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Taiwan's Info-Tech Triumphs

By Bruce Einhorn The star of this year's BusinessWeek Info Tech 100 is LG Electronics (see BW Cover Story, 6/21/04, "The Information Technology 100"). The electronics subsidiary of LG Group has labored in the shadow of its more glamorous South Korean rival, Samsung Electronics, which has established itself as a world-class brand that can compete in the same league as Sony (SNE), Panasonic, and Philips (PHG).

LG isn't quite there yet. But it emerged as No. 1 in this year's IT 100 rankings, helped by LG's push to become a world-leading producer of consumer electronics. The shift from second-generation (2G) wireless phone technology to third generation (3G) helps LG. When it comes to cellular handsets, the 2G world is so commoditized that Chinese manufacturers such as TCL or Ningbo Bird -- with only a few years of experience making phones -- have been able to come on strong. It's not that easy to make 3G handsets, however. As telecom operators worldwide roll out their 3G networks, a company that can make a good 3G handset -- like LG -- is sitting pretty.

Canning Fok, managing director of Hutchison Whampoa, the Hong Kong-based conglomerate that's a 3G pioneer in Britain, Italy, Australia, Hong Kong, and elsewhere, can't say enough about LG, which is starting to supply the Hutchison Whampoa with 3G handsets. "We've arrived in terms of cost, functionality, size, and batteries," says Fok. "In 3G, the soup of the day is LG."

NATURAL ADVANTAGE. And the country of the year has definitely been Taiwan. The island's electronics companies traditionally do well in BusinessWeek's IT 100, but in this year's version they stand out. Of 2004's top 25 companies, eight are Taiwanese. Altogether, Taiwan accounts for 15 of the top 100 IT companies worldwide.

Many of the Taiwanese on the list are beneficiaries of the worldwide boom in flat-panel displays. As PC users junk their clunky old cathode-ray-tube monitors and replace them with sleek thin screens, the Taiwanese companies that make thin-film transistor liquid-crystal displays (TFT-LCDs) have enjoyed impressive results. That's behind the rise of AU Optronics, No. 17, which is one of the world's largest producers of TFT-LCDs.

These aren't the only Taiwan tech companies that have gotten a boost. LCD components makers have, too. Take Novatek Microelectronics, No. 20. It's a "fabless" company, a chip-design house without a semiconductor manufacturing plant of its own. Novatek farms out its production to foundries, chipmakers that produce for others. It was among the top 10 most profitable companies, largely due to its focus on designing chips used in making LCDs.

DESIGN WORK, TOO. Nonetheless, some of the Taiwanese are by now regulars to the list. Quanta Computer, the island's biggest producer of notebook PCs is No. 3 this year, following up on its No. 2 rank in 2002. (For 2003, Quanta managed just a No. 34 ranking.) Its revenue soared last year, and a 108.9% increase gave it the second-best sales growth of any IT 100 company. Quanta is tops in original design manufacturing (ODM).

Quanta doesn't just produce notebook PCs for Dell (DELL), Hewlett-Packard (HPQ), Acer, and just about any other name you can think of. It also does much of the design work. Now that margins in the notebook PC business have shrunk so much that it makes little sense to produce the machines in Taiwan, Quanta has been pushing aggressively to develop its production base in China, with a huge facility in the Shanghai area.

Quanta is hardly giving up on Taiwan, though. Across from corporate headquarters in a technology park close to Taipei, construction is now under way on a large new research and development center.

INDIAN CHALLENGE. When it comes to IT 100 consistency, even more impressive is Hon Hai Precision Industry, which is a top 10 perennial. No. 4 Hon Hai is the outsourcer of choice for companies looking for a low-cost manufacturer of PCs, game consoles, cell phones, and other electronic gear. It improved on its 8th-place ranking last year and almost matched its No. 3 spot in 2002. Hon Hai is the leading Asian player in the ultracompetitive world of what's known in the industry as electronic manufacturing services. In EMS, a company like Sony does the design work for the PlayStation game console and then hires Hon Hai to manufacture it.

As the world's electronics industry has gravitated to China, Hon Hai, with its vast production base in the mainland, has an edge over North American rivals like Celestica (CLS) and Solectron (SLR). Indeed, Hon Hai is now closing in on Flextronics (FLEX) as the world's EMS leader after paying $1 billion in stock last fall for a Taiwanese telecom equipment maker. Last week, Hon Hai approved a plan to spin off a division that makes cellular phones, probably in Hong Kong.

One potential challenge for Hon Hai: India, which seems to be emerging as a new battleground for the EMS industry. While Flextronics has an edge in manufacturing in the West and Hon Hai is ahead in China, neither has a leader in India. The country has lagged behind China as an electronics market and as a manufacturing destination. But now that India has the world's fastest-growing cell-phone population, manufacturers are starting to think again about whether they can ignore the country.

Flextronics early this month announced that it was buying a controlling stake in Hughes Software Systems for $226 million. Hon Hai's ability to match Flextronics in markets where it doesn't have a natural advantage will go a long way in determining whether the Taiwanese company can make it to the top tier of the IT 100 list again next year. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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