This year, the Lunar New Year fell on January 31st, but Chen Qing and her partner did not return to North America until the end of February. They weren't being lazy; they had been busy with the various projects they were overseeing, with the most important being the newly established BBK. During this process, Chen Qing discovered a significant business opportunity, inspired by the research and analysis of VCD products conducted by the BBK team.
First, it's necessary to talk about the origins of VCD.
In 1992, the founder of China's Anhui Wanyan Group attended a technology expo, where they were inspired by a video decoding chip demonstrated by the American company Sigma Designs. This led to the idea of developing the VCD.
Wanyan Group was then established.
In September 1993, after burning through 140 million RMB, Wanyan Group successfully produced its first VCD product and launched it to the market in 1994. This should have been China's first player with independent intellectual property rights. However, due to various reasons, key VCD patents were snatched up by foreign companies, and the overall patent for the device was not applied for in time, rendering it an open technology standard.
This was undoubtedly a significant regret.
For downstream manufacturers, losing the patents meant losing their bargaining power, leaving them at the mercy of component suppliers.
In Midtown Manhattan, at the Rockefeller Center.
In Simon's office at Westeros Company headquarters, Chen Qing was presenting her idea: "I contacted Sigma Designs but couldn't obtain specific details. However, with Miss C's help from Silicon Valley, I was able to confirm that Sigma Designs' latest video decoding chip, based on the MP4 video format introduced by Westeros, currently costs no more than $10 to produce. However, Sigma sells it to downstream manufacturers, including even close partners like Wanyan Group, for $80 per unit, yielding a gross margin of 700%. Other core components like the laser reading head and system control chips also have gross margins several times their production costs. By comparison, Wanyan Group's VCD, priced at $500, has a production cost exceeding $350, leaving them with a gross margin of only 40%. So, if China's VCD industry grows as we predict, I believe the best investment is to control the upstream component manufacturers. That way, we can even dominate China's VCD industry and maximize profits."
After listening to Chen Qing, Simon nodded slightly but didn't respond immediately. Instead, he looked over at Lin Su, who was sitting quietly on the opposite sofa, her head lowered as if deeply engrossed in reading a document on her lap.
Sensing the sudden quiet, Lin Su raised her head and met Simon's gaze. Her eyes flickered, quickly shifting to a look of confusion.
Simon, observing her delicate features, suddenly asked, "Are you starting to feel like you're working for the enemy?"
Lin Su's eyes flickered again. She didn't deny it, but she didn't confirm it either.
Simon relaxed further into the sofa and continued speaking in Mandarin: "That's quite normal, actually. It shows that growing up under the influence of the state has given you a proper sense of values. But remember, you don't owe anyone anything, not even your own country. I heard that during your trip back, you donated most of your advance year's salary to Project Hope—a very commendable initiative. So, you've already done enough. Now, you belong to me, and your only duty is to remain loyal to me."
Lin Su finally spoke, "I don't belong to you; I'm just working for you."
Simon had no intention of arguing semantics with her and instead said, "Chen Qing's idea is very good. For this matter, we only need to consider it from a purely commercial perspective. Everyone is operating within the rules, and there's nothing to criticize. Moreover, I've always believed that pity and sympathy never truly strengthen anyone. Only constant setbacks and challenges can achieve that. The same principle applies to nations. I'm confident that China will reflect on this experience and learn from it. It's a challenge that many countries face on their path to development."
Lin Su hesitated, wanting to argue but ultimately nodded slightly.
Simon smiled, "However, I also remember Hegel once said, 'The only thing we learn from history is that we never learn from history.' So, I believe this kind of thing will happen a second, third, and even fourth time."
Just as Lin Su was starting to relax, she realized Simon was teasing her again. She could only glare at him, though it was more playful than serious.
Simon complimented her, "You look beautiful when you're angry. Truly, beautiful women are heaven's darlings."
Lin Su simply lowered her head again, trying to ignore him.
Simon wasn't bothered and continued, "Actually, I genuinely appreciate your donation. So, keep it up. And work hard for me. That way, you can gain more resources to give back to your country."
Lin Su waited a moment, sensing that Simon wasn't teasing her this time. She softly replied, "Thank you."
Shifting his attention back to Chen Qing, Simon said, "Alright, let's get back to business. I've reviewed your proposal. I agree with the acquisition of Sigma Designs. However, I disagree with the plan to establish a core component supply chain for the VCD market. While it's true that China currently lacks the capability to produce these components, the development of VCD components is not particularly difficult for Western and Japanese electronics manufacturers. There's no way we could monopolize it."
Chen Qing shook her head and countered, "Time, boss, that's our biggest advantage. Take the video decoding chip, for example. Sigma Designs has already developed a highly mature MP4 decoding chip. Because of the lack of attention on VCD products, other manufacturers haven't invested much effort in this area. Even a giant like Sony would need at least a year to catch up with Sigma. And in that time, Sigma will likely have developed even more advanced products."
"But you seem to be overlooking something," Simon interjected. "The DVD standard has already been established. VCD is ultimately just a transitional product developed from the CD format. One has a fixed capacity of 4.7GB, while the other only holds 700MB. No matter how much VCD advances, it can't overcome that fundamental gap—it's simply a product from a previous generation. So, Chen, I have to remind you, and you should also remind Duan and the others, that VCD is just a quick money-making opportunity for us. In five years, you'll have to consider transitioning, or you'll be replaced by DVD and eventually become obsolete."
"I'm aware of that, boss," Chen Qing responded, undeterred. "I agree that DVD will ultimately replace VCD. But due to content-related issues, it will take a long time for DVD to gain widespread adoption. During that time, we can accumulate enough technology to secure a share of the much larger DVD market."
"A large share? How large do you think it will be?"
