collapse of the Berlin Wall, he was one of many who expected an economic boom period for Germany, eastern Europe and Russia. Eastern Europe was soon going to be Europe’s own Asia. His mistake had dramatic consequences.

“When that eastern European growth did not come through as fast as expected, we had to wind down capacity again,” recalls Han van Splunter in 2005, a Dutchman who was on the four-person strong Grundig management board for six years. He helped to shut factories in Barcelona (Spain), Italy and France, and move production to eastern Europe while creating a base of contract manufacturers in China. But the most important manufacturing base, Germany, was much harder to restructure. “It was extremely difficult to do that in Germany.”

In an attempt to stem the tide with an aggressive move to increase its size, Grundig wanted to take over the television set activities of Nokia from Finland. Nokia’s TV operations were in a similar tight spot, and the new CEO Jorma Ollila was ditching everything unrelated to mobile phones. (in 1992/1993 just when Jorma Ollila had taken over as CEO of Nokia) The takeover failed, because Nokia refused to shut a loss-making TV tube factory in Esslingen, Germany, which was a condition for the acquisition. “Grundig didn’t want another bad running factory,” said one person close to the companies. Ollila declined to comment, but sources at Nokia confirmed the talks.

Grundig’s CEO in 1997, Pieter van der Wal, a giant fair-headed Dutchman who went by the nickname ‘the killer whale’, took the blame. “In hindsight, Grundig was too focused on Europe, and within Europe too much on Germany. In addition, we wanted to make too many products by ourselves.”

Under the terms of the 1984 purchase, Philips had been obliged to cover all of Grundig’s losses, and pay an annual dividend of 45 million euros to the heirs of Max Grundig regardless the earnings. It had already spent more than 3 billion guilders (1.4 billion euros in today’s money) on the German company when reporters filed into a conference room on that miserable Friday in 1997. A few moments later Philips announced it would cut all ties with Grundig. The German consumer electronics group was a sinking vessel that would need to find another partner to keep it afloat, said Philips, hardly trying to conceal its bitter contempt.

Dieder Dornberger, another assembly line employee who I met a few hours later, was deeply saddened when I asked him about the decision. He too would lose his job that year.

Grundig relied heavily on one product, TV, and TVs were no longer special enough to guarantee fat profits. Three quarters of Grundig’s annual sales of 3 billion marks (1.5 billion euros) was generated by TVs and VCRs, with remaining activities in car radios and HiFi equipment. TV-making, in the mid-1990s, had become a cut-throat industry. The technology to make a TV was no longer a well-kept secret and this had led to a host of new Chinese rivals which were producing important components such as the tubes and benefited from their lower cost base. Lower prices and oversupply caused sharp price drops. Every year, VCRs became 10 percent cheaper and TVs dropped 5 percent in price. Only very large players were able to reduce their costs enough to stay marginally profitable. Grundig, with its factories in high-wage Germany, and its reliance on Philips chips and tubes, was not one of them.

The very thing that was killing Grundig in the 1990s had once been its birthright. Benefiting from low cost labour in war-destroyed Germany, it had carved out its place in the market by leading the price war. In 1952 it had introduced the Zauberspiegel (The Magic Mirror), which was the first TV priced under 1,000 marks. Max Grundig had opened the TV era for Germany.
The company was an early adopter of new technologies, either purchased or developed in-house, with products such as a mini-radio in 1947 and a portable radio in 1949. It launched a dictation device in 1954 and a tape recorder in 1955. But by 1997, all of these products were at the end of their development. The consumer markets, in particular Grundig’s German home market, had become saturated.

There was one big hope: high definition television. It was a technological leap ahead that would leave the low-cost Chinese biting the dust, and it would force consumers to replace their existing sets long before the end of the normal life cycle. But the technology was not ready yet and the revolution took another decade to take off. Instead, TV makers tried to lure consumers into buying sets with wider screens (16:9, instead of 3:4). These were also harder to make for the Chinese upstarts. The mass market, however, did not bite. A new consumer electronics product needs to be “10 times better” in order to convince consumers to upgrade, according to former Intel CEO Andy Grove, and a few centimetres of extra TV screen added to the side was not a compelling reason for consumers to flesh out a 500 to a 1,000 euros.

An emblematic tale
Grundig’s fate was emblematic for the German processing industry. In eight short years, the German economy had gone from 32.2 percent of GDP generated by manufacturing industries in 1986 to 24.5 percent in 1994. Grundig was not the first “Traditionsunternehmen” (traditional enterprise) that collapsed under the pressure of high wages. Another example was the Allgemeine Elektrizitäts-Gesellschaft, better known as AEG, wich dated back to the 1800s. Parent company Daimler-Benz, was fed up with the losses of its white goods and electronics unit and had shut it down in 1996. Only the brand survived, and landed in the hands of the world’s biggest white goods producer Electrolux in 2004.
Grundig awaited a similar future. No strategic partner was prepared to pick up the pieces left by Philips, and the firm ended up in the hands of a Bavarian consortium led by several regional banks. The losses kept mounting and the firm had to seek creditor protection in 2003 when employee numbers had dropped to 3,500. Grundig’s consumer electronics activities, effectively the brand name and some sales staff, were sold for 80 million euros to the Turkish firm Beko Electronics which has large production facilities outside Istanbul, and Britain-based Alba Radio Ltd. Car systems were later sold to United States-based car parts giant Delphi – which in its turn collapsed in 2005.

Nazi Landmark
I left Fuerth and Nuernberg (Nuremberg) with the image of two symbols of bygone eras. At a stone’s throw away from the soon-to-be derelict Grundig production facilities, I passed the stadium designed by Nazi architect Albert Speer for the NSDAP party rally. In the same city where World War Two criminals had been sentenced to death, the 1930s symbol of their megalomania still lay there. I was stunned. Somehow I had always assumed that this dubious site, the scene for Leni Riefenstahl’s 1934 film Triumph des Willens, had been demolished. I realised the Grundig name would probably be erased from the Nuernberg (Nuremberg) landscape long before Speer’s landmark.

Grundig not alone
Grundig’s story was no isolated case. There had been many Grundigs before Grundig, and there would be many more after it.
Aristona, RCA (Thomson) and Nokia are no longer TV makers. Well known American brands like Zenith, Emerson, Magnavox, Sylvania, Philco, Admiral, GE, Sears (Warwick), Quasar (Motorola) have exited the business. In Europe, Saba (Thomson), AEG, Thomson have all disappeared. In Italy, dozens of smaller names have vanished.
They all struggled to deal with a new world of ferocious competition, mainly from Asian rivals whose names they could not pronounce, In the early 1990s, many of the new Chinese rivals did not even exist five years earlier.
Let’s take a closer look at Nokia, which is now the world’s best known maker of mobile phones, but which in the 1980s was an industrial conglomerate looking for a future. It had decided it wanted to be a top consumer electronics name and had started buying troubled TV producers Nokia had acquired Salora from Finland and state-owned Luxor from Sweden in 1983, as well as Oceanic from France in 1987 and the associated companies Sonolor and Televisso which was from Electrolux of Sweden. Nokia also bought Standard Electrik Lorenz (SEL) from Alcatel in late 1987. It produced TVs under Finlux and Guestlink.
All this consolidation had given Nokia a larger presence, but it was still not big enough to compete with cheap Asian imports and its production base was in expensive Europe. Soon after it turned down Grundig to merge because it did not want to shut down its Esslingen plant, it was forced to close it anyway. Nokia’s capacity was 2 million tubes a year, and it needed 3 million to be profitable.
Its TV production activities collapsed in 1996 after it failed to find a partner. It had to shut down most of its operations. Cumulative losses from TV manufacturing had been 1,3 billion euros. Without the profits from Nokia Mobile Phones and Networks, Nokia may very well have collapsed. Thomson, in its turn, booked billions of euros of aggregate losses in the 1990s.

Consumer electronics has transformed our lives
Why is it so hard to make a profit with a TV? After all, TVs are important to our lives. We dwell a staggering number of hours in front of TV screens. An average person in North America watches four hours and 32 minutes of TV at home every day. (Nielsen, in 2004/2005 TV season). Europeans tend to lag behind, but still watch an average 3 to 4 hours a day.
But there is more time we spend in front of screens. Young people between 8 and 18 years spend eight and a half hours of recreational (non-school) use of TV and videos, music, video games, computers, movies, and print. This total amount of media content consumed by young people has increased by more than an hour over the past five years (from 7:29 to 8:33), with most of the increase coming from video games (up from 0:26 to 0:49) and computers (up from 0:27 to 1:02, excluding school-work). (A March 2005 survey of 8 to 18 year-olds by the Kaiser Family Foundation)
Because children multitask, they pack that content into an average of six and a half hours a day, (44.5 hours a week) including three hours watching television, two hours listening to music, more than an hour on the computer outside of homework, and just under an hour playing video games.
Adults may spend less time in front of a PC at home, but most office workers spend hours every day in front of a PC monitor.
The time we spend in cars dwarfs by comparison. The people in Basel, Switzerland spend only 27 minutes per day in a car, but even in car-intensive Perth in Australia it is not more than an average 47 minutes a day (study Werner Brög, Nicola Mense, Socialdata GmbH, Hans-Grässel-Weg 1, 81375 Munich, Germany; Broeg has been a lecturer at the Massachusetts Institute of Technology (MIT) and at the Technical University of Graz (Austria).
One would expect that the companies who gave us the Walkman, the compact disc, the DVD player and plasma TV are handsomely rewarded for their accomplishments to change our lives so dramatically over the course of the last 50 to 60 years. Who would have thought 10 years ago that we could play all of Beethoven’s symphonies from a gum-sized MP3 player of just a few grammes worn around our neck? It’s nothing short of magical.

Profits are tiny
For all the importance of consumer electronics, almost all manufacturers of our daily high-tech diet struggle to make a profit.
For the last nine years, the world’s top consumer electronics companies -- Sony, Panasonic-owner Matsushita, Samsung Electronics, Philips and LG Electronics – have generated disappointing profits from their operations. Profits have averaged well below 5 percent of sales of TVs, DVDs, camcorders, digital cameras, stereo sets and other consumer gadgets. (graph 1). For every dollar of equipment those multinational behemoths sold to retail stores like Best Buy, Circuit City and Media Markt, they have only been able to keep a few cents of profit after deduction of all their costs.
Sony, the best known consumer electronics brand in the world and a fountain of innovation, has not generated earnings from its consumer electronics operations in the last four years. Even when the profits from its highly successful games console PlayStation are thrown in, the company’s profit margin has not exceeded 2.5 percent.

Sony is no isolated case. The top 10 electronics companies in Japan, including top names such as Fujitsu, Toshiba and Canon managed to earn an operating profit of just 2.8 yen on every 100 yen of sales (excluding Sharp which did 5.9 percent)

Samsung, the big challenger which has stormed into the global top 3 during the last decade, has very little to brag about either. Its record profits are entirely generated by its electronic component divisions and its mobile phone unit. The large digital media group which makes PCs, TVs, hard disk video recorders, MP3 music players, camcorders and still cameras has been barely profitable.

The same gloomy story goes for personal computers, which have also come to fit into the consumer electronics space as roughly half of sales are to consumers, students and home offices. Averaged out over the last nine years, Hewlett-Packard earned next to nothing with its PC unit. And IBM, the company which set the world standard for the personal computer in 1981, piled up $973 million of losses in the 3.5 years before it decided to sell that division for all but $1.25 billion to Lenovo from China in late 2004 – it has annual sales of close to $10 billion.

(For a full Excel spreadsheet and graphic of the long-term financial performance of consumer electronics companies, click on the Excel attachment at the end of this Prologue)

“The PC business has a history of recurring losses, negative working capital and accumulated deficit. The ability to settle obligations as they come due is dependent on IBM funding the operations on an ongoing basis,” IBM said in a regulatory filing published on Dec 2004.

David Katz, chief investment officer at New York-based Matrix Asset Advisors, sold millions of shares in Hewlett-Packard after that company took over Compaq and, briefly, became the world’s biggest PC and computer maker. Investors who buy shares in H-P only pay for the printer business. The balance of the computer business they get for free, he says. In other words, H-P’s personal computer business which generated staggering revenues of almost $25 billion in 2004, is deemed worthless by investors. (operating profit margin hovered between 0 and 1)

A small profit is the same as no profit
It is a misunderstanding that a company is secure as long as it is making a profit, no matter how tiny. Normal companies need capital to conduct their business, to invest in factories, to finance their inventories and give credit to customers – there are examples of abnormal ones and I’ll talk about those later.

Most companies have to borrow that money, either from banks or investors, and they pay roughly 7 percent of interest for a year. Even if they do not have to borrow that money, for instance because they have been able to save some cash, the money they invest still has a price because it can be productive elsewhere. Suppose that a company has a billion euros or dollars in the bank. It can use that money to build a new factory, but it can also invest the money in a mix of bonds, equity, commodities and real estate, and achieve a reasonably secure return of around 7 percent, depending on how much risk it is willing to take. This opportunity cost determines the price of the money that is needed by a company, also known as the "cost of capital". And so a company must always be confident its investments will generate more money than the capital markets. Why else would would anyone -- including you -- invest in your company in the first place?

Sometimes a company does not need any money, even when it makes a loss. If such a company does not have to invest a lot of money in its factories, it may still generate cash. The mirror image of this example is a very profitable company which consumes cash -- for instance a fast-growing company which is investing a lot of money. Over the long run such a profitable company is doomed if it's not able to cut its spending or boost sales and start generating cash. Surely if that's the case, then the marginally profitable consumer electronics companies may not be in such dire straits after all? Suppose they have very modest investment needs? In that case it's almost irrelevant how small their profit is.

While that may be the case -- and we will see that this is indeed the strategy pursued by some of the electronics firms, -- investors still expect the company to generate a long-term return on its assets. Investors have many options for their nest egg. If a bank offers a safe interest rate that is higher than a company's share price increase annual dividends, they may sell the shares of that company. If many people sell shares, that leaves a company vulnerable for a takeover, or the management may get the boot.

Indeed, a nest egg is often better off at a local bank branch where a savings account yields a safe albeit meager 4 percent interest, than invested in an electronics company. Investors know it, too. The stock market tells that tale in very clear numbers. Shares of Philips, in June 2005, were at the same level where they were in 1998. Sony’s stock was at levels of mid-1997. Hewlett-Packard, the company which almost single-handedly created Silicon Valley, saw its shares hover around 1996 levels. And by mid-2005, Motorola and Matshushita shares were back where they were in 1995.

Compare that with the tech-heavy Nasdaq stock index in New York which has more or less doubled early 1997 and mid-2005, on the back of phenomenal price performances of software and Internet companies such as Oracle, Microsoft, eBay, Yahoo, and, as of late, Google. The main Dow Jones Industrial went up 64 percent over the same period.
In general, the software and Internet companies have done remarkably better than the hardware firms. Yet, without the hardwired boxes produced by the likes of Motorola, Sony and Hewlett-Packard, there would be no software or Internet to use. You need a computer and a display to search on Yahoo or run a word processor.

Why is it that many hardware companies pulled the short straw in the past decade? More importantly, why do these tech giants continue to throw valuable resources such as money and talented people at an industry that is so clearly unable to deliver results? And what does the next decade have in store for those struggling companies?

These questions surface every three months with another string of disappointing quarterly results, like an endless strain of un-kept promises of improvement only occasionally freshened up with a rare windfall that will not last.
If there had been an investor at Kitty Hawk on December 17th 1903, he might have shot down the Wright brothers’ contraption of tent poles and cloth, multibillionaire Wall Street investor Warren Buffet from Omaha once said. That smart investor would have saved the world from billions of dollars of capital destruction by the airline industry in the following century.

You may wonder what would have happened, had that same investor been present at the New York Bell Labs in December 1947 when John Bardeen, Walter Brattain, with support of their supervisor William Shockley, discovered the transistor. And what would have happened in Philo Farnsworth’s lab in 1927 if that same investor had witnessed the transmission of the first television image comprised of 60 horizontal lines? Or even earlier, in 1884, would that investor have also stopped Paul Gottlieb Nipkow proposing and patenting the first electromechanical television system?

Without these geniuses, there would not be no $2.5 trillion a year technology industry, or the Internet, or the fifth season of the West Wing. But neither would there be the value destruction as applied by so many of the companies who sell us personal computers, microwaves, digital cameras, car radios, TVs and electronic toothbrushes that have come to define our modern lives.

Gadgets have helped the greater good
It would of course be a tad short-sighted to land a hammer on the first transistor only because Sony failed to make a profit 58 years later. Billions of dollars have been burned by the airline industry, but its planes have enabled global trade. Similarly, technology products have made us more productive, they have made our lives more comfortable, and they also have borne the radio, TV and Internet media industries.

The fact that Hewlett-Packard, IBM and pretty much all of their competitors cannot make a profit from PCs does not make the invention itself a failure. Without the PC, we would be without email or spreadsheets at work. It’s only a few decades ago, before the introduction of the fax, that we would wait a day or two to receive our mail. With our cell phones and Blackberries we now have instant access to people and email wherever they are. At home, without a PC there would be no song swapping, no CD burning, no free Internet calls.

“It’s such a fast-paced industry. It has the potential to be very cool and emotional,” says David Steel, Vice President Marketing Team Samsung’s Digital Media Business. Perhaps we should just be grateful that the PC producers go through the trouble of delivering computers to us at cost price, and move on.
Still, it is puzzling why it is so hard to make money with such essential products as PCs of which over 200 million units are sold every year. Equally disturbing perhaps is that the similarly sized TV market, another 190 million units every year, is an almost identical trench war. Why do we not award the producers according to the value they provide us?

It is not as if computers and televisions are easy to make. You need big factories, expensive equipment, lots of trained engineers and a library of books on physics, chemistry and electronics.

How unfair is it that some companies only need fresh water, wheat, barley, hops and yeast to brew up profit margins that are a lot higher. Beer brewer Heineken generated an operating margin between 10 and 15 percent for the past 10 years. Anheuser-Busch, the producer of Budweiser, squeezed out an operating margin of more than 22 percent in 2004, 2003 and 2002. How do they manage to achieve such results, considering that it is hardly a sophisticated production process? After all, even the ancient Egyptians already knew how to brew a pint.

And so the question is why? Why is Sony still in this industry? Why is life so bad for LG? And what are they going to do about it?

You liked the Prologue? Continue with Part 1 here

Chapter 2.4

gadgethell — Tue, 29 May 2007 10:32:02 CDT

Brand

Which is first: the brand or the product? Is iPod a success because of the strong brand of Apple, or is Apple a strong brand because of its products like the Macintosh computers and iPod?

Brand value is added value, and should be included when caculating return on capital.

Jan Oosterveld: The brand is being promoted by the consumer products. You need the brand investment. That’s worth it.”

Ten years ago, when hearing the following names most people would shrug their shoulders: Haier, Tsingtao, TCL, Lenovo. While not exactly household names around the world, these firms are becoming familiar to consumers. In another 5 years, Huawei may be as familiar a name as Alcatel. Ningbo Bird may be right up there with LG and Samsung, while Little Swan ….. Are we watching the birth of the next multinationals?

“The more cluttered a space becomes, the more customers seek a brand. We’ve made a big effort to create that. Our corporate marketing budget is $400 million a year. That doesn’t include product marketing.” David Steel, (March 10, 2005) Vice President Marketing Team Samsung’s Digital Media Business.

“We couldn’t afford to be a low margin manufacturer. The business model for that sort of market position is low cost, a lot of outscourcing and no brand. That was not how we organized the company.”

All producers point out that the products are the main point of contact with consumers, and that a brand image starts there.

Fumio Ohtsubo: “A good product is the most important thing for the brand value.”

Design is also a key element. Samsung’s Steel mentions the tectile sensations to create products that are aspired by consumers.

Ohtsubo also stresses the importance of simplicity as a way to build brand value. His boss, Matsushita’s chief is on a mission for “universal design” which needs to lead to simplicity and ease of use.

Care for the environment, often mentioned by Matsushita, Sharp, Philips, is also seen as a way to create sympathy with consumers. “Environment also brings up the brand value,” Ohtsubo says.

Lenovo’s marketing chief Deepak Advani points to Samsung as to what can be achieved by Asian companies that are able to combine innovative products with consistent branding. (FT, Nov 10, 2005)

“The brand essence is innovation that matters. Branding is not a marketing issue for us, it is a business issue. We have to deliver on products and services.”

From Goldman Sachs and Wolf Olins study, Feb 23, 2007:
Brands are increasingly important because consumers today face enormous
choice: for any given product or service there are tangible and intangible
features with multiple price-points that they need to trade off. Strong brands
help consumers navigate by standing for functional, emotional and pricerelated
attributes that consumers recognise and trust. They reduce consumers’
search costs, facilitate choice and preference, and drive long-term loyalty.

