HISENSE The Difficult Choice of Independent Innovation: Based on Case Study of the TV Chip 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/10.4135/9781529768688 Abstract: Hisense Group is a large Chinese electric appliance enterprise and its core product is television. The TV chip is one of the most important components, determining the performance of the TV. But Chinas chip industry started very late so that during the long term Chinas TV manufacturing firms had to import TV chips. In order to gain the comparative advantages, Hisense Group started to develop its own TV chip in 1998 and successfully developed a kind of TV chip called Hiview in 2005, which was the first TV chip independently developed by Chinas companies. Since then, Hisense Group continued to achieve some success in TV chip development. However, Hisense Hiview Tech Company, which is the subsidiary of Hisense Group responsible for developing TV chips, was in a state of loss until now. Whether to increase the investment in Hisense Hiview Tech Company is a difficult choice for Liu Hongxin, the new president of Hisense Group. Case On 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 of Hisense Group. Nowadays, the financial situation of Hisense Group has already begun to deteriorate; in this context, should the group subsidiary company Hisense Hiview Tech Company, which has been continuously at a loss, be kept? If so, what can be done to make up the deficits and get profit? Liu Hongxin must make a decision as soon as possible. Hisense Group is a mega electronic information industry group company with more than 20 subordinate companies throughout the country, and it is one of the largest TV production enterprises in China. The core of the TV technology mainly refers to chip technology. The cost of a liquid crystal 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 and 2 complexity of the circuit; therefore it plays a vital role in the finally displayed image quality. Japan and the United States are two chip industry superpowers. Currently, the highend chip production brands in the global market are mostly manufacturers from America, Japan, and South Korea, such as Samsung, Sony, Panasonic, Intel, and so forth; the brand chips that occupy the low-end market are mainly MediaTek, Ding Tai, Sunplus (Taiwan), and some other manufacturers. Chip makers from mainland China are rarely seen. Without chip design and chip manufacturing, it is impossible to gain the initiative in market competition. On the one hand, the prices of imported chips are very high, which increase the costs of complete machines and cut the overall profits of the electrical appliance enterprise. On the other hand, Chinese enterprises usually get the chip design 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 in the first half year after its first launch is the highest. Aware of the importance of chips in 1997, the Hisense management team seized on the idea of self-developed chips. Due to lack of experience and technology, Hisense Group first tried to acquire chip technology by utilizing cooperation, but intellectual property rights like the chip code and chip design process were under strict and tight protection of cooperative enterprises from the United States, and they would not reveal a word. Little success had been achieved through cooperation with them. The failed cooperation made the Hisense Group learn a lesson: to develop the chip industry, autonomous development is the only option for enterprises. But self-developed chips required 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 team could not make up their mind. In 2000, Chinese electrical appliance enterprises fell into a downturn; the overall level of profitability of the color TV industry was close to an all-time low. In order to enhance the level of enterprise competitiveness, the Hisense Group management team finally decided to start independent research and development of TV chips. In 2001, Hisense set up Hisense Group Co., Ltd. ASIC Development Division in National Industrialization Base of Integrated Circuits in Shanghai. The R&D team was very simple and young with only 11 core members, of whom the average age was only 28 years old. The first step of chip R&D was to identify target chip products. Researchers established the development goal as a kind of digital video-processing chip. The second step was to determine the chip design process. Chip development has two kinds of design process: top-down design and bottom-up design. Top-down design products were more innovative and technical but also more difficult and demanded very 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 design of low-end chips. Considering all the factors, researchers decided to adopt the more complex method of top-down design to improve the innovation and quality of chips. 