Digital TV's 100-Meter Dash

On a bitterly cold January day this year, the countdown read 1289 days, 3 hours, 32 minutes, and 33 seconds on the gigantic clock that looms over Beijing's Tiananmen Square, blocking the view of the Museum of the Chinese Revolution. The clock, a short walk across the square's gray paving stones from the portrait of Chairman Mao that's hanging over the entrance to the Forbidden City, ticks off the seconds until the opening ceremony of the 2008 Beijing Olympic Games [see illustration, "Countdown"]. At that moment, in every corner of the world and all over China itself, Olympics fans will be watching events unfold in crisp high-definition television, thanks to a state-of-the-art digital TV infrastructure the Chinese government is now furiously assembling.

Throughout Beijing, an Olympics-related frisson is palpable, as rickety taxicabs are replaced with shiny new models, their drivers listen to English-language lessons on tape, and construction crews tear down block after block of crumbling brick buildings to make way for gleaming towers of glass and steel. But nowhere is the pressure of that ticking clock felt more intensely than in the television industry.

Elsewhere in the world, plans for the transition to digital TV are being thrashed out among telecommunications authorities, nudged along by politicians who want decisions to be made. In China, there are feuding ministries, too, striving to negotiate details of a local digital broadcasting standard. But those in the consumer electronics industry do not underestimate the government's power. Nobody doubts that the deadline will be met.

The stakes are huge. It's not just about showing China's high-tech face to the world--it's also about getting a piece of the local market for television receivers, already the world's largest, with some 40 million new TV sets sold to Chinese consumers annually. Most of China's 350 million households already have at least one TV set, generally a basic analog one made by a domestic manufacturer. It is an article of faith among TV makers that a sizable fraction of the country's big and burgeoning middle class will soon be buying more sophisticated receivers as fast as they can get them. And the high-end market, according to Anne Stevenson-Yang, managing director of the U.S. Information Technology Office in Beijing, "is bigger than most people would think," with sets being installed everywhere from karaoke bars to subway cars.

The competition for the hearts and minds of the Chinese consumer pits multinationals like Matsushita Electric Industrial Co., in Osaka, and LG Electronics Inc., in Seoul--by various measures Japan's and South Korea's leading or second-leading consumer electronics companies--against each other. But also in the fray are home-grown Chinese TV manufacturers such as Sichuan Changhong Electric Co., in Mianyang, and TCL International Holdings Ltd., in Hong Kong, which are big exporters as well [see photo, "On The Shelf"].

Matsushita, probably more than any other top consumer electronics company, has worked steadily for decades to build a formidable presence in China. LG Electronics, with big ambitions and the advantage of the cultural affinities many Chinese feel toward Korea, is a worthy challenger.

When Matsushita and LG aren't fending off each other, they'll have all they can do meeting the indigenous Chinese competition. Until the beginning of 2004, Sichuan Changhong, a maker of those ultracheap DVD players that line the shelves in Wal-Mart stores, was generally described as the world's largest television maker. But late in 2003, TCL bought the television operations of France's Thomson SA, in Boulogne--and with it the storied RCA brand that Thomson acquired from Fairfield, Conn.-based General Electric Co. 15 years ago.

The world television market is huge: 2004 unit sales numbered nearly 150 million, and the aggregate value of those sets, in terms of what distributors paid manufacturers, was US $48 billion, according to Gartner Inc., in Stamford, Conn. Gartner estimates that China supplied about 50 million of those sets, but the China Securities Journal puts the number higher, at 73 million units. Nobody knows exactly what is happening in this large and fast-evolving market, but it seems clear that China makes between one-third and one-half of the world's televisions and buys close to a third of them itself.

Matsushita began selling televisions in China, pushing the Panasonic brand it is best known for worldwide, not long after the reformist leader Deng Xiaoping invited the company to help modernize the country's consumer electronics industries [see sidebar, ]. In a 1987 joint venture with the Beijing city government, the company opened a plant in the capital to make cathode-ray tubes. It was the first factory Matsushita established in the People's Republic of China to fabricate a sophisticated component rather than just to assemble components made elsewhere.

Five years ago, following a radical restructuring that shifted more manufacturing overseas, Matsushita began to consolidate its China operations into major manufacturing centers that produce all kinds of consumer products--not just televisions, but everything from rice cookers to remotely controllable washing machines.

Following that reorganization, in 2001 Matsushita built a plasma-display factory in Shanghai that now turns out high-tech TV screens at a rate of 240 000 annually. Today one key focus of Matsushita engineers at a nearby R and D lab is the development of custom chip sets for digital televisions. The company's long-term strategy is based on the assumption that as Chinese consumers replace their analog sets with high-definition and flat-screen sets, it will have a clear advantage over the technically less advanced domestic manufacturers.

