By Stuart Wilson
Taiwan remains the focal point for global IT manufacturing. While they may not be the best-known brands in the world, the giants of the Taiwanese IT sector are the true powerhouses of the global industry.
Soaring sales|~|gigabytenb200.jpg|~|Vendors such as Gigabyte are looking at the finished goods arena with products such as notebooks|~|Taiwan remains the focal point for global IT manufacturing. While they may not be the best-known brands in the world, the giants of the Taiwanese IT sector are the true powerhouses of the global industry. Channel Middle East talks to some of Taiwan’s finest manufacturers and brands to get the lowdown on the upstream channel forces at work in the market.
Contract manufacturers posting billions of dollars of sales every year are the companies that A-brand vendors such as HP and Dell rely on to make a significant proportion of their products. The recent Computex exhibition held in Taipei, Taiwan, once again underlined the power that these players exert in the global arena. While many of the major players are based in Taiwan the most significant trend in recent years has been the movement of production plants to Mainland China.
Where once ‘Made in Taiwan’ was a common sight on IT kit, it is increasingly giving way to a ‘Made in China’ label. Initial concerns over the quality of goods manufactured in China have now dissipated and manufacturers are flocking to the country to take advantage of plentiful labour, economies of scale and also to tap into the massive domestic market that exists. For Taiwanese manufacturers, the shipment value of goods produced in China soared 71.2% during 2004.
With orders from international A-brand vendors picking up, Taiwanese IT hardware shipments climbed 22% in value during 2004 to a staggering US$69.6bn according to the Taiwanese Market Intelligence Centre. Notebooks and LCD monitors contributed to this solid growth rate as total computing hardware sales, including motherboards and desktop PCs, hit US$55.4bn. Networking and communications kit accounted for US$10bn of the annual total.
While sales volumes are expected to keep on climbing during 2005, margins remain under relentless pressure for the contract manufacturing giants as customers play suppliers off against each other. It is resulting in a growing trend for more players from Taiwan to start positioning themselves as end-user brands in their own right.
||**||Brand builders|~|Marvin200.jpg|~|Marvin Tsai, marketing supervisor, channel sales division Middle East, Africa and CIS at motherboard giant MSI|~|Giants such as MSI and Gigabyte are supplementing their core components business with concerted efforts to create their own brand equity and build up their own channels-to-market. And contract manufacturers that may previously have been content producing kit for other companies to brand and sell have dedicated resources to promoting their own-brand products in the market. Foxconn, which has invested heavily in building up its presence and channels-to-market in the Middle East is a prime example of this trend.
This development does raise some interesting issues in the supply chain dynamic. As contract manufacturers begin producing finished goods of their own they immediately come into competition with the customers they serve. It is a delicate balance at present and requires careful management to keep both sides happy.
Margin pressure and the mature nature of specific product sectors are just some of the driving forces behind Taiwanese players’ interest in finished goods. Marvin Tsai, marketing supervisor, channel sales division Middle East, Africa and CIS at motherboard giant MSI, explains why finished goods are so alluring to the vendor: “The reason we are making the transition to a finished goods vendor is because the market for components such as motherboards and graphics cards is increasingly becoming a mature industry.”
“Our company wants to achieve annual growth and we see the opportunity in end-user focused products such as notebooks and even consumer electronic products like MP3 players. That is the future so we started making the move towards these areas. We can leverage our technical strengths in the components area when it comes to producing finished goods,” he added.
The shift towards finished goods poses channel challenges for Taiwanese players looking to make this move — especially if they come from a components background. A distributor selling components in the Middle East may have excellent reach into the PC assembler space, but there is no guarantee that they will be able to replicate this strength when it comes to finding the appropriate resellers and retailers to sell finished goods to.
“This is a dilemma for MSI,” adds Tsai. “We want to grow with our distributors because we are looking for long term partnerships so if our distributors want to help us grow in these business segments, we are happy to work with them. However, it may be the case that we need to appoint different distributors to handle products such as MP3 players because it requires a very different channel to components.”
||**||Channel segmentation|~|apacer200.jpg|~|Taiwan IT fair Computex pulled in the crowds|~|For many vendors, channel segmentation is the way to build strong channels for both components and finished goods. Taiwanese giant Asus has already employed this tactic in the Middle East, working closely with distributors such as Empa to develop a channel for its own brand notebooks in the region. The strategy for building up finished goods awareness also requires components manufacturers to adopt new strategies regarding their brand equity.
“Compared to components like motherboards and graphics cards we need to make more investment in promoting finished products in the region. Channel partners like Jumbo and Jacky’s are the companies we need to reach with the finished goods and we also need to make sure that end-users know what the MSI brand stands for,” added Tsai.
One company that has successfully blended the roles of components vendor, contract manufacturer and finished goods vendor into a harmonious entity is FIC. As well as promoting and building up its own Everex brand, FIC is also a major supplier of PCs and notebooks to OEM and ODM customers as well as a components manufacturer. FIC’s PC business is worth some US$3.8bn a year, underscoring its strategic position as an important supplier to global brands.
Hassan Ashi, managing director at FIC Middle East, believes that the Everex brand is a valuable vehicle that allows the company to introduce new technologies to the market. “One of the main benefits of the Everex brand is the ability for FIC to bring cutting-edge technologies and solutions to the market,” said Ashi. “This could be in terms of PDAs or even digital home concept PCs. Next month we plan to launch a new product in the smartphone sector.”
However, even FIC — despite its size — is careful not to push too hard with its own brand, understanding that it would be counterproductive to compete head-to-head with vendors that actually form part of its customer base.
“Contract manufacturers always look for volume and as such FIC is committed to supporting its major OEM and ODM customers, working with them on product design and producing the quantity of products they require,” added Ashi. “At the same time we also work to develop our own brand but do manage the levels of competition with our customers very carefully. We make unique products under the Everex brand that do not compete directly with the major OEM and ODM customers that work with FIC.”
The complex web of upstream relationships that exist between A-brand vendors and contract manufacturers is frequently kept well hidden. A contract manufacturer’s own brand notebooks could be 10% cheaper than one of its customers that is selling exactly the same product as a premium brand. It is not in the best interests of the contract manufacturers to draw too much attention to this fact, especially as their customers have a choice of contract manufacturers to work with. The price differential is a reflection on the investment that some of the premium vendors make in building up their brand equity in the market.
||**||Future thinking|~|bakshi200.jpg|~|Manish Bakshi, general manager at BenQ Middle East and Africa|~|One company that has taken the branding exercise to its natural conclusion is Acer. Proud to call itself a pure sales and marketing organisation, Acer draws heavily on contract manufacturers for the products it sells around the world. Other Taiwanese vendors such as BenQ maintain a mix and match approach combining some manufacturing capability of their own alongside contract manufacturers providing it with product.
Manish Bakshi, general manager at BenQ Middle East and Africa, is convinced that Taiwan’s long-term position as an IT leader is assured. “Taiwan has been established as an IT leader and a manufacturing force for many years and this will continue in the future too. There are many reasons including the economies of scale and the technical innovation that happens there,” he said.
“The whole area of supply chain management is extremely efficient in Taiwan and the Far East and many of the major IT companies have CEOs with strong visions,” continued Bakshi. “Many of them believe they have the ability to make their brands internationally famous. That is the reason why the contract manufacturers are slowly shifting towards their own brand and in the future Taiwan will become even more important. It is not easy to create a brand and requires a great deal of marketing. It is easy to come up with a product and easy to brand a product but unless you have grass roots offices that are operating effectively it is difficult to create end-user demand for that product in various markets.”
The temptation to build up their own brand remains strong for many of Taiwan’s contract assemblers and it is unclear how the long-term market landscape will develop. At present, the Taiwanese IT sector retains a mixture of pure contract assemblers, pure branding and marketing companies, and those that engage in a combination of both.
What is clear is that Taiwan-based IT companies are being taken much more seriously on the global stage. The ability of vendors such as Acer and BenQ to crack markets such as Western Europe and even the US is something that the old order of IT A-brands needs to watch carefully. If the brands are seen as being on an equal footing then neither can justify charging a premium price. That means that every company has to maximise efficiency in its manufacturing processes and optimise its supply chain.
The next few years will be a fascinating period for industry dynamics as the rise of Taiwanese vendors and Chinese manufacturing keeps everyone on their toes.