Taiwanese companies continue to have a lock-hold on many important sectors of the international information-technology industry. The island is currently the world's fourth-largest IT hardware producer and the number-one supplier in 10 product categories, as well as a major sourcing center for global IT companies. It has managed to retain its leading position by moving much of the manufacturing to China, where it dominates IT production. Rounding out its leadership position, the island is also strong in the upstream sector of the industry; it is the world's fourth largest semiconductor producer and second largest producer of large-sized liquid-crystal displays (LCDs).

But as large global IT entities have followed Dell's lead to pursue aggressive pricing strategies in recent years, Taiwanese companies have found their profit margins tightly squeezed. Profits for the contract-manufacturing business, known as original-equipment (OEM) and original-design (ODM) manufacturing, are now often as low as 2% to 5%. When looking at the huge US$10-billion annual turnover of a company such as Hon Hai Precision (also known as Foxconn), for example, it is important to remember that the profit margin may be only 5%, notes one analyst. OEM and ODM work is all about mass production and cost reduction.

A joke making the rounds in the IT field demonstrates how competitive the market has become. When a Taiwanese company develops a new product, the story goes, it enjoys profit margins of 50%. When a second company enters the fray, they both get 25% margins, but when a third gets into the picture, the profit for all three becomes zero.

Companies such as Philips and Dell buy from Taiwan in big volume because it is the cheapest place to source from. They factor in profit margins of 2% or even less for their suppliers, putting the Taiwanese companies in a take-it-or-leave-it situation. Turning down the order can mean getting stuck with no way to cover fixed costs.

That price pressure has encouraged some leading companies to attempt to develop their own brands. While many challenges face any company that hopes to achieve global name recognition, several -- including BenQ, Foxconn, and Acer -- seem to be achieving some success, in sharp contrast to the failures of similar efforts 15 years ago. At the same time, other IT companies are sticking solely to their OEM and ODM relationships with important global players, preferring to stay with the businesses they know, even if they are less profitable.

Source of Taiwan's strengths

The Taiwan External Trade Development Council (TAITRA) divides information and communications technology into six categories: IT hardware, information appliances, software and services, communications, LCD panels, and semiconductors. In 2003, Taiwan's production value was US$57.1 billion for IT hardware, US$5.7 billion for LCD panels, and US $4.8 billion for information appliances, a new category that includes such items as PDAs, smart phones, set-top boxes, and home media centers. The Taipei Computer Association (TCA) predicts that the production value for IT hardware will rise to US$70 billion this year, with continued annual growth of 15-20% over the next several years.

Counting its offshore production, the island's powerful IT sector currently accounts for 67% of the world's notebook PCs, 65% of LCD monitors, 79% of motherboards, 55% of color display tube monitors (CDTs), 91% of scanners, 42% of optical disk drives (ODD), and 79% of cable modems. In the important related industry of LCD panels, the island's manufacturers last year accounted for 39% of global production and expect to become the world's number-one source of supply this year, passing South Korea. That would add greatly to Taiwan's competitive strength, as these panels are important components in many IT products.

Taiwan enjoys its enviable position in the IT industry, says Philip Huang, manager of TAITRA's capital goods section, because of its "unbeatable global logistics and flexible delivery," its well-established high-tech industrial "clusters" that maintain close links with Silicon Valley, and the extensive expertise Taiwanese companies have accumulated in OEM, ODM, and OBM (original brand manufacturing). The major international procurement offices (IPOs) have increasingly recognized the value in sourcing from Taiwan. In 1999, IPOs purchased US$21 billion in goods from Taiwan. By 2003, that number had more than doubled to US$45 billion.

Huang also points to Taiwan's rich stash of foreign-exchange reserves -- the third highest in the world -- and to the fact that foreigners are allowed to operate securities, futures, securities financing, and trust investments in Taiwan. These factors mean that Taiwan has abundant access to the capital needed for research and investment.

Technology-intensive industries account for more than 50% of Taiwan's manufacturing output and the ratio of R&D expenditure to GDP has risen steadily from 0.6% in 1986 to 3% in 2002. Taiwan's leading manufacturing industries are characterized by strong vertical integration, with a complete range of upstream factories supplying mid- and downstream assembly lines. This has enabled the island to grab and retain such high world-market shares.