As part of that strategy, Matsushita will make full use of its status as the "official visual sponsor" for the 2008 Olympic Games, which means that the Panasonic name will be seen everywhere. Matsushita will provide equipment for the digital broadcast centers, the public address systems, and the viewing venues inside and outside the Olympic facilities, including the TVs in the Olympic villages.

Not to be outdone, LG has been building for itself a flashy headquarters in Beijing, the 30-story, blue-glass-and-granite LG Tower, at a cost of $400 million. Designed by the renowned Chicago architectural firm Skidmore, Owings and Merrill LLP, it is meant to signal that LG is as much a Chinese company as a Korean one and that it is in China for the long haul. "We want to root in this soil, to no longer be viewed as a foreign company," Yuhn-Sihk Pahk, president of LG Beijing Building Development Co., says in an interview, gazing out at the construction site from a neighboring building.

LG won't have the privilege at the Olympics of being a sponsor, but "our products will be seen," promises Jim Sohn, chairman and chief executive officer of LG Electronics China Inc., in Beijing. The company's plans, besides billboards and bus-stop displays, include installing large flat-screen televisions for public viewing throughout Beijing.

Like Matsushita, LG is having engineers at its Beijing R and D center--its largest lab outside Seoul--concentrate on the design of chip sets for digital TVs (DTVs), and it established a plasma display production line in China in 2004. It's setting up a factory in Nanjing to manufacture liquid-crystal displays for televisions, as well as for computer monitors, with Philips Electronics NV, in Amsterdam, with which it has a global partnership in LCDs. The LG-Philips alliance, in fact, is more or less tied with Seoul's Samsung Group as the world leader in LCDs. Currently, LG-Philips is building the world's largest LCD manufacturing facility near Seoul, at a cost of about $5 billion.

Although LG's managerial style and philosophy are certainly different from Matsushita's, its strategic thinking about the China entertainment market is essentially the same: it's betting it can acquire market share in advanced television technology before lower-cost domestic manufacturers catch up. At the same time, both companies appreciate that for the near future, at least, conventional cathode-ray tubes will continue to prevail in the Chinese market. So they are pushing their engineers to develop better and cheaper CRTs that will give them an edge over local manufacturers.

As they gear up for the coming battle over digital TV, which includes high-definition as well as standard variants, Matsushita and LG--along with all the other contestants--face two serious problems. One is that China doesn't yet have a standard for over-the-air broadcasting of digital television. Although it has adopted the European standard for cable and satellite transmission of DTV, the terrestrial broadcasting standard is much more important. Without one, manufacturers can't complete the design of digital receivers and broadcasting equipment for what will be the biggest part of China's television market. "It is really, really affecting our work," says Ning Huang, an IEEE member who is manager of Matsushita's AVC China Development Center.

The other big problem, intimately related to the first, is that as Matsushita and LG seek to develop technology to meet whatever DTV standard is adopted, it will be crucial for them to keep control of their new intellectual property (IP) long enough to get and retain a lead in the market. Trying to keep too tight a lid on IP could stifle the free exchange of information, and therefore development efforts, while also poisoning relations with Chinese employees and customers. On the other hand, relaxing control too much could amount to giving away the farm.

Development of a broadcast standard is already years behind schedule. With barely three years to go until the Olympics deadline, the time normally needed to build equipment to new standards will have to be radically compressed if China's officials are to make good on their promise to broadcast the games to the world in vivid digital high-definition splendor.

China set out to develop its own standards for cable, satellite, and broadcast digital television, but for cable and satellite transmission it chose to expedite the process by adopting the European standards. The authorities, however, are so far holding fast in their determination to formulate a homegrown DTV broadcast transmission protocol.

Why are they doing that, and what's taking them so long? In other hot consumer areas--notably cellular telephony and wireless local-area networking--it's been widely suspected that the Chinese want their own standards in order to exclude or at least hobble foreign producers and promote their own manufacturers. But close observers of China's television scene say other considerations are more important.

Norio Sakamoto, executive technology officer for Panasonic Corp. of China, in Beijing, suggests some developing countries are motivated mainly by a wish to avoid having to pay licensing fees. Both the U.S. and the European digital transmission systems depend on patented technology, and while the royalties for use of that technology may seem trivial in rich countries, they are not minor in a country at China's income level.

Customizing the digital television standard to local tastes was also an important reason for the home-grown broadcast standard. For example, officials decided that, because of the country's increasingly congested traffic conditions and the growing amounts of time people spend on buses, it would be essential for them to have the possibility of being entertained by broadcast TV in real time--and in a high-definition, digital format at that. Allowing for mobile reception of digital television was not a criterion, however, in the formulation of the European and U.S. digital standards, although mobile reception of European digital broadcasts is possible.