As industries mature, commoditisation pressures inevitably set in.
Competitors and new entrants mimic the functionality of market leaders,
slowly mitigating any perceived functional and, eventually, even emotional
differences. And as consumers fail to recognise any differences, price
becomes the main criterion for choice, leading to eventual margin decline.
Successful brands fight this trend by creating differentiation in
consumers’ minds. In many cases this differentiation is purely perceived.
Mercedes, for example, retains strong functional perceptions: it is thought of
as the best engineered car despite its dramatic falls in reliability rankings.
Price differentiation can also be perceptual; Skoda, for example, goes to
market as a low cost car, despite being more expensive than its Korean rivals.
And for other brands its emotional differentiation; BMW’s Mini, for example,
exists principally because of its emotional bonds with consumers. Every
industry has competitors differentiating to a lesser or greater degree around
these elements. In the airline industry, Singapore Airlines differentiates on
quality and service (function), Easyjet on price and Virgin Atlantic on
emotional elements.
Sustainable differentiation builds strong emotional bonds, which
drive choice and loyalty
Successful brands sustain their differentiation by tailoring their offer to
specific customer segments, and keeping those consumers engaged with fresh
and relevant propositions. The purpose is to both enlarge and deepen the
relationship with their clients, thereby creating emotional bonds that
competitors will find hard to break, even after years of below-par product
line-ups.
Our research has shown that, in the handset market, this emotional bond –
captured by the Wolff Olins Love Index – is critical to handset vendors’
performance.
First of all, this is because emotional bonds drive choices, i.e. consumers tend
to choose the brands that they love the most. As a result, long-term market
shares are highly correlated to “love” scores, which assess whether consumers
dislike, are indifferent, like or actually love their handset. More importantly,
variations in “love” scores are highly predictive of future market share
changes. Our model, in this particular case, showed a closer correlation
(R-squared of 79%) than the more widely used “net promoters” score
(R-squared of 30%). (The net promoters score is the net of consumers who
would positively recommend a product to their friends, less those who are
indifferent or negatively disposed.)
Secondly, emotional bonds are important because they drive loyalty, i.e.
consumers tend to stick to those brands that they love the most. As a result
vendors with higher “love” scores enjoy much lower customer volatility,
making them less vulnerable to commoditisation pressures.

In our last report, we highlighted Nike’s response to the challenges of
maturity in the sneaker market, which has become the benchmark for brand
and marketing excellence. It exemplifies how vendors can achieve effective
customer segmentation by (1) standing behind a strong and recognisable set of
ideas – what we would call the brand DNA – and (2) organising and
communicating its offer in a form that connects with each individual buyer.
Coming from a track & field heritage, Nike always stood for “Winning”. It
successfully expanded to other categories such as basketball and tennis by
signing up iconic athletes while forging strong emotional bonds with
consumers through the long-running “Just do it” campaign.
When the market matured, Nike’s strategies had to become even more
targeted and segmented. As a result, new market niches were created. The
product portfolio was organised around families and sponsorship grew to
local teams and events, thereby showcasing each branch of the offer in an
individually relevant way.
Yet, despite the fragmentation of the offer and audiences, the ideals that the
brand stands for never changed. For those segments that the brand could not
stretch to, new brands – such as Converse and Cole-Haan – were bought.
Today, the Nike brand is present across all price points and categories. Its
products are generally seen as more expensive than those of its competitors
but still considered by consumers to be worth the money. And both the brand
and the group are growing.
We continue to believe that Nike’s example offers insights for the
handset market. Differentiation allows brands to generate their own pull,
thereby providing relief from distribution and competitive pressures.
Blackberry’s Pearl is a case in point. Strong differentiation is leading to very
strong “love” scores and purchase intentions from customers belonging to all
types of operators, despite the fact that so far the product is only available at
T-Mobile and Cingular in the US.
Furthermore, differentiation also allows brands to stand out from their
peers, thereby attracting higher market share in fast-growing markets
such as India and China. This is highlighted in our vendor-specific findings
below, which show that the brands which seem to stand for and stand out for
something coincide with those that are most likely to succeed in India and
China, i.e. Nokia/Sony Ericsson in India, and Nokia/Samsung in China.
The industry is making progress, but could still do much better
Over the last two years in particular, a number of handset vendors have made
major efforts (and substantially increased investments in advertising) to
reposition and differentiate their brands, although progress has been quite
slow and the full results have yet to emerge. For example, Nokia has yet to
roll out its new brand message across most of its markets, and is still some
years away from fully segmenting its product range in a consistent way. We
note two continuing challenges that most vendors need to address:
There is still a lack of strong, clearly understood ideas
In our view, too many handset brands still fail to reflect clearly the four simple
virtues that underpin great brands. Such brands stand for something that is:
- Simple: clear and relevant
- Unique: different and ownable
- Big: important and relevant to all segments
- True: credible and deliverable.

Nike’s brand is again an excellent example. It stands for activating human
potential, crystallised in the famous “Just do it” tagline.

Our research suggests that Nokia is still living off its legacy – it is still mostly
known for being “easy to use” and “reliable” – while Sony Ericsson stands for
“technologically advanced”, Samsung stands for “high quality” in some
markets and Motorola does not stand for anything in any market.
All these attributes are not sustainable in our opinion. Nokia lost its “easy
to use” edge to most other handset brands in the US while Blackberry has
already overtaken Sony Ericsson and Samsung in “technologically advanced”
and “high quality” categories in the US and the UK.
Customer segments are not being targeted effectively
In addition, brands do not seem able to connect with segments in most
markets. With the main exceptions of the Unpretentious in the UK,
consumers rarely recognise brands for those attributes that matter the
most to them.

We believe that confusion at retail is likely to be the single biggest headache
that vendors have to overcome if efforts at segmentation are to succeed. One
way to address this problem is through improved retail education. Nokia
claims to have found up to a 200% jump in sales at retail outlets where it has
trained the staff to understand the differences between its products. This may
be harder to achieve at operator stores than at independent retailers/
distributors, although potentially improved consumer education could benefit
both operators and handset vendors if it leads to accelerated take-up of new
services.
A second important way to reduce confusion is to ensure products visually
stand out on the shelf in a highly recognisable way. Sony Ericsson’s success
with its Walkman products probably stemmed in part from their distinctive
orange colouring, while the familiar Walkman logo instantly communicated
their differentiated functionality. In fact, the W800 Walkman phones are a
great example of the power of segmentation to boost margins. These products
had almost exactly the same functionality as the K750, but came at a
significant price premium.
Difficulty in navigating through the offer has important consequences.
From consumers’ point of view, it means search costs have escalated, often
causing them to settle simply for the latest deal rather than expending the time
and effort needed to find the exact handset that meets their requirements.
Once again, this highlights the power and importance of distribution, and the
ability of retailers/operators to weaken handset brands.
Nokia spends more dollars on advertising and promotion (about $2.1 billion) Nike ($1.8 billion) -- as a percenttage of sales Nokia spend 4 percent and Nike 12 percent. Nike ranked 31 on the Interbrand/Economist 2006 brand value ranking with $10.9 billion, and Nokia ranked sixth with a $30.1 billion brand value. Both values had risen by 8 and 14 percent respectively.

Going Upmarket, the position of the brand

Remember Bang & Olufsen? There’s a Danish example:
Being slow and expensive is good, says B&O
Here's a story I did from the Consumer Electronics Show in Las Vegas in January 2007
LAS VEGAS, Jan 9 (Reuters) - Being slow and expensive can be a clever strategy in today's frenetic consumer electronics industry, television and audio systems maker Bang & Olufsen finds.
At the Consumer Electronics Show here, the Danish consumer electronics maker unveiled its first flat LCD television set, at least half a decade after its bigger competitors entered that market. And it showed its second flat plasma TV set, 10 years after Philips <PHG.AS> showed the world the first plasma TV.
What's more, B&O's first LCD TV is about as expensive as the first LCD TVs that were introduced many years ago, with a recommended retail price of $13,250.
Yet, B&O has no problem selling its products and it is more profitable than any of its much bigger rivals. The company's full-year operating profit in its fiscal year 2005/2006, which ran to the end of May, was 10.4 percent of revenues.
It has been consistently profitable at those levels for many years and its cumulative profits since 2000 are much higher than those of consumer electronics sector leader Sony <6758.T> from Japan, which is roughly 100 times bigger in terms of revenues.
The company went its own way several decades ago, when world famous Danish design was mixed with B&O's electronics.
"That's probably the reason we're still here. At the time there were 70 Danish consumer electronics companies, and we're the only one left," said Kim Gravensen, the company's North American director.

MORE THAN A PRETTY FACE
However, the products are more than just a pretty face, he adds. Even though B&O buys its components from the same chip and display vendors as anyone else, its relatively small team of engineers work together with customers to to adapt the product.
It demands, for instance, that its listening panels attend live concerts to have the perfect benchmark for what the Hi-Fi product should sound like.
To match its sleek designs, it also makes the software and user interfaces simple, such as by merging all remote controls into one, even those of peripheral devices it does not make itself.
While it is a small company, with 4,225 million Danish crowns ($738.4 million) in 2005/2006, its engineers can spend more time on developing a single product because the company only launches a few new products every year.
"Our initial investment in a single product is probably higher than that of our bigger competitors, but our products last a lot longer. Our 6-compact disk player is from the 1990s," Gravensen said, adding that the company only recently retired a 25 year-old speaker set.
This is also the reason why it appears to be late with new technologies, such as LCD and plasma televisions.
"First we wait to see if there's a benefit to the customer and if the technology will still be around in two years' time. When we know the technology is going to last, we'll build it into our products," Gravensen said.
It is one of the reasons B&O is reluctant to start producing a Blu-ray or HD DVD player, because it reckons one of the two successors of the DVD will probably disappear.
"We like to see one format instead of two. Until there's an outcome, B&O is not going in. We don't want our customers to buy a product that will be obsolete within three years. There will always be the next buzzword," Gravensen said.
B&O focuses on its niche of very high-value products because there is no longer a market for medium-priced products.
"The middle market has disappeared," Gravensen said. Even the cheapest consumer electronics gadgets are packed with features and "being a little different" no longer works.
Selling products for $10,000 to $20,000, on the other hand creates a pretty stable business, even when the economy weakens.
"Our customers will still be wealthy when the market goes down," said Gravensen.

Rapid technology shifts and product refreshes pressure margins when changes are especially fast, said Bang & Olufsen.
"The products that are being announced here at CES will be discounted in six months from now when the successor products are being launched. We, on the other hand, will raise our prices," North American President Kim Gravensen said.
If B&O had not found its niche in the 1970s, it would probably not have been around anymore, Gravensen said in an interview.

And here's another story I did in early 2007, this time on the rising power of (Web) brands:
Popularity of Web brands signals power shift
By Lucas van Grinsven, European Technology Correspondent
AMSTERDAM, Jan 26 (Reuters) - A consumer poll on Friday exposed the worst kept secret in the business world: Internet companies are becoming more important to people than firms that operate in the real world.
Google <GOOG.O> retained its title as the world's most influential brand, and video-sharing site YouTube and online encyclopedia Wikpedia were catapulted into the top five at the No. 3 and 4 spots, according to the annual survey by online branding magazine brandchannel.com.
While brandchannel's survey is not uncontroversial as it asks 3,625 branding professionals and students "Which brand had the most impact on our lives in 2006?", rather than measuring economic impact, the evidence of the result is everywhere.
Visitors of technology and telecoms tradeshows, for instance, may be forgiven for thinking that photo-sharing site Flickr, blogging software firm Vox, Internet calling service Skype and YouTube are multibillion dollar companies, because no company from the old world announces anything without them.
At the Consumer Electronics Show in Las Vegas, Internet service provider Yahoo <YHOO.O>, at 12 years already an old timer in the Web world, was marched on stage during several "joint product" announcements, including those with Sony <6758.T> (founded in 1946) and Motorola <MOT.N> (from 1928).
Mobile phone giant Nokia (founded 1865) needed Skype, Flickr and Vox to beef up its new product launches.
"All innovation is coming from the edge of the Internet," said James Enck, an analyst at Daiwa Securities, referring to the websites which offer services online.

WEB TRAFFIC EXPLODING
As in any industry, innovation lures new customers.
John Chambers, the chief executive of Cisco <CSCO.O> (founded in 1984) which is the biggest plumber of the Internet, calculated that in four years time 20 families will generate as much Internet traffic as the entire world in 1995.
Analysts point to the obvious.
"Ask yourself how many more hours you are using the Internet compared with 10 years ago. Now ask yourself how many more minutes you make calls on a mobile phone. There's no comparison," said Bengt Nordstrom, chief strategy officer at business and technology consultants InCode.
"Internet brands are the brands people use and which they like. They are much stronger than mobile brands," he added.
Jupiter Research estimated last year that online users clocked up an average of 14 hours of Internet usage per week. That compares an average 5 to 10 minutes per day of mobile phone chats amongst consumers in Europe, China and India, according to market research group Wireless Intelligence.
It can be easy and cheap to run an Internet company and this means a lot of ideas are coming to the market and many products are free to use.
It explains why 3.5 year-old Internet community site MySpace has 90 million unique users. Rival Craigslist, despite its no-frills layout, has 10 million registered users and gets over four billion page views per month with just 22 employees.
Small wonder Philips <PHG.AS>, Nokia, Motorola and Sony, as well as telecoms operators like 3 all want to tap into those vast customer bases which embrace the new Internet brands.
"People value strong brands," said Gerard Kleisterlee, the chief executive of Philips which at CES launched Skype phones.
It may not be so surprising that Google tops the global brand chart. It has a market capitalisation of $153 billion and also takes a strong position in the traditional Interbrand ranking of global brands -- at the No. 24 spot it is the world's fastest rising brand measured in dollar value.
More significant is the popularity of six year old online encyclopedia Wikipedia which has fewer than 10 employees and relies on volunteers to write the entries, and Skype which is a four year old company with 510 staff, 171 million registered users and ranks No. 2 in Europe according to Brandchannel.com.
"The Internet is the great equaliser. It doesn't matter how small you are, the Internet gives you power and presence and you can reach the global population in one fell swoop," said Skype's co-founder Niklas Zennstrom.

Sony has introduced the Qualia and Bravia brands.

Bravia launched in 2005 and supported by $140 million marketing campaign in the United States.

Nishida: “Digitalisation has led to commoditisation. It has become easier to source components. This has led to a flood of new entrants and severe competition. How can we compete and appeal to consumers in a unique way?”

“With Qualia design, technology and functionality will give experience to consumers they have never had before. Our engineers have been freed from the need to compromise. They can live out their desires to the ultimate limit.”

The project, initiated by ex-CEO Idei, has resulted in a 30,000 euro video projector.

“That’s differentiation. High design, high quality. It’s very technology driven, we didn’t have time to do consumer research. We just told the engineers: ‘Do the best you can’. And if you say that, you know one thing for sure: It gets very expensive.”

“Right now, Qualia is a very niche market. We’re not staying in that niche. We’re bringing it down in other markets.”

Chris Deering:

You can be Rolex, but then you can’t be a 80 billion dollar company.”

“Perhaps we should be a Rolex.”

“Idei once joked that if you combine the profits of Bose and Bang & Olufsen, it’s more than Sony.” (laughs)

Bose is not listed, but B&O has generated a return on capital of between 10 and 20 percent in the last four years. Operating profit (334 million crowns) was 10 percent of sales in 2004/2005, 9 percent the year before, and has not been below 6 percent in the previous four years.

B&O's strategy to focus on very stylish consumer electronics with high selling prices has yielded it an operating margin four times the average of consumer electronics units of much bigger rivals such as Philips, Matsushita's Panasonic or Samsung.

"We're not trying to participate in the traditional grey commodity market," B&O Chief Executive Torben Ballegaard Sorensen says.

“We only launch 3 to 5 new products in a year. Our products last a very long time. We only do things that cause a paradigm shift.”

“It’s unfair to compare us with Sony. I have a lot of respect for Sony. But this industry is really polarized. You’re either a high volume box shifter or a high-end specialized products maker. I don’t think anyone can survive in the middle. You cannot be everything to everybody. You have to choose what you are.”

Han van Splunter:

“The big attracton is the total value of the electronics industry. But the profits are not there, unless you can find a niche. The money is being made in the niches. If you want to produce everything, you throw away what you made in the niches. Philips will do a lot more niches.”

Vaio tries to do the same.

BERLIN, Sept 3 (Reuters) - Samsung Electronics <005930.KS> is gearing up for a new marketing campaign that will have to push the South Korean firm into the elite ranks of aspired global brands with premium prices, an executive said on Saturday.

"So far, we've built awareness. 7 years ago we weren't a very well known brand. No we are, and now we have to build preference and emotional attachment," David Steel, vice president marketing at Samsung's consumer electronics unit, said in an interview.

Samsung was the world's No. 20 brand in 2005, taking over the position of Japanese rival Sony Corp <6758.T> which fell to No. 28, according to Interbrand.

Yet, Samsung feels it does not yet have the exclusive aura that makes consumers' hearts beat faster.

"5 to 10 years ago we were a second tier brand. Now consumers say: 'I have a phone, or a TV, and it's fine. A few years ago it wasn't the right time to set our flat panel TVs as premium products, because they weren't. We've got the right competitiveness of products now, and this is the time to position the brand as one with emotional attributes," Steel told Reuters on the sidelines of the IFA consumer electronics fair.

"I think of our brand direction as aspiration. Also when I look at other industries, like the car industry, the language is aspiration and prestige," he added.

Samsung is an integrated electronics company with products that range from chips and flat panel display components to finished goods such as cell phones and TVs in which it has become a global top 3 player in terms of sales.

Most of its profits come from components and mobile phones, while the consumer electronics products are marginally profitable, much like those of its rivals like Sony, Panasonic from Matsushita <6752.T> and Philips <PHG.AS>.

BRAND CAMPAIGN NEEDS TO PUSH UP SALES

Its strategy is built on continued sales growth, and the new brand push is aimed to keep gaining share in a consumer electronics market which is relatively stable in revenues terms.

"The aim is that it will lead to premium pricing and more sales," Steel said.

With a more exclusive image and pricing, Samsung's consumer electronics arm should be able to increase margins, Steel said.

"Our aspiration is to reach high single digits (of profits as a percentage of sales)," he said.

The way to reach the status of a premiere brand, Samsung has boosted its design efforts to make its products look sleeker than those of the low-cost producers from whose ranks it came.

"But even if we would execute perfectly on our corporate strategy, unless we have the right channels to the market to bridge the last few meters to the consumer, it's all in vain," said Steel, stressing that Samsung aims to broaden and deepen its relation with retailers.

"8 years ago we weren't seen as a core supplier to retailers of MP3 players, TVs and cell phones. Now we are, and we need to broaden that," Steel said.

At the same time, Samsung recognises that it is pointless to try to create an exclusive brand image in some commoditised categories such as desktop personal computers.

After Sony recently created top-of-the-range Qualia products, and Philips brought out Sonicare products for high-value electric toothbrushes, Nokia's first three products in its N-series are targeted at those who want a multifunctional phone but no compromises in camera or audio quality.

"I think it's positive they have a new brand to differentiate products. I view this as a super-brand. This is an aspirational brand on top of the naming brand," industry analyst Ben Wood at Gartner research said on Thursday. The strategy to create new brands allows companies to establish themselves as producers of luxury products, which is especially useful if their main brand is diluted or is not able to support the higher prices for much higher value items.

In its Qualia line, a project initiated by departing Chief Executive Nobuyuki Idei, Sony's digital projector costs more than $30,000, a price inconceivable for a normal Sony product, despite its premium image in the consumer electronics market.

"How can we compete and appeal to consumers in a unique way? With Qualia design, technology and functionality we will give an experience to consumers they have never had before," he added.

Nokia, which over the last five years has become the king of low-cost handsets and produces one in three mobile phones sold around the world, aims to regain its presence in the higher end of the market where it encounters stiff opposition in Sony Ericsson and Samsung Electronics.

With N-series, it will launch high resolution video and camera phones with high quality lenses from Carl Zeiss in a stainless steel casing that will sell for 600 euros, contrasting with other models priced at an average 150 euros.

"(It is) an important step in Nokia improving its mid-tier and higher-tier handset portfolio, which should help handset average selling prices and (profit) margins," Piper Jaffray analyst Michael Walkley said in a research note.

"With its strong brand and innovative features in these products, we believe these N-series phones will prove popular Holiday Season selling products in Europe and Asia," he added.

Outsiders concur that such new brands allow for product positioning outside the boundaries of the bigger brand.

"(What Nokia and Sony are doing) is a very logical step," Han van Splunter, outgoing chief executive of Philips' domestic appliances and personal care unit which launched Sonicare toothbrushes, said in an interview with Reuters.

Nokia's chief of multimedia devices, Anssi Vanjoki, who is responsible for the launch of the new N-series of premium handsets, told Reuters that the new brand, design and technology all need to work together to make sure consumers associate the new products with high quality, high value and high prices.

Nokia has some experience in brand diversification, after it launched a new brand Vertu for very expensive mobiles made with platinum, gold and diamonds. Unlike N-series, however, it is not associated with the Nokia brand and only sells in selected jewellery shops and other exclusive outlets.

Continue with Chapter 2.5 here

Chapter 2.1

gadgethell — Tue, 29 May 2007 10:23:55 CDT

Technology

Innovation touches the essence of the electronics industry. Innovation to the electronics business is what the smell of kerosene is to an airline CEO. It is what Julia is to Romeo is to Julia. It clouds rational judgment, but it is also the stuff dreams are made of. Albert Einstein’s said that “if an idea does not seem absurd at first sight, then there’s no hope for it.”

This is the reason why we can buy a cell phone today that works because of a chips inside with circuits less than one 10,000th of a millimeter wide. “He didn’t know it couldn’t be done, so he did it,” was how one Texas Instruments engineer developed a chip that was officially declared impossible. If scientists had given up when their first blue lasers burned out after one millisecond, back in 1993, we would not be able to pick up a Blu-ray DVD player today that can pull 50 Gigabytes of information off a flimsy 12 inch plastic disc (equivalent to the letters in a row of books that stretches out half a kilometre).