3 Hisense Group invested altogether 30 million RMB in the R&D project and it took over 1,600 days to finally and successfully develop Hiview () in 2005 (hereinafter referred to as Hiview). Hiview was a kind of high-definition and high-quality digital video media-processing chip. It belonged to the middle-level chips in the international world. The success of Hiview made Hisense Group master the preliminary technology ability of chip development and enhanced its confidence to develop in the chip industry independently. In 2005, with Qingdao Hisense Electric Appliance Co., Ltd., as the major initiator and Hisense Group Co., Ltd., ASIC Development Division as the foundation, Hisense Hiview Tech Co., Ltd. (hereinafter referred to as Hisense Hiview Tech Company), was established. It was responsible for the development of the digital video-processing chip of Hisense Groups multimedia business and its system solution. Since then, the sector of chip development, which was originally a division in Hisense Group, became an 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 launched a series of new products. In order to crack the problem of insufficient R&D domestic resources, Hisense Group started to establish overseas R&D centers in 2012 to access overseas innovation resources. So far, Hisense Group has set up seven overseas 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 TV system-on-chip (SoC) main chip in China in 2013. In November 2015, the Hi-ViewPro graphics engine chip was successfully developed. By then, the two generations of Hisense chip have been used in some product lines in the company, while most of the chips used in Hisense TVs still depend on foreign procurement. Today, there are more than 100 people in the R&D team of Hisense Hiview Tech Company. Although the emergence of Hiview has improved the confidence and expectation of industry manufacturers and consumers for domestic chips, Hisense managers have always known that, due to the inadequacy of technical accumulation, it is quite hard to catch up with the level of foreign manufacturers in a short time and their costs are higher than that of foreign manufacturers. When Liu Hongxin took over as the president, the color TV industry in China entered a stage of white-hot competition. Hisense Groups profits have already started to fall and 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 Hisense Hiview Tech Company to design high-end TV chips. Although Hisense Hiview Tech Company 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-end chips cannot keep pace with that of Hisense Groups high-end TV sets, and once the chip research and development is not finished on time, heavily invested chips will not be able to be put into production and use. 4 The cost of chip development is higher than that of foreign rivals. The enterprises in developed countries started early in the chip industry and they have applied for a large number of related patents. The chip development of Hisense Hiview Tech Company inevitably would be confronted with the patent barriers set by those enterprises; in this case, it will have to pay for some patents. Also, the chips developed by Hisense Hiview Tech Company can be used only for Hisense Groups high-end TVs, which means small batch production and difficulty in playing the effect of economies of scale. This kind 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 has been relying on the groups funds to maintain operations since its establishment more than ten years ago. Given the above reasons, some managers of Hisense Group have suggested closing Hisense Hiview Tech Company. They insist that the day when Hisense Hiview Tech Company turns losses into gains is far away and not within the foreseeable future, and chips purchased from overseas not only meet the demand of the development of Hisense TV products but also have lower prices. Still, even though Hisense Hiview Tech Company is losing money, its chip development ability has been gradually improved, and its technological gap with the international leading enterprises has been reduced to one year or so. The managers of Hisense Hiview Tech Company believe firmly that as long as the group increases its 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 separated from Hisense Group has long existed, but the then-president Yu Shumin prevailed over all dissenting views, making managers of the group shut their mouths. After Liu Hongxin became the president, the demand of decoupling Hisense Hiview Tech Company from the group has again arisen, especially that of the executives from financial departments and Hisense Electric Company, the company that is engaged in TV production. Having felt the change in the attitudes of executives of Hisense Group, researchers at Hisense Hiview Tech Company have begun to lose morale. Some researchers worried about Hisense Hiview Tech Company being deserted by the group and therefore have left the company for new jobs in other enterprises. The number of the companys staff has been reduced from more than 140 in the first half of 2015 to more than 90 at the beginning of the year 2016. Among those who have left, most people are experienced developers. 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 backbone staff 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 articles below) News articles: a)Hisense Group acquires Toshiba TV business - for 12.9 billion yen (Richards, 2017) b) 2015 Hisense one of Chinas' largest TV makers acquired North American manufacturing assets of Japan-based Sharp (Silva 2020)

How can Liu Hongxin of Hisense Group effectively manage the integration challenges at Hisense Hiview Tech Company? Answer this question in 400 words