Pan: When we launched our first MP3 player in 2002, the market was still unfamiliar with the concept. We were therefore one of the pioneers of the MP3 phenomenon in Asia. But the term MP3 has now become a byword for digital entertainment, and it embodies much more than just digital music, which was what it started off as. Some of the new models we're launching later this year will offer other functions such as a digital camera and movie playback.

And it's not just about personal entertainment either. Many users plug their MP3 players into their computers and download documents and large files, so it's also becoming a work tool.

The versatility of MP3 players now lets users perform many personal entertainment and work functions.

Worldwide, about 40 million MP3 players were sold in 2004. That's according to IDC, the market research firm.

Q: How many of those did Matsunichi sell?

A: In the half year to September we sold about 400,000 MP3 players, as well as about 800,000 USB drives. Our sales in the US market grew more than eight times in that period, and they accounted for 86 percent of our turnover. We made about 12 percent of our sales in the China and Hong Kong markets. Nearly all of our USB drive shipments in the first half were unbranded original design manufacturing orders, what's called ODM. But about 70 percent of our MP3 player shipments were branded sales. ODM accounts for the majority of our unit shipments but only around 25 percent of our revenues. There's a large difference in prices between branded sales and ODM sales, so we are looking to increase our branded sales.

Q: What is Matsunichi's strategy for increasing awareness of its brand?

A: In 2002, we started marketing our first MP3 players in Hong Kong through TV and billboard advertising, and an added benefit of that was that the message also reached other parts of south China because TV signals from Hong Kong are received in many places there. I believe part of the success of the Matsunichi brand achieved here in the region was down to our strategy to employ celebrities to endorse our products.

Many customers still associate our brand with the singing group Twins.

In our efforts to make our brand become truly international, this week we announced we will work with the American swimmer Michael Phelps, who won six gold medals at the Athens Olympics. Having such a well-known international personality to endorse our products will really help us expand our business overseas, especially in the US market. We are planning to spend about 4 percent of our annual turnover on advertising and marketing in 2005.

Q: More than 86 percent of Matsunichi's first half sales came from the United States. Does that make you over-dependent on a single market?

A: Our ODM sales helped us to build our business in the US, so we now have a number of important sales and distribution partners such as OfficeMax and Office Depot on which we hope to leverage to increase our branded sales. We already have a strong brand here in Hong Kong and China and we are increasing our sales to the European market. In 2005, we hope to achieve a better balance - 30 percent in the US, 30 percent in Europe and 40 percent in China and Hong Kong.

Q: The consumer electronics business is highly competitive. How does Matsunichi plan to sustain its growth?

A: Marketing and advertising are an important part of our company's strategy, but our success ultimately rests on sound business fundamentals. In the electronics business, I believe the most important ground rule is to build up good relationships with suppliers. Some other businesses subscribe to the philosophy that ``the customer is king,'' but I believe that ``the supplier is king.''

Q: Do you mean the supplier is even more important than the consumer in the electronics business?

A: The most important breakthrough in the development of MP3 players was the emergence of semiconductor flash memories capable of storing huge amounts of data. In recent years the technology has moved on to mini hard-disk drives.

Solving the problems of space and storage of large quantities of information was key to making MP3 players viable consumer products.

The supply of semiconductor flash memories and mini hard-disk drives is always extremely tight because there are so few vendors with the technology to provide them. Back in 2003, most of our competitors were short of flash memory supplies, but we didn't have that problem, and this was crucial in allowing us to get to the market faster and getting our business off the ground.

Q: How did you manage to avoid the problems faced by others in the industry at that time?

A: We were in the advantageous position of ordering our flash memory supplies earlier than most simply because we started product development much earlier than our competitors.

Because we were working closely with our suppliers, we anticipated the launch of these new flash memory products and a lot of effort went in to product development to ensure that as soon as their flash memories started shipping, we were in a position to order them in the specifications and quantities that we required.

Q: Do you worry that as the market for MP3 players matures, profit margins will decline?

A: The early mover advantage is totally crucial in the electronics business because that is the key to achieving healthy profit margins. In the past year, a flood of new companies also launched products in the MP3 market, following early movers like us and Apple Computers. The enabling technology, flash memories, has now become widely available, so the entry barriers are lower for other companies to enter the market. As late starters, these companies are much more vulnerable to price cuts because their cost structure is much higher, and they are also competing against more advanced products from their early-mover competitors.

Apple Computers cut the prices of their iPod MP3 players earlier this year by more than 20 percent, which we followed, and I predict this will drive many companies out of the market because they are selling MP3 products that cost the same or even more than our higher specification models, which offer larger storage capacities. They will end up losing all their customers to the early movers, that is the harsh reality.

There won't be more than 10 commercially successful companies in the MP3 market because they will soak up the supplies of all the latest and highest specification mini hard-disk drives and flash memories, and Matsunichi is one of them.

To be part of the value chain in the MP3 player market, a company must have the research and development capability, the finance, and stay in the distribution channels of its suppliers.

Q: So, after the MP3 player, what will the next mass volume product be?

A: We have taken into account the product roadmaps of our major suppliers and we already have a plan for next year, and further on. We will be interested in entering any markets that offer large growth, and won't be confined to the MP3 player market.

Q: Given Matsunichi's growth in the past two years, is there still room for more?

A: In 2003 we invested HK$600 million in a new production facility in Longgang, Shenzhen, to add to our earlier production facility in Dalian.