“Any sufficiently advanced technology is indistinguishable from magic,” science fiction novelist Arthur Clarke wrote as his third law (*the second law of the ‘2001: A Space Odyssey’ author says: The only way of discovering the limits of the possible is to venture a little way past them into the impossible, and his first law states: "When a distinguished but elderly scientist states that something is possible he is almost certainly right. When he states that something is impossible, he is very probably wrong.").

Knowledge decided who won World War Two, and even in today’s electronics industry innovation is essential for survival for two reasons: it creates a competitive edge for a company’s products, and it generates a rich stream of royalties. Both are needed for investments in future growth. Without cutting-edge technology, a company needs to rely on cheap labour and capital, smart production and marketing, and cutting corners. Is it so simple then, to just focus on technology and the laws of economics will automatically make you a world leader?

Perhaps one of the greatest examples of value added through technology in consumer electronics is the compact disk player launched in 1982. But that was not after some very expensive lessons. The success of compact disc also begs the question why Sony and Philips failed to be equally successful with other standards they tried to introduce around the same time.

The difference between a great invention and an equally great invention can be billions of dollars. The compact cassette, for instance, was a pretty neat invention, but Philips failed to milk it when it waived its royalty rights in 1966 to take Sony on board as a licensee. Because of Sony’s backing, the compact cassette became a world standard, but it did nothing for Philips’ royalties. The company learned from the mistake when it invented the next big thing: compact disk. Up to today, when a music publisher presses an optical disk, 2 to 3 dollar cents go to the inventors Sony and Philips which split the income. (It can be four times as much for blank, recordable discs). In 2004 alone, 13 billion CDs were produced around the world, good for some $325 million.

In addition, for every CD player sold around the world, they receive two percent of the net selling price -- that is at least what they should receive, since not every electronics manufacturer pays his dues. And this is before the royalties on DVD discs and players kick in.

Philips and Sony also earn money from the semiconductors that power CD and DVD players, and on other components and finished goods. “Add it all up and the proceeds are gigantic. It’s billions,” says Jan Hommen, CFO of Philips between 1997 and 2005.

The companies need the money, too. Philips, between 1997 and 2006 earned a total operating profit of just 608 million euros on its consumer electronics activities, while Sony hardly broke even over the last years. Without the billions from CD, those numbers would have looked far worse. The optical disc has been nothing less than a life vest.

Philips’ former strategy officer Jan Oosterveld, now retired from the Philips management board and a consultant and business management professor at a university in Barcelona, has no qualms underlining the success. “It is not talked about a lot, because there’s envy in the industry, but it’s a massive hit. It’s much, much bigger than all other inventions combined. And the returns far outstrip the investments. Almost all Philips’ income from licenses is from optical discs. Some of it is recognized as Consumer Electronics income, and some of it elsewhere. They don’t hand out royalties like favours. You have to earn them. Philips has won that fight with a landslide. It still receives more royalties than anyone else.”

Not bad for a development project that started with two people and which was nothing more than an offshoot of the video disk. Lou Ottens, who fathered the compact disk, was astounded to hear at a dinner table conversation after his retirement that his brainchild had earned the company over 300 million euros in the previous year, and this was 13 years after the first CD player was introduced. (around 1994/1995)

Ottens was a senior Philips engineer in charge of audio research. He conceived the compact disk back in 1978 when he put together the first two-person research team with some unallocated research funds he was allowed to play with.

The earliest patents date back to the late 1970s and early 1980s, and although these first ones have expired after the usual 20 years of protection, they have been succeeded by related patents for recordable CDs and DVDs. Most of the 200 million euros in royalties Philips receives every year in its consumer electronics unit are generated by the optical disk technology.

The electronics industry started meddling with optical disk technology in the early 1970s. The Holy Grail was considered an audio disk. After all, didn't the industry already have an audio disk in the shape of the vinyl record? The vinyl record was considered unassailably succesful. However, a video disk did not yet exist. It would be much more useful than video tape, also in its infancy, because there was no winding back and forth.

Teldec, an alliance between Germany’s Telefunken and Decca was first to demonstrate a mechanical video disk, basically a gramophone with microscopically thin grooves that could play video. It produced a black and white picture, and of very poor quality. But still, it was video.

“The world was abuzz with talk about video disk,” Ottens recalls. It was clear that something needed to replace the needle in the groove. Mechanical reading caused too much surface noise, caused by the needle scanning grooves at very high speed. The diamond head eventually ruined any recording.

In 1969, Philips had tried creating a video disk by shrinking film frames to just one square millimeter and putting them on a disk with semiconductor machines. Projection was done by rapidly showing one image after the other, as if it were film. It worked, but it was too expensive and sensitive. "That is why we never did it," says Piet Kramer, the head of the optical research group at Philips Research Laboratories. "We didn’t see how it could ever be worthwhile because we knew from our experience with the chips technology what a struggle it would be.

At the time, Lou Ottens was no novice to hot new technology. In fact, he was probably ideally placed to recognize the opportunity and he also knew what was required to make it a success. A mechanical engineer by training who joined Philips in the mid 1950s after his graduation and compulsory military service, the towering Dutchman had first put his stamp on vinyl record players by fitting them with much smaller engines and suspension-fitted turntables, dramatically reducing vibration and background noise.

At his Belgian base in Hasselt, not far from Philips' Eindhoven headquarters, his group subsequently developed the compact cassette which was presented at the Internationale Funkausstellung (IFA) in Berlin in 1963. This is where he tasted his first pyrrhic victory. Philips had single handedly shrunk the unwieldy big Hi-Fi tape recording machines pioneered b y CBS into a compact system that played Hi-Fi quality music. The cassette was put in a little plastic container and the tape itself no longer needed to be touched by human hands. The system could be used easily by consumers and would fit into the standard dashboard space for car radios.

Philips headquarters, however, had ordered Ottens to not tell anything to Grundig. The German consumer electronics firm was supposed to be Philips’ partner for consumer tapes. When CEO Max Grundig got wind of Philips’ secret innovation, the authoritarian entrepreneur exploded with anger. “Quite understandably”, Ottens sighs four decades after the event. In just a few months the German rival cranked out a similar system that was somewhat bigger and had several disadvantages but was still good enough to split an emerging industry in two camps.

To make matters worse, Japanese electronics spies had diligently taken notes and pictures at the 1963 IFA trade show, and soon came out with similar, but slightly different cassette players. “One used a broader tape, another used a bigger cassette and a third winded the tape into the opposite direction. We said: ‘This is going to be a mess.” Ottens says.

With the support of sister company PolyGram, a large record company, Philips started a standardization process. Developing a great technology is one thing, it also needs to be used by other companies, even if the company’s name was Philips and the Japanese players were just starting to play on the world market. And so, in 1965 Ottens, his legal counsel and a sales colleague boarded a plane to Tokyo and visited some 15 electronics companies there, including Sony, Matsushita, Akai, Nippon Columbia, Pioneer and Hitachi. For three weeks the men traveled through a Japan that few people would recognize today.

In the first half of the 1960s Japan was not nearly as affluent as it is today. At one of the company’s he visited, box springs were poking through Ottens’ seat into his bum. “They would listen to us, and we heard nothing back. We’d brought a little machine, a stereo prototype, and told them we wanted to create a world standard. They would politely hear us out and then accompany us to the door without telling us anything.”

The situation was slightly different at Sony, the only company where they could have their conversations in English without translators. The larger than life Norio Ohga, who would later become Sony’s chief, connected the Philips cassette player to an immense speaker system and turned the volume on maximum even before the music had started. Ottens can still see Ohga’s cruel smile when the thunderous crackling of the empty tape filled the room, but when the music finally started the former opera singer seemed pleased nonetheless. Ohga, too, left Philips to its own devices and the threesome was none the wiser when they headed home.

To make matters worse, Grundig had started its vendetta and offered its own system for free to some of the Japanese companies Philips had just been talking to. “So we decided to drop our royalties, as long as they went with our system. And not long after Sony was the first to sign.” The music industry went along and started publishing titles in compact cassette. A world standard was born.

It was a lucrative business for everyone. “Machines that cost 40 to 50 guilders to produce were sold for more than 300 guilders.” The net profit margin was 30 percent and tape recorders had become a mass market product of which millions were sold. There was another surprise too. The companies had never expected they would ever be able to make the machines so cheaply. “In the beginning, we knew we could do it cheaper than the first models, but it was so complicated to make the tape heads and the transmission, we initially thought we could do it perhaps twice as cheaply.”

By the early 1970s Ottens, who was now development director for all audio products which accidentally also included video because it shared the same electro-mechanical processes as the compact cassette, had learned several things. He knew that even for technologically advanced products production costs fall rapidly when manufactured in mass volumes from cheap, standard materials. He also knew that support of the record industry was crucial to set an industry standard. He had also learned that consumers preferred to use compact-sized audio equipment over wieldy big tapes, and he knew he needed at least one Japanese partner to turn any product into a global standard. Finally, he had come to know Sony as a reliable and open Japanese partner for a Western company.

The compact disc was on nobody’s radar yet. All eyes were firmly fixed on the video disc, and how to get there if the mechanical Teldec disk was not working. At Natlab, Philips’ research centre, optical engineer Piet Kramer who had toyed with the tiny film reel printed on a disk, now suggested to use an optical disk with a laser to read the track. The advantages: no friction with the disk and no wear and tear. “He held a presentation for us, and said he could put an optical signal with a track width of only one micron on a disk. We were being a bit shitty. ‘One micron? How are you going to find it? And what will it cost?’ We told him that he should come back if he had a way to recover the track. Sure enough, after a while he returned with an optical disk that played a black and white picture. Then I told him: ‘Nice. We want to tag along.’”

“A special team was put together in the basement of the Natlab and I told them to deliver a working prototype by mid 1972. And they succeeded. We organized a press conference in June 1972, and the engineers thought we could now take it into production. I mean, really. The naivety if those guys was unbelievable.”

It took many more years to turn the laser video disk into a commercial product, but the concept had also triggered the imagination for a separate audio product. If they could make a laser disk the size of a 12 inch vinyl record that contained 30 minutes of video on one side, that same disk could also store 20 hours of music.

“It did not make any sense to me. We knew from the cassette that the record companies were not interested in more than 60 minutes and most vinyl records at the time only played for 45 minutes.” Ottens saw an opportunity to dramatically cut the size of the vinyl disk and come up with something much more user friendly, something that would fit in the dashboard of car.

Using the abundant budget of the video disk development team, Ottens put two engineers apart and asked them to see how small an optical disk could be if it only needed to store an hour of music. Initially, the two researchers Loek Boonstra and Toon van Alem used an analogue optical track, just like the video disk and the phonogram, but that caused too much “noise” (crackling and static) with a modulated Hi-Fi signal. “It had to go digital.”

At the same time, a few other things were coming together. The expensive gas laser used by the video disk team could possibly be replaced by a newly developed laser from semiconductor materials that would be much less costly. Meanwhile, Philips’ own telecoms equipment teams had some early experience in turning analogue, real-life audio signals into digital signals and filtering out the errors.

For years, the small team worked under the radar on a compact disc that would have a size of only 11.5 centimeters. Ottens was spending the 10 percent of the video disk’s development budget earmarked for exceptional items. It was only until 1978 when he had to take a decision to come out of the closet. He needed more significant amounts of money in the project for full-out development.

“We decided that we would only come out if we could estimate the production cost, and if that would be close to a Hi-Fi vinyl record player of 150 guilders ($75).” Ottens’ subsequent calculations were more or less sucked out of his not insignificant thumb.

He had learned from tape recorders that mass produced electronics quickly fell in price. “We knew what integrated circuits cost in 1978 and I knew Moore’s Law. It did not actually have the name ‘Moore’s Law’ yet, but we knew component costs halved every 18 months or so. So, we estimated what chips would cost in five years time. We needed five glass lenses for 15 guilders in 1978, but estimated we could bring that back to one plastic lens costing 2,5 guilders. Yes, we thought we could do it.”

The development team was quickly expanded, and it was only then that the Philips board was informed. “The CD only reached the board level in 1978, after we had already decided to do it. We had much more freedom to improvise than today’s employees.”

With 80 percent of the research done, Philips now needed to find a Japanese partner to make compact disk a world standard. Many Japanese electronics producers were in various stages of developing their own optical audio disk. By 1978, there was even the Digital Audio Disk Standardization Conference (DAD), set up by Japan’s Ministry for International Trade and Industry (MITI) which desired a Japanese-invented world standard for an optical audio disk. The DAD forum was an attempt to end the fragmentation of different Japanese solutions.

At Sony, Ohga was winding himself up. The Japanese electronics companies were talking about a 12 inch disk, just like the engineers at Philips many years earlier. “He was so angry. ‘The disk may be worth a few cents,’ he shouted, ‘But if you fill it up the content on the disk will be worth hundreds of dollars. Who can afford that?! Nobody can buy that!?” recalls Katsuaki Tsurushima, now Sony Electronics’ chief technology officer.

In the fall of 1978, Sony and Matsushita had traveled to Eindhoven to check out a prototype of Compact Disc which at that time did not yet have any error correction for misreading the optical disc. Philips had a close relationship with Matsushita. The two operated several factories together and Philips held a significant stake in a joint venture with the Japanese firm. Founder Konosuke Matsushita was invited to come to Eindhoven by Philips president Nico Rodenburg for a demonstration. It was a sensitive moment, because Philips knew Matsushita’s unit JVC was working on its own audio disc, called AHD. Matsushita, when confronted with the small player, uttered a long slow hiss: Tssssssss. It was the clearest expression of admiration Ottens would ever witness of a Japanese executive after seeing their product.

Matsushita supposedly told his lieutenants they should team up with Philips, but nothing happened to that effect. Perhaps Matsushita believed in its own product, or perhaps it was a negotiating strategy. Matsushita must have been more confident than ever before. At the same time JVC was waging another format war in video. It had just introduced its VHS video recording format in 1978, and this was positioned against Sony’s Betamax -- Philips also played a marginal role with a third format called Video 2000. (In the early 1980s, Matsushita established a joint venture with Thorn in the United Kingdom, Telefunken in Germany, and Thomson in France, which allowed it to quickly multiply the forces arrayed against Philips in the battle for leadership in the European VCR business; Hamel and Prahalad, Strategic Intent)

Tsurushima at Sony offers another explanation why Matsushita did not bite: Matsushita did not understand music. Unlike Sony’s Ohga who was a musician, Matsushita preferred pictures. “He was much more interested in video.”

On March 14, 1979 Ottens found himself once again on a plane to Japan, joined by seven colleagues including project leader Joop Sinjou and audio chief Joop van Tilburg. With them they brought four tiny CD disk players, dubbed Pinkeltje after a Dutch fairy tale gnome, as well as the necessary “cubic metre” of electronics they planned to hide under a table. In fact, they had two sets of cubic metres of equipment – one for back-up – which were traveling as carry on luggage on first class seats on the first row. At Japanese customs, Philips estimated the value of each set of equipment at 2,600 guilders, which was the value of Swedish and Japanese measurement instruments inside the heap of electronics. The real value ran into millions of guilders.

The trip lasted a week, and took place a few days after a presentation of Compact Disc to international journalists in the Netherlands. And while the nine demonstrations in Japan went without glitches, the Philips crew was, again, stonewalled by the courteous but non-responsive hosts. Philips offered each company to jointly develop the compact disk, and felt this was a rather generous offer considering it had a working prototype and most Japanese firms were still messing about with bigger disks and had most probably not progressed as far.

Many Japanese, even at Sony, had their doubts. Tsurushima: “I remember looking at it, thinking: ‘it’s too small’. It had no sense of value to me. And there were many more people like me. We all cherished the ritual of putting a vinyl disk on the record player, wiping it, putting the needle on.”

But Ohga and Sony Sony co-founder and president Akio Morita thought differently. A few hours before the flight back to the Netherlands, while packing his bags in his hotel room, Van Tilburg received a phone call from Morita who told him Sony was in. “They did not have anything working themselves, but their experience with recording equipment for music studios had given them a lot of experience with digital signals and error correction,” Ottens says.

Error correction was one of the weaknesses of Philips’s system. It may sound trivial, but without proper error correction the crystal clear CD sound would be marred with series of little ‘clicks’. Even worse, without proper error correction the CD would be completely useless for computer programmes. The error-correcting coding that was ultimately agreed upon bears primarily the mark of Sony’s know-how, based on a redundant “control number” after every sequence of bits.

Sony also insisted to make the discs half a centimeter larger which would extend the maximum playing time to 74 minutes. The reason for this was that Morita wanted the storage capacity of the disk to be big enough to play Beethoven’s entire Ninth Symphony (Alle Menschen werden Brueder) – it was his wife’s favourite piece of music and is a popular piece in Japan. Co nductor Herbert von Karajan, a personal friend of Morita who would later become instrumental in marketing the first CD, only needed 66 minutes to perform his version, but there was also a 74 minute version from a 1951 performance at the Bayreuther Festspiele conducted by Wilhelm Furtwängler. The opera singer Ohga concurred, pointing out that the first act of many operas lasted longer than 60 minutes, and that a disk size of 12 centimetres would extend the musical capacity to 74 minutes. Philips protested, pointing out that it would be more difficult to fit it into a car radio slot, but eventually caved in.

There was a debate if the sound sampling would be done in 14 bits or 16 bits. Eventually, Sony chose to sample 16 bits which would guarantee higher sound quality, while Philips chose the cheaper 14 bits plus additional over-sampling to make up for any shortcomings.

In June 1980 the black book with specifications was ready -- in this case it was actually a ‘red book’, Sinjou’s favourite colour, and the two parties had agreed to split the royalties 50:50. Now they needed to win over the music publishing companies and fellow electronics makers, in order to avoid another VHS-Betamax format war.

Matsushita was one of the first to yield, in 1981, when it was already too late for the company to play a role of any significance. It was the first major licencee of CD technology, sounding the death bell for Japan’s DAD standard even before the final meeting of that group. MITI’s conclusion was that it officially supported three formats, including CD, but it was already too late for Japan’s tech firms. Apart from Sony, they had missed the boat and as profits from CD grew over the years, this was a painful lesson they would never forget.

Most record companies, on the other side, did not see the point of optical disks. They would have to invest dozens of millions of dollars to build new CD replication factories and upgrade recording studios, while the new perfect digital copies would facilitate piracy. “The truth is in the groove,” executives chanted at a music trade conference in Athens, Greece in May 1981 (Nathan p143). Philips ploughed ahead anyway with its own music publishing house PolyGram, while Ohga had skimmed excessive profits from its CBS/Sony Records venture which he now used to build three CD printing plants on three continents.

Timing could not have been better. In Germany vinyl disk sales had already plateaud in 1978. By 1989 the new CD format exceeded vinyl record unit sales and three years later they were higher than vinyl sales had ever been. (Lang, p79) CDs were priced almost twice as high as vinyl and profits were pouring in at the music labels.

On the hardware side, Sony was more than six months ahead of Philips in introducing its first model, as the Dutch struggled with the optical pick-up which was more expensive than Sony’s system and which they could not get stable. Although the sound quality due to its unique oversampling chip was impressive, Philips’ initial models also lacked smart features such as a display to read the title number and playing time, a remote control and clever buttons to skip between songs. Philips became an important supplier of semiconductors for CD players and harvested abundant royalties, but it was never very successful in selling the final end-product of Hi-Fi CD players, having squandered its innovator lead right from the start.

Today, the business of end devices is as deadly as any electronics item. A CD drive costs $20, or 1 percent of the $2,000 for the first products in 1982 and 1983. Then again, they sell in hundreds of millions instead of tens of thousands.

The compact disk became a much bigger hit than anyone had imagined, while the video disk did exactly the opposite. By the late 1970s video laser players and 12 inch video disks the size of long-play vinyl records hit the market. In order to watch a feature length movie, a consumer needed to turn the heavy, fragile disks halfway through the film, making it a truly cinema-like experience complete with an intermission to get popcorn and a comfort break. Although not digital, the quality of the images was much better than VHS video which was also an analogue medium, but the price tag alone made it clear that this was strictly a product for movie buffs and technology freaks. Laser disk found one market niche which was highly lucrative: it was the essential video machine in every Karaoke bar across the globe until the 1990s. “It was the wrong product at the wrong time. VHS was coming up and was cheap. The video disk dropped dead. It was too clunky and too expensive,” says Ottens.

The CD success story got a second boost with the introduction of CD-ROMs for computers. “When I took over CD modules, we only had audio drives. Now 80 percent of disk drives produced are for data storage,” says Jan Oosterveld, the first chief of the optical modules unit established in 1989 which also produced drives for external customers.

CD-ROM opened up the market for PC games and which in its turn kicked off the home entertainment computer. “Before the CD-ROM there really wasn’t much fun and entertainment on a PC,” says Frank Simonis.

Then CD-Video became a hit in China. China had skipped the VCR era and went straight to the digital era with the brand new MPEG1 code to encrypt and decrypt video. “We sold tens of millions of players. It put us on the map in China and we earned a ton of money on it, which was used to develop CD-recordable and rewriteable,” Oosterveld says.

The first CD-recorders, with a price tag of $12,000 apiece, were strictly sold to professional users such as archivers and music studios, and that too was a very profitable business. It wasn’t until the second half of the 1990s when a group of six companies, Sony, Philips, Hewlett-Packard, Ricoh, Yamaha and Mitsubishi came together to develop a new world standard for it and make drives small enough to fit into the same PC slot of the CD-ROM drive.

Instead of just two companies, Sony and Philips, discussions now involved four more companies. “It made the standardization process more complex, but they were needed because we needed the computer industry. They have the volumes and they are eager to embrace new and innovative products,” Oosterveld says.

From there, CD burners soon started to wreak their havoc on the music publishing business. Illegal track ripping and song swapping have knocked revenues of the global music industry to $32 billion in 2004 from peaks of $39 billion between 1997-2000. (estimates British research group Informa)

A decade after the introduction of the CD, the electronics industry started discussing its successor for movies, the DVD, a disk with thinner trenches and therefore higher capacity that could store full-length high quality movies. The companies which had lost the first time around, and had missed out on hundreds of millions of dollars in licensing income on CD patents, were adamant to make up for their losses. Toshiba created a powerful front with fellow Japanese electronics giants Panasonic (the brand that is owned by Matsushita) and Hitachi. They were backed up by movie publisher Warner, which was a major coup because Hollywood would have to print the pre-recorded movie disks.

The movie industry would never support two different formats – it had learned that costly lesson from the VHS-Betamax format war. Toshiba was pushing the Super Density Disk (SD-disk), while the old brotherhood of Sony and Philips proposed the Multi-Media CD (MMCD), backed up by Thomson from France which brought in powerful video and sound compression technology.

By now, it was an all-out war. In a cab in Tokyo in 1993, at the fringes of the first discussions between the two groups, Toshiba’s chief fellow of technology Hisashi Yamada started ranting against Philips representative Frank Simonis. He blamed Sony and Philips for twisting the arms of the industry with the compact disk and that it was payback time. Yamada was a significant opponent, for he was the chairman of the DVD Consortium, now called the DVD Forum.

The young Philips executive told the driver to pull over and he got out of the car. “I was just a little dick from Holland, but I told him we would either talk in a civilized way or don’t talk at all. I said to him that they should go ahead and produce a 13 centimetre DVD disk and that no-one would ever accuse them of copying our 12 centimetre CD format.” (Yamada says he cannot recall the incident)

At another occasion, a bomb alert disturbed a party of the Sony-Philips group which was celebrating 15 years of CD licences in a San Fransisco hotel. The hotel guests were ushered out of the building and when the journalists flooded the street they were kindly invited to the hotel next door where the DVD Consortium had a gathering. The bomb alert was fake.

“Matsushita and Toshiba did not like what Philips and Sony had achieved with CD,” says Katsuaki Tsurushima at Sony. It was clear that the Japanese industry would not accept two companies setting a world standard ever again. For a long time, it did not look like the two camps could agree. “The problem was the fight for royalties. Billions of euros were at stake. There are costs and risks if you go it alone. We could have done that, but we did not dare to,” says Jan Oosterveld, who claims the DVD format war was eventually decided between just four individuals: Yojima from Toshiba, Nagasaki from Matsushita, Aoki from Sony and Oosterveld on behalf of Philips.

Oosterveld’s boss at the time, Henk Bodt, agrees he had very little to do with creating the awkward alliance. He is pretty blunt about it now: “It’s all about the money. Who gets most.”

Pride and prestige played a role in the board rooms. Most chief executives thought their companies were more important than they were. It took months before the most senior management layers were aware of the real balance of power. “It didn’t happen overnight. I traveled to Japan twice a month. Initially they did not want us to come together. The rapprochement took a year,” Oosterveld says.

“But if we calculated the risk, they must have done the same.” All that time, the two camps were getting stronger and more confident. Oosterveld: “In such a process both parties build up so much strength. We could have done it without their technology, but then again they had a product ready before we did. Eventually you reach a point when you ring each other up and suggest to work together, and from there on the rest is pretty straightforward and predictable.”

The compromise, pushed by IBM and some Hollywood studios, was presented to the world at the IFA electronics show in Berlin in August 1995. Philips employees still cringe when they remember their demo failed due to a disconnected wire. It did not prevent the first products to hit the market two years later. As usual, the Japanese were first to get their products in stores. (Royalties for a cheap sub$100 player are around $14, plus about 20 dollar cents for every DVD disc)

Soon after, the fragile alliance shattered when it needed to take the next step: recordable DVDs. This was another historical moment. At last, at the turn of the millennium, the perfect video recorder was in sight. With a DVD recorder, consumers would be able to record every last pixel of any show or film, and after playing it back hundreds of times it would still be the exact same quality as the original -- it also spooked Hollywood, which was horrified with the onslaught in the music industry caused by CD burners.

The battlegrounds for the wars in the electronics industry are large hotels scattered around the globe. Dozens of technical standards are being negotiated at any given time. They can be about the next universal serial bus (USB) cable, mobile telephony radio systems, or a piece of anti-piracy software. But some of the biggest meetings in the largest ball rooms are about the future of the optical disc.

DVD Forum meetings have become huge events which bring together groups of stern men in suits. The set-up is extremely formal – a speaker risks losing his talk time if he shows up in jeans. Any speaker who tries to crack a joke can join the guy in the denim. Companies are represented by two executives, supported by a team of consiglieres who manage through two long days on backache-causing hotel chairs directly behind their bosses. “It’s like the United Nations. And the big countries do whatever they want, anyway,” Oosterveld quips.

For the recordable DVD, the film industry pushed for a division between the living room and the personal computer. Others, such as Sony, Philips and Hewlett-Packard disagreed. They saw only one market, where a young family edits their holiday footage on a PC, burns a DVD and sends the disc to the happy grandparents who will watch it on their TV set in the lounge. This was not just a fight over patents. It was a fundamentally different view on the world and who should come first: consumers or Hollywood.

“We never wanted the DVD recordable in the DVD Forum. Hollywood produces more noise than substance. It’s the computer industry which determines the format,” Oosterveld says, pointing at the 200 million plus personal computers sold every year.

Usually, there are informal satellite meetings in the days around the official meeting, where business gets done and technical bottlenecks are being discussed. It was in several of such meetings that a group of eight companies from the computer and consumer electronics industry decided they would stop wasting their time and develop their own recordable DVD format, which would be the same for all devices.

Between 1999 and the target date of 2001, Hewlett-Packard, Sony, Ricoh, Philips and Mitsubishi Chemical Corporation/Verbatim, Dell, Thomson and Yamaha met four times a year to create DVD+RW (RW for rewritable). Everyone dressed down -- even the Japanese -- and laughing was permitted, if not encouraged. The much smaller group and personal contacts meant the group could move quickly. Problems were tackled between member companies before they reached the meeting.

While some members, such as Sony, had their doubts if they could get DVD+RW to work technically and commercially, the group also needed to win a public relations war. The group came from behind and needed to prove its claims that discs burnt on a DVD+RW machine would play back on any DVD player from any manufacturer. At the Consumer Electronic Show in Las Vegas in January 2000 it took a bold move and put a dozen burners and players on stage. The presentation looked flawless to a room filled to the brim with technology journalists, but Philips’ Hans Driessen recalls with sweaty hands how he had to reboot one machine twice during the presentation, and even five times at the analysts presentation later in the day. “These were prototypes running on a specification that was 99 percent perfect. We pulled an all-nighter getting it all ready, and it just about worked. We took a gamble,” he said.

Ever since the DVD+RW group spun off, the DVD Forum has become a far less influential institution. The group of eight ‘defectors’ are still official members of the Forum, but follow their own agenda. Ever since the group ventured out on their own in 1999, they have also started another format war, this time about the successor of DVD. This time it is Blu-ray against High Density DVD (HD DVD).

HD DVD, supported by the DVD Forum, claims its players and discs are much cheaper to produce, while Blu-ray says its technology makes the big leap that is needed to last it for the next 10 years. The film industry is divided, with some giving tentative backing to HD DVD and others supporting Blu-ray, but the decision power appears to have shifted once again.

The two camps tried to come to a single unified standard in April 2005, combining HD DVD and Blu-ray just like they combined their standards for DVD in 1995. The talks were pushed along by two new CEOs of Toshiba and Sony who are more worried about the Chinese competition than some trench war about DVD. The talks collapsed only weeks later, hampered by thorny technical issues.

The companies plan to revisit the issue, but for now they will just go ahead “full force” as Chris Deering and Cesar Vohringer put it. “We’re the bigger group anyway,” Deering says (June, Luxembourg).

Hollywood studios can hardly wait for the new standard, hoping for another boost in sales since the current generation of DVD sales has flattened. “Every individual has bought the old movies, and now consumers are buying only one or two new titles a year,” Deering says.

Matsushita’s Fumio Ohtsubo, the chief of the Panasonic AV products, believes that it is not Hollywood but the video games group within Sony which is pulling the strings this time around. That group needed to decide which next-generation DVD player will be used in the PlayStation 3 console which is slated for a 2006 launch. They could not wait for the uncertain outcome of endless political haggling.

Whoever loses the next battle, will lose big, Ohtsubo reckons. “Development of Blu-ray started almost 10 years ago. Toshiba started with HD DVD 5 years ago. They stand to lose 5 to 6 years of R&D investment.” (Sept 2005).

Simonis believes Philips is only tolerated by many Japanese firms, because it cannot be ignored. “If we hadn’t been in DVD+RW we would not have played in Blu-ray. The Asians would rather not have a European player in the game. Initially they did not want PC players either. Computer makers were just seen as customers.”

Only Sony is unambivalent in its support. “Philips had great technology. They were probably teaching our engineers about optical technology when we started. From that point on the two companies have always worked together very closely,” says Yukinori Kawauchi, who is currently in charge of the next generation of optical disk development at Sony.

The admiration for each other’s capabilities is shared by Philips. “DVD is essentially a souped up CD, and Blu-ray now is a souped up DVD. It’s technically tough, but we have so many super-qualified people. You can’t find better ones. And if we don’t have them, Sony will. They get along very well. Sony is not a very Japanese company and has a good eye on the world outside Japan. A lot of other Japanese companies have a parochial atmostphere; they don’t speak English. Between Sony and Philips there’s a network of people who trust each other blindly. And some of the key players are still there. Ohga is still there, Idei is still there,” Oosterveld says.

Bill Gates claims that the days of optical disks are over and that pretty soon the world will store everything on memory chips which are rapidly falling in price. If you are the richest man on the planet and have a few billion dollars on your savings account that may seem a no-brainer, but as long as a 1 Gigabyte chip costs $50 and a 25 Gigabyte Blu-ray disk costs 50 cents, there is a future for optical disks.

The optical disk, whose story began in the early 1970s and lasts until today, is a classic case of a “breakthrough” as described in the 1986 book by P. Ranganath Nayak and John M. Ketteringham. The two consultants at Arthur D. Little found that innovations were driven by “technology push” rather than “market pull”. Real innovations do not have a market until the product exists. This is the flaw in “market research”. Other examples include the VCR, yellow sticky notes from 3M, the ulcer-healing drug Tagamet, Sony’s Walkman, Microwave ovens and Nautilus exercise equipment.

The question that remains unanswered is why Philips and Sony were successful with one breakthrough product, but unsuccessful with the next. “The CD success came more or less at the same time as the VCR disaster. The people who were responsible for CD were the same people responsible for VCR. They made a error of judgment to not seek a world standard for video, but did not make that mistake with CD. How did those people weigh their decisions?” Oosterveld wonders.

In 1978 Philips had 100 percent of the young world market for consumer VCRs with its 1700 and 1500 systems. Philips had video systems as early as 1968. “They were ahead of their time. Perhaps that’s the reason they did not pay attention to what was happening in Japan with VHS and Betamax.”

“In 1982 I went to Japan for the first time and invited myself to a Panasonic plant. I realised then that we had already lost the war, while we thought the war had barely started. Their production numbers and process technologies were far ahead of ours.” In 1983 Oosterveld was put in charge of Philips’ entire video and camera business and his first decision on his first day was to kill Philips’ own Video 2000 technology and move to VHS.

Perhaps much of the secret lies with one man, Ottens, who fathered the CD. With his background he was ideally placed to avoid mistakes of the past. But he was not put in charge of the video cassette recorder development when it was already too late, around 1981.

A few years later, another blunder caused more damage. Philips tried to do launch CD-i, an interactive version of the CD which could be used for video games, education and other applications. Again, it chose to develop the product on its own. “Microsoft was shit scared for CD-i. Bill Gates came to Eindhoven and had a look at it. It had the potential to become an operating system. But why didn’t we do CD-i with someone else? We didn’t we make that mistake with CD,” Oosterveld wonders.

One may wonder what the real innovation was with CD, the technology itself, or the realization that the world had become too big and that alliances were needed to create a global standard?

Sony’ Walkman became a stunning success not in the least because it used the world standard of the compact cassette. No extra investment of time and effort was demanded from consumers to take their music on the road if they already had it on a cassette. Apple’s iPod took that lesson to heart and made sure its digital music vault could also play back the MP3 songs consumers had already piled onto their PCs. It is mind boggling why Sony, with all its experience, refused to embrace the MP3 format for its first generations of its computer-memory based digital Walkmans and instead forced consumers to re-record all their songs in Sony’s proprietary ATRAC format – by doing so Sony has pretty much given the market away to Apple.

The optical disk example illustrates how a hot new technology is nowadays claimed by an ever expanding number of companies from different countries. The first DVD standard was nailed down by a consortium of Japanese and European firms, including Pioneer, Sony and Philips. Only one U.S. company took part, Time Warner which contributed the rather useless regional code which to this day prevents consumers to play a disk from the U.S. on a European player. No South Koreans, no Taiwanese and no Chinese contributed any patents.

In the consumer electronics, you need to own certain technology in order to receive other technology. This practice of cross-licensing with closed wallets is working for Japanese companies, but not for Samsung and LG which had no patent portfolios in optical disk technology. Determined not to let that happen again, they have made a big effort to contribute technology to the successor of the DVD, first the rewritable DVDs and now the Blu-ray format which can store five to six times more information on a same size 12 centimetre disk.

“They have come a long way. Not just in collecting knowledge, but also in real innovation. What they are doing in research is perhaps better than what the Japanese are doing. The Koreans have no heritage to protect. So, they can be more creative,” Simonis says.

Samsung, for example, has made a breakthrough in optical pick-up where the blue laser for Blu-ray follows the same light path as the ‘old’ red laser for CD and DVD reading and recording. Blu-ray’s blue laser has a different wavelength that makes the light beam narrower, and enables the machine to read and write even smaller dots on a disk.

So far, only Philips and Samsung managed to achieve this integration, which will help them to make smaller and more efficient optical disk drives that can read and write all available formats, from the CD where it all started in the 1982 to Blu-ray disks. “If our developers talk to their developers, they come back and say: ‘That was really well done’. The country that used to be infamous for its stealing has built real expertise,” Simonis says.

An indication of its new innovative strength is that Samsung is chairing some of the working groups to develop Blu-ray. “They are contributing a lot to the format,” says Yukinori Kawauchi, the Sony engineer responsible for Blu-ray development.

Many believe China will follow the same path, and in many ways is already well on its way. Remember the Chinese crew setting up a DVD production line for Philips in Shanghai? The experience wetted the appetite of the Chinese employees. The company now has a research laboratory in Shanghai since 2001 and this is expected to contribute key patents to the next optical format, when the Blu-ray format that is currently being introduced has run its course.

Access to technology alone is not enough. Being able to milk it is essential and South Korean companies show that they are learning how to do that. In memory chips, Samsung has sufficient access to the commoditised technology and it understood at a very early stage that large volumes and low costs are the key to success. In LCD displays, Samsung and LG.Philips LCD have applied the same strategy and are winning because of it.

Outside those focus areas, Samsung’s approach appears more like a collector of technology than anything else. It piles features into devices and calls this “convergence”. Today, Samsung and LG can be relied on to be the first with the latest features, even when these are completely pointless. Samsung was the first to fit a 7 megapixel camera into a cell phone, not that anyone knew how to screw the lens on. In another phone model, Samsung included a movement sensor so consumers could literally throw the dice on their display. LG added a alcohol breath analyzer in a phone model shaped like a Porsche, but warned customers not to rely on it in court. This is the integrative design which straddles somewhere between applied research and exploratory development. Similarly, in optical disk technology it is taking hurdles in a race that was set out by someone else. It is not the fundamental research which can deliver breakthroughs that shape new markets. (ASEAN development journal, p84; A perspective on entrepreneurship, intellectual property creation, enterprise development and competitiveness in ASEAN)

The compact disk has shown the electronics industry what a real breakthrough can do for a company’s reputation and its profitability. It is a powerful inspiration to pursue success in the electronics business.

The social and economic returns from R&D are far higher than those associated with imitation and reverse engineering activities, or with the formation of tacit skills and knowledge, such as know-how and then know-why. R&D spending produces economic payback rates of 20-40 per cent for OECD countries. In the case of middle-income economies, these rates approach 60 per cent but they are as high as 100 per cent in low-income countries. The overall economic gains average 78 per cent while the rates of social returns are in the range of 70-100 per cent. (Watson, Crawford and Farley, 2003, p. 10, (ASEAN development journal)

There is one problem with patents. If everyone has them, the playing field is level again and competition centres around price, says Sony CTO Katsuaki Tsurushima. “If you make a gadget, it includes core technologies. But one company cannot hold every core technology. Sony has some, Matsushita, Sharp. You end up cross licensing technologies, and everyone ends up having access to the same technologies.”

Continue reading Chapter 2.2 here

Part 2; 12 Strategies To Survive In The Gadget Hell

gadgethell — Tue, 29 May 2007 10:13:18 CDT

“Happy families are all alike; every unhappy family is unhappy in its own way.” Tolstoy's opening line for Anna Karenina may still be very relevant to the technology industry, although slightly tweaked. “Unhappy technology companies are all alike; every happy company is happy in its own way.”

This part of the book looks at happy technology companies and at technology companies which are unhappy now, but which were happy for a while. The latter ones are confident, or at least hopeful, that they can outsmart their rivals again. They have tasted the good life, and they cannot get enough of it.

“China has taught us an important lesson: that Korea and Japan can be taken over and that they are not so big.”

2.1.Technology
2.2. Production, Business Process, Captive Systems, The Analogue Edge, Barriers to Entry
2.3. Marketing
2.4. Brand
2.5. Design
2.6. Lifestyle
2.7. Disruptions
2.8. Cheating and Scale
2.9. Escape commoditization
2.10. Help your own
2.11. The only one, or the first
2.12. Just get out
Conclusion

Chapter 2.5

gadgethell — Mon, 28 May 2007 14:20:20 CDT

Design

"Sometimes design can be seen as an adjunct; that it is essentially a superficial veneer that can be applied afterwards, when very often the most important product decisions have actually already been made." (Jonathan Ive in Guardian interview, June 2003)

Design can be seen as cosmetics. It can flatter bland products (or people) and make them acceptable or even attractive to the eye. Some cynics may even say that eventually the veneer will come off and nakedness reveals itself. To those people, the design of a product is nothing more than a skin hiding the true value of a product, be it a car or a couch.

Sometimes the design of an electronics gadget is much more than the skin of the product. It can be the essence of the product. It becomes the key feature that defines its position and that sets it apart. A unique design can even help to save companies, as the story of Hiroshi Nakaizumi shows. His task was simple: to create a mobile phone that would throw a lifeline to a young company in deep trouble.

The Sony designer was dispatched to London in 2001, where Sony had a major project going on. The cell phone industry had become the biggest consumer electronics segment with annual sales of $100 billion, but bizarrely the world’s biggest consumer electronics company was not able to grab its usual slice of the market and Sony was making big losses.

In Sweden, Ericsson was one of the founding fathers of the GSM mobile phone standard that had conquered the world, but it too was losing market share in the handset market and losing billions of dollars with it.

For the casual observer, Sony Ericsson was nothing short of a marriage made in hell. Both Sony and Ericsson were haemorrhaging cash and unable to compete. The top management decided that, rather than give up, they would give it one last try by putting their two crippled units together. “The two problem children, the black sheep of the mobile phone industry were getting together. A lot of people told us the probability of survival was very low," recalls finance chief John Peter Leesi.

Its operations were a mess. At the low point, less than one out of every five of its phones was delivered to customers in time, Leesi says. It was all part of the heritage of bad logistics and lazy management. When a Philips semiconductor plant in New Mexico went up in flames in 2000, Nokia got wind of it within hours and arranged alternative supplies for the critical chips that transport the radio signal into the handset. Ericsson, which bought chips at the same plant, was too late and ran into supply problems. The Swedes were always a little too relaxed compared with the hard driven Finns. Finland, having been ruled by the Swedes, has historical scores to settle with its bigger neighbour. So, Nokia had all the chips and Ericsson none. Timing could not have been worse, for this was the year when the mobile phone market exploded from 260 million units sold in 1999 to 400 million units in 2000.

What the new company Sony Ericsson needed most was a hit product to keep it afloat while everyone else on board was plugging holes in the leaking ship. In 2002, however, that was easier said than done. This was not 1992 when you could impress consumers with a battery that lasted more than a day.

By now, all phones were small enough to fit in a breast pocket and worked for days without a recharge. The new battlefront was colour displays and built-in cameras, but Samsung and NEC had taken the lead there, using technology developed for their more demanding South Korean and Japanese customers. Sony was only a small player in the Japanese mobile phone arena, and did not have in-house supply of colour displays and cheap cameras.

It was up to Nakaizumi and his team to come up with a design that would stand out. The phone they developed became the T610. “It was our life saver product,” Nakaizumi says.

The situation was dire for both Sony and Ericsson when Hiroshi, a graphics designer at Sony in Tokyo was called for a very secret meeting in Stockholm in November 2000. There were negotiations between Sony and Ericsson and the two companies needed a new brand identity in case the talks succeeded. For Nakaizumi it was a familiar brief. Earlier that year he was the leader for another top secret project at Sony: a portable video games machine – the project was put on ice in 2001, but would later be resuscitated and become the PlayStation Portable.

He developed a barebones logo and brand campaign and then things quieted down for the next five months – “The negotiations did not go very smooth.” He never anticipated what would happen next. “I did not expect anything. I appreciated they needed some support, but I though that would the end of my role.” Hiroshi thought he would stay in Tokyo, together with his Japanese wife.

In April, however, any problems that existed between the two parent companies had been ironed out, and the merger would be announced in a few months. Hiroshi was named head of design at Sony mobile phones, a company which everybody knew would soon cease to exist. The potential new company Sony Ericsson would need instantly recognizable products and advertising. From the designers, three people from Sony and three from Ericsson were now meeting once a month, alternating between Tokyo, the Ericsson research centre in Lund in the south of Sweden, and the plush and far too fashionable European base of Ericsson at St James Square in London. The building was opposite British general Montgomery’s headquarters in Mayfair. It was the most expensive part of town in the most expensive city in Europe, indicating that some of Ericsson’s cash problems were of its own making.

Before getting to work the Sony and Ericsson designers decided they would use the first months to get know each other, and more importantly what each of them regarded as “good design”. They would not show each other pictures of mobile phones, but instead pictures of cars and kitchen utensils. They found to their surprise, and perhaps even some relief, that the Nordic home with clean lines, wooden furniture and plain crockery had the same tranquil atmosphere as the quintessential Japanese interior with unadorned objects that immediately reveal their functionality.

“If you open a Scandinavian and a Japanese design book, they are very much alike. It was a very happy coincidence for our company,” Nakaizumi says. The Scandinavian school of design is inspired partly by the 1920s modernists from Bauhaus: form follows function. Japanese designers are familiar with this artistic school through their education, but they arrive at modernist design also through their own cultural heritage which goes back hundreds of years and is exemplified by the tea ceremony – an ancient ceremony where every action has a meaning.

In the early 9th century, Chinese author Lu Yu wrote the Ch'a Ching, a treatise on tea focusing on its cultivation and preparation. Lu Yu's life had been heavily influenced by Buddhism, particularly the school which would become known in Japan as Zen. The Japanese tea ceremony that Lu Yu inspired interweaves four principles - harmony (with people and nature), respect (for others), purity (of heart and mind), and tranquillity.

The tea ceremony in Japan is much more than “having a cuppa”. It is a transformative practice and has its own aesthetic, in particular that of wabi which means quiet or sober refinement, or subdued taste. It is characterized by humility, restraint, simplicity and naturalism, emphasising unadorned objects and architectural space, and celebrating the mellow beauty that time and care impart to materials.

Each utensil - including the tea bowl (chawan), whisk (chasen), and tea scoop (chashaku) - is ritually cleaned in the presence of the guests in a precise order and using prescribed motions. Conversation is kept to a minimum throughout. Guests relax and enjoy the atmosphere created by the sounds of the water and fire, the smell of the incense and tea, and the beauty and simplicity of the tea house and its seasonally appropriate decorations.

Sen no Rikyu, a historical figure in tea ceremony, introduced the concept of ichi-go ichi-e, or "one time, one meeting", a belief that each meeting should be treasured, for it can never be reproduced. His teachings led to the development of new forms in architecture and gardens, fine and applied arts.

For Nakaizumi, his two key words are “simplicity” (kanso) and “honesty” (shojiki). Several other Japanese words such as “shisso” (not showy, plain), “junshin” (a pure mindset) all hover around the philosophy of making pure, uncomplicated, non-ornamental objects.

Those words were essential in August when Nakaizumi and his new team needed to start designing mobile phones, without actually being able to do so, because the technicians had not yet come up with any features. “We started visualizing products with sketches. But there was nothing specific, because no company existed. None of our ideas were based on material specs (specifications). It was about finding the ‘essence’. That was the purpose of the sketches.” The Sony Ericsson ‘gene’ was discovered in those sketches, and the keywords to get there were simplicity and honesty.

Honesty, for instance means that it should be clear what the product is, and from what material it has been constructed. Nakaizumi detests the silver coatings that look like metal, but feel like plastic. "We wanted a good textile sensation. Real aluminium which we used is very uncommon in telephones.” Aluminium creates a mobile phone which dents, rather than bounces, when you drop it.

That summer, his boss told him he would leave Sony and go to London to join Sony Ericsson and lead the design department. He was to be joined in Europe by five colleagues – considered some of the best talent at Sony. The fact that Sony sent its ace designers to work at a risky venture at the other end of the world was a deliberate signal the Japanese wanted to send to the doubters: we are serious to make this work. Hiroshi had been on a stint in New Jersey earlier, but for half of his compadres it was their first overseas assignment.

Not everyone was going to London. Most of the Japanese designers were going to be located in the Swedish town of Lund, a small town in the south, where the Ericsson design team worked. “They were sent to this place in Sweden which they couldn’t find in the atlas. (Sony Ericsson President) Ihara looked at me when we tried to find it. ‘Where is it?!?!’, we asked each other.”

Lund is close to the Danish capital Copenhagen, which sits on the other side of a narrow sea channel.

Nakaizumi had plenty more reasons to be concerned. He was put in charge of a group of people whose prime responsibility was to make mobile phones, but as a graphics designer who works in two dimensions, he had never learned how to work in three dimensions. “I was scared. I had no background in industrial design.”

Furthermore, most of his colleagues would be working in Lund, while his new boss Ihara wanted Hiroshi next door in his London office. That meant Hiroshi had to rent two apartments, one in Lund and one in London, and travel between the two places – a two hour flight, one way – every week. Meanwhile, his wife would stay in their Tokyo home for the next two years, putting more strain on his personal life.

The reason Ihara wanted Hiroshi near him, was that he had decided that design, style and image would be the battleground where Sony Ericsson would conquer its lost market share. The mobile phone was no longer a business tool but had become a consumer device. Ihara was convinced that he needed to improve the style and image of his company and its products to appeal to consumers.

Before Nakaizumi arrived, Ericsson’s designers were far from confident. After an unsuccessful period of churning out bland phones with square edges, they had more recently started following the design language of market leader Nokia, which had segmented the market in many different social groups and which was diversifying its design. Curvy lines appeared in most Nokia models and it was no accident that Ericsson’s last phone, the T69, was also shaped in a smoothly curving casing. It wasn’t a bad phone – it was one of Europe’s first colour screen handsets -- but the new team decided they would be heading into a blind alley if they continued to follow Nokia.

“Even the T69 designer admitted that he had been under a lot of pressure to be more successful against Nokia. Our original design for the successor of the T69 was also curved, but we said to each other that if we followed Nokia we could have no brand indentity.”

What Nakaizumi’s team came up with instead was a model shaped like a slim, square bar of soap, with the bottom made of aluminium and the top with a shiny black plastic that appears piano lacquer. The materials they chose for the T610 were unprecedented in the handset industry and gave the phone its unusual look and feel. It was cooler, for instance, because real metal was being used. “When you touch it, it has to have the right feeling. The textile feel has to be an emotional experience. The material needs to be honest."

Nakaizumi soon came to realize that designing a square phone in Sweden was a highly sensitive issue. For years Ericsson’s nickname had been ‘boring Ericsson’ because of its plain rectangular blocks of heavy plastic that passed for handsets. They were like Swedish car maker Volvo which was renowned for its solid (safe!) cars shaped like a shoebox on wheels.

“We were not aware of the risk. We realized it only at the point when we presented the mock-up to the sales and marketing people. And…We…Were…Attacked.”

Without the unwavering support of president Ihara the T610 would not have seen the light of day. He demanded to see all the sketches and mock-ups long before anybody else. “When we showed him the first mock-up of the T610, he only said: ‘That’s it. Let’s go.’”

The sales and marketing staff, mainly Swedes, had been the laughing stock for years due to their square handsets and dwindling market share. And now, just when things were looking up with more Nokia-like shapes, the new Sony Ericsson design team proposed to return to the lego blocks of the past. They could not believe their eyes and ears. Hiroshi: “They were driven by fear.”

Ihara stood up and made clear that this would be no democratic process and that he had decided to go with this design. Nakaizumi, who had experienced at Sony that compromises lead to bland and uninspired products, is still grateful for the vote of confidence, borne out of willingness to make a difference. “If this failed, if Sony Ericsson turned down this design language, there would be no reason for a guy from Tokyo to be in Europe. One needs to take risks or fail in this industry.”

Memorable designs are usually unconventional. "If we had wanted to make a safe product, the product could have been very boring. Usually my passion tells me: 'Yes, go for it'.

Although the outside of the phones signaled a real change in the company’s policy, the insides of the T610 were hardly impressive. The colour screen was mediocre and barely readable in broad daylight, the built-in camera took grainy pictures and the memory was limited. The electronics, the so-called “guts”, were taken from an existing 18-month old phone, the Ericsson T69.

Yet, the T610 sold more units and for a longer time than anyone had

expected. Sales started in the spring of 2003 and production was stopped only two years later – some 11 million units later. For the average handset, two years on the shelves is a very respectable old age. Most models don’t last much longer than 12 months before the public gets bored with them and moves on to the next ‘coffee flavour of the month’.

Consumers who buy a Sony Ericsson today stand a good chance of purchasing the offspring of the T610. The design language that was developed for the T610 has come back in many subsequent models, including the world’s first mobile phone with a built-in Sony Walkman music player that was introduced in late 2005. The challenge Hiroshi and his team now face, is too make wilder variations on the theme, without losing the essence that was created in the T610.

“We want to start making cocktails, but we still need to upgrade the gin. It needs to get more alcohol. The essence needs to be more overwhelming. Since we make variations, we need to emphasise what our core is.”

Miles Flint, the Sony Ericsson president who took over from Katsumi Ihara in 2004, shares Nakaizumi’s fear for the bland or boring, although he attempts to maintain a likeliness, a familiarity between the models as his company expands its base and can no longer afford to rely on just one or two models. “As the portfolio expands, there needs to be a Sony Ericsson house style. It’s a fine line. If you have lots of different products they may appeal to the individual but they’re not a family. If they’re too similar, it may get boring.”

When asked what the overriding theme, the binding element should be, Flint does not hesitate for a second. “Energy. Our products should be energising the consumer’s lifestyle.” Snap a picture, rip a song and put it on your phone, edit a video clip. That kind of thing.”

“Energy” is a very different target from the ones used by its rivals. “It’s not a technical feature, such as thinness,” says Flint in a clear dismissal of Motorola’s strategy.

These days, and thanks to the T610, there is no longer a feeling of crisis at Sony Ericsson's headquarters. The company has long left the expensive building at St James Square which it inherited from Ericsson, and has moved to the more down-to-earth borough of Hammersmith in West London. The company is profitable. In fact, it has been doing so well that Sony's top management in

Tokyo have singled out the profits from the phone venture as a welcome contribution to otherwise disappointing Sony earnings. It is easy to forget that only a few years earlier this phone manufacturer was facing its moment of truth.

What good design of a single product can do for a company’s image is also evident at Motorola. The Schaumberg, Illinois-based firm is the world’s second biggest mobile phone maker although twice as small as No. 1 Nokia from Finland which makes one in three phones sold around the world. In 2004, Motorola was having a tough time shaking off Samsung from South Korea which was breathing down its neck – in the third quarter of that year the two were virtually on a par with almost equal global market shares.

But then came the fourth quarter and Motorola introduced a new model: the RAZR. In an industry where handset makers bring out between 40 to 60 new models every year and usually don’t bother giving their products proper names, a name like RAZR was a breath of fresh air. The title was no accident, either. It was very thin indeed, but few people expected it to have a major impact. Here was a company that for years had struggled to bring out appealing phones, and if it accidentally hit on a popular product, it would instantly run into production problems and logistical bottlenecks. This was going to be just another one of those phones that Motorola could design but not produce, the pundits thought.

The pundits were right in a sense, Chief Executive Ed Zander admits. Of all the 32 million phones Motorola produced in the fourth quarter in 2004, less than only one million were RAZRs. “We has some capacity problems,” says the man who was hired in early 2004 to fix the company’s seemingly incorrigible sins. But Motorola was not punished for its shortcomings as it was used to. On the contrary. It sold 42 percent more phones than in the previous year and took two percent additional global market share.

“Look what this product did for us. It was a record market share gain. This product has driven a lot of people to the Motorola brand. It isn’t about quantity, if you really build incredibly great products. Customers who cannot get or afford a RAZR, choose another Motorola phone.” And Motorola had no problems making sufficient quantities of those other models.

The RAZR was a lot more expensive than phones with similar features. You could pick up more powerful models, even from Motorola itself, and pay a lot less. Nobody cared. “With substance to back it up, the Motorola V3 RAZR is a very stylish phone that will appeal to professionals and those with deep pockets,” CNET wrote in a review, hailing its “sophisticated design”.

Brian Modoff, a very well respected wireless industry analyst at Deutsche Bank, applauded the company with the “truly unique handset designs, crucial in this world of ubiquitous silver clamshells”, adding that it would help Motorola stand out in the United States, and, more importantly, that “in Europe and many other markets RAZR-derived products will play an important role in rebuilding the Motorola brand.”

Wait a minute… sophisticated industrial design? From the United States?!?! Jim Wicks, now Motorola’s chief designer responsible for RAZR, recalls that after his pre-graduate design studies at the University of Illinois he considered two options for his post-graduate education: Italy or Japan. Design in the United States, let’s be civilized, is insignigicant. “I wasn’t happy about the U.S.”

Europe was very en vogue with his peers, but Wicks’ passion for Asia, and a student exchange programme, drove him to Tokyo’s Nihon university. After his studies he joined Tokyo’s design studio GK Design Group, run by Kenji Ekuan, a famous designer and a Bhuddist priest who is known to volunteer time to projects and products that are in need of an aesthetic overhaul.

And then, suddenly, the tea ceremony is back as a leading theme. Wicks studied Japanese tea ceremony and flower arranging for two years while studying in Illinois. And another coincidence, after his studies Wicks worked at Sony design alongside Hiroshi Nakaizumi, the same man who now leads the design effort at the handset industry’s dark horse Sony Ericsson – Nakaizumi hails Wicks as a dear colleague and one of the very few non-Japanese he knows who can speak and, more impressively, write Japanese.

It is hard to imagine the lanky Wicks, with his waving arms and long legs, pouring a cup of tea in a dress. But that’s not the point, of course. It is the esthetics in the ceremony that fascinate him. “The gestures, the motions, the sound of water, the different sound of hot water versus cold water.”

Wicks does not look like someone who runs a tight ship of 200 industrial designers, advanced mechanical engineers and software writers. Or may be creative people need a different kind of drill. He volunteers: “If two people in a room of 10 designers can agree on something, that’s a pretty good result.”

In a world where there are many influential schools promoting organic or asymmetrical designs, Wicks and most of his team scattered around the world work with the same key words, also used by Nakaizumi. “It’s about symmetry, simplicity, honesty.” Wicks pulls a PEBL phone out of his pocket. It is perfectly oval-shaped – the design team even needed to come up with a new hinge to keep the curve flowing where the phone flips open. You would think it is the diametrical opposite of the square RAZR, but both phones are built on the same principles. “It has a Zen-like quality. It sneaks up on you.”

For Wicks as well as Nakaizumi, a material should not just be decoration, it needs to have a function. Magnesium is already used in laptops, but the magnesium casing of the RAZR is a new material for cellphones. The RAZR also uses aircraft-grade aluminium, even though these metals complicate the reception of the radio signal. Part of the cover is made from plastic to let the radio waves pass to the aerial, but elsewhere the metals are needed to give the thin design the extra strength it needed.

The thinness was a strategic direction initiated two years earlier – that is how long it takes to develop a new phone and bring it to the market. The Chief Technology Officer and other top managers initiated a plan to reclaim the company’s heritage as the “King of Thin”.

“We wanted to go back to what we kind of lost,” Chief Executive Zander says. In the early 1990s, when it was still the world’s biggest mobile phone company, you could rely on Motorola to bring out the smallest and thinnest models. However, it lost its throne to Nokia in 1998 after a series of management blunders, including a strategic mistake in the early 1990s to catch the wave of digital mobile telephony GSM, TDMA and later CDMA. Motorola was so good in making small analogue handsets, that it balked at the bulkier size of the first digital mobile telephones – it needed extra chips to turn analogue signals into digital signals and vice versa.

After years of meandering, Motorola figured out its brand needs to be supported by cohesion but also differentiation to keep consumer interested. Products need to “wow” consumers. Up to the CEO – or probably from the CEO down - everyone in Motorola now talks in earnest about this utterly un-quantifiable “wow” factor.

In addition, Motorola’s new products need to be easy to use, which should result in more phone calls, more text messages and more Internet page look-ups, which is good for telecoms operators. “That’s the use over time element. If our products sell well to consumers, but the operators don’t earn money with them, it’s not a good product for them. The next time they will choose someone else’s product.” The telecoms operators, after all, subsidise the phones when they move them on to consumers, in the expectation that they will earn back their investment through service revenues, such as telephony.

Then, Wicks’ four design rules kick in: “Simplicity, Honesty, Richness and Surprise.” They need to help achieve the drivers – he realises only too well that in the end his designs need to drive sales (“Good design sells.”).

Simplicity and honesty, those two Japanese words, point to the outlines and materials used in a product. When it is metal it has to feel like metal, and has to have the weight associated with it. The choice of materials helps the third element: richness – as consumers associate weight with luxury, Wicks’ user tests showed. “Remember those bakelite phones from the thirties and forties with those beautiful patterns. They were really heavy. It makes them feel valuable.” Richness also comes from exclusive materials such as a never-before-used nickel-plated copper alloy keypad.

The surprise factor, ultimately, is the trick up the sleeve. “It has to feel as if someone was thinking about you when you didn’t know it. It’s a pleasant surprise”. In the case of the RAZR the surprise comes when the flip is opened: unveiling an unusually large display and a keypad made from a single slab of shiny steel.

Analysts are still very critical about the RAZR’s usability and regard its user interface unwieldy, something a consumer will only find out after he buys the products. It does not matter. What seemed impossible a few years earlier, is happening. Nokia is now taking a cue from its smaller rivals. It introduced a stainless steel and resin-constructed “movie star to mafia-boss” cell phone 8800 in 2005. Nokia’s Chief Designer Frank Nuovo said he “believes the Nokia 8800 belongs in this pantheon of iconic products - a sophisticated mobile communication device that quietly earns a nod of appreciation and admiration from other connoisseurs of fine taste.”

It is almost sad to see a company try so hard after it single-handedly revolutionised handset manufacturing and design. Nuovo’s comments that the stainless steel “expresses the tensile strength and durability”, and the resin was chosen for its “organic properties” almost sound worn.

“Nuovo has become too fat and happy. Driving around in his four wheel jeep, bragging about his other cars in his garage,” says one of the top analysts who tracks the global handset industry.

Looking at real iconic product, the iPod, you begin to wonder if all the successful industrial designers have been sipping from the same Japanese green tea, served by a graceful hostess in a rice paper-walled room somewhere in Kyoto.

But of course, the digital music player was there first. Its minimalistic design paved the way, says Wicks. “iPod has had a big impact. It showed something doesn’t need to be very decorative.”

The portable music player is a product of Apple's industrial design department, headed by Jonathan Ive, which means it is very clean and contemporary. The back of the iPod is shiny stainless steel, while the front is bright white plastic.

One of the reasons Apple turns out stylish products that are unrivaled by its competitors is the personal involvement of Chief Executive Steve Jobs who, says long-time friend and software billionaire Larry Ellison, has the heart of an artist and the mind of an engineer. "That's a very unusual combination, an enormous advantage when you do consumer products. Look at the iPod. I think the iPod is a beautiful design and I think the iMac is a brilliant design. He's done a tremendous amount of innovation on the integration of hardware design and software design," Ellison said (at a Wall Street Journal conference in 2003).

ID Magazine even named the Apple CEO the No. 1 designer (of the year). The magazine recognised the practical aspects of the Macs' industrial designs, arguing that "for Jobs, great design is a means to an end: bringing technology to people. He understands that you need smart designers - industrial designers, but also interface designers, software designers, mechanical engineers - to make that happen."

In fact it was not Jobs himself who wielded the marker and set out the new course of the computer and electronics industry. He did not even hire the man who did. But Jobs gave him the power to weave his magic.

It would be excessive to say that Apple was saved by iPod —after all the company was sitting on hundreds of millions of dollars of cash, but its computer sales were not going anywhere and the company needed something new to be noticed.

That is not where the iPod story begins, however. First Jonathan Ive did something amazing in 1998. He transformed the dull grey box, known as the computer, into something dazzling and desirable. "He made computers sexy, didn't he?" says Jeremy Langmead, editor of style magazine Wallpaper. What did Ive do? In the spring of 1998 he blew away the blandness with the multi-coloured iMac. It was a computer designed to be striking from the outset: a machine with screen and speakers enclosed within a translucent shell, with the keyboard and mouse carefully designed to match.

Ive, a Briton born in London in 1967 who studied art and design at Newcastle Polytechnic and who was named designer of the year by London’s Design Museum in 2003, at the launch of iPod:

“We all love music. It was a project we were really looking to get our hands on. The big design story is clearly the interface. It’s so simple. It’s completely intuitive. We’re surrounded by a lot of small (electronics) devices. Our goal was to design something that was small but also easy to use.”

How big an event was the first iPod? Soul musician Seal compared the moment he saw his first iPod with the first Walkman. “Do you remember that first Walkman you had in your hands. It made you feel ‘Wow’. There have been lots of MP3 players, but this is the first (music playing) thing that makes me feel ‘wow’ again.”

The product is clearly minimalist, clean and simple. But there is simple and there is simple, says Ive. “There's an applied style of being minimal and simple, and then there's real simplicity," he said. "This looks simple, because it really is. We wanted to get rid of anything other than what was absolutely essential, but you don't see that effort," he said.

"We kept going back to the beginning again and again. Do we need that part? Can we get it to perform the function of the other four parts? It became an exercise to reduce and reduce, but it makes it easier to build and easier for people to work with. It's not an appearance game we're playing. It is very utilitarian. It's the use of material in a very minimalist way.” (Wired at G5 launch in 2003)

What helped was some scientific progress.

“Polymer advances mean that we can now create composites to meet very specific functional goals and requirements. From a processing point of view we can now do things with plastic that we were previously told were impossible. Twin shooting materials - moulding different plastics together or co-moulding plastic to metal gives us a range of functional and formal opportunites that really didn’t exist before. The iPod is made from twin-shot plastic with no fasteners and no battery doors enabling us to create a design which was dense completely sealed. Metal forming and, in particular, new methods of joining metals with advanced adhesives and laser welding is another exciting area at right now.” (In an interview with the Design Museum, (http://www.designmuseum.org/designerex/jonathan-ive.htm)

Ive is probably one of the few designers who improved design both in the computer world as well as the traditional consumer electronics industry. He is unimpressed with both.

“If you think about the consumer electronics industry, that's as creatively bankrupt as the computer industry. It's funny ... I never quite understand why the consumer electronics industry is seen as more sophisticated than the computer industry, because I think they're really as bad as each other.” (Guardian, 2003)

As Apple, Motorola and Sony Ericsson showed, design can help a company achieve results that were believed unimaginable. Design saved Sony Ericsson’s skin, design sold 20 million RAZR phones in its first year and more than 30 million iPods in the four years after the October 2001 launch.

The question is, is it imitable? Samsung has been hiring designers like it is collecting baseball cards and currently employs 500 of them in an effort to catch up with its established rivals. They are scattered around the world, in London, Japan, Korea and the United States, and do a lot more than designing products. In fact, they are developing products.

“When I ask an engineer what a product will look like next year, he’ll say: ‘We will have 20 times better performance here and a 30 percent improvement there.’ But a designer thinks differently. You can give him components and ask: ‘What would you do with those?’ And he will say: ‘Hey, here I have some memory, a display and now I have a music player. But what if I put in a radio and Bluetooth? What is it now? It’s a new product.’ That’s why 500 designers are really important. They should be driving and seeding product development,” says David Steel.

The Chinese companies are taking a different approach. For many products, the design is just as commodotised as the rest of the device. Italian design houses deliver TV casings to the highest bidder.

Born in Varese, Italy, in 1950, Stefano Marzano says was to be expected, and the design battlefront has moved on from the outside to the inside, from the body to the soul: “Like any other competence, the more design proves itself, the more it commoditises. But it only happens if it doesn’t develop itself. One of major paradigm shifts is that we’re moving from design of materiality to the design of immateriality. Design is developing to a relationship, interaction, to behaviour. That’s the next development.”

“Our team is 450 people. The way we do things is the real differentiation. Having 500 or 800 is not really the issue. Without cultural sophistication and a cultural framework and a set of values, design can create disasters.”

“In the 1960s and 1970s choices were more quantitative than qualitative. Take washing machine. Initially it had five washing programmes. Then it became 10, then 12, then someone came up with 15. And all that time, consumer research showed people only use 4 or 5 washing programmes.”

Continue with Chapter 2.6 here

Reading for a price

Anonymous — Fri, 04 May 2007 20:24:54 CDT

It may will come as a surprise to the sighted that the blind and print disabled are asked to spend more on the software that makes a computer accessible than the computer itself costs.

Consider that after buying a computer, with an operating system, you were then required to pay $800 US for the keyboard to use it. In effect that is the situation that the blind find themselves in.

Now consider that a major organization which purports to represent the blind in the U.S. told Microsoft not to build in an interface, they are called screen readers, for them into Windows. They argued that should Microsoft do so it would destroy the tiny market for such products and reduce consumer chose.

The politics of this runs hot and heavy. Apple releases a screen reader, VoiceOver, in it's MacOS. Microsoft get caught flat-footed having followed the advice they got only to have a competitor, Apple, offer the very fuction that they could have had two years sooner.

An organization for the blind write a scathing review of Apple's efforts only to have it be exposed that the author of that review had told people he was going to "make sure this blows up in Apple face" long before ever setting pen to paper, or in this case stylus to slate.

Linux and freeware authors enter the fray as well. In the end, the day of the add on $800 screen reader is coming to a close. In the future screen readers will be as part of the OS and a whole industry built around over charging the blind or agencies serving them will die a long over due death.

Chapter 2.12

gadgethell — Wed, 25 Apr 2007 04:27:32 CDT

Just get out

In 2000, if you had gone long on Brent rather than than Nasdaq, you would have been a lot better off. Crude oil is three times more expensive in April 2007 than 2002. Copper prices have quadrupled since 2000, Aluminium is up 2.5 times in the seven years since 2000. Lead has doubled in the year to April 2007. And the Nasdaq? Down 50 percent.

If you want to read the tea leaves for the next decade, you might as well look at China. And China is buying into Africa, the world's biggest potential resource of commodities.

TAIPEI, April 25, 2007 (Reuters) - Taiwan computing devices maker BenQ Corp. <2352.TW> posted its sixth straight quarterly loss on Wednesday due to its ailing mobile phone business, and said it would spin off its branded business.
The company also said it plans to reduce its capital by around 40 percent to T$15 billion ($452 million) later this year from the current T$25.6 billion.
The spin-off and capital reduction come as BenQ's quarterly loss narrowed sharply from a year earlier. As the impact from its ailing mobile phone business starts to recede, it forecast sales would rise by a low-teens percentage amount in the second quarter from the first.
BenQ posted a net loss of T$1.76 billion ($53 million) for the first quarter, narrowing from a year-ago loss of T$5 billion and T$7.89 billion for the fourth quarter.
The first-quarter result was wider than an average forecast for a T$1.47 billion loss from four analysts surveyed by Reuters.
BenQ, which has focused on building up its higher-margin branded business in the past few years, said it would spin off that business into a separate company on Sept. 1. After the spin-off, the new company would keep the BenQ name.
The non-branded business, meanwhile, would retain the company's current ticker symbol and be renamed Jia Da Corp., focusing on ODM business.
Since March, BenQ has also been the subject of an insider trading investigation, though the company's chairman and president have both denied any wrongdoing.
BenQ, also a supplier to Hewlett-Packard Co. <HPQ.N> and Dell Inc. <DELL.O>, has said it will continue to sell phones in Asia, even though it failed to turn around the loss-making handset unit it bought from Germany's Siemens <SIEGn.DE> in late 2005.
BenQ announced its results after the Taipei stock market closed. Its shares rose 2.79 percent to T$12.90 on Wednesday, outperforming the benchmark TAIEX <.TWII> index which lost 0.75 percent.
(US$1=T$33.2)

Outsource or Sell, or Bail Out

Outsource:
Peter Tan, Flextronics

q: do u have a sense, in terms of japanese cos, how is
outsourcing demand from them?

a: want to say that it's goodd, but also want to say that
it's cautious. japaneswe cos are cautious in moving out. as part
of this trip i'll be seeing a couple of our customers. they want
to build product for the uerope market, for the asia market and
for the u.s. market. i think this is where we can play a
signhificant part for japanese cos. up to now we have had more
than 3 yrs relationship with casio. ... i think it would be alot
ore difficult for casio if they did not do the deal with us.

there's a lot of good branding for japanese comapnies. but at
the sam etime there's a lot of manfucturing capabiltiy outside
japan, particularly in taiwan and china, to take that brand
abroad. i think the day will come when japanese companies apply
more technology (to brand a move manufacturing outside)

the way apple does it ... relentlessly comes out with new
products all the time wihtout focus on the manufacturing
difficulties. cisco also does that, microsoft with their xbox
appears to be successful int aht area.

the likes of sony ericsson, nokia and also motorola to some
extent, a lot more focus should be put on time to market ...
rather than how to make the product.

IBM didn't want the bother anymore, and neither did Philips, Alcatel and Thomson which flogged their production of mobile phones, TVs, DVD players and PC monitors to Chinese rivals.
You should not be fooled, however. They stay in the game, all the
same. IBM still makes more expensive server computers. Philips still
produces its own big and flat television sets. Alcatel still owns a
large stake in the cell phone joint venture it has with Chinese
competitor TCL.
“They are maintaining their high margin activities. Some companies feel proud about their technology and the higher margin products they can make with that. Why outsource? It’s only the commoditised products that are being outsourced,” says Mark Youngblood, banker at Shenyin Wanguo Bank (2005-01-04)

Samsung is very aggressive maintaining manufacturing, but Sony is finally yielding. doing alliances with Chinese companies.

So are Philips, Thomson, Alcatel, IBM

Mature products etc.

A bigger exporter is Haier, China's largest producer of consumer products. Approximately 15 per cent of Haier's revenue is generated outside China. Haier is best known as a branded producer of white goods and some electronics such as color televisions. Haier has 6 per cent of the global market for refrigerators and 5.8 percent of the global market for washing machines. The company sells its products in 160 countries and has relationships with such retail giants as Wal-Mart, Home Depot, and Sears. Aside from selling Haier-branded products, the company also performs outsourced manufacturing. For example, Haier manufactures home freezers for Japanese producer Sanyo for sale in Japan under the Sanyo label.

Due to its low prices and increasing brand awareness, Haier poses the same kind of challenge to Japanese and Korean producers as those producers did to U.S. suppliers a generation ago. Indeed, Haier already has a refrigeration factory in South Carolina in order to be closer to the ultimate U.S. consumer.

Straight exit (after expansion in new territories)

"Even before he took over as chief executive from Lou Gerstner in
2002, Palmisano was at the center of strategy shifts that pushed IBM
into realms far removed from the PC business. Palmisano, who at one
time ran IBM's personal computer group, came away with an up-close
understanding of that cutthroat business. If he learned one lesson
during that tenure, it was that the future was elsewhere.
With perfect 20/20 hindsight, it now seems a no-brainer: Margins on personal
computers, workstations and servers were getting thinner every year,
and IBM needed to find a place in a high-priced business where the
word "commodity" was not part of the lexicon. Under Palmisano, IBM
achieved all that in spades--so much so that Big Blue's success in
services loomed large in Hewlett-Packard's controversial acquisition
of Compaq Computer, a deal that has yet to prove itself.
Charlie Chaplin was the perfect mascot when 40 megabytes was
mega-storage and 80286 microprocessors constituted technology's
cutting edge, but those days are gone. Just like legendary safecracker
Willie Sutton, Palmisano long ago recognized where the real money
was--and he's pointed IBM in that direction ever since." (Charles
Cooper, executive editor of commentary at CNET News.com, Dec 7, 2004)

Focus on components

The car industry is very similar: Many large component makers (known as Tier One suppliers) are taking over some of the roles previously played by original equipment manufacturers, such as GM and Ford. By working for a large number of OEMs they are becoming the expert in their particular field, in terms of both product and process technology.

Dr Mathias Hüttenrauch, director of Marketing and Corporate Strategy for Visteon in Europe and South America, says, “We are really moving strongly towards the consumers. We have to have a customer focus. In the current environment it is not enough for a tier-one supplier to just come to an OEM and find out what its idea is. You have to bring some ideas to the table. They see us as the experts.”

Equipment suppliers are rapidly standardising their range of products in order to make high quality components at a low cost. As vehicle manufacturers adopt platform policies, whereby different models use the same core chassis and powertrain technologies, suppliers too are using common and reusable components. Modules or systems designed specifically for one model or one OEM can contain many components that are also used for other models. This can be taken further by standardising subassemblies within modules and systems. (The Economist Intelligence unit in an October 2005 paper).

Continue with the Conclusion here

Part 1; The Crisis In Consumer Electronics

gadgethell — Wed, 18 Apr 2007 09:50:18 CDT

No business seems more brutal than the electronics industry. Profits are low. Products are sold more cheaply every year. There is abuse of dominant market players. Government grants are hurting competition, and there is rampant price fixing.

In this part of the book you will read more about the causes of the crisis in the consumer electronics industry, and how it has changed in nature over the decades.

Prologue

1.1 All business is brutal, but some is more brutal than others
1.2 What is consumer electronics?
1.3. Haven’t we seen this before?
1.4. Who, or what, opened the floodgates?
1.5. Asian governments – the not so secret weapon
1.6. Hony or Sony, what’s in a name
1.7. Is China's strategy sustainable?

Chapter 1.1

gadgethell — Wed, 18 Apr 2007 09:11:41 CDT

All business is brutal, but some is more brutal than others

All business is brutal, but after World War Two no business seems more brutal than the electronics industry. Indications can be found everywhere. Low profits are one. Price drops of between 5 to 10 percent on consumer electronics is another. Computer microprocessor maker AMD complained in 2005 at the European Commission and in Japan that its bigger rival Intel coerces low-margin computer makers to use its chips – without Intel subsidies and discounts these firms could easily slip into losses. Dozens of PC makers offices have been raided by government officials. Another sign of rot is rampant price fixing.

Samsung was fined to the tune of $300 million after it pled guilty to the United Stated Justice Department in 2005 to price agreements for DRAM computer memory chips, a highly volatile segment of the chip market where profits rapidly turn into massive losses as a result of wild price swings – akin to the pork bellies of economic textbooks. Rivals Infineon and Hynix are also suspected. Further in 2005, Sony, Philips and Matsushita were fined by the French competition authorities for price fixing.

It is not hard to imagine the despair of a product manager of fancy flat TVs, or a sales sergeant out in the field, faced with a flood of cheaper products from no-brand rivals. His product is more expensive to produce and offers better picture quality, design and service, but he knows that many consumers may not be willing to pay 50 or even 100 percent more when given the choice. His options are limited. If he cuts prices, he loses his bonus – electronics companies have smartened up their bonus schemes and now reward profits rather than sales. If he sticks to his prices, he may lose his bonus too, because he will not sell enough products. Under such circumstances it is tempting to clinch a deal with fellow premium brands. It may not stop those consumers who will always buy the cheapest product, but the ones going for the high-end, high-margin, envy-of-the-neighbours flat TV, will at least be paying the full price.

Low profits are a real spoiler
Few people are better placed than Jan Hommen to witness the havoc caused by a low-margin industry. Under his tenure as Chief Financial Officer, Philips cut the number of employees by almost 100,000. A former crown prince at aluminium giant Alcoa, he knew how to deal with global markets and commodity products. Unlike Alcoa, however, Philips was no dominant player in its markets, except in lighting and niches such as electric shavers. In consumer electronics Philips is Europe’s top brand (Forrester research), but elsewhere it lags behind Sony, Panasonic and Samsung. Hommen soon realised that the consumer electronics business, which was marginally profitable at the best of times and heavily loss-making when it rained, was no candidate for closure. It generated over one-third of revenues and the reputations of many of the executives were built inside the business unit that had given the world the compact cassette and the compact disk.

Hommen, working under two CEOs, also had some nicely profitable businesses within the electronics conglomerate. The lighting division generated steady profits, and so did the home appliances unit. Hommen and his CEOs were also enchanted by the unit which made medical diagnosis equipment for hospitals. In all of these healthy business units, Philips needed its top talent. The less profitable units needed to be fixed, sold or closed. Consumer Electronics, which had too many allies within Philips to be shut or sold, was a candidate for fixing, although it was evident that it would never be able to generate a profit margin higher than 4.5 percent due to the ferocious competition. Much to Hommen’s surprise, he noted that for many years the top people in his company did not go to work at the most profitable business units.
“I’ve seen really talented managing teams in consumer electronics. They were top of the range people who worked their butts off for a tiny profit, or no profit. It pained me to see how a top team broke their backs on a very tough industry.”

"Now and then I’ve been thinking: ‘It’s a real pity that a low-margin unit like consumer electronics is run by such a talented team that would be better off at a more rewarding business activity.’ More recently we’ve started bringing people over to our medical systems division, because the opportunities for growth and value creation are much bigger there. And we’re going to do more of that.”

Why are we doing this?
Frans van Splunter is one those managers at consumer electronics who felt like a squeezed lemon after his years at Philips associate Grundig.

“After Grundig I moved to South Africa, and became responsible for sub-Sahara Africa for Philips. It was a breeze. I worked 5, 6 hours a day and that was considered hard work. I looked back at my stint at Grundig and wondered what on earth I had been doing there. If I could do it again, I wouldn’t have stayed in Germany.”

The son of an affluent Dutch farmer who retired as Chief Executive of the home appliances and bodycare division of Philips, Van Splunter points out that the salaries in the electronics industry, especially for managers, are no big incentive to stay in the business. “The base salaries are reasonable, but the bonuses are miniscule because nobody ever meets their targets.”

“I see colleagues in consumer electronics slogging, and I wonder: ‘Why?’”

For an executive, there is nothing more frustrating than seeing talent and energy go to waste. “Not being able to make a profit is one of the hardest things for a manager. It puts enormous pressure on your psyche. You believe yourself to be a good manager, and yet you cannot make a profit. So, you start to work harder, in an attempt to force that profit to happen. But it never does. It tires you out,” Van Splunter says.

He’s not the only one wondering what the point of it all is.

“Everyday I wake up asking myself: ‘Why I am doing this?’,” says Fujio Nishida, Executive Vice President and Corporate Executive Officer at Sony Corp. Refreshingly informal for a senior Japanese executive and with an easy, relaxed smile, Nishida is in charge of marketing of electronics at Sony (April 2005). Sony has just announced a new CEO, the Welsh-born Howard Stringer, the first non-Japanese chief executive in Sony’s history. Such a revolutionary appointment means the once-proud Japanese firm is getting desperate. Nishida thinks it will be a huge challenge to turn Sony around in the cut-throat electronics business.

Rob Westerhof, another Dutchman who recently retired from Philips and who now sits on the board of Chinese electronics group TCL is also bemused when he looks at the current state if the industry. “I have been surprised how much money, talent and energy is being spent in an industry with such lousy returns. They would be better off bringing their money to the bank.”
Even at TCL, one of the Chinese upstarts which has made life so difficult for the big brands, management is wondering if their aggressive expansion into the global consumer electronics markets is a wise thing, he says.

It was not always like this
In the heydays of electronics, the 1950s and 1960s, electronics could be an extremely profitable business. Many electronics companies had unique technology and products, and even if they faced competition, they could still barely meet demand.

RCA dominated colour TV tubes in the 1960s and it earned $35 on every unit sold. It had developed colour TV pretty much on its own, in a giant effort that took nearly two decades from around 1940 to 1959 to turn in the first profit. But when it did, demand for colour TVs and tubes was so big that RCA could not fulfill customer requirements. Its plants were running flat out. Between 1960 and 1965 RCA’s profitability was three times the average of all U.S. manufacturing enterprises. It grew to become the 26th largest industrial enterprise measured in revenues, with sales of over $2 billion.

In Japan, the voracious appetite for electronic gadgets is shown in Matsushita’s fast growth. It increased sales 36-fold in 15 years, from 5,600 million yen in 1950 to 203,500 million yen in 1965.

Philips, Grundig and other European players, in the 1960s, had managed to transform the unwieldy big Hi-Fi tape recording machines pioneered by CBS into a compact system that played Hi-Fi quality music and sold at a 30 percent net profit margin. (Ottens). CD recordable machines from Sony and Philips, long before they became standard on personal computers around 2000, were priced at several 1,000 dollars and carrying profit margins of around 20/30 percent.

Admittedly, these devices did not sell in huge quantities. One reason was their price which limited appeal to small market niches. But the high price was the result of limited production capabilities, and that is something which is very hard to imagine for today’s consumers who live in a decade when Nokia sells 100 million units of one single phone model, and when Microsoft’s new Xbox 360 games console comes to the market with 3 million units for just the first three months.

The scarcity of technological expertise and limited production capability is illustrated by the fact that by 1966 RCA produced 20,000 chromatron colour TV tubes every month and Sony still only managed to produce 1,000 sets, which were also of lower quality. (Sony history – The comeback, http://www.sony.net/Fun/SH/1-12/h6.html)

Sony’s TR-63 portable transistor radio cost the average Japanese employee a full month’s wages in the late 1950s – Sony claimed the radio was pocketable (a Japanese English term coined at the time), but it only fit inside the extended pockets of the custom-made shirts of its sales force. For the Christmas rush of 1956 it flew out a few extra thousand radios to the United States to meet so-called red-hot demand. Compare that with Sony in 2005 which had 1 million Playstation Portable (PSP) for the first two weeks after its European launch and which sold 13 million of the devices worldwide in the first 18 months.

During the 1950s and 1960s, technological know-how started to spread amongst nations and companies. Governments of developing countries like Japan encouraged the development of an electronics industry, while the U.S. government actively encouraged distribution of technology which greatly helped the emerging Asian and European electronics industries.

The beginning of overcapacity
As more companies gained access to key technologies, production increased and prices started falling. “In the 1960s, we ceased to be a monopolist,” says Jan Oosterveld, a business professor at the University of Barcelona and the former chief strategist at Philips.

“When Philips started (in the late 1800s) with technology it was not a saturated market. If you could make a light bulb, you would be able to sell it. Around the 1960s, the market started to become saturated. This created the need for a more sophisticated approach,” says Stefano Marzano, chief of design at Philips.

Shortly after World War Two the manufacturing industry had cracked it. From there on, shortages and scarcity were no longer issues that determined the output of a factory. Consumer demand became the driving factor. The results of that shift are still relevant even today. An investor who invested 1 euro in a basket of the DJ Stoxx European technology index at the peak of the technology bubble in March 2000 is still short 75 cents in April 2007. Nasdaq investors are slightly better off : they still have to recoup 50 cents for every dollar invested. These investors had bought into the belief that there was going to be much stronger demand for technology services and products that eventually materialised.

This meant companies needed to shift their focus from innovation and mastering production processes, to include marketing and design. This is the period when Sony made a quantum leap, and others lagged behind.

Marketing and technology in the 1970s and 1980s
Much earlier than most of its rivals, Sony grasped the importance of marketing and brand. From the theft of 4,000 transistor radios from a Long Island, New York warehouse of Delmonico’s in January 1958, which was transformed into a wave of free publicity (only Sony’s products had been stolen!), Sony has enjoyed decades of excellent marketing. Its co-founder Morita had an unfailing gut feeling for the needs and desires of his customers, culminating in what was perhaps his finest hour when he helped conjure the Walkman in 1979. Made from components that had been on the market for a decade, the product could hardly be called innovative. But creating a portable compact cassette player with dual stereo headsets, and using guerrilla street marketing to sell it, was a breakthrough, nonetheless.

Being first has the advantage of setting a standard, establishing a brand name and it buys the pioneering company 3 to 6 months of exclusive sales. Sony knew that it would not take long for Taiwanese and Japanese rivals to create a me-too product – after all, it took its own engineers all but a few months to piece it together from off-the-shelf components. The strength of Sony was that it subsequently married the marketing edge it had created for itself, with innovation and production excellence.

There is now a dedicated Walkman room at Sony’s office amongst the high rises around Shinagawa rail station in Tokyo, where the Shinkanzen bullet train departs. The room itself is unimpressive, hiding behind a plain door in a non-descript corridor in a grey and beige furniture-fitted building. But in the room is every single Walkman model that was ever created. There must be over 500 different types, covering four walls. The firm has sold over 200 million units of its cassette-based players, plus more than 50 million Walkmans based on minidisk, compact disk and hard disk.

During the 1980s and 1990s, Sony launched 20 to 25 new models every year. Interestingly, in the most important first five years after the introduction it only launched a few models, but these included breakthrough designs such as the WM5 which was much more compact than the original model which was rushed to market. The development cycle culminated in a Walkman that was only marginally bigger and thicker than the standard-sized tape cassette it contained: the W20 introduced in 1983.

“The WM5 already seemed impossible to create,” recalls Shizuo Takashino who was in charge of the development team. Two engineers, one electrical and one mechanical, stayed at the manufacturing site for 3 months, pulling all nighters to come up with a design that was small enough to be fashionable, cool and impossible to copy. One engineer had to postpone his wedding, while the other met his future wife at a bar because he never went home anymore.
Once they achieved their target, Takashino took a block of metal which was only slightly larger and thicker than a cassette and showed it to his engineers. That, he informed them, was the size of the next model. Having received their new marching orders, the developers threw out everything they had worked on, because they needed an entirely different motor to spin the cassette. The old one, albeit an improvement from the original Walkman drivework, was too big and required two AA batteries. In the new design, there was room for only one battery. The new Walkman, therefore, required an engine that was much smaller, yet with the same horsepower at half the energy consumption.

Now a senior executive in charge of Sony’s Chinese business, Takashino is the archetypical Japanese manager not to be messed with. His employees never even requested to have a closer look a the mock-up, which was a good thing for Takashino, because hidden in the palm of his hand was a bulging space which could house the motor. Even he had figured that his engineers would need more space for the motor than he demanded. Since they never asked for a closer look, and worked extra hard to solve the puzzle, the engineers actually managed to fit the entire product into the strict contours of Takashino’s original wishlist. He cannot help a satisfied smile when he concludes tough leaders get results: “You need to set a very clear goal. If I had accepted their view that a smaller motor was impossible to engineer, the product may have never been created.”

It was a strategy he repeated several times. When he needed a Minidisk version of the Walkman, Takashino carved out a block of wood in the shape of the new device. “It took me 10 minutes to create the block of wood, but it took the engineer one year to develop the product.”

What's failing, the spirit of innovation or innovation itself?
Ambitious targets kept Sony ahead of the competition. Clever marketing and protection of key innovations with patents, made it the world’s biggest consumer electronics maker. “We need to outwit the customers and the competition. We need to give consumers something they did not expect, so that they are surprised. If customers have such experiences, they become Sony’s sales force,” Takashino says.

A product of the golden days of Sony, Takashino sounds like many other seasoned executives in the electronics industry struggling with a new reality of low profits and shriveled pride. When he tells me: “it is important for a top manager to set a radical target”, he is also sending a hardly concealed message to the top of his company to raise the ambition level. Undeniably, he is also longing for the good old days when it seemed easier, or at least possible, to impress the consumer.

He warns that: “Nowadays, products are developed by large groups of people and there’s a real risk they may become average. If we develop a product with too many people it may end up bland.” What else is he trying to say other than that Sony has become too big and bureaucratic, and that it has fought the war in a losing way?
Engineering prowess in the age of cassette players, video recorders, minidisk players and televisions gave Sony an edge that lasted to the 1990s. Other Japanese firms also reached a level of sophistication in their production processes that was hard to copy by ambitious competitors of the new tiger economies: South Korea, Taiwan, Hong Kong/China and Malaysia.

Only through cunning, personal friendships and even bribes did LG Electronics and Samsung Electronics from South Korea get their hands on the horribly complicated drum technology in VCRs from Japanese rivals. Samsung pumped corrupt Japanese engineers over the weekend in hotels near Tokyo’s Narita airport, while LG developed friendships with key suppliers to the big Japanese brands such as Matsushita.

The closing of the technology gap
Eventually, the Koreans, the Taiwanese and the Chinese mastered most of the technology of the analogue electronics age. Although considered of lower quality, their products were still good enough for many consumers. In the early 1990s, a typical salesmen in an electronics store would actively promote VCRs of $250 fully acknowledging they wouldn’t last for more than 5 years. “But what the heck. For $250. In five years time you throw it in the bin with a smile on your face and buy something better for the same money.”

Except for one thing, of course. VCRs did not get better any longer. They only got cheaper. Supply had started to exceed demand, and with almost full market penetration of TVs, VCRs, CD players, and DVD players, the industry could no longer grow itself out of trouble.
Now, in the new millennium, the misery is everywhere. The technology gap has closed, because chips have replaced the mechanical and transistor systems of the 1970s and 1980s. An MP3 player from Samsung is not materially different from those of LG or some no-brand from Guangzhou, China. Same chips, same basic software, same display, same headsets. “The electronics industry at large has completely lost its grip on the market,” Philips’ Marzano says.

Making science fiction become reality
Despite low profitability, most people in electronics seem to be enjoying themselves.
Anssi Vanjoki, who is in charge of Nokia’s multimedia mobile phones knows exactly why he is still thrilled to be part of the industry although Nokia’s phenomenal revenue growth has stalled for years, and its shares have been sinking since the middle of the year 2000. The lanky Finn with broad shoulders and piercing blue eyes, who would not be miscast as a Russian or east-German spy in a James Bond movie, picks up the latest Nokia phone that features a built-in high quality digital still camera and a video recorder with a miniature Leica auto-focus lens. “Try to put that in a small phone.”

He aims the camera of his phone at the sandy beach of Cannes, in France. As he talks, he records the setting sun. I watch him create a video message to a friend back in Espoo, ploughing through the snow of the Helsinki suburb which is the home of Nokia, some 2,500 kilometres north of where we are today. He’s beaming, and that is a remarkable sight -- I know a few dozen Finns and they normally take life rather serious.

His fascination with high tech goes as far back as his early childhood. “I’ve always wanted to do things that hadn’t been done before. As a child I had a dream to be able to see what other people could see. Today it came true. I sent someone a video message. It’s a boyhood dream. It’s wonderful.”

Technology’s enchantment, or perhaps technology’s spell, is easy to understand. On this February afternoon on the Cote d”Azur, Vanjoki has helped create the very science fiction that he imagined as a boy, makes the technology industry personal in a way that no detergents or insurance company can ever match.

Vanjoki’s belief in the power and excitement of advanced technology is endemic in the technology industry. Forget Bill Gates’ rants about how “great software” changes the world, because technology changes lives even at a micro level. Robert Ashcroft experienced this first hand. The Brit heads up Sony’s network services business in Europe, the part of the company that sells you songs on-line and pipes on-demand personal radio to your cell phone, and he has never been without a subject since. “In this job, you are the dinner party conversation. I worked in the call center business, and I can tell you nobody ever wants to talk about call centers.”

Anand Chandrasekhar, the man who co-leads sales and marketing at the world’s biggest chip maker Intel also had a personal motive to get into electronics. “I chose computer science over other industries largely because technology excites me. I love tech products. I love to play with them. I feel like a boy in a candy store. I couldn’t imagine myself working at a bank. I’d get bored out of my skull.” (10 march 2005, Hanover, Germany)

Chris Deering, the affable American who was Sony’s European president until late 2005, is equally aghast at what life may look like elsewhere, even though he admits profits are hard to come by. “You win some, you lose some, but at least it’s making a difference in the world. It’s like a drug. Once you’re hooked you cannot imagine what so interesting in other sectors. It’s invigorating. You’re never bored. It attracts people who are energized by the unknown, the mix of artistry and technology.” (9 march 2005, hanover, germany).

Andreas Ditter, a Sony man in charge of TV marketing in Europe, is just plain curious what is next. “There are always new things coming through when we talk to our engineers.”
The reason that Fujio Nishida ended up at Sony underlines the impact Japanese consumer electronics companies have made on consumers around the world. When backpacking around the world in his gap year after university, in the early 1970s, Nishida found that two Japanese brands were on the lips of anyone he met: Sony and Canon. He decided to apply for a job at those firms. “I was attracted by the big brand recognition.”

Meanwhile, he also drank the Kool-Aid. “I adore these products. Every year we bring out new products. It's more than a gadget. It’s the beauty of art. It’s an addiction.”

It's personal, that's why!
The reason electronics gadgets are so personal, is that people spend so much time using them. Watching TV and listening to music helps us to overcome our low boredom threshold. And our biological need to communicate is facilitated with mobile phones – a recent study showed women spend an aggregate 4.75 years of their working lives talking on the phone, and men just over 3 years; some 180,000 calls are made on office phones and 100,000 over mobiles. (Toucan research amongst British office workers in December 2005)

“Entertainment is the core of the home and communications is the core of people’s lives,” says David Steel, the vice president for marketing at Samsung’s consumer electronics unit. An undergraduate in physics, British-born Steel went off to the United States for materials research at the Department of Energy, and then went to business school. After a year at McKinsey, he was off again in 1997, this time to Samsung in Korea. He wanted to move to the place where the action was. “It was an opportunity for me to go to Asia. Particularly Asia is very dynamic, very fast moving.”

These are bright people, some of the brightest in the industry, constantly exploring opportunities to outwit their competition. Although their talent is recognized within the industry, they cannot alter the fundamental characteristics of the electronics business which is getting tougher every year. The funny thing is that most still believe they can beat the odds. They believe they are different from the gambling addict, because the game they play it is not a game of chance. They believe their talent will set them free.

“There is no silver bullet. It’s hard work with intellect.,” says Vanjoki. “It’s very demanding.”
And when it appears impossible to win in the overcrowded market, a victory tastes even sweeter.

“It’s great to win, because it’s so hard,” says Jim Wicks, the chief designer of Motorola, a few months after the launch of the RAZR phone which marked the turnaround of the U.S. cell phone maker. Before RAZR, Motorola seemed incapable of producing a desirable handset. But the ultra-thin model changed everything. Motorola sold an estimated 15 million units of the expensive flip phone in the second half of 2005 alone, and increased its global market share by 5 percentage points to almost 19 percent, stemming years of decline.

Wicks, the proverbial designer in a stylish dark outfit that falls smoothly around his tall frame, sounds like an Olympic athlete who knows he only has the tiniest of chances to win the gold medal, and that he may have spent many years practicing in vain. “You have to be an insane individual to work in this industry. But when someone picks up a thing you have created… that is sooo cool.” (17 feb 2005)

The sheer joy of seeing products in the hands of millions of consumers makes executives forget that they do not make any money with them. Frank Simonis, in charge of strategy for the troubled optical disk drives unit at Philips concentrates on the next battle of industry format wars he is fighting. He flying around the world, hustling rivals to set the next standard for rewritable CDs or DVDs, and more recently its successor Blu-ray. “I create my own anchors that I want to achieve. We were in a lost situation with DVD+RW, and then we were still able to create an alliance and become a standard. Clinching an alliance with a company like Dell keeps me going. And the introduction of the double layer disk gave us a profile that lifted us above the rest,” Simonis says.

Nothing beats the sensation of seeing someone getting all excited about a new electronics gadget, agrees Hugh Brogan, who for six years ran his own British mobile phone company called Sendo. “When it’s good, it’s really good. When a customer is blown away when he sees a phone, when you see that, it’s fantastic. We toil away for months without telling anyone, and then you can take the cover off. I get a lot of personal satisfaction out of it.”
He especially enjoyed it when his little Birmingham-based company, with a few hundred staff, proved it was able to compete with mighty giants like Nokia and Motorola. In the spring of 2005 he already had a full-fledged music phone for sale, while the big boys were still six to 12 months away from launching theirs. In certain markets, such as Britain, Sendo’s models were outselling Nokia’s. “Despite all their 10,000s of engineers we make products that are better-selling than theirs.”

Eventually, however, Sendo was no Icarus and could not fly away. For a while it ignored the pull of gravity, but in the end it crushed to the ground by the brusque force of technology’s laws of economics. Brogan, whose company was flirting with profitability was unable to bet big. “When life in the electronics industry is not so good, it’s actually pretty terrible. Sometimes a customer lets you down. They don’t keep their promises. That can be soul destroying. You’ve ordered $40 or $50 million worth of components and then they don’t place the order. And they look at me and say: ‘So? Sue me.’” (17 feb 2005) Sendo sold out to Motorola a few months later.

Young companies get chances
The reason start-up companies get a shot in in the first place, is that unlike any other industry, the electronics sector gets a complete makeover every few years which creates opportunities for newcomers. In the car or banking industries few major companies have emerged in the last decade or two, but in the tech industry some of the biggest names are not even teenagers, like Google. Even communications hardware maker Cisco was founded as recently as 1984, and is now bigger than its main rivals such as Siemens and Alcatel which have been around for more than a century.
“This is an industry where technology obsoletes itself every few years. The people who work in it are driven by the challenges of that,” says Intel’s Chandrasekhar.
Jim Balsillie is the co-CEO of Research In Motion from Canada, the inventor of the Blackberry mobile email service. His company would have never seen the light of day when snail mail and wired telephones were the pivot of communications. RIM got its chance with the seismic shift that occurred when electronic mail collided with cheap mobile communications, and were joined by a new software programming language called Java. Before Microsoft or Nokia realized what was going on, RIM had sown up the market and Blackberry had become synonymous with wireless email. Balsillie is intrigued by these frequent moments of disruption. “I believe in the tech industry for its innovation and discontinuous events. What’s fun about it is that you can rewrite conventions.” (16 feb 2005)

For technicians, another benefit of the electronics industry is that it is more forgiving than physics. “There’s always wriggling space,” says Gert-Jan Hesselink, product manager for non-widescreen tubes at LG.Philips Displays, the world’s biggest tube displays maker. Engineers, and Hesselink is one of them, know that something which does not work right away, may eventually lead to a successful product.

The tech landscape is scattered with big hit products that initially seemed impossible to manufacture in large volumes. The first solid-state lasers needed for CD players lasted only seconds before they burned themselves up like a candle. RCA had to work for more than 20 years to develop colour TV, because it was so hard to do. Sony spent another 10 years on Trinitron, its own colour TV. LED lamps can light up a street today, and that is a very long way and a lot of research dollars after the little red indicator on a stereo set 20 years ago.
What all these people share is a belief in the power and excitement of technology with which they chase away the doubts that come to haunt them in their private moments. It also the start of an explanation why the electronics industry is such a busy place and why very few companies leave.
Nokia’s Vanjoki expresses the spirit of determination to fight when he says: “When you score, that feels good. And when you’re defeated, you prepare for the next fight. Some people disappear, but we don’t. We concentrate on the next battlefield.”

Continue with Chapter 1.2 here

Chapter 1.4

gadgethell — Tue, 17 Apr 2007 08:22:56 CDT

Who, or what, opened the floodgates?

In 1998, when the first DVD players were hitting the market, Philips started production of their own DVD video wheel mechanisms on a pilot line on a sprawling industrial park right in the middle of the drab Dutch town of Eindhoven. This provincial place, some 110 kilometres south of the capital Amsterdam, was hardly more than a collection of rural villages on poor, sandy soil when Philips moved there in the early 1900s to find the cheap labour it needed to become a global multinational company.

The town that Philips built has come a long way and the wages for its employees are now among the highest in the world. By the end of the 1990s, more than 100 years after the firm was founded, Philips used its Dutch home base for pilot production lines before moving them to lower cost locations, the idea being that the well paid process engineers in Eindhoven knew best how to max out a manufacturing line.

Around 2000, the Optical Storage division, which is responsible for CD and DVD players, planned to start mass production of DVD wheel mechanisms in Malaysia, overseen by management in Singapore -- the wheel mechanism is the core of any DVD player and contains the laser and all the other microelectronics and mechanisms to read the information on the 12 centimetre optical disk.

After two years, the plan was to move the lines to even lower-cost Shanghai, which at the time was not regarded to be ready for demanding high-precision manufacturing – the level of accuracy required in a DVD player can be compared with flying a jet plane with average cruising speed of 1,000 kilometres an hour (600 miles/hour) a few meters above a narrow, bending road.

Certain people within the division had their doubts about the two-phased plan. Malaysia could quickly become too expensive if price erosion of DVD players would follow the same pattern as the CD, especially if Chinese competitors would start bringing in their cheap, inferior products.

“Every analysis showed that manufacturing in Malaysia would be too expensive,” says Frank Simonis, strategic marketing director at the optical storage division.
Without telling anyone at the Philips executive board, Simonis and a few of his colleagues approached the management of Philips’ Shanghai factory and asked them to do a few calculations of their own. The Chinese management figured they could offer the same ‘yield’ as the Malaysians and they were hungry to prove it (the ‘yield’ refers to the number of sellable products that come off a manufacturing line and is usually expressed as a percentage of the total number of product starts)

A production team of 30 Chinese workers and engineers, plus their own cook, were flown into Eindhoven. While staying in a modest local hotel, the group learned over three months how to operate the production line. Much to the surprise of the Dutch engineers, the Chinese crew managed to reach a higher yield than their Dutch counterparts. “It is quite telling that the Dutch did not care that they were beaten,” Simonis recalls. He shakes his head.

The line was then shipped to Shanghai where the production yield was increased by another five percent within two weeks. “They had changed the set-up themselves. They had come to understand the process so perfectly, that they could make improvements on their own that weren’t in our book here,” Simonis says.

The example is no longer unique, either. “We have seen similar things in many different places in China. Ten years ago we started to see the first signals of that dynamic. Therefore we no longer need to take intermediate steps. We can take production straight to China. They have an eagerness and competitive spirit we don’t see amongst Europeans. Their first strength is in labour force and morale. They believe that they can and must work seven days a week. Secondly, they always think: ‘How can we do things differently?’.”

“They have developed themselves much faster than we had expected.”
It is too simple to dismiss Chinese electronics manufacturers as cheap labour companies. Certainly they benefit from cheap labour, but their drive to learn and compete are equally important to explain the rise over the past decades. South Korean and Taiwanese producers, which are no longer cheap labour bases, still enjoy this competitive spirit that enables a company like Samsung to go from an idea to a finished product within three months.

When I told him, at 3GSM 2007 in February in Barcelona, that most mobile phone companies said they needed 18-24 months to bring a product from concept to a sellable item in the shops, Samsung's newly appointed telecoms chief Geesung Choi rolled his eyes. "Lazy people. Lazy companies," he said.

Labour

Labour, capital and technology are the three main weapons in competition. In the next pages, you will see how well Asia and China in particular have been armed in two respects, and how poorly in the third. The mix of these three has determined the ill health of the electronics industry as we know it.

Against any objective yardstick, labour is obviously not a scarce resource in Asia. It is home to roughly half the world’s population. China alone is home to 1.3 billion people, 800 million of whom still live on less than $1 a day and who are in a similar position as the poor farmers flocking in slums around Seoul when per capita income was just $80 a year in the 1960s. It is the same story as it was for the peasants Philips ushered into its factories in the early 1900s, or even the deprived and starving masses which filled the British mills and factories in the 1800s to set off the industrial revolution. In China 160 million people now work in ‘secondary industries’, i.e. manufacturing. That may seem like a lot (correction: it is a lot), but there is still plenty more where they came from.