In any case, time is growing short. In the United States, the digital television standard, including the capability of broadcasting in high definition, was finalized in 1996; limited service began in 1998 and has slowly rolled out nationwide ever since (at last count, there were several million households with digital television tuners in the United States). In Japan, the digital television standard was finalized in 1999, and nationwide service started at the end of 2003. Panasonic's Sakamoto says it takes about four years for the consumer electronics and broadcast industries to get new equipment built and installed to a new standard.

But China doesn't have four years before the Olympics. Everything, Sakamoto says, "will have to speed up." Fortunately the odds are that time will in fact speed up; everything in China, visitors are often told, is measured in "reverse dog years"--what takes seven years anywhere else takes just one here.

The breakneck efforts to roll out broadcast DTV will sorely test the ability of companies like Matsushita and LG to protect their intellectual property. For DTV development, as for countless other enterprises in China, protection of IP is a daily concern. But DTV development involves the additional challenges of being a crash program. The temptation, naturally, is to cut corners when things have to be done in a hurry, but both companies are keenly aware that they cannot afford to lose control over their IP. Protecting it is an obsession at both.

Matsushita has introduced its own information security systems, and it has physical security systems in place as well. At the end of each day, the company's researchers are expected to lock their working notes in a safe, rather than leaving them on a desk or in a drawer, as is done in a typical research laboratory.

Following the example of other high-tech companies, Matsushita now has employees sign confidentiality agreements when they're hired and again upon leaving the company, and every effort is made to enforce those agreements. Morio Iwazaki, president of Panasonic Research and Development (China) Co., said that the procedures used to protect intellectual property are more strictly followed in the China laboratories than in Japan, although Matsushita officials indicate that the policies are identical around the world.

More conventionally, Matsushita files patents in both Japan and China. Among the foreign tech companies operating in China, it filed the most patents in 2003--nearly 1800. Although patent enforcement is notoriously lax, Matsushita expects that at some point China will begin enforcing its intellectual property laws in earnest [see Steal This Software, in this issue].

The thinking is similar at LG Electronics China. It also patents all its innovations in China--about 610 in 2003--and its CEO, Sohn, expressed confidence that "the Chinese will enforce patent rights in the future." But LG's general approach to IP protection is different from Matsushita's. "We are trying a number of things," says Joo Bin Lim, chief manager of the informational appliance group at the LG Beijing R and D Center. For example, everyone who goes through the R and D Center gate, including employees, cannot carry notebook computers or storage media without potentially having their data screened.

But LG's focus is on the establishment of trust. "We are setting up an R and D-specific labor culture," Lim says. "That is, we are encouraging our engineers to see themselves as having technical careers. We are providing financial support for higher education." The point is to discourage employees from walking their research out the door and taking it to another company.

"I don't know if it will work," Lim told IEEE Spectrum.

"To speak frankly, we don't have any solution at this time, we just have worries." The risks of too much openness are obvious, but there are also risks in installing so much security that it constrains employees.

Lim says LG hasn't had to modify its management system much to adapt to Chinese expectations because the natural Korean style "is more the Chinese way." That is, promotion is based on merit, and you don't have to be a native of the headquarters country to get into the executive ranks. Thus, LG hopes its employees, as well as its customers, will feel the company really is Chinese and will want to guard its intellectual property as a simple matter of professional responsibility.

That expectation will be ever more vital as the LG engineers in China develop world-class technology. "So far," Lim says, "the R and D centers in China, India, and Russia focus on low-level products. But we do expect to make research breakthroughs that will be shared throughout the company."

Matsushita has adapted the Japanese management style to the local market. "These people expect their compensation to reflect their contribution to R and D results," Panasonic's Iwazaki said. "In Japan, our system was based on age, but that doesn't work here." About two years ago, Iwazaki dumped Japanese management ways for the two R and D operations that he manages and brought in a pay-for-performance system.

Rumors linger that Japanese firms find it hard to recruit top Chinese engineers because they are reputed to work them too hard and not promote them. Paul Liao, chief technology officer of Panasonic Technologies Inc. in Princeton, N.J., says that the company's statistics belie such talk. According to Liao, in Matsushita's China R and D operation alone, more than half of high-level management--that is, employees with the title of associate lab director or higher--are Chinese nationals, including the director of the Beijing Laboratory, the largest of the research operations. And Chinese representation in the management ranks of manufacturing operations is even higher.

China's domestic TV manufacturers have many obvious advantages, making them a formidable force. By virtue of being rooted in their communities, it is easier for them to inspire loyalty and persuade their employees to work ferociously hard for less money and longer hours. Their managers know local tastes better and can spot new consumer trends. The locally based companies may actually do better in getting sophisticated products to the consumer, even though they're starting from a technically less advantageous position.

