Taiwan's computer firms look at ways to diversify

As well as developing their products, many Taiwanese firms have been relocating their manufacturing operations to China in a bid to cut costs

When founding Quanta Computer Inc  in 1988, chairman Barry Lam had envisaged that technological evolution was moving towards portable computing, which would offer users greater mobility.

This was a bold move, considering that the 1980s was the age of the rise of desktop computers, especially with IBM Corp betting heavily on their desktop machines to be tomorrow's stars.

"People laughed at us and viewed Quanta's first portable products as a piece of junk at that time," Lam said at a Jan. 5 media roundtable on Taiwan's competitiveness.

But the contempt did not deter Quanta's determination to pursue laptop production, and the firm's far-sightedness has turned it into the world's largest notebook contract maker, with volumes hitting around 18 million units last year. The company's customers include computer vendors such as Apple Computer Inc, Dell Inc, Hewlett-Packard Co, Matsushita Electric Industrial Co and Sony Corp.

No bed of roses

However, the notebook production business is not a bed of roses for Quanta, as it is faced with the issue of lower margins, along with other makers.

"In fact, most notebook contract makers are now posting much lower profit margins than the 5 to 6 percent reported. A five-percent margin is already a good deal to most," said Albert Chen, a notebook industry analyst at the Taipei-based research firm Market Intelligence Center (MIC).

This probably challenges makers to think of their next "winning formula," and Quanta is no exception.

"What's next after notebooks? Computers are only accessible to fewer than 20 percent of the world's population. How can we provide different forms of devices to make mobile computing possible to most?" Lam asked.

This probably explains the rationale behind Quanta's participation in the "One Laptop per Child" project.

Launched in January last year by Nicholas Negroponte, chairman and co-founder of the Massachusetts Institute of Technology's Media Lab, the scheme aims to develop computers for children around the world priced at US$100, far lower than the current cheap notebooks sold at US$500.

While industry watchers question the viability of the project, which is set to churn out 5 million to 15 million units of budget laptops by the end of this year, Quanta seems to be unperturbed and is again convinced that it is on the right track.

Quanta is just one of the cases where local PC makers are attempting to diversify into new market segments, or "blue oceans," to maintain future competitiveness.

"Blue ocean strategy," a hot term in Taiwan's IT industry last year, refers to competition in an uncontested market space, while companies adopting "red ocean strategy" are those competing in an existing market and undercutting each other as most do now.

Acer Inc also realized that instead of concentrating all its efforts on the contract manufacturing business, it should dip into the blue ocean for growth.

The company, founded 30 years ago, thus spun off its manufacturing operations in 2000 to focus on globally marketing its brandname products including desktop and portable computers.

The efforts bore fruit last year as Acer successfully became the world's fourth largest branded computer maker, pushing it one step closer to joining the top-three club next year.

What consumers want

However, understanding what consumers really want is the toughest job for contract makers venturing into brandname business, as they have long been designing and manufacturing products based on clients' requirements, said Simon Yang, an analyst with Topology Research Institute.

"They need to enhance after-sales services to listen to consumers' voices, and focus on various markets with smaller volumes as a start," Yang said.

By dedicating resources to more markets, the volumes added up in total would be significant, which would help to boost a company's market share, Yang added.

In addition to adopting a "blue ocean" strategy, Taiwanese makers have been quick to relocate assembly lines offshore, including to China, to improve margins, taking advantage of the lower labor and production costs there.

Last year, First International Computer Co shut down its Taiwanese factory, becoming the latest Taiwanese laptop maker to move its production facilities to China.

"Now, over 90 percent of Taiwanese notebook production is being churned out in China," MIC's Chen said.

Shipments of notebook computers are expected to climb 18 percent to US$35.8 billion this year, according to the institute's forecast.

But the heart of their research and development (R&D) remains in Taiwan, at least for now.

"However, we see the trend of R&D moving gradually to the mainland over these few years, depending on the maturity of the engineers there," Chen added.

A case in point is the nation's largest laptop maker Asustek Computer Inc, as its upcoming notebook "A9" will be its first laptop entirely designed, developed and manufactured across the Taiwan Strait.

Quanta's Lam said that the number of local engineering graduates every year is insufficient to deal with the industry demand and that companies have to turn to China.

"But the quality of local engineers here is still better compared to their Chinese counterparts," Lam said.

In Chen's opininon, it is irrelevant whether notebook manufacturing or R&D is done locally or offshore because it is not equivalent to the competitiveness of the industry.

"Companies will eventually find their own `blue ocean strategy' to embrace the competition, as they always did in the past," he said.

source: Taipei Times