1HISENSEThe Difficult Choice of Independent Innovation: Based on Case Study of the TVChip R&D Process of Hisense• Author: Baolin Wang• Publisher: Renmin University• Original publication date:2016• Contains:Teaching Notes• Length:1,779 words• Region:Eastern Asia• DOI:http://dx.doi.org/10.4135/9781529768688Abstract:Hisense Group is a large Chinese electric appliance enterprise and its core product istelevision. The TV chip is one of the most important components, determining theperformance of the TV. But China’s chip industry started very late so that during thelong term China’s TV manufacturing firms had to import TV chips. In order to gain thecomparative advantages, Hisense Group started to develop its own TV chip in 1998and successfully developed a kind of TV chip called Hiview in 2005, which was thefirst TV chip independently developed by China’s companies. Since then, HisenseGroup continued to achieve some success in TV chip development. However, HisenseHiview Tech Company, which is the subsidiary of Hisense Group responsible fordeveloping TV chips, was in a state of loss until now. Whether to increase theinvestment in Hisense Hiview Tech Company is a difficult choice for Liu Hongxin, thenew president of Hisense Group.CaseOn October 14, 2015, Liu Hongxin, the original principal of the Hisense TV department,succeeded Yu Shumin, who had been in office for 15 years, as the new president ofHisense Group. Nowadays, the financial situation of Hisense Group has already begunto deteriorate; in this context, should the group subsidiary company Hisense HiviewTech Company, which has been continuously at a loss, be kept? If so, what can bedone to make up the deficits and get profit? Liu Hongxin must make a decision assoon as possible.Hisense Group is a mega electronic information industry group company with morethan 20 subordinate companies throughout the country, and it is one of the largest TVproduction enterprises in China.The core of the TV technology mainly refers to chip technology. The cost of a liquidcrystal TV is mainly composed of 3 parts: panel module (30%), backlight module(30%), and chip (6%); these three components constitute the core parts of an LCD TV.Not only that, but the chip determines the function of the TV set, and the program and2complexity of the circuit; therefore it plays a vital role in the finally displayed imagequality.Japan and the United States are two chip industry superpowers. Currently, the highend chip production brands in the global market are mostly manufacturers fromAmerica, Japan, and South Korea, such as Samsung, Sony, Panasonic, Intel, and soforth; the brand chips that occupy the low-end market are mainly MediaTek, Ding Tai,Sunplus (Taiwan), and some other manufacturers. Chip makers from mainland Chinaare rarely seen.Without chip design and chip manufacturing, it is impossible to gain the initiative inmarket competition. On the one hand, the prices of imported chips are very high, whichincrease the costs of complete machines and cut the overall profits of the electricalappliance enterprise. On the other hand, Chinese enterprises usually get the chipdesign scheme one year later or more than home appliance giants like Panasonic,Sony, and Samsung. For a new type of TV, time means profit; and the profit gained inthe first half year after its first launch is the highest.Aware of the importance of chips in 1997, the Hisense management team seized onthe idea of self-developed chips. Due to lack of experience and technology, HisenseGroup first tried to acquire chip technology by utilizing cooperation, but intellectualproperty rights like the chip code and chip design process were under strict and tightprotection of cooperative enterprises from the United States, and they would not reveala word. Little success had been achieved through cooperation with them. The failedcooperation made the Hisense Group learn a lesson: to develop the chip industry,autonomous development is the only option for enterprises. But self-developed chipsrequired a huge initial investment and it had a long cycle, low success rate, and highrisk decisions. For this reason, for a long time the Hisense Group management teamcould not make up their mind.In 2000, Chinese electrical appliance enterprises fell into a downturn; the overall levelof profitability of the color TV industry was close to an all-time low. In order to enhancethe level of enterprise competitiveness, the Hisense Group management team finallydecided to start independent research and development of TV chips. In 2001, Hisenseset up “Hisense Group Co., Ltd. ASIC Development Division” in NationalIndustrialization Base of Integrated Circuits in Shanghai. The R&D team was verysimple and young with only 11 core members, of whom the average age was only 28years old.The first step of chip R&D was to identify target chip products. Researchersestablished the development goal as a kind of digital video-processing chip.The second step was to determine the chip design process. Chip development hastwo kinds of design process: top-down design and bottom-up design. Top-down designproducts were more innovative and technical but also more difficult and demandedvery strong research and development ability; it was a kind of design suitable for highend products. Bottom-up design was less difficult and it was usually used in the designof low-end chips. Considering all the factors, researchers decided to adopt the morecomplex method of top-down design to improve the innovation and quality of chips.3Hisense Group invested altogether 30 million RMB in the R&D project and it took over1,600 days to finally and successfully develop “Hiview (信芯)” in 2005 (hereinafterreferred to as “Hiview”). Hiview was a kind of high-definition and high-quality digitalvideo media-processing chip. It belonged to the middle-level chips in the internationalworld. The success of Hiview made Hisense Group master the preliminary technologyability of chip development and enhanced its confidence to