It's no wonder, in light of those considerations, that companies like TCL and Sichuan Changhong have emerged as major suppliers not only in the home market but in global markets as well [see photo, ]. When TCL first entered into a joint television venture with France's Thomson last year, TCL was making about 10 million receivers annually and exporting about a third of them. Thomson was selling about 7 million RCA sets globally, so the combined assets of the two companies were impressive indeed. By now, TCL must be in a position to make at least 20 million receivers per year.

But there are pitfalls, too, in the way the Chinese television companies sometimes are set up and in their extreme dependence on foreign markets. A recent episode involving Changhong is instructive. The company is largely owned by the Mianyang municipality, which means in effect that the city's political leaders compose its supervisory board. A couple of years ago, city leaders entered into an agreement with Apex Digital Inc., a television and DVD distributor in Ontario, Calif., run by a native of China and naturalized U.S. citizen, David Ji. [See "The Price Is Wrong," IEEE Spectrum, March 2005.]

Disregarding warnings that Apex's creditworthiness was dubious at best, Changhong sold Apex more than $1 billion worth of televisions and DVD players, only to get stiffed last year for $500 million. When Apex CEO Ji had the poor judgment to show up in Mianyang at the end of the year to talk with Changhong executives, not too surprisingly the city's police took him into custody, where at this writing he remains.

Meanwhile, Changhong was getting hit hard by tariffs imposed at the behest of parties alarmed at the inroads Chinese companies were making in foreign markets. From 2001 to 2003, U.S. television imports from China increased from barely more than 50 000 units to nearly 2 million units, with Changhong supplying an estimated 80 percent.

In May a year ago, the U.S. government slapped tariffs averaging 22 percent on Chinese TV imports, acting on complaints from Five Rivers Electronic Innovations LLC, a TV assembler in Greeneville, Tenn., and two U.S. labor unions that Chinese companies were selling the receivers in the United States below cost. While the European Union, in Brussels, dropped a draconian antidumping tariff levied on Chinese manufacturers in early 2003, it set quotas on TV imports from China, which started that year at 550 000 units and are scheduled to rise to 1 million units in 2007.

The U.S. tariff imposed on Changhong's products was 46 percent. Why would a company like Changhong sell below cost? One reason, it's alleged, is because the city-owner's tax receipts are based not on the company's profits but on its gross revenues.

Not content to just keep making commodity televisions and DVD players for low-margin markets, leaving everything fancy to the big Asian players, some of China's domestic manufacturers are pushing into the higher-end technologies.

For example, BOE Technology Group Ltd., in Beijing, has acquired an LCD operation from South Korea's Hynix Semiconductor Inc., in Inchon, and plans to manufacture LCD panels in China this year. In Shandong, two companies now making high-end sets are Hisense Electric Co., which started to sell a 60-inch plasma television early last year, and Weihai Daewoo Electronics Co.--in a joint venture with South Korea's Daewoo Corp., based in Seoul--which sells 42- and 50-inch plasma models.

Besides TCL, Changhong, Hisense, and Weihai, these manufacturers include SVA Group, in Shanghai; Skyworth Digital Holdings, in Hong Kong; and Konka Electronic, in Shenzhen. Collectively, the Chinese companies have the capacity to produce at least several million digital television receivers a year.

Some of these manufacturers are already selling DTV receivers for use in cable systems adapted for digital transmission. The cable picture provides a preview of how digital TV may evolve in China and gives a glimpse of the stakes involved. Matsushita has been involved in trials of digital transmission technology, and about a dozen provinces and municipalities are scheduled to begin offering digital cable service this year. Remarkably enough, many Chinese provinces already have well-developed cable television systems, with about 100 million subscribers in all. The process probably will be hastened by support from provincial and municipal authorities.

One model being tested by China's cable industry is for network operators to provide customers with free set-top boxes, designed to the cable digital transmission standard. Tests have been limited so far; digital subscribers throughout the country numbered no more than 400 000 by year-end 2004, contrary to expectations a few years ago of millions of subscribers. But with free cable converters and low subscription prices (less than $1.50 per month), adoption of digital cable is poised to take off. In Qingdao, one of the cities passing out free converter boxes, the number of digital cable subscribers is expected to soar to 1 million by the end of this year.

Indeed, the entire television business, along with the rest of China's electronics industry, is at that same stage. "Consider the typical, hockey stick-shaped growth curve: consumer electronics in China is just at the turn, before the curve rockets up," says Kent Kedl, executive director of Technomic Asia, a Shanghai-based consulting firm.

When the Olympic torch reaches Beijing's stadium, in 1205 days, 13 hours, and 41 minutes from this writing, will it light this rocket? The world will be watching--in high definition.