Umair Haque / Bubblegeneration
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Monday, August 09, 2004


Beyond Hypercompetition

Profit margins for DVD players down to $1. We can safely call this perfect competition - largely due to massive entry from Chinese rivals. Now, clearly, competing in this market has been a sucker's bet. The interesting question is: why? I think there are three reasons.

1) Barriers to entry fell suddenly, and massive amounts of capital are still chasing a smaller and smaller number of good bets. Hypercompetition is the inevitable result.

2) One of the biggest DVD players manufacturers in China is Jiangsu Shinco. As far as I can tell (this data is pretty hard to come by), it's a 'Jiangsu province advanced technology enterprise' - which means it's still majority publicly owned. This means it can accept a much lower return than private investors would demand.

3) Because they face extreme buyer and platform power, and because their innovative capacity is relatively low (it takes a long time to build), price wars are these firms' first, last, and only tactic.

But these firms are smarter than I've given them credit for. For example, Skyworth is happy to accept 1% margins because it's using these to invest heavily in R&D in a place where 1% goes a long, long way.

-- umair // 10:32 PM // 0 comments


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