Dealing With the China Cost Crater

Not to overstate the obvious, but given a choice between two off-the-shelf products with the same reliability and feature set, nine out of 10 times, price will determine which item gets purchased.

People generally do not care where a product is made. Often they are unaware that a local company has imported and relabeled or rebranded the product. The right to do this is called an OEM license in the industry, and it is usually stipulated in the buyer's contract. The manufacturer often receives the buyer's artwork and model numbers, so the rebranding can be done before the product is shipped. In most cases, end users pay a higher price than they would if they purchased directly from the manufacturer with its name and artwork.

Here comes a good consumer tip: When you purchase an electronic product, look very closely at all the labeling. See if you can find a manufacturer's name that may be in contradistinction from the label under which the product was marketed. If you find the OEM label, look up the company and its prices. Software and firmware may be different for your local versions, so you must get as much information as possible before purchasing such products. This is especially true for audiovisual equipment. You might get it home, hook it up, and find foreign text on the display.

Recently, I had an old cable television operator tell me he could buy a set-top box from China for $20 but was being charged $60 for it by a US supplier. I asked him if the products were identical. He said the Chinese box had all the same features and worked on his system. I asked him about warranties, guarantees, and other potential differentiators, and he said they were identical. Understanding that the CATV plant has an initial investment of rack equipment to process and distribute satellite feeds and over-the-air signals, I asked him about compatibility across his entire distribution network. He had already tested it and discovered everything worked.

CATV operators make their money from their subscriber base. The more subcribers they have, the more set tops are required. After the in-plant rack equipment is purchased, the main cost burden is set-top boxes. If China can sell the same product at a third of the price of competitors, who do you think will eventually capture the set-top box market?

There are about 5,000 small CATV operators in the US alone. Each has growth ambitions. Each has to recoup its investment in order to show a profit. If set-top box investment costs were significantly reduced, the operators could get to their profit markers much sooner.

Motorola has had the set-top market basically cornered in the US for the past 30-plus years. In fact, it makes deals with operators to give them all the in-plant equipment they need if they will purchase set-tops only from Motorola. That's a giveaway program amounting to somewhere between $250,000 and $500,000 per operator. That is how important the set-top business is to Motorola.

Enter China. After a certain crossover point, the operators that have been buying Motorola boxes have more than paid for the cost of the free rack equipment, so there is no deal there. But China has also launched programs to give away rack equipment to secure set-top commitments. Now the playing field is no longer level. There is a deep crater right in the middle. We call that crater China.

How much of the US set-top box market China eventually will rule is unknown. We do know that difficult economic times make for very aggressive marketing strategies. No matter how clever the ads from local manufacturers are or how pretty the products are, China is gaining weight in the CATV business around the world. My recent contact was calling me from Guyana. He said he has associates in Trinidad, the Philippines, and Jamaica who are now using Chinese boxes.

The Society of Cable Television Engineers holds annual tradeshows, where boxes from many Chinese manufacturers are on display. The National Cable Television Cooperative resells CATV hardware to its members. Chinese products are in demand, because the operators live and die by their subscriber count. I pay $7 a month to rent my cable box, and I would gladly cover the one-time $20 fee for a Chinese one. The end user creates the demand that drives the supply.

The "no monthly fee" selling point could give some competitors an edge. CATV operators know this, and it could help put a Chinese cable or satellite box in the heart of your entertainment center soon.