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Patent Fees Hit Domestic-Brand DVD Exporters

Exports of domestically branded DVD players have stalled because of huge patent fees.

According to the China Chamber of Commerce for Import and Export of Machinery and Electronic Products (CCCME), exports of Chinese-brand DVD players have plummeted this year.

Exports to the European Union by Skyworth, a major producer, totaled just 17,911 units in the first five months, a drop of 95 percent from the same period last year. Exports to the United States plunged to zero. SVA exported a mere 16 units to the EU and three units to the US. Even Changhong, China's home electronics giant, saw its exports to the EU fall 60 percent to 1,800 units in the first five months.

Shanghai Customs reports that exports of domestic-brand DVD players shipped from Shanghai Port totaled 193,000 sets in the January-May period, a drop of 78.6 percent year-on-year and accounting for less than 7 percent of the port's total export volume of DVD players.

According to Chen Xiang, secretary of the audio and video products branch of CCCME, payment of patent fees has eroded the companies' profit margins, weakened their competitiveness and thus led to the decrease. Some have ceased making export models or have become processors for foreign brands, while others have withdrawn completely from DVD player production.

China has become the world's biggest DVD producer and exporter. In 2003, DVD players manufactured by Chinese enterprises accounted for 70 percent of the world's total production of about 100 million sets.

Nevertheless, with all the core technologies introduced from abroad, domestic DVD players have only a narrow competitive edge and little room for further development, Chen said.

Since 2002, foreign firms holding technology patents -- the 3C Alliance (Sony, Philips, and Pioneer), 6C Alliance (Panasonic, JVC, Hitachi, Toshiba, Mitsubishi Electric, and Time Warner) and 1C (French Thompson) -- began to charge Chinese domestic-brand manufacturers patent fees for using core technologies in their exported DVD players.

The fees have reached as high as US$27.45 per unit, representing 20 to 30 percent of their production cost.

As exports of domestically branded DVD players wither, China's total DVD player exports have maintained explosive growth, jumping 113.8 percent in the first five months to 41 million units, Chen said.

Exports of foreign-branded DVD players shipped from the Shanghai port totaled 2.6 million sets, up 10.7 percent during the first five months of the year.

Domestically made DVD players with brands warranted by patent owners may be partially exempted from patent fees, while domestic brands must pay all patent fees.

"The backlash is miserable for the Chinese DVD industry," said Fan Wenjian, a spokesman for Shinco, China's largest DVD player producer.

When DVD players are assembled with imported core technologies, they are sold with foreign brands.

Domestic manufacturers obtain a small processing fee, while a large portion of the profit goes into other peoples' pockets, Fan said. In the first five months of this year, nearly 30 DVD player producers have gone bankrupt in Shenzhen's Bao'an District, where many of the manufacturers are gathered.

Chinese companies have urged foreign technology owners to lower patent fees.

"The patent owners should revalue their benefits if all the Chinese companies are forced to quit exporting. The foreign companies would then earn fewer patent fees and have tougher competition in the domestic market," Fan said.

Foreign companies have agreed to negotiate the issue but no timetable has been set, he said.

Exporting only high-end products is one way to offset patent fees charged by foreign technology holders.

Meanwhile, DVD player makers are looking for avenues of diversification. Shinco has turned successfully to air conditioner production, while Nintaus has said it will move into color TVs and mobile phones.

Shinco, currently the largest DVD exporter in China, has shifted its focus in the video market to mobile DVD players, EVD (Enhanced Versatile Disc) players and LCD TVs.

Meanwhile, Fan said, manufacturers have organized various inter-industrial alliances.

Video products such as EVD, HDV and HVD may replace DVD, he said. When the differences in the systems are clarified and the state sets standards, DVD machine makers are expected to complete their transformation, bringing the DVD era to an end and beginning a new one.

EVD technology was developed domestically. China's EVD Alliance was founded in April to push the production of EVD players.

The Market Economy Research Institute of the State Council's Development Research Center says that China now has more than 200 DVD player manufacturers, with annual output hitting 70 million units. Domestic demand, however, is only approximately 5 million units.

(China Daily August 3, 2004)

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