Playing Catch Up

By HU YUE

Playing Catch Up

By HU YUE

China’s fledgling e-reader industry faces serious headwinds

After Amazon’s Kindle e-reader became a market hit in 2008 in the United States, a string of Chinese companies have jumped on the bandwagon. There are currently 41 Chinese companies—of 80 throughout the world—engaged in producing e-readers.

E-reader sales in China totaled 611,800 units in 2009 and 1.07 million units in 2010, accounting for 15.5 percent and 20 percent of the world’s total, respectively, only behind the United States. The U.S. intelligence frm iSuppli Corp. even expects China to replace the United States by 2012 to become the world’s largest e-reader market.

But after torrid growth over the past two years, the Chinese e-reader industry is on the ropes.

Newspapers are filled with reports that two Chinese IT giants—Aigo and Founder—have decided to bow out of the e-reader manufacturing industry as market demands sinks.

Market leader Hanvon, which controls two thirds of domestic market shares, reported heavy losses of 176 million yuan ($27 million) for the first half of this year, compared with profts of 87 million yuan ($13.4 million) for the same period last year. Its revenues totaled 258 million yuan ($40 million), diving 61.71 percent from a year ago.

With such gloomy results, the market prosperity of the past two years seems a distant memory for Chinese e-reader makers.

Stumbling blocks

E-readers provide a paper-like reading experience. Some manufacturers make the devices more attractive by adding functions such as handwriting, intelligent search engines and dictionaries.

But it’s no secret that Chinese e-reader makers are plagued with many shortfalls. Among them is the significant technology barrier.

Many products cannot support all formats of e-books or maintain stable access to the Internet while others have small storage capacities and battery lives. Even Hanvon products have problems.

“Our e-ink technologies are far from perfect,” said Wang Bangjiang, Vice President of Hanvon. “Our products are still unable to support all formats of video and audio, and the screens are also quite slow to refresh.”

The e-reader market in China is taking off. But they have no unique strength in that field, said Wei Yuhuai, an analyst with the CCID Consulting. “They rely on Taiwan’s manufacturers for the fat panels, on telecoms operators for the channel and on publishers for the content,” he said.

It’s no surprise that Apple Inc.’s iconic tablet iPad poses the most serious threat to domestic e-readers. It features interactive technologies and a touch-screen display that allows users to browse the Internet, read books, watch videos and check e-mails. Most importantly, in March 2011, Apple lowered the price of its 16-gigabyte Wif iPad from 3,988 yuan ($614) to 2,888 yuan ($448). Many e-readers of domestic brands are still priced above 3,000 yuan ($465).

In the frst quarter, only 280,000 e-readers were sold in China, a decline of 7.41 percent from last quarter, while tablet PC sales reached 1.04 million units, up 32.5 percent, said the Beijing-based think-tank Zero2IPO Research Center.

Competition with the iPad triggered market contractions, but the root cause was high prices, which impeded customer acceptance, said Zhang Yanan, a researcher with Zero2IPO.

While Amazon felt the pinch as iPad fever sweeps the globe, the company effectively cushioned the impact by lowering Kindle prices. It is reported that Amazon would distribute Kindles for free to subscribers of Amazon Prime, a $79-per-year service that provides customers with free two-day shipping on everything they buy from the company.

Amazon believes it can make money on the giveaway because its best customers will buy enough e-books to make up for the free device over a few years. Amazon has this confdence given a mature market. The share of U.S. adults who own an e-reader surged to 12 percent in May 2011 from 6 percent in November 2010, according to a survey conducted by the Pew Research Center based in Washington, D.C.

Chinese companies are following suit. Hanvon in May 2011 announced to cut prices of major products by 14-40 percent. Shanda Literature, operator of China’s largest online literature website, also lowered price of its Bambook e-reader to 499 yuan ($77) from 998 yuan ($155).

But for Chinese companies, the price cut may rub salt into their wounds.

As Chinese customers are less willing to pay for e-book downloads, forcing the companies to rely heavily on device sales as a major source of income, said Zhang Yanan.

Price cuts thus squeeze the proft margin of device makers. Take Hanvon for example. The gross profit margin for its e-reader businesses had decreased to 37 percent in 2010 from 47 percent in 2009 and 51 percent in 2008.

“They have no other choice,” said Zhang Yi, President of the Iimedia Research Co. Ltd. “It is the only way to solidify the customer base and convince users to buy ebooks.”

“While Amazon profits from a sales boom of e-books, Chinese enterprises are struggling with a lack of book content,” said Zhang Yijun, Director of the Technology and Digital Publication Department of China’s General Administration of Press and Publication.

NIE JIANJIANG

LI WEN

Amazon’s second-quarter financial report said its Kindle Store now has more than 950,000 e-books, including 110 of 111TheNew YorkTimesbestsellers. In comparison, Hanvon only had 130,000 titles through its online bookstore by the end of 2010. The frm aims to double the collection in the near future.

In June 2011, Hanvon announced a partnership with Shanda Literature. Hanvon’s e-reader users will be allowed access to Shanda’s Cloudary online bookstore, which boasts nearly 4 million titles. But 95 percent of its e-books are currently free of charge, and the remaining e-books cost only 10-20 percent as much as paper books.

“A more intractable problem is online piracy, which makes publishers hesitant to develop new e-books,” said Hao Zhensheng, President of the Chinese Academy of Press and Publication. “Worse still, it makes consumers even more reluctant to pay for e-book downloads, a detriment to the health of the emerging industry.”

Road ahead

Despite these obstacles, industry insiders remain confdent of the industry’s outlook.

Liu Yingjian, founder and Chairman of Hanvon, said the market downturn is only temporary and the industry is bound for a promising future due to its remarkable user convenience and environmental benefts.

“The iPad, which is more of an entertainment terminal, cannot replace e-readers as professional reading tools,” he said. “In addition, the e-ink screen used by e-readers is harmless to one’s eyesight, which makes it child- and senior-friendly.”

Hanvon will continue to shift its business model to focus more on content services and build a proftable industrial chain, he added.

Hou Xiaoqiang, CEO of Shanda Literature, also said the e-reader will become a necessity for people in the future.

“But the industry is still young and fragile and we need time to fully realize its potential,” he said. “The key is to provide more attractive book content and erect defense against online copyright infringement,”said Hou.

“One effective solution is to set passwords for paid downloads and make the downloaded e-books unreadable on computers so they cannot be copied and spread on the Internet,” said Hou.

“Chinese e-reader producers need to build a profitable business chain that integrates devices, applications, content and value-added services,” said Sun Peilin, a researcher with Analysys International.

Amazon, for example, has introduced low-priced Kindle products with advertisements on the bottom of the device’s home page and on its screen savers.

But a CCID report said, for most Chinese e-reader producers, it is very diffcult to duplicate the Kindle model—device plus content, due to a lack of core technologies and rich content.

“It’s still too early to talk about the market scale, but the Chinese market has great potential because of its large user base,” said Sun.

The CCID report also said the only way out is to closely tie up with telecom operators such as China Mobile and China Unicom. With a solid customer base, the telecom carriers can help massively promote the ereaders and spread the book content.

“While 5,000 years of traditional book reading will not be displaced overnight with the emergence of a new, popular device, the push for the broader acceptance of e-books will likely go unabated,” said iSuppli in a report.