Brighter Stars in the East
No doubt about it: When it comes to information technology companies, this is Asia's moment to shine. Companies from Korea, Taiwan, and China have grabbed 7 of the top 10 slots on the BusinessWeek IT 100 list. South Korea's Samsung Electronics Co.--a giant in semiconductors, mobile phones, and consumer electronics--ranks No. 1 overall.
One obvious reason for the Asians' triumph is the crash in American technology stocks, as well as weak demand in the West for everything from desktops to broadband service. Meanwhile, most Asian stock markets have surged forward in the past year, pushing up the value of the region's information technology champions. No company has benefitted more from the two trends than top-ranked Samsung.
But there is more to the story than that. Another factor making Asia especially hot is that its IT companies are well suited to thrive in a global down- market. Several top companies on the BusinessWeek list this year are Taiwanese manufacturers of computer hardware and key components, such as Quanta Computer (No. 2), Hon Hai Precision Industry (No. 3), Elitegroup Computer Systems, (No. 8), and Asustek Computer (AKCZF ) (No. 23). They're there largely because of their role as innovative low-cost providers of manufacturing and services.
In a tech recession, "the lowest-cost producer is always the winner," contends Barry Lam, chairman of No. 2 Quanta Computer. That certainly explains Quanta's success. The Taiwanese company is one of the world's biggest producers of notebook PCs, even though it doesn't sell any under its own name. Instead, Lam's company designs and manufactures on a contract basis for 9 of the world's top 10 brand-name companies. Its biggest customer, Dell Computer Corp. (DELL ), sharply boosted its orders from Quanta last year. Quanta had sales of $3.3 billion in 2001 and profits of $353 million.
The intensity of the tech slump has increased the pressure on Western companies to save money by outsourcing production of PCs, cellular phones, and semiconductors. Taiwanese companies have long been strong in costs, design, and speed. But in the past few years, they have increased their competitiveness even further by shifting their manufacturing to China.
Taiwanese executives know they cannot count on strong growth from outsourcing forever. Already, Taiwanese companies make 85% of PC motherboards globally, and 60% of the notebooks. And there are few major new customers remaining to be won over. Making sustained growth even tougher is severe pressure on profit margins for mass-produced products. This year alone, says Elitegroup Computer Systems Co. Chairman Johnson Chiang, average selling prices for motherboards have dropped 20%. Even though Elitegroup has saved costs by moving work to China, he says, that's not enough.
As a result, Taiwanese IT executives are looking to diversify. "If you want to grow, it's important to add value," says Chiang. Elitegroup is focusing on the consumer market by designing tablet PCs and hybrid devices that are smaller than traditional desktops but more powerful and less expensive than most notebooks. After rolling out these products, Chiang expects that motherboards will go from nearly 100% of its revenues to 25% in a few years. Hon Hai Precision Industry Co. is branching out, too, not only into servers, routers, and storage devices but also into high-tech components for autos.
With customers doing ever more outsourcing, "you can't sit back and say: 'Tell me what you want,"' explains Hon Hai chairman Terry T.M. Gou. "You have to anticipate what they need." To help Hon Hai do that, Gou announced on June 10 that the company would be building a new research and development complex in Taiwan.
Asia's role as an inexpensive manufacturer center isn't the only factor pushing its companies higher on the BusinessWeek list. Samsung Electronics Chief Executive Yun Jong Yong believes his diversification strategy is bearing fruit. Mobile phones and home electronics goods accounted for two-thirds of the company's $2.4 billion profit last year. Despite the global tech slump following the Nasdaq crash, Samsung upped its R&D spending from $1.6 billion in 2000 to $2 billion last year, and marketing spending rose from $580 million to $870 million. Such aggressive moves have paid off. Last year, Samsung's global market share in DRAM chips hit 27%, up from 20.9% in 2000, and its share of mobile phones topped 7%, compared with 5% the previous year. Samsung's performance shows "the power of keeping balance in business portfolios," Yun says.
Like Samsung, many other Asian companies are relying on buoyant domestic demand. That's especially true in China, where a surging appetite for cell-phone service boosted China Mobile (No. 6). And Korea's strong economy, which should grow almost 6% this year, helped telecom enjoy hot growth. While consumers elsewhere have been slow to adopt the mobile Internet, Koreans have embraced it enthusiastically.
Now, Korea's hot companies hope to expand on that base by developing new services and products to make those phones attractive. Both SK Telecom Co. (SKM ) (No. 9)--Korea's largest mobile company, with 16.1 million subscribers--and rival KT Freetel (No. 4), with 9.9 million, are pouring resources into third generation (3G) networks. Although 3G has been plagued by delays and huge licensing costs in Europe, Korean companies believe 3G will pay off at home. And they are pushing creative new uses for the wireless Web. SK Telecom is installing 3G equipment in Seoul's public transport system to enable impatient mobile Web users to see how much longer they must wait for the next bus. Samsung Electronics and LG Electronics Co., a sister company of LG TeleCom (No. 43), have rolled out 3G phones with built-in cameras to let shutterbugs download images and zap them to other phones and computers.
Transformation also is a theme at one of the top Japanese companies on this year's list, Canon Inc. (CAJ ) (No. 24). Much of the credit goes to Canon President Fujio Mitarai, who has been cutting spending, closing divisions, and introducing cash-flow management. Canon dominates its core businesses, commanding 30% of the global market for copiers and 70% of the laser printer market. But Canon makes its best margins in the software and service side of the business, providing maintenance, network applications, and other products to go with its machines. Canon also hopes to leverage its global edge in optical technology by investing heavily to develop semiconductor manufacturing equipment. After developing state-of-the-art optical technology for chip production, Canon can apply the knowhow in its printer and copier business.
Will Asia's new stars remain on the IT 100 list a year from now? A comeback in U.S. high-tech stocks--and new setbacks to Asia's markets--might push many of them off. More important, however, is whether Asian companies are able to navigate the new risks facing their businesses. Just as Canon pushes into digital cameras, for example, Taiwanese rivals are jumping in--and are already driