The rush to consumer electronics

/ Source: BusinessWeek Online

Three years ago, a little-known Chinese outfit called Jiangsu Shinco made a bold move. The consumer-electronics concern decided to start selling in the U.S., where people spend on average $600 per year on consumer electronics. It was armed only with a slew of portable DVD players and a new brand called Mintek.

Eventually, its U.S. distributor managed to squeeze Shinco's products into Best Buy (BBY ) stores. The rest, as they say, is history. Today, Mintek players are sold through retail chains like Sears (S ), Costco (COST ) and Macy's. Mintek is the U.S. market-share leader in portable DVD players.

Big attractions
Shinco's success is inspiring a fresh stampede into America's already-crowded $247 billion consumer-electronics market. Currently jam-packed with manufacturers ranging from unknowns from China to giants like Sony (SNE ), U.S. consumer electronics is about to get even more competitive, with everyone from high-tech giants to home-appliance manufacturers piling in.

Tech players see many lures. PC producers are spurred by Apple Computer's (AAPL ) stunning success with the iPod digital music player. The popular device now accounts for 12.4% of Apple's $8.28 billion in annual sales, up from near-zero just three years ago. Hardware makers and software giant Microsoft are now pushing their own digital entertainment products. Who wouldn't want to add an iPod-like success to the top line?

Another big attraction: For the first time in recent memory, the consumer-electronics market is growing faster than that for technology. Sales of tech products are expected to grow 3% to 5% next year -- about half the industry's historic growth. Electronics sales, however, are expected to climb 8% this year and another 8% in 2005, according to the Consumer Electronics Assn.

Brand proliferation
The new entrants from technology are all banking on that old buzzword, convergence. They've seen computer users download songs onto little digital music players, and they know digital cameras are now requisite for any new parent with access to a high-speed Internet connection. Now they're hoping for the next convergence wave, where consumers wirelessly beam their songs and photos to the TV or even a refrigerator equipped with its own video screen.

While it's hard to say how the next electronics wave will play out, it seems clear that all this competition will mean lower prices for consumers and consolidation among companies as they scramble to survive cutthroat pricing, says John Barrett, director of research for the tech consultancy Parks Associates, in Dallas. Already, newcomers from China, such as Shinco and Shanghai LeJin SVA Electronics, are attacking bigger rivals with low pricing.

Crazy as it sounds, 124 brands of digital TVs now vie for buyers' attention. But it's not just tubeheads attracting this mercantile overload. Americans can choose between 322 brands of digital still cameras, according to market researcher NPD Group. The survival of all those brands in the coming years is no sure thing.

Sliding prices
Already, the electronics gold rush is leading to overproduction in flat-panel TVs. Eight new liquid crystal display (LCD) factories will come online this year, a healthy addition to the 50 or so already up and running, according to semiconductor consultancy iSuppli/Stanford Resources. As a result, LCD panel prices dropped 20% in the first half of 2004.

Prices in other categories are also sliding.  In September, average selling prices of plasma TVs dipped 10%, to $2,500, as cheap models flooded the market, according to a Nov. 29 alert from NPD. Other electronics markets will likely follow the same trajectory, as Chinese manufacturers introduce prices that are half those of the more established players.

Those Chinese products are also, by most accounts, of competitive quality. Take Shinco's U.S. distributor, Mintek. It returns to China half the products Shinco sends, filtering out things like clunky models with poor screens, says Bill Daugherty, Mintek's marketing director. It also packages the gadgets with carrying cases, headphones, and other goodies.

Daugherty had to turn down a request from department store Bloomingdale's because all the output of Shinco's nine Chinese factories, already working at full capacity, is spoken for. Chinese manufacturers should be able to "do what Japanese companies did 20 years ago" and establish high-end brands, says Daugherty.

Kitchen gizmo
Nonetheless, the low-cost threat isn't stopping new entrants -- and it's not just tech outfits that have caught electronics fever. LeapFrog (LF ), which produces educational toys, is increasingly turning its playthings into minicomputers. In June, it announced a new product, called the Personal Learning Tool, which costs less than $100 and can be used to upload and download information from a school network so teachers can do things like follow individual students' progress with homework.

Appliance makers are also jumping into the fray. In March, Salton (SFP ), known for its George Foreman grills, began selling a, Web-enabled entertainment center for the kitchen called iCEBOX CounterTop. The $1,800 system includes e-mail and Net access, Web-enabled TV, a DVD and CD player, video home-monitoring, an adjustable touch-screen LCD monitor -- and even a washable keyboard.

Beyond that, the Salton subsidiary that created the high-tech kitchen gadget has also recently come out with a special microwave that can be wirelessly connected to a home network to upload product bar codes, so the appliance can automatically figure out how long to heat an item.

Networked surge
Will all these outfits succeed? Hardly. The electronics market has been notoriously difficult to crack. A survey of 1,206 consumers conducted by researcher IDC two months ago found that shoppers for digital TVs still overwhelmingly pick established electronics brands like Sony over those of newcomer PC makers.

That said, the battle for electronics dominance is just beginning. Consumers are just getting comfortable transferring songs from their PCs onto their portable music players. Broadband adoption still has a ways to go.

Industry standards, allowing devices from different manufacturers to work together, are still being developed. As they're put into place, "the number of networked products should increase dramatically over the next 12 months," predicts Louis Burns, vice-president and general manager for desktop platforms at chipmaker Intel (INTC ), which has been shepherding much of the standards work.

View of the field
"The door [to the electronics market] is wide open," says Stephen Baker, an analyst with NPD Group. "You're staring at a huge wave of opportunity." And with everybody wanting a piece of this pie, expect pressure to cut prices -- and consolidate -- to continue.

In this special report, BusinessWeek Online takes a look at the outfits breaking into consumer electronics and their tactics for grabbing some of the lucrative action. From the secrets of Apple's success to Microsoft's (MSFT ) big plans for digital entertainment, businesses are going out on a limb for electronics gold.