Cutting the Cost Could Mean Paying the Price for IPR Protection

Related entries: Business Issues, Consumer Market, Corporate News, General, Strategy

Further to the recent post on IPR abuses in China, there is interesting news from Philips.

The company is launching a new strategy to protect IP for its recordable CD (CR-R) technology. Under the “Veeza” system, royalties will reportedly be reduced from 4.5 US cents to 2.5 US cents per unit, and will be charged based on shipment numbers. In parallel, special, “tamper-proof” packaging will be launched so that consumers can tell real from fake products (not sure about that one…I remember the case of Dulux and 3M spending several months to develop special stickers for paint pots – but the stickers were being copied perfectly after only a couple of weeks!). The intention is to draw consumers to a premium product while allowing manufacturers to make better profits, thus removing part of the incentive to copy illegally.

This strategy follows the decision by (legitimate) DVD makers last year to reduce prices in China to around US$3 so that they could compete with the pirates (who sell at US$1 or less, depending on the negotiating skills of the buyer).

Ikea has also tried a low-price strategy. It sells in China at a lower cost than anywhere else in the world. Although it suffered from local competition copying and undercutting it in the early days, few have been able to compete with them in the longer-term.

All in all, price competition is a dangerous game to play in a market where costs can be very low indeed – local DVD player makers suffered badly from a price war a couple of years ago. Added value features (as on the more expensive DVDs), premium packaging, good service and branding may provide more sustainable competitive advantages…unless you have very, very deep pockets.

Please contact us if you would like to discuss strategy, IP or other issues in China.

See source news:

    China International Business
    March, 2006 (print version)

    DDA China Snapshot (e-newsletter)
    March, 2006
    David Diebold & Associates

    Rampant piracy of DVDs in China
    … rampant piracy of DVDs in China and CDs in Mexico, are “cutting prices on …
    Even with massively reduced prices, they won’t be matching the pirates. …

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