Experts differ on contract manufacturing

Executives from Taiwan's high-tech firms disagree on whether companies should keep manufacturing when they move into brand-name selling

The nation has in recent years seen an increasing number of information technology (IT) companies enter the branding business in order to make better profits than contract manufacturing provides.  But a question often faced by manufacturers is whether they should outsource labor-intensive and low-margin manufacturing businesses when they enter the profitable branding business.

Manufacturing is best off abandoned because it is not necessary for developing an own-brand business, Acer Inc's president, Wang Jen-tang, told the Taipei Times in a recent interview.

Another heavyweight player, Asustek Computer Inc's chairman Johnny Shih, does not seem to buy that theory.  The capability to create innovative technology and maintain manufacturing strength is crucial for IT players as they try to outflank their competitors in fast-changing times, he told shareholders at an annual meeting last month.  Asustek is Taiwan's No. 1 laptop vendor, followed by Acer. 

"Each company has finite resources that can't be stretched infinitely," said Steven Tseng, chief analyst on downstream electronics at Yuanta Core Pacific Securities.  Giving up on manufacturing can be workable in the PC sector, which has mature technology and a complete vertical division of labor, Tseng said, and companies can thus concentrate on building up the brand images and distribution networks that are essential to branding business.

Asustek's brand image is too manufacturing-oriented, and so it doesn't affect consumers in the same way that Acer's does, Tseng said.  Acer underwent a drastic transformation in 2000, uncoupling its brand-name from its contract-manufacturing businesses, with the latter becoming Wistron Corp, which specializes in original equipment manufacturing.  That left Acer to concentrate on branding.  Before the restructuring, the company had suffered from a weakened competitive position in both sectors.  But after outsourcing its manufacturing and focusing on brand positioning, Acer has begun to see returns, after going through an initial adjustment period.

Huang Ho-ming, founder of Atelligent Global Consulting, said that manufacturing is not everything and that one company does not need to do all the work.  "In advanced countries, manufacturing consists of less than 30 percent of gross domestic production," said Huang, who was former chairman of the semi-official Institute for Information Industry (III) -- after having served for 20 years as chairman of Hewlett-Packard's Taiwan branch.  "Taiwan's IT companies should pursue higher added value," he said.

Acer generated revenue of NT$157.7 billion (US$4.66 billion) last year, up from NT$105.7 billion the previous year.  The company generated revenue of NT$97.58 billion in the first half of this year, making up 48.3 percent of this year's projected sales of NT$202 billion.  The company held on to its fifth-place position in worldwide shipments of personal computers (PCs), with 1.27 million, or a 3.3-percent market share, over the same period, according to figures released by International Data Corp last week.

"Most Taiwanese companies believe the myth that a branding business must be linked to its own manufacturing for better growth. But actually they are two different businesses, with different focuses and investments," Wang said.  "Brand positioning, brand promotion and relations with market and distribution partners are the core of a brand-name business, which requires long-term, constant and stable management," he said.

But Asustek's Shih believes in the hard work of manufacturing. "The groundwork of strong technology is competitiveness," Shih told shareholders last month.  Giving up on manufacturing could cost a company its edge in the transition in the digital home era, standards for which are still undecided, he said.

Victor Tsan, managing director of III's Market Intelligence Center, said that research and development (R&D) capability is still crucial to own-brand developers, but that it can be split apart from manufacturing.  "Companies boosting brand-name business need to understand consumer desires well, and then control product specifications to differentiate themselves from competitors," Chan said.

Asustek, also the world's largest motherboard maker, is expected to ship 40 million units of motherboards -- with its own-brand products comprising around 60 percent -- as well as 3 million laptops this year, half of which bear its own name.  These totals are up from 30 million units and 1.7 million units last year, respectively.

Source: Taipei Times