Beats Electronics to expand China operations

Beats Electronics is a world hit in the premium headphone market and has big plans to expand the firm's operations, including R&D, in China

PUBLISHED : Monday, 21 January, 2013, 12:00am
UPDATED : Monday, 21 January, 2013, 5:29am

When Beats Electronics launched its first product in 2008, the appetite of consumers for expensive, large headphones with an overtly hip hop music branding seemed highly uncertain. "We came to market with the US$300 'Beats by Dr Dre Studio' on the same day that Lehman Brothers folded," said Luke Wood, the president and chief operating officer of California-based Beats.

That was at the height of the global financial crisis. Investment bank Lehman Brothers filed for bankruptcy with US$613 billion in total debts and closed its doors on September 15, 2008.

"We didn't know whether that was a good time to put out a US$300 headphone, but it sold well," Wood said. "More importantly, we created a market for premium audio in the headphone space which didn't exist then."

More than four years later, Beats has become entrenched as the global market leader for headphones priced at more than US$100. The privately held company is due to build up its operations in China this year to meet growing demand for its headphones worldwide. "We're going to be making investments, from the standpoint of operations and research and development, in Shenzhen," Wood said, without providing figures. "We will also hire a marketing team based in Shanghai and build up our sales organisation in Hong Kong."

Wood said Beats was now sharpening its focus on managing its contract manufacturers on the mainland and logistics partners. The company has more than 170 staff, including about 40 engineers. Beats was also "investing more … resources against counterfeiting" this year, he said. Similar to the strategy of other packaged-goods firms, Beats is working to catch counterfeits before these reach the market.

Efforts to shore up Beats' research and development, manufacturing, logistics, and sales and marketing infrastructure directly stem from the company's decision a year ago to amicably part ways with Monster, a maker of premium-priced audio and video cables, speakers and headphones.

Monster, which is also based in California, was the exclusive manufacturing partner for the Beats by Dr Dre headphones. The firm helped Beats founders Andre Young, the hip hop artist known as Dr Dre, and Interscope Geffen A&M (IGA) record group chairman Jimmy Iovine introduce the high-performance Studio at the International Consumer Electronics Show in Las Vegas in January 2008.

At the world's biggest consumer electronics trade show, the Beats partners presented a new type of headphone that can reproduce the full spectrum of sound that musical artists and producers hear in professional recording studios.

"Monster did ODM [original design manufacturer] management, manufacturing, distribution and sales. We did the marketing, as well as production design with [US industrial design firm] Ammunition," Wood said.

Wood, a musician-turned-record producer, has been involved with Beats since Iovine and Young set up the company in 2006. He formally joined Beats in February 2011. "If we want to be a great consumer electronics audio company, we needed to move quickly to build a super technically efficient team internally," he said.

Beats was helped by the US$309 million investment made by Taiwanese smartphone maker HTC in August 2011 to acquire a 51 per cent stake in the company. "HTC kind of helped us transition into a free-standing company," Wood said.

In July last year, HTC sold back half of its shares in Beats to the company's founders for US$150 million. HTC retains a 25 per cent stake. Meanwhile, Monster has released its own line of branded premium headphones. Beats uses some of the same suppliers it had when Monster was a partner and new contractors. By working closely with suppliers in Asia, Beats was "striving to have the capability to push a global launch day and localised marketing campaign for each new product", Wood said, referring to how big companies like Apple and Nike conduct their operations.

A report by Futuresource Consulting estimated that the global headphone market reached US$6 billion in value last year on total sales of more than 260 million units, up from US$5 billion and unit sales of 228 million in 2011. Sales are expected to top 330 million units in 2016. The steady increase is attributed to the fast-growing base of portable audiovisual devices, including smartphones and media tablets, which consumers use with their headphones. Headphones from Sony, Philips, Sennheiser and JVC led unit sales, according to Futuresource. Revenue share, however, was dominated by a collection of premium-priced brands, which often leveraged innovative design, celebrity endorsements and heritage in high-end acoustics. These included Beats, Skullcandy, Bose and AKG.

Citing both external and company estimates, Wood said: "Worldwide, we're clearly No1 in revenue."

He said Beats had about 60 per cent share in North America and 40 per cent in Europe of the over-US$100 premium headphone market.

"We're seeking triple-digit increase in annual sales to Asia and South America," he said. "We're No 1 in markets like Hong Kong, Singapore, South Korea, Germany, France and Britain."