Taiwan tech

One island is home to a bevy of IT powerhouses at the cutting edge of product development. Taiwan’s IT giants continue to lead the way.

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By  Stuart Wilson Published  June 28, 2004

Global stage|~|taiwanhassan.jpg|~|“We know how to maintain OEM and ODM relationships and also push the Everex brand,” says Hassan Ashi, managing director Middle East at FIC|~|It does not matter what brand of PC or notebook you choose. It does not matter where in the world you buy it. Regardless of these two considerations, it is pretty safe to say that a Taiwanese company played a role in bringing the product to life. The island of Taiwan has spawned a global top tier of components vendors and contract assemblers. While manufacturing and assembly has gone global, Taiwan remains both the financial home and R&D centre for IT heavyweights shaping the future of the industry. With a population of just over 20 million, the sheer financial value of Taiwan’s tech sector is testament to the island’s position as a global IT powerhouse. Taiwan’s top 20 technology companies alone posted combined 2003 sales of US$67.8bn. Reading like a Who’s Who of the contract assembly space, the top 20 includes global giants such as First International Computer (FIC), Quanta, Compal, Wistron and Inventec. In the components space, AsusTeK and Micro-Star International (MSI) show the power of Taiwanese vendors. Mix in power brands such as Acer and BenQ building global presence from their Taiwan base, and the impact of the island’s IT sector on the world stage becomes apparent. Such is the scale of the Taiwanese IT sector that globally renowned components and systems vendors such as Gigabyte and Elite Computer Systems (ECS), with sales of US$1bn and US$1.3bn in 2003 respectively, do not make it onto the top 20 list. Taiwan’s buoyant IT sector epitomizes the globalisation of the industry and the need for companies to take advantage of differences in labour costs, raw material availability and supply chain efficiencies that exist around the world. The birth of Taiwan as a global IT hub has been part and parcel of this process. “Going back in time it was the ability to produce competitive products with cutting-edge features at reduced prices that really got the sector moving in Taiwan,” explains Philip Ashkar, sales and marketing director at Acer Middle East. “It is not rocket science and was actually a pretty simple formula. But it was done with a Western mentality and management style that has led to the birth of many global players including Acer. Today, the attraction for major IT players is the Chinese market with a population in excess of one billion.” ||**||Manufacturing hub|~|TaiwanManish.jpg|~|“Quanta. Wistron and Inventec manufacture the vast majority of notebooks produced in the world,” says Manish Bakshi at BenQ|~|China plays a prominent role in the business model for Taiwanese IT vendors and contract assemblers on two fronts — both as a huge domestic market to sell into and also as a location for building massive manufacturing plants offering cost-effective economies of scale. Many of the manufacturing facilities, previously located in Taiwan, have now shifted to China as well as other countries around the world, reflecting the global aspirations of the Taiwanese tech sector. “BenQ now has four manufacturing facilities around the world,” explained Manish Bakshi, director and chief operating officer at BenQ Middle East. “These are situated in China, Taiwan, Mexico and Malaysia.” Taiwanese motherboard vendors were quick to identify the benefits of opening Chinese manufacturing plants. Initial concerns about product quality persuaded some to set up secondary brands based in China before moving production of their main brands over the Taiwan Straits. When it comes to assessing a vendor’s in-house manufacturing capabilities, it is important to understand the complex role of the contract assemblers in the market. The simple fact is that many of the global A-brands have been reduced to little more than sales and marketing outfits in today’s IT landscape. Processes such as design, manufacturing and assembly are outsourced to the massed ranks of contract assemblers through a complex web of OEM and ODM relationships. “Companies such as Quanta. Wistron and Inventec manufacture the vast majority of notebooks produced in the world including those sold by global brands such as HP, Dell, Acer and BenQ,” said Bakshi. “In many cases the specifications between brands are the same, the software is the same and the quality is identical.” With so much in common, it is brand equity, channel strategy, market perception and the ability to value-add around service provision that make one vendor’s offering stand out from another. These extras are one of the reasons why only a few players have managed to translate their success as a contract assembler into growth as a finished goods vendor selling off their own brand equity. ||**||Avoiding conflict|~|taiwanbenson.jpg|~|Benson Lin, general manager Asia-Pacific sales and markting group at AsusTeK|~|For example, AsusTeK is the number one notebook vendor in Taiwan, yet outside of its home market — particularly in the Europe, Middle East and Africa region — it is viewed primarily as a components vendor. In fact, AsusTeK has a massive portfolio of finished goods ranging from network kit through to notebooks and PDAs. To invest heavily in promoting its own brand finished goods would however bring AsusTeK into conflict with the OEM and ODM customers it sells to and serves in the market. This potential conflict has to be monitored carefully and a degree of caution exercised. Motherboards only account for a third of AsusTeK’s sales with notebooks poised to outstrip this part of the business in sales during 2004. Benson Lin, general manager Asia Pacific sales and marketing group at AsusTeK, is keen to replicate the company’s Taiwanese notebook dominance in other markets around the world. “Right now, Asus is the number five manufacturer of