Research rewards

Investment into research has also paid off handsomely. In 2001, Taiwan patented 6,545 products in the United States, of which 3,003 were high-tech patents. By country, the number of patents awarded was the fourth highest, behind only the United States, Japan, and Germany. One factor aiding that development is the fact that more than 20,000 people in Taiwan receive either a Master's degree or Ph.D. every year, providing a wealth of managerial and R&D talent for multinational corporations.

With more and more products being developed to foster a digital home or digital lifestyle, the next step for the market is clearly one of convergence between IT and consumer electronics. "The trend in the next three years will be the digital home," says Rosemary Ho, country managing director of HP Taiwan. "It's not just being propelled by consumer interest. There is motivation from the entire supply chain to target three areas -- mobility, digitalization, and virtualization." Inhabitants of such digital homes will be able to go beyond basic computing to perform such functions as sharing digital photos and editing home videos.

HP currently is increasing its focus on product offerings by developing and commercializing 24 new product lines. An important part of adding variables to existing product lines is localization, says Ho. "We have a lot of product differentiation going on at our product development center in Taiwan."

"The most important trend in the computer industry is the shift from computers alone to digital content, communications, and digital consumer electronics," says Li Chang, deputy secretary general of TCA's Overseas Service Division. He attributes this development to the fact that the PC market is already quite mature, leading many companies to move into digital electronics. While large-screen TVs started to appear on the market 10 years ago, for example, the market was limited until the digital-home trend began to spark heavy demand.

Given that much of the technology on the market is similar, companies are trying to gain advantage by maximizing economies of scale. That is why so many computer companies that originally made only computers, mobile phones, or flat-panel TVs are now moving to produce all three, since all of them are key products in the digital world.

Taiwanese companies seem well placed to put these market forces to their advantage. "Taiwan can play a key role in supplying the hardware," says Li. "It's only real competitor is Samsung in South Korea." Two areas giving Taiwanese companies an edge are their prowess in commercialization and design. In Taiwan, it takes only three months to develop a prototype and move into mass production, says Li. In addition, there are more than 300 IT-product design houses on the island -- second only to the number in the United States. Many of these were founded by returnees from Silicon Valley who still maintain valuable connections with the industry in California.

The main challenge facing the Taiwan industry, in Li's view, is the shortage of high-level senior engineering talent, especially in areas such as photo-electronics and wireless communications. Taiwan's key strengths lie in digital design; it lacks talent with sufficient background in materials and analog technology. While engineers could be attracted from China, the complications of the cross-Strait relationship make it difficult to bring them over to work in Taiwan. Although the government has talked about liberalizing regulations in this regard, progress has been slow. As a result, many Taiwanese companies have been relying heavily on Indian and Russian engineers.

The lack of direct transport links with China adds another element of inconvenience to the industry's operations. With Taiwan now serving chiefly as the base for product development, marketing, and financial support, while China handles manufacture and assembly, travel between the two sides is excessively time-consuming. Executives of multinational companies "don't want to waste their time sitting around airports in transit," says Li. "If the production is in China and the head office is in Taiwan, many will simply request that all meetings take place in, for example, Shanghai."

The China advantage

While transport ties may be troublesome, China does provide the low-cost manufacturing environment that has enabled Taiwanese companies to stay competitive. "There are very few negatives," says TAITRA vice president David Liu. "Although computer production is moving to China, everything is being integrated in Taiwan to better meet specific customer needs." Taiwan remains the location of production for higher-end production or customized products, and orders are still received through head offices on the island.

Even large Chinese companies like Legend are sourcing through Taiwan. In 2003, according to TAITRA, Legend's procurement from Taiwan exceeded US$1 billion, covering a wide range of finished products and components. Taiwanese companies are also continuing to stay ahead of their Chinese counterparts in terms of productivity. "No one can compete with a company like Foxconn in this area," says Liu. And he points to the rapid growth being registered by Quanta Computer, whose annual revenue last year of US$8 billion was double that of two years before. "Can you imagine that kind of growth anywhere else?" asks Liu. Taiwan now boasts a number of billion-dollar companies, whose "size gives them a formidable advantage and discourages new entrants," he adds.

To keep those orders flooding into Taiwan, TAITRA has developed an "ABC" system, which is essentially a platform to handle orders from three top IT players (A): IBM, HP, and Compaq. These orders are then parceled out to 31 top Taiwanese IT suppliers (B), while involving financial management and cash flow (C), delivery (D), and e-commerce and logistics (E). The convenience of the system is encouraging even more outsourcing to Taiwan, directly benefiting Taiwanese companies.

