Taiwan: Hitching A Ride On The Wireless Web

Taiwan's PC makers are morphing into cell-phone producers

If any Taiwan company knows how to thrive in a cutthroat business, it is Quanta Computer. Over the years, Taipei-based Quanta has grown into a $2.4 billion electronics power by building personal computers for Dell Computer Corp., Gateway Inc., and other brand-name giants. But this year, the incessant price-cutting has taken a toll. Quanta's profits were down 32% in the first quarter; its stock has slid by 10%. So Quanta is trying a new route: It's gearing up to become a major manufacturer of mobile telephones, which are on course to overtake PCs as the prime gateway to the Internet. "The future is in wireless," says Quanta Executive Vice-President Michael Wang. "And it all begins with the handset."

Many other Taiwanese electronics players think so, too. Like Quanta, they are suffering as margins for notebook PCs continue to shrink--in some cases by 25% since last year. They also are struggling to deal with costly bottlenecks for key components and intensifying competition from China. Mobile telephony, by contrast, promises growth, high profits, and market buzz.

A Taiwanese invasion of the mobile-phone market also could be a boon both to consumers and to the up-and-coming corporate powers of the wireless Internet. It was Taiwanese cloners in the 1980s that helped turn the PC into a low-cost appliance. If an influx of Asians pushes down the cost of cell phones, which now run about $300 for Internet-capable digital models, that could lead to a dramatic increase in wireless Web usage. It also could help the Western telecom-equipment companies fill out their product lines with affordable phones.

Taiwanese contractors hardly have a lock on the market, however. Motorola, Ericsson, Nortel, Siemens, and other big original-equipment manufacturers have been contracting out to giant U.S. companies such as Flextronics International and Celestica Inc., which boast worldwide networks of factories, suppliers, and just-in-time delivery systems.

But the Taiwanese have their own edge: engineers up-to-date in digital technologies and able to turn out cheap models with original designs--something OEMs want. U.S. contractors typically use designs supplied by their customers. "Previously, we thought we could do everything ourselves," says Ericsson President Kurt Hellstrom, who is scouting for a Taiwanese partner. "But with the need for a larger lineup of models, we know that is not possible."

SOARING OUTPUT. The Taiwanese are scrambling to seize the opportunity. In 1999, Taiwan produced just $130 million worth of handsets. Three companies--DBTel, GVC, and Acer Peripherals--dominated the output. They're investing heavily in capacity and new models. Acer is rolling out its Smart Phone--a combination mobile phone, Internet appliance, and personal digital assistant that features a touchpad screen and stylus.

By this fall, computer makers Quanta, Compal, Arima, and Inventec all plan to begin making phones. "We're going to move in full speed," says Compal Electronics Co. President Ray Chen. Taiwan's industry-backed Market Intelligence Center predicts the island's handset output will soar by 540% this year, to 18 million phones. That should give it a 5% share of the worldwide market.

In August, Quanta will launch the Beacon, its first Internet-enabled mobile phone. Although Quanta has yet to secure orders from top-tier cell-phone companies, Wang expects to be one of the world's top 10 mobile-phone makers by 2003. Thanks to Quanta's experience with PCs, he reckons, it will be able to develop handsets capable of handling the huge amounts of data required for so-called third-generation technology, which will start appearing in 2002.

Within four years, Wang predicts, an influx of competitors should push margins down to about 8%. But for Taiwan manufacturers who have honed their skills through decades of computer wars, that would be nothing new. By then, they'll be on to the next big thing.

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