"At least comparable to VHS, since DVD offers significant cost advantages. Even though the core patents are controlled by companies like Sony, that doesn't mean there won't be opportunities for us."
Simon studied Chen Qing for a moment before replying, "I must admit, your thinking is sound."
Chen Qing eagerly asked, "So, boss, do you agree?"
Simon shook his head, "Unfortunately, no."
"Why not?"
"Do you use the internet often now?"
"Yes."
"Then go back and study it more closely," Simon advised. "You'll find that there are already some websites offering pirated music and movies for download. This is the real trend. Whether legal or pirated, the future belongs to the internet. The global spread of the internet will completely dismantle the traditional player industry. If the internet didn't exist, I'd fully support your plan and invest heavily. But now, it's simply not feasible."
Chen Qing argued, "Boss, you just mentioned that a DVD disc has a capacity of 4.7GB. A movie with that much data offers a viewing experience far superior to what the internet can currently provide."
"That's true for now, but in five years, the gap will likely be negligible."
"But... in the West, unlike in China, copyright protection is much stricter. DVD should thrive easily. And in China, where the internet is still in its infancy, DVD could have at least ten years of viability."
"You clearly haven't fully grasped the openness of the internet," Simon replied. "This is something neither the East nor the West can stop. Human nature includes a desire to get things for free, and that's something no one can prevent." Cutting off further debate, he concluded, "In short, VCD and DVD will both eventually be rendered obsolete by the internet. Moreover, many of the core patents for both technologies are already controlled by companies like Sony, Hitachi, and Philips. Investing heavily now would mean competing for scraps, with no guarantee when the profits would dry up. So, this is just a quick money-making opportunity."
Realizing there was no room for further negotiation, Chen Qing reluctantly asked, "So, boss, are we just going to acquire Sigma Designs?"
Simon nodded, "I've looked into the company. It went public early last year, and its 1994 revenue was only $21 million. Its market value is inflated due to the tech boom, currently at $120 million. Even in a hostile takeover, I think we could acquire it for under $200 million. It's a good deal. As the sole supplier of video decoding chips for VCD, once the Chinese VCD market takes off, we could potentially see a tenfold return within five years. It's an excellent opportunity."
Founded
in 1988, Sigma Designs was an offshoot of Texas Instruments, similar to the early days when Intel and other small companies clustered around IBM. Sigma primarily focused on video decoding chips. Since VCD sales in China only reached a few thousand units last year, no one had yet recognized Sigma's potential.
This was the Westeros system's opportunity.
Interestingly, Sigma Designs had Texas Instruments as a shareholder and was also a key investment project for Sequoia Capital, with Sequoia's founder, Don Valentine, personally serving as chairman.
Given Sequoia's venture capital nature, if the Westeros system initiated an acquisition with the right price, they would likely be happy to sell. Texas Instruments, a major supplier of baseband chips to Nokia, wouldn't mind offloading a small, somewhat overvalued company like Sigma, especially to maintain their cooperative relationship with Nokia.
Some might resist the sale to the Westeros system, but in the worst case, a hostile takeover would suffice.
Hearing Simon's explanation, Chen Qing's eyes brightened, "Boss, can I handle this acquisition?"
Simon nodded, "If it were anything else, I'd say no. If it were your original plan to dominate the entire player industry, I wouldn't give it to you. But since it's just a small company like Sigma, and it involves the Chinese VCD market, I don't see a problem. Consider it a test, Chen. Once China's VCD industry takes off, as the sole supplier of video decoding chips, you'll have to balance the supply between BBK and other VCD manufacturers. If you handle this well, we can maintain significant control over China's VCD industry. If not, you'll push other manufacturers to our competitors."
Chen Qing nodded seriously, "I understand, boss." After a brief hesitation, she asked, "Boss, will Lin and I still have a stake in this?"
Simon smiled and nodded, "As before, each of you gets 5%. Since your position is tied to Apollo Management, launch the acquisition under Apollo's name. But think carefully—based on a $200 million acquisition budget, you'll each owe me $10 million."
Chen Qing blinked, her expression growing more playful, "Boss, if we lose, we'll offer ourselves as compensation."
Lin Su, who had been silent, glared at Chen Qing and finally spoke, "Don't count me in on that."
Chen Qing wasn't intimidated, retorting, "If you don't want your share, I'll take all 10%."
Lin Su opened her mouth, looked at Simon, and saw the man's amused expression. In the end, she didn't refuse.
With the matter settled, Simon closed the file in his hands, crossed his legs, and smiled, "Alright, that's it for now. Go ahead and start preparing. Oh, and I'll have someone pick you both up for dinner tonight."
After dinner... well.
Lin Su blushed slightly at the thought. This insufferable man, did it always have to be both of them together?
Chen Qing, on the other hand, looked expectant but didn't stand up. Instead, she asked, "Boss, are you sure you won't reconsider the official invitation from China? You could treat it as another vacation. It's April now, the perfect time to enjoy the spring scenery in Jiangnan."
Simon shook his head, "Maybe another time. I don't have the time right now."
It was April 2nd, and Simon had to fly to Australia tomorrow, where he would stay for less than a week. On April 6th, Universal Studios Osaka was opening. Though Simon wasn't planning to visit Japan to avoid causing another "Westeros effect," he still had to keep an eye on the event.
Then, on April 7th, there was the one-year anniversary of the Rwandan genocide. Following last year's events, the U.S. government had claimed most of the credit, and even President Clinton would be attending the memorial. Simon planned to take the opportunity to visit Africa.
And after that...
In short, there was no time in the near future.
Moreover, ever since Simon's private trips had been exposed last year, there had been too much attention focused on him. Engaging with Chinese officials now would require careful consideration of many factors given his current position.
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