To this alphabetical mix, HP's Ho adds an R for radio-frequency identification -- another element growing rapidly in importance. "HP has started shipping to Walmart using RFID on our pallets and boxes," she says. "Logistically, RFID is not just an ID but also tells you what kind of product it is and its global location as well as providing global tracking, inventory control, and fraud management."

The change in focus from Taiwan as a production center to treating the island as a sourcing base is apparent at TAITRA. In 1992, the organization launched the "It's Very Well Made in Taiwan" campaign. Then, as production migrated to China, the slogan shifted in the late 1990s to "It's Very Well Made by Taiwanese." Now TAITRA is touting "Sourcing through Taiwan," and already has some impressive accomplishments under its belt.

In 1997, it initiated an international sourcing project, helping to put multinational companies in touch with local suppliers. To date, it has completed more than 2,500 cases that have generated billions of dollars in new and recurring business. In May 2002, for example, Japan's NEC assigned TAITRA to help supply 650 IT items, sending 7,500 blueprints for different products and designs. TAITRA set up a dedicated web site and contacted 700 local companies, screening these down to 277 finalists. It successfully filled all 650 product requirements within a month, generating US$500 million in new orders and reducing procurement costs for NEC by 30%.

Moving on to branding?

Most IT manufacturers in Taiwan are contract manufacturers that feel the pain of global pricing strategies. They face a difficult choice. Continuing with the OEM/ODM model can still be highly profitable if companies succeed in both holding down costs and amassing enough volume to make up for the low margins. Building close customer relations provides some assurance of a long-term relationship, but ultimately there is always the risk that one day the buyer will shift to a different source of supply. The other route, to develop brands as a means of protection against this threat, is also far from easy to achieve. In terms of global branding capability, Taiwanese companies still have a long way to go.

Business Week annually publishes a Global 500 brands list, on which HP currently ranks as No. 12. In 2002, the only Taiwanese company to make the list was Acer, and it was well down toward the bottom. When Acer reorganized, spinning off BenQ and Wistron, it dropped off the list entirely. Now, BenQ is trying to develop its brand, but HP's Ho notes the challenge that entails. BenQ markets in 19 countries, while HP is active in 160. HP spends US$8 billion a year on marketing and branding, which "tells you how much you have to pay," says Ho.

Among the criteria to make the Business Week list is that the brand has to sell the product, not the other way around. Acer, says Ho, found that its product was "selling" the brand.

John Collins, public relations manager at Wistron, agrees about the difficulty of making the leap to branding. "Currently, major Taiwanese OEM companies are sticking with OEM," he says. "Branding is wonderful, but so far we have yet to see companies do both manufacturing and branding well. It's a difficult migration."

Collins finds that Wistron's customers like knowing that the company is truly focused on ODM. "Previously, under Acer, our customers would perceive that when it came to crunch time, we would give Acer priority as to who got components. Companies assume that you'll worry more about your own groups' brands rather than theirs. So we are very clear with our customers that we strictly focus on OEM, with no brand of our own. They get automatic priority."

Big brands, says Collins, are looking for long-term partners. They do not want to spend a lot of time developing the relationship, only to find out that their partner companies suddenly want to develop their own brands.

The computer association's Li notes that the problem with establishing a brand is that you wind up competing with your own customers. For that reason, most companies in Taiwan are remaining OEM and ODM players; Taiwanese manufacturers may hold a 70% share of the PC market, but the consuming public has no idea who they are.

Henry Wang, Acer Inc.'s senior director of public relations, has a different take on the question of branding, based on the Acer Group's experience. Acer Inc. (the parent company of the Acer Group) several years ago switched from a manufacturing business model to one based on the global marketing of brand-name PC-related products and services. As part of that shift, Acer's PC manufacturing unit split off to become Wistron Corp. And BenQ, which was formerly known as Acer Communications and Multimedia, launched its branding program.

Acer is now enjoying good profitability by outsourcing to top-tier vendors and channel partners to build an efficient supply chain, providing customers with competitively priced, value-added products. By reducing overhead, raising operational efficiency, and increasing economies of scale, says Wang, this business model has enhanced Acer's brand position to support company growth. The company now has more flexibility to respond quickly to market requirements and keep partners content.