Unlike historical transformations from agricultural to industrial societies, China’s work force already includes millions of highly skilled workers. Its universities churn out hundreds of thousands of engineers every year. Not only are they skilled, but the also eager to learn and eager to compete. Don’t expect to buy hand-me-down production machines from a Chinese company. They prefer to cut them up and sell them as scrap, rather than risk putting a new rival in business. Some Western companies wondered why their machines broke down so often in China – but their expatriate managers from the West suspected that this was how the Chinese learned more quickly how to repair and copy the production lines.

How are Asian workers different from European and North American workers?
Work ethic is influenced by history, culture and religion. In Europe and North America, the work ethic in largely protestant countries is determined by a sense of duty and the sins of idleness, while Roman Catholic nations tend to be flexible, passionate and share an expectation that creativity and improvisation will save the day. In East Asia, respect for seniors and balanced duties are promoted in the influential Confucianism, while the violent history of South Korea emphasised a strongly hierarchical society – Korea was East Asia’s battleground for centuries and was run over by the Japanese in the first half of the 20th century.

Such broad brush and generalist statements mean very little, and yet they were often offered as an explanation for the differences in work ethic.

It is November in Silicon Valley. A pleasant 20 degrees and I’m having lunch with two South Koreans, one of which a former Samsung employee. Korean employees would not dream of leaving work early before they have finished an assigned task, one says. They will work nights if needed. Whatever their boss orders them to do, they will bring to an end quickly.

Unlike any of its Western or Japanese competitors, the salesman at Samsung’s mobile phone division travel to a telecoms operator with a suitcase full of different handsets. They simply ask the customer to pick the one they want, they take the suitcase back to Korea and return a few weeks later with the finished product. Nokia needed two years to catch up when Motorola launched the trend of thin mobile phones with the RAZR. Samsung caught up well within a year.

The former Samsung staffer, who currently works for a Western electronics company, says she no longer has to work hard and claims that is how she has been spoilt by her new employer, She will never be able to work for Samsung again. With her fork she stirs the food on her plate in the fancy Spargo restaurant in Palo Alto. Her new colleagues at the Western company will never be able to compete with the disciplined Korean forces at Samsung, she says. In her voice I can hear a mix of pride and regret.

Silicon Valley versus South Korea. In both places people will pull all-nighters if needed, but in Silicon Valley they do it for the company’s stock and in South Korea they do it for the company. Highly ambitious individuals who we often see in the West are suspect in Asia where the team takes precedence. Cadaver discipline. Military style. Korean soldiers apparently have no qualms walking straight into an almost certain death, if that were to be the mission. I mean, even the student revolts were bloodier than anywhere else.

In general, Asians tend to work harder and longer than Europeans -- which is easy enough with their 35- to 45-hour work weeks -- and even the Americans. Even so, there are regional differences. The Japanese, not exactly twiddling their thumbs either, found themselves complacent by comparison. ''We play on Sundays while the Koreans work -- and they work far more fiercely,” Hiroshi Takeuchi, managing director of Japan's Long-Term Credit Bank of Japan Ltd. said back in 1985 (Business Week).

The Chinese, in their turn, are more aggressive than the Japanese in their pursuit of wealth and progress. The Sony executive in charge of computer products, Keiji Kimura, never ceases to be amazed about the unmitigated hunt for cash by his overseas rivals. “The Chinese are so ambitious. They want the money. They do everything to get the money.” That drive, he admits, he will never understand or approve of.

It may seem strange to a European from the Rheinland business model, where profit only seems to be the means to the end of serving a variety of stakeholders such as employees, shareholders, customers and the environment, but money is regarded a perfectly acceptable target in life for many Chinese, says Kaj den Daas, a Philips executive at the Lighting division who was born in Indonesia and who worked in Taiwan for many years. “In Taiwan we came to work thinking: ‘How much money are we going to earn today?’” Tellingly, his Dutch boss Theo van Deursen looks at him astonished after the revelation. “Really?”

In Asia it takes a long time to agree to a deal with the Japanese, but once the terms are set, it is a great deal. It also takes a very long time to negotiate an agreement with Koreans, and when you think you have a deal, that’s when the real bargaining starts. With the Chinese, you will find you have a different deal every day.

That is the view of one Western executive who worked many years in Korea and Japan and who is often in China. It underlines the regional differences. Lennart Thulin, a Swede who set up the Samsung organization in his country and who was deputy manager in Sweden between 1992 and 1999, was taught by his Korean boss that he needed to be more aggressive with his superiors in Seoul to get his way.

“My boss instructed me: ‘Go to Korea and get these prices for the products we need. Don’t let them send you back to Sweden before you have your prices. Slam your fist on the table.’ Sure enough, I wasn’t getting the prices I wanted. They told me: ‘Please go back to Sweden and we’ll be in touch next week.’ Watch carefully, I’m now going to do what my boss told me, I told my Finnish colleague who was with me. I slammed my fists on the table and started shouting. ‘What kind of operation are you running?!’ They told us to come back the next day, and we went home with the prices we wanted.”

Amongst themselves, Koreans are not supposed to challenge the authority of their bosses, and this means they do not speak up even when their senior is believed to make a horrible mistake. South Korean companies would never have risen to prominence if they hadn't found a strategic solution for this fundamental challenge. Two to three times a week the boss takes his staff on a drinking binge after work, and under the veil of alcohol the underlings can take their chief aside to tell him the truth. "They can always say it's the alcohol that made them speak up, and that's an acceptable excuse," says a senior Samsung executive. On business trips, it is not uncommon to see Koreans stumbling around town in the evenings, leaning heavily on each other. "Imagine what a great company we could be if we weren't drunk all the time," former Samsung marketing chief James Kim once told a colleague. The colleague replied that it was only because of the drink, that Samsung had become great.

In Japan similar rules and exceptions apply. The best, or most demanding Japanese managers use their position of authority to whip their staff to exceptional performance. In a Western firm, Sony's former Walkman chief Shizuo Takashino would have never got away with his hand of magic (described in Chapter 1.1) when he showed his people the contours of the new Walkman they needed to design. Western employees, many of whom firmly believe their boss is first among equals, would have demanded to see and touch the whole mock-up and would have found out that Takashino had tried to trick them into believing the product should be made smaller than even Takashino himself thought possible.

At its overseas factories, Samsung organizes cultural awareness classes on Korean social rules, with their adherence to Confucian obedience to authority and deference to rank. There are also differences in emancipation of women. Hyundai from South Korea lost a $14.2 million civil suit in a California court in 1997 after a recruiter claimed the company fired him after it told him that he had sent the company too many female job applicants. Mitsubishi Motor Corp. from Japan created headlines in 1997 when it settled a lawsuit with 27 women who claimed the company had condoned sexual harassment in its factory in Bloomington, Illinois.

On the more positive side, high ambitions are set for the nation or the corporation. “A radio in every home”, was a powerful rallying cry of the Japanese Ministry of Posts and Telecommunications after World War Two. Honda aimed to “Beat Benz”. Matsushita still encourages its workers to look for 30 percent improvements, not the 5 percent improvements that can be achieved by anyone. Honda drives for 50 percent cost reductions, not 10 percent.

Sometimes Asian companies need a foreigner to wield the axe and do things necessary that would be frowned upon when executed by a local. Sony appointed the Welshman Howard Stringer as its CEO. "Gajin" (outside person) Stringer who was unrestricted to take more drastic action to clean up the heritance of lost market share and low profits, left by Nobuyuki Idei who was not challenged by his board. Carlos Ghosn is another example of a successful Western executive who had his hands and mind free to turn around car maker Nissan.

Ultimately, a picture builds of a large and relatively cheap Asian work force which excels in demanding team work to achieve ambitious production targets, against a much smaller and expensive work pool in the West which have strengths in software, design, fundamental research, lateral thinking and other tasks where indivualism and non-conformism create an edge. After all, even the low-cost Chinese ask high-brow Italian design and engineering firm Pininfarina to draw their next model. AviChina-Hafei, Chery, Changfeng, Honda, Daewoo, Mitsubishi, Brilliance, Hyundai are all on the client list.

In a survey among 176 Chinese companies a lack of innovation and creativity were mentioned as the main weaknesses of employees. Six out of ten managers of domestic Chinese companies complained about the lack of innovation and creativity among their workers, possibly the result of a rigid education system that focuses on rote learning and the tendency of companies to overstaff middle-manager ranks to the point of suffocation. Another cause is the completely standardised training manuals and training requirements. Lack of strategic thinking was seen as the next main weakness of employees. But in terms of work ethic, Chinese companies have no complaints. Only 2 percent of survey executives were troubled by it. (Economist Intelligence Unit, 2005)

Capital

Looking at the second competitive factor of capital, China in particular has nothing to complain about either. Lured by its massive work force and potential consumer demand, Asian and then multinational companies jumped to the occasion to invest in China when the country opened up in 1978.

Foreign direct investment in China, between 1979 and 2004, amounted to $560 billion, $60 billion of which was spent in 2004 alone. (source UNCTAD) In contrast, India received 12 times as little. It was kickstarted by the ethnic Chinese themselves, with two-thirds of the money coming from Hong Kong, Macau and Taiwan between 1985 and 1996, paving the way for the multinationals. China’s average gross domestic product per person is now approaching $6,000 from $1,000 around 1987, and although the wealth is unfairly distributed and the affluent people live mostly in the coastal regions, it means the Chinese consumer society has taken off.

Technology

Without a third ingredient, however, the Chinese electronics industry would still look very different from today’s. The third component that determines the competitiveness of a company or an industry is the state of technology. As explained earlier, China did not have an advanced technology base to build an industry on. One part of that technology gap was closed by investments from Western, Japanese, Taiwanese and South-Korean companies which helped China to acquire knowledge of production processes and mechanical technology, but a fundamental shift in the 1980s threw a spanner in the works.

When Fujio Nishida started his career at Sony in the 1970s, manufacturing was a core competitive advantage for an electronics vendor. “I used to work at the production line. I knew how many hours it took to make a product. We needed one, two or even three hours. When the compact disk was invented, that became just 20 minutes. There was no value anymore. All the value had moved to the digital processor, converter and other digital device blocks. Nowadays already 80 percent of the value of a product is already there before assembly starts.”

This trend has only accelerated. It takes an employee in a mobile phone factory less than one minute to slap together the different components and create a handset. Even including earlier manual processes, labour cost as part of the total production cost of a cell phone is only 3 percent of the total manufacturing bill, estimates James Kim, a previous CEO of LG’s mobile phone unit. Market leader Nokia mentions similarly low percentages for labour costs, which translate into $4 or $5 per mobile phone.

The same is true for other categories. Lenovo estimates 70 to 80 percent of the cost of its personal computers is in the components. Analysts at investment bank J.P. Morgan added up the bill of components for the average desktop PC, right on down from a $195 Pentium4 3.2 Gigahertz microprocessor to the $15 for the mouse and keyboard and arrived at a total $521, excluding monitor. Similarly featured machines at Dell retail for around $700, which means Dell has only $180 to: assemble the PC, package it, sell it, ship it, and make a profit.

This componentization is not unique to the electronics industry. The automotive industry has gone through a similar shift, where pieces of a giant jig-saw are being combined into a vehicle. But where the electronics industry is unique, is that all the key functions of a device have gone digital. Unlike a car, which still has to burn analogue fuel to power an analogue engine to set in motion analogue wheels, today’s modern TVs and DVD players take a digital signal, process it and project it. It’s all done in chips and electronic circuits.

To be fair, the trend already started in an era when television signals were still analogue, but this does not fundamentally change the concept. Chip makers often deal with input signals that are analogue and which need to be digitized before they can be processed and manipulated. A mobile telephone is fine example of a device which takes in an analogue signal (voice) which is then transformed into binary code (ones and zeros) which is subsequently sent to another mobile phone which decyphers the ones and zeros back into spoken words. The key thing to recognize is that everything happens inside the chip.

The TV industry went through the componentization shake-up in the second half of the 1980s when semiconductor companies introduced “one chip TV”, a semiconductor which could drive the entire TV system. Almost overnight, they put hundreds of TV makers in business. Until then, most TV set makers built their own electronics parts, except the tubes which were manufactured by only the biggest companies. Tuners, resistors and other components which determined the quality of a set were produced and soldered together in-house. It was a delicate process which included 8 to 10 manual adjustments and tests before a TV was ready to be shipped, and only very big companies had resources and staff to deliver high quality TV sets. This better picture quality was easily visible to consumers who recognized it was worth the higher price.

The TV chips delivered a standard quality that smaller set makers could not have achieved on their own, and as a result they found a much bigger market for their products. With the one-chip TV, the television set industry had become like the PC industry: an industry that was no longer vertically integrated where one company made all the components as well as the finished product, but one that was horizontally integrated and where different suppliers delivered different pieces of the jig-saw. Anyone could now become a TV maker; you just needed to buy a tube, a TV chip, some software, an assortment of other components and you would be in business. “With access to TV chips, all TV vendors could more or less deliver the same picture quality. Everbody wanted it, and they got it, too,” Van Splunter sighs.

The picture quality gap between “white box” sets from no-brands and the premium sets from established names has steadily narrowed further in recent years (J.P. Morgan analysts said in September 2005).

“The net effect is that a top player has a lot better product, but at a lot higher cost, and that this is not perceptible to the consumer during the lifetime of the product which has become too short,” says Sony’s European president Chris Deering.
What he means is that it does not matter if a DVD player has more functions and lasts 15 years, because consumers will replace it long before it dies a natural death. There will always be demand for really high value devices, like the gold-plated Vertu phones from Nokia which sell well to sheiks and Russian mobsters, but that is a niche market. “It’s a huge problem for the high value, high volume technology companies. You can be Rolex, but then you can’t be a $80 billion dollar company (like Sony),” says Deering.

What is important to realize is that chips are horribly expensive to produce, and a high proportion of the costs is fixed in research, development and manufacturing equipment. If a medium-sized chip company can boost sales by $1, the incremental earnings are 30 cents. (Van Houten, Mondial, Nov 2005) This means the profitability of a chip company depends heavily on the volume of products it can sell – if it sells too few it will dive head-first in a sea of red ink, but if it sells many it will laugh all the way to the bank.

Consequently, consumer electronics companies which developed their own one-chip TV started looking for customers outside the walls of their own organizations. Had they not done that, they would have failed to gain sufficient scale to survive and thus have handed the nascent market on a silver platter to independent chip makers such as STMicroelectronics, Motorola and Texas Instruments. This story is not restricted to TV manufacturing – it is true for virtually all electronics products currently in stores --, but in TVs it was particularly visible because there was a “before” and “after”.

The end result was that Chinese and other Asian electronics rivals got their hands on technology, but not in the traditional sense. What they got was access to the components, which is as good as getting access to a safe without the combination.

The conclusion, therefore, is that Chinese vendors entered the game with people and capital, but not with the third differentiator of technology. Crucially, in the electronics stores the big traditional brands no longer benefited from their technology edge either. Their products no longer stood out among the low-cost competition. Or if they did, not enough to swing the consumer. Strange as it may sound, but technology itself had become a commodity.

By the 1990s, and much to the chagrin of the established brands, cost had become the key differentiator. Asia and China in particular had an edge because of the clear lead in the two competitive factors of people and capital. This lead caused such a rapid fall in selling prices that all the established brands needed to cut costs quickly. The only way out was to run their remaining production to China, or risk failure like Grundig, Zenith and so many others. “It’s not enough to move with the rest, but march ahead of the rest,” says Frank Simonis at Philips.

Ironically, by bringing more production to China, the Western and Japanese companies had to partner with more Chinese rivals. This put more Chinese companies in business and accelerated the price fighting. Only the production of very big and heavy items for American and European markets, such as big TVs, could not be done economically in China because of high transport costs.
Componentization of consumer electronics, therefore, became the starting signal for the race to the bottom. The first DVD in 1997 cost $1,000. Five years later Wal-Mart already sold one for $29.

Domingo Jaumandreu Ros, Vice President at Sony’s Home Electronics group gives an example of how even the biggest brands are pinching pennies as a result. A few years ago, Sony looked if it could get away with unpainted plastics for the back of a television set. Sunlight and molding cause discolourings. What it did was to use plastic covers with an uneven surface to hide any irregularities due to molding. It also stuck with the cheap plastic, liable to discolouring, because it reckoned it did not need the more expensive plastics that are UV resistant because most people do not watch the back of their set too often and do not put it in front of a window either.

“Manufacturing is really about saving cents. I come from aeronautics which is about saving grammes. In luxury goods the rationale of manufacturing is the same. You set up a standard of quality, and the responsibility of the engineers is to make it as cheap as possible.”

Even Chinese vendors complain that their margins are too thin. In 2003, Skyworth Digital Holdings Ltd, China's fourth biggest television maker made just 10 yuan ($1.21) on every low-end TV, like a 21 inch model. “It's not even as good as selling cabbage," said Chairman Stephen Wong, who founded the company in 1988. (Reuters)

With such low prices it is no wonder that new products are swooped up by consumers in no-time, reducing the opportunity to earn back R&D dollars. It took 25 years for 80 percent of households to own a black-and-white TV. Colour TV showed up in 4 out 5 households in 21 years, and "High Definition TV" will take only 15 years (a study by Euroconsult and NPA Conseil) In France, it took only five years before 2 million homes had purchased a flat TV, a period after which barely 0.5 million homes had a colour TV.

Philips CEO Gerard Kleisterlee complains the overcapacity and price declines have led to an “electronics glut”. The industry has “disenchanted” its customers because low profit margins do not allow for the necessary research in new breakthrough products. Traditionally, the big brands invested 5 to 15 percent of their sales in research, but when Chinese rivals fail to do so and offer lower prices as a result, the research budgets come under pressure, and indeed they are. Nokia’s R&D budget has been frozen and is declining as a percentage of sales. Philips R&D costs have slipped to 8.4 percent of sales in 2004 from 9.6 percent in 2002 -- revenues remained flat. At Matsushita, the 2005 increase in R&D expenses lags behind revenue growth. (see also spreadsheet tables)

Fumio Ohtsubo (now president, but in August 2005 Matsushita’s CEO of the AVC division for consumer electronics, personal computers and car electronics) dismisses the business model of his Chinese rivals as inferior. “They buy almost 100 percent of their components from outside suppliers. Their competitiveness is purely based on very cheap labour. They cannot develop new models,” he says. With cheap labour as their only edge, low-cost rivals from mainland China can never raise high enough margins to invest in research and development and expand their technology base. (interview at IFA in 2005)

This has led to a dangerous trend of “incrementalism” in which companies only tweak existing products. A hard drive video recorder is, after all is said and done, simply a video recorder with a computer hard drive. The first iPod, although a masterpiece of design and software, was basically a Walkman with a computer hard disk. The race to the bottom has polarized the electronics industry into two camps: the established brands view themselves as “value-add” players, as opposed to the low cost vendors which they blame for using a “cost-plus” model.

Continue with Chapter 1.5 here

Lucas van Grinsven

gadgethell — Tue, 17 Apr 2007 07:15:24 CDT

Lucas van Grinsven is a writer/journalist who works for Reuters and worked at the Financial Times. I am currently based in Amsterdam, The Netherlands.

(Is this the closest a Dutchman will ever get to the World Cup?)

After starting my career in general news and financial reporting, I began covering technology companies and trends in earnest for Dutch national newspaper De Volkskrant in 1996, focusing on consumer electronics and semiconductors and soon writing about the small but vibrant Internet community in Amsterdam. In 2000 I became a fellow at the Financial Times and moved to London where I joined Reuters as the European technology reporter later that year.

Between July 2000 and June 2007 I led a Reuters team of technology, telecoms and media reporters in Europe, Middle East and Africa, and coordinated global stories with colleagues in Asia and the United States. I grew up in and around Amsterdam, and read Dutch language and literature and argumentation theory at the Amsterdam University and also did a postgrad in journalism at the Erasmus University in Rotterdam. I have Dutch, English, good German, reasonable French and basic Spanish (in case you like to send an email in a language other than English).

As the European Technology Correspondent at news agency Reuters, I became intrigued by the often very weak financial performance of electronics companies and the equally persistent optimism of the management of these companies. I started asking for explanations. What I ended up with was a lot more than I could work into a typical 600 word story for the news wire. Hence project: “Gadget Hell”.

Gadget Hell started out as an idea for a book, and it can still become one, but I’ve concluded that I can only take this project so far. What's needed is a collaborative approach, an interactive discourse which is open to everyone who has an interest in the global consumer electronics industry and is intrigued about survival strategies for it.

Gadget Hell can benefit from a collaborative approach, especially in the area of
the technology transfer between Asian companies and nations. On this website, you will find a structure and the first 50,000 words of Gadget Hell. Every chapter has key questions and issues, and you are welcome to suggest new entries, which can range from a simple query or an anecdote, to a piece of research or even an entire chapter.

There are a few rules, the most important one of which is sourcing:

If you write or edit: be specific where information was obtained, and your profile should give your real name, location and contact details.

If you do not wish to be identified, you can still contribute material by sending information confidentially to email address: lucas@gadgethell.org -- your personal details will be known only to Lucas van Grinsven.

Recent development: from 1st June 2007 I'll be director of corporate communications at Dutch semiconductor equipment maker ASML, based near Eindhoven -- the former headquarters of Philips. With 60+ percent market share ASML is the world market leader in chip lithography steppers, the heart of the semiconductor production process. It competes with Nikon and Canon from Japan. Customers include virtually all the chip makers, including Nr. 1 Intel Corp. and Nr. 2 Samsung Electronics.

This project continues.