These are hard days in Taiwan's computer industry. Plummeting PC prices are turning manufacturing into a low-margin, high-volume game. Taiwanese companies must offer complicated inventory and distribution services to keep clients. But the island's computer makers aren't licking their wounds. Instead, they are moving nimbly to outflank global rivals in the hot market for notebook PCs.
Last year, Taiwan's notebook exports soared 36% in a market that grew just 8.5%. And this year, Taiwanese companies are set to topple Japanese rivals as world market leaders by grabbing a 46% share. It's likely to be a profitable dominance: Gross margins at leading companies such as Quanta, Compal Electronics, Acer, Inventec, and Arima Computer are in the 14%-to-20% range on notebooks, far higher than the usual 8% on PCs.
TIGHTER GRIP. Indeed, Taiwan is successfully parlaying its manufacturing clout to rule the notebook industry as firmly as its PC makers did by making boxes for foreign companies. Now, the lucrative grip of Taiwanese notebook makers is set to tighten as companies worldwide, from NEC to Dell Computer and Apple Computer, continue to outsource more to trim costs. "A majority of our product is made in Taiwan, and the volume will continue to grow," says Max Fang, Dell's regional procurement director.
Few thought the Taiwanese would learn so quickly how to make complicated notebooks. Their designs still aren't as spiffy as the premium products that the likes of IBM and Compaq Computer make in-house. But Taiwan's engineers have made huge strides. "They used to be just low-cost manufacturers," says Bruce Stephen, vice-president for PC research at International Data Corp. "Now, they seemed to have stepped up."
Taiwan's engineers have had to master the art of fitting components, such as CD-ROMs, digital video disks, CPUs, and hard drives, inside the tiny casings of notebooks and still keep them from overheating. "It's like a three-dimensional jigsaw puzzle" needing electronic, mechanical, and materials knowhow, says Tony Massimini, technology chief at Phoenix-based Semico Research Corp.
But, then, the Taiwanese aren't exactly novices. They have made notebooks under contract for the likes of Compaq and Dell since the mid-1990s. And these days, they're no longer just order-takers. Companies such as Inventec, Compal, and Quanta now design their own notebooks and shop them to clients. Compal, for example, sold designs to both Dell and Hewlett-Packard Co. "We don't have time to wait for them to give us a design," says Compal President Ray Chen. "We just go ahead and do it."
That may be overly modest. Quanta, for example, developed a notebook in 1997 that combined the latest Pentium processor with popular features like a bay for a dual battery, all in a small, light case. Dell signed up and baptized it the Latitude CP, which turned into a big seller--and a big contrast to Dell's initial poor showing in notebooks. Dell's notebook sales are now doubling yearly. "Taiwan is doing a lot more of the design work," says Dell's Fang. "There is a critical mass of expertise." The Taiwanese have spent big on acquiring expertise fast. At companies such as Compal, up to one in every five employees is a design engineer. And typically, they spend 5% of sales on research and development--more than the island's PC makers
All the same, they'll have to run hard to stay ahead. With Intel Corp. and Advanced Micro Devices Inc. turning out new chips at a faster pace, notebook product life cycles have shrunk from 9 to 12 months to 6 or even 3 months, so makers must develop more than one product at a time. Besides, the present juicy margins could be squeezed because notebook prices are dropping while those for liquid-crystal displays, a key component, are rising. Undaunted, the Taiwanese keep building on their success. Some companies are branching into servers or handheld devices. Inventec, which has hired 1,600 software engineers in mainland China, has developed a top-selling software package, Dr. Eye, that can translate English text into Chinese and back again. Taiwan is clearly determined to stay in the game, whatever it takes.