develop in the chip industryindependently.In 2005, with Qingdao Hisense Electric Appliance Co., Ltd., as the major initiator andHisense Group Co., Ltd., ASIC Development Division as the foundation, HisenseHiview Tech Co., Ltd. (hereinafter referred to as Hisense Hiview Tech Company), wasestablished. It was responsible for the development of the digital video-processing chipof Hisense Group’s multimedia business and its system solution. Since then, thesector of chip development, which was originally a division in Hisense Group, becamean independent R&D enterprise.With the successful experience of Hiview and the earlier talent pool and technology,the morale of Hisense Hiview Tech Company was boosted. It successively launcheda series of new products. In order to crack the problem of insufficient R&D domesticresources, Hisense Group started to establish overseas R&D centers in 2012 toaccess overseas innovation resources. So far, Hisense Group has set up sevenoverseas R&D centers around the world, among which five are in the United States,one is in Canada, and one is in the Netherlands.After Hiview, Hisense developed and completed the first network multimedia TVsystem-on-chip (SoC) main chip in China in 2013. In November 2015, the Hi-ViewPrographics engine chip was successfully developed. By then, the two generations ofHisense chip have been used in some product lines in the company, while most of thechips used in Hisense TVs still depend on foreign procurement. Today, there are morethan 100 people in the R&D team of Hisense Hiview Tech Company. Although theemergence of Hiview has improved the confidence and expectation of industrymanufacturers and consumers for domestic chips, Hisense managers have alwaysknown that, due to the inadequacy of technical accumulation, it is quite hard to catchup with the level of foreign manufacturers in a short time and their costs are higherthan that of foreign manufacturers.When Liu Hongxin took over as the president, the color TV industry in China entereda stage of white-hot competition. Hisense Group’s profits have already started to falland Hisense Hiview Tech Company has been losing money since its establishment.The existing main problems in the company are as follows.Its high-end TV chip development ability is insufficient. The Hisense group takes highend TVs as the main direction of the enterprise development, which requires HisenseHiview Tech Company to design high-end TV chips. Although Hisense Hiview TechCompany already has certain experience in mid-range and low-end TV chip designs,its high-end chip design ability is obviously insufficient. The R&D speed of high-endchips cannot keep pace with that of Hisense Group’s high-end TV sets, and once thechip research and development is not finished on time, heavily invested chips will notbe able to be put into production and use.4The cost of chip development is higher than that of foreign rivals. The enterprises indeveloped countries started early in the chip industry and they have applied for a largenumber of related patents. The chip development of Hisense Hiview Tech Companyinevitably would be confronted with the patent barriers set by those enterprises; in thiscase, it will have to pay for some patents. Also, the chips developed by Hisense HiviewTech Company can be used only for Hisense Group’s high-end TVs, which meanssmall batch production and difficulty in playing the effect of economies of scale. Thiskind of situation further pushes up the cost for Hisense Hiview Tech Company.In fact, Hisense Hiview Tech Company has always been in a state of loss and hasbeen relying on the group’s funds to maintain operations since its establishment morethan ten years ago.Given the above reasons, some managers of Hisense Group have suggested closingHisense Hiview Tech Company. They insist that the day when Hisense Hiview TechCompany turns losses into gains is far away and not within the foreseeable future, andchips purchased from overseas not only meet the demand of the development ofHisense TV products but also have lower prices.Still, even though Hisense Hiview Tech Company is losing money, its chipdevelopment ability has been gradually improved, and its technological gap with theinternational leading enterprises has been reduced to one year or so. The managersof Hisense Hiview Tech Company believe firmly that as long as the group increasesits financial input, the company will surely make profits one day in the future.As a matter of fact, the voice that Hisense Hiview Tech Company should be separatedfrom Hisense Group has long existed, but the then-president Yu Shumin prevailedover all dissenting views, making managers of the group shut their mouths. After LiuHongxin became the president, the demand of decoupling Hisense Hiview TechCompany from the group has again arisen, especially that of the executives fromfinancial departments and Hisense Electric Company, the company that is engaged inTV production.Having felt the change in the attitudes of executives of Hisense Group, researchers atHisense Hiview Tech Company have begun to lose morale. Some researchers worriedabout Hisense Hiview Tech Company being deserted by the group and therefore haveleft the company for new jobs in other enterprises. The number of the company’s staffhas been reduced from more than 140 in the first half of 2015 to more than 90 at thebeginning of the year 2016. Among those who have left, most people are experienceddevelopers. Does Hisense Group still need to retain Hisense Hiview Tech Company?If the new president, Liu Hongxin, still could not make his attitude clear, the backbonestaff of Hisense Hiview Tech Company would sooner or later be running out.Liu Hongxin must make a decision as soon as possible. (refer to the news articlesbelow)News articles: a)Hisense Group acquires Toshiba TV business – for 12.9 billionyen (Richards, 2017)b) 2015 Hisense one of Chinas’ largest TV makers acquired North Americanmanufacturing assets of Japan-based Sharp (Silva 2020)5
