Media Wonk

Chinese innovation has impact despite limits - August 28, 2007

According to a report by the Organization for Economic Cooperation (OECD), China "still has a long way to go to build a modern, high-performance national innovation system."

Not for lack of trying, however.

Spending on R&D in the People’s Republic has soared since 1995, the report notes, and now ranks sixth in the world, as China races to become a technology standard-setter rather than simply a shop floor for assembling high-tech products based on standards developed in the U.S., Europe and Japan.

The Chinese government has set an ambitious goal of turning the world’s most populous country into an “innovation-oriented” economy by 2020. But deep structural problems in the country’s financial, educational and legal systems continue to hinder progress, the report said.

Despite a series of reforms since the mid-1980s, the innovative capabilities of the Chinese business sector remain weak. Further reform of China’s financial system which is still dominated by state-owned banks would help business innovation. Fostering more open and efficient capital markets would also enable entrepreneurs to take greater risks and invest in sectors… [that] require long-term investments.

To encourage domestic firms to innovate and benefit more from closer ties with R&D centres of foreign companies, the government should enforce intellectual property rights (IPRs) more effectively and strengthen competition.

Although not addressed in the new report, China’s effort to develop a home-grown high-definition video disc standard provides a case-in-point for where its reach still exceeds its grasp.

Since 2004, three separate high-def DVD formats have emerged in China based on conventional red laser technology rather than the blue-violet lasers used by Blu-ray Disc and HD DVD.

At various times, two of those formats, EVD (Enhanced Versatile Disc) and HVD (High-definition Versatile Disc), had enjoyed status as China’s “official,” or at least “recommended,” HD system. The third format, HDV (High Definition Video), was at one time slated for export to Europe.

Yet a fourth red-laser format, HD FVD (Forward Versatile Disc) was developed in Taiwan, and efforts were made recently to combine it with EVD into a single cross-Straights format.

Despite developers’ efforts all of the Chinese red-laser formats failed, due to competition among themselves, inconsistent government support, shaky financing and a lack of compelling content.

Since then, EVD, HDV and HVD have no been combined into a single standard called EVD2 (Chinese), but that, too has struggled to gain traction as prices fall in China for the blue-laser based Blu-ray and HD DVD formats.

But the goal of the efforts was clear. Starting in 2003, the Chinese government set out to “break the monopoly” of foreign companies on the existing DVD standard by developing China’s own, high-def DVD format and "attack[ing] the market share of [standard] DVD."

The failure in the home market also doesn’t mean the Chinese efforts at innovation have had no impact in the outside world.

Earlier this year, the DVD Forum formally approved technical specs for a “China-only” version of HD DVD. The only significant difference between the China-only version of the format and the one in the rest of the world is the video codec it supports.

The global version for HD DVD supports VC-1, H.264 and MPEG-2, which the China-only version supports the Advanced Video System codec developed in China.

The goal is to spare domestic Chinese manufacturers the royalties they would otherwise have to pay for use of the global codecs. But as a practical matter, it means low-cost Chinese manufacturers will be gearing up to produce HD DVD players, and once they are dropping in the AVS chip instead of the VC-1 chip will make little difference in their output.

The economies of scale that Chinese manufacturers can bring to the game will inevitably lower prices for HD DVD players worldwide, widening that format’s price advantage over Blu-ray and perhaps tilting the balance in the format war.

Not bad for a country whose “innovative capabilities…remain weak.

UPDATE: Barely had I posted the above item then the first Chinese-made HD DVD player for the North America market was unveiled. Markham, Ontario-based Venturer Electronics posted a statement on its website announcing plans to introduce the SHD7000 "in times for 2007 holiday sales." No price was given, but I'd be shocked if it didn't come in below $200 U.S.

LEAVE A COMMENT