notebooks in the world and number ten in terms of brand,” says Lin. “In Taiwan we are number one with a 30% marketshare. Asus has a notebook OEM agreement with Sony but we do not work with major brands such as HP, IBM and Acer so any conflict is minimal. Asus has spent ten years building its brand in the motherboard space and now we need to start doing that in other product areas.” The relationships between global A-brands and contract assemblers are not well publicised. With the A-brands investing so much in building up their image and pumping out focused marketing messages to persuade customers that they are somehow better than their rivals, most vendors are loathe to admit that their products are actually identical in all respects apart from the badge and the exterior styling. It is often a balancing act for contract assemblers wishing to build up their own reputation as a vendor of finished goods while simultaneously keeping their OEM and ODM customers sweet. FIC is one company that has successfully differentiated these two business goals by acquiring the Everex brand and using it as a vehicle for promoting its finished goods. “We know how to maintain OEM and ODM relationships and also push the Everex brand,” says Hassan Ashi, managing director Middle East at FIC. “The products may look exactly the same but we make sure that we do not create any conflict. Some vendors are now purely marketing machines dedicated to promoting a brand and maintaining a market position. In every industry some companies focus on manufacturing while others end up focusing on branding and marketing.” Own brand operations play an important role in providing stability to a contract assembler. Vendors outsourcing their manufacturing to a third party do not sign up for life and are free to chop and change the contract assemblers they use. For the contract assemblers, the own brand also provides an opportunity to showcase new technologies to the market and encourage their OEM and ODM customers to evolve and keep using their services. ||**||The Acer story|~|taiwanashkar.jpg|~|Philip Ashkar, sales and marketing director at Acer Middle East|~|The restructuring of the Acer Group in 1999 demonstrated the advantages derived from a clear distinction between manufacturing and branding businesses. Acer boss Stan Shih — often hailed as a driving force behind Taiwan’s success in the global IT landscape — took the bold move of restructuring the group into three distinct business units: Acer, BenQ and contract manufacturing unit Wistron. This allowed each group to focus on its core activity and also paved the way for Acer and BenQ to start sourcing finished products from the best contract assemblers available and not feel duty-bound to work with the internal group manufacturing capability. According to recent reports, Quanta has now overtaken Wistron (part of the Acer Group) as the largest contract assembler for Acer notebooks. Splitting the operations has allowed Acer to develop its brand, pursue a highly flexible business model and maintain minimal inventory. “Acer is a Taiwanese company but we have become a well recognised global brand,” says Ashkar. “This has been achieved using the initial economies of scale and advantages that Taiwan offered, but planning to play a role on the global scene from day one.” While Acer and BenQ have successfully promoted their brands across the world and built reputations as vendors of finished goods, it is a challenge that others are now facing. For those companies involved in components manufacturing and contract assembly, becoming an end-user focused vendor of finished goods poses risks and rewards. The potential to boost sales exists but this opportunity is tempered by damage such a move can do to relationships with channel players sourcing their components or using their contract manufacturing services. Despite these barriers, AsusTeK, Gigabyte and ECS all harbour aspirations to extend their reputation beyond components and into the finished goods arena. Dislodging the established brand names in a mature and heavily consolidated IT market will be no easy task. “Today you can identify the major players very easily,” says Ashkar. “Is there room for a new player to emerge? I doubt it. Gateway bought eMachines in the US in March to consolidate the major players even further. I am not ruling out the emergence of a new global player but don’t see it happening very soon.” For Taiwanese components vendors looking to make a name for themselves as finished goods providers, a radical channel revamp is required and a new breed of distribution partners must be brought on board. While a components distributor focuses on selling into the assembly channel, a finished goods channel needs to reach further down and target retailers, dealers and VARs actually pushing product to end-users. Trying to push finished goods through a channel set up for components is frequently an abject failure. Expect to see continued polarisation and consolidation in the Taiwanese IT space as companies choose one of two paths: the contract assembly route or the finished goods vendor route. For contract assemblers, economies of scale will remain vital. After all, the larger the company, the greater its purchasing power and its ability to dedicate resources to research and development activities to keep it ahead of the curve. FIC’s acquisition of the Everex brand gave it a credible consumer brand and also allowed it to create a separate route-to-market for finished products, while both Acer and BenQ have been brand-building since day one as part of a pure end-user focused sales and marketing strategy. For those Taiwanese companies still looking to extend their footprint from components and contract assembly into selling finished goods, a frank realisation of the power and history of the global A-brands they are trying to displace is a pre-requisite. Despite the daunting task confronting them, do not expect Taiwan’s finest to walk away from the challenge ahead. ||**||

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