Wang points to successes in 2003, when Acer became the world's No. 6 brand for PCs and notebooks, No. 4 for PCs in Western Europe, and No. 2 for notebooks in Western Europe, while registering the highest growth among the top 10 vendors worldwide. By the fourth quarter of 2003, Acer was the No. 1 notebook brand in eight countries in Western Europe: Germany, Italy, the Netherlands, Switzerland, Spain, the Czech Republic, Austria, and Belgium. It was also the No. 1 LCD brand in Western Europe.

What has worked for Acer, however, may not be the solution for everyone. In the end, companies will have the find their own answer depending on their market, their customer relationships, and their core competencies. "To brand or not to brand" is likely to remain a key question for Taiwan industry for some time.

Converging at Computex

Computex Taipei, the world's second largest computer exhibition, showcased the increasing importance of convergent technologies as it set new records this year.

The 2004 show, held during the first week of June, attracted 26,222 professional international visitors, up 17.85% from last year and bettering the previous record registered in 2002. The number of domestic visitors was also up sharply at 82,602, as was the number of international journalists (531). Last year the outbreak of SARS caused the show to be postponed to the fall, resulting in lower than normal attendance.

This year, the leading Taiwanese companies were in full attendance, including Acer, BenQ, Foxconn, Mitac, Sampo, Tatung, and Via. The show also attracted international luminaries such as Intel, Microsoft, and Texas Instruments. In addition, several local companies, such as Foxconn and Asus, that formerly specialized in OEM and ODM work, introduced new branded products.

The top country in terms of visitor origin was the United States, followed by Japan, Hong Kong, South Korea, and Singapore. Strong attendance from Germany, China, Malaysia, Austria, India, Thailand, Indonesia, and Canada further ensured that the event was truly international.

Exhibitor numbers also saw strong growth. This year, 1,347 exhibitors occupied 2,828 booths, and net exhibition space grew by 16.9% from last year, making Computex Taipei the second largest professional information-technology show in the world. It now trails only CeBIT in Hanover, Germany.

Computex Taipei is organized jointly by the Taiwan External Trade Development Council (TAITRA) -- formerly CETRA -- and the Taipei Computer Association. This year marked the 24th consecutive show. Over the years, the show has grown to the extent that demand for space now far exceeds what is available at the Taipei World Trade Center. Construction has now started at a second exhibition center in Nangang; completion of that facility in August 2006 is expected to solve the space shortages.

Integration was a major theme at the show, and new products were primarily targeted at concepts such as digital home, wireless environment, Internet applications, and audio and visual quality. More attention is being paid to design and to making products more user-friendly to attract a broader range of consumers. Major development trends in evidence at the show included all-in-one multifunctionality, environmental consciousness, and human-machine interface friendliness.

Stan Shih, chairman of the Acer Group, outlined the challenges and opportunities facing personal computers in digital homes. Referring to the debate as to whether such homes will revolve around PCs or TVs, Shih said he was confident that with continued improvements in technology and products, PC manufacturers would find abundant opportunities to expand their businesses.

Since digital-home products mostly connect via wireless LAN, Shih said they should be easy to use, reliable, and compatible. After-sales service will also be crucial, he noted, as will improvements in management efficiency at home-appliance makers.

As part of the move toward digital homes, flat-panel displays took a prominent place at the show, including products that combine monitors, TVs, and home-theater displays. Many leading-edge technologies, such as wireless, flat-panel displays, IC design, security, and high-speed connection, were gathered in specialty pavilions.

Computex 2005 will be held May 31 to June 4 at the Taipei World Trade Center.

BenQ: Branding as a Religion

BenQ, one of the Taiwan companies putting the greatest effort into establishing its own brand, is staking its success on its ability to forge an image for its products as central to a digital consumer lifestyle. "We're the only ones doing this, to my knowledge," the company's chief marketing officer, Jerry Wang, told the Taipei Foreign Correspondents' Club in June, noting the company's TV commercials featuring lifestyle rather than product information. "We're in a unique position in that we have a multi-technology platform, not just computers," he said, referring to the company's product mix of digital cameras, MP3 players, and mobile phones, as well as computers, displays, and peripherals.

BenQ's message appears to be getting through. The company's LCD monitors are currently the second best-selling brand in Australia and number three in Canada. Total company revenue has grown from US$1 billion in 1995 to US$2.3 billion in 2003, of which US$1 billion came from branded products. Wang said he expects the branded business to grow to US$3 billion in 2005 and US$5 billion in 2007.

Wang predicts that 2008 will represent a major milestone -- the year that BenQ's sales of branded products exceed its revenue from OEM and ODM business. In the first quarter of 2004, the brand accounted for 31% of total revenue, up from 27% a year earlier.

One of the reasons why BenQ has been able to grow so quickly, observed Wang, is that it has continued to invest not only in communications, but also in product development. In the year and a half since BenQ set up a "Digital Lifestyle Design Team," the unit has grown from six to more than 60 engineers working on delivering better-quality designs.

BenQ's success can be seen in the number of prestigious awards it has received. "In March, we received seven awards for our designs, equivalent to Sony and Samsung," said Wang. That kind of recognition provides vital reinforcement because corporate commitment is important to successful branding. Many people think that branding is all about money -- or "No money, no talk," as Wang puts it -- but the marketing executive says this is actually not the case. "You don't need huge money like Samsung, which spends US$500 million per year to build a brand." (Wang declined to give BenQ's own promotional budget, which he said was confidential).

A good branding strategy, said Wang, encompasses more than just communication. He considers three factors to be essential to a successful global branding strategy. The first is strong overseas management capabilities -- crucial for mastering the vast cultural differences from country to country. For companies that just want to do OEM and ODM, understanding global markets is not a priority. The second factor is excellent technological and product-development capabilities, and the third is solid marketing and distribution.

According to Wang, who has 20 years in the industry at Acer and then its BenQ spinoff, the reason most attempts by Taiwanese companies to build brands over the past two decades ago ended in failure is poor overseas management. But in contrast to the previous generation of decision-makers, Wang and his fellow executives at BenQ have considerable international experience under their belts. Wang, for example, worked in Europe from 1991 to 1997 before returning to Taipei at the behest of Acer Chairman Stan Shih to take over brand management.

"You cannot just graduate from management school and expect to be a good leader," he maintained. Good managers need a lot of on-hands experience and must live in a country before understanding it well enough to be able to handle brand marketing there. "The way you talk to Germans and Dutch is totally different. They way to conduct a meeting in Britain and France is totally different. If I hadn't been there, I wouldn't know this. That's the difference."

BenQ believes in developing local managerial talent in foreign countries, and has been particularly successful in attracting managers away from Japanese and Korean plants. But when it first sets up shop in a new market, it dispatches a team of Taiwanese expatriates to gradually bring the local personnel up to speed. Later, when these Taiwanese managers return, they bring back overseas experience and expertise that can be used to further train staff in Taiwan.

In highly mature industries such as PCs, once companies reach a certain scale, differentiation becomes very difficult. BenQ devotes a lot of research effort to find the right way to differentiate its products. Most of the products are designed inhouse, where the company employs more than 2,000 engineers, though some design work -- such as for notebook computers -- is outsourced.

"A lot of people are concerned about the conflict between OEM/ODM and the branded business," said Wang, but "BenQ had its own brand for a long time under Acer Inc. We coexisted for a long time and didn't see the situation as a conflict." Before launching its brand at the start of 2003, BenQ's management talked to its OEM customers, informing them about the products and markets where branding would begin. Wang regards it as important to follow a two-pronged strategy -- both branding for long-term profitability and OEM/ODM to provide economies of scale.

Volume provides advantages in the market. "You can take advantage of OEM and ODM to leverage your brand," said Wang. That said, every "BenQ"-brand product on the shelves it totally different from what is supplied to its OEM and ODM customers. The design teams doing branding and those doing OEM and ODM work completely separately to put its customers at ease.

At the same time, BenQ also makes its new technology and products available to OEM and ODM customers. "If we develop good products and technology, we can share that with our ODM and OEM customers to create value," said Wang. But the OEM/ODM mentality is different from branding. "With a brand, you start from the consumer and give the same cost but try to increase value," noted Wang." For OEM and ODM, you start with technology and then try to reduce costs."

Branding has come a long way in Taiwan, he observed. When BenQ first launched its brand, the well-known local bookstore, Eslite, carried perhaps four or five books on branding, he said. Now there are 30 to 40, and Wang gets frequent invitations from the government, universities, and other institutions to speak on branding.

Yet most Taiwanese companies still face an uphill struggle in building brands. Many simply do not have the scale that BenQ enjoys, and are too technology-driven and find it hard to make the shift to being what Wang calls "market- or consumer-centric." They also have difficulty shedding the OEM/ODM fixation on cost.

In addition, many Taiwanese companies -- instead of sticking it out for the long-term -- tend to jump in and out of the market in various countries. Wang sees that as a mistake, since "Brands have to be like a religion -- you have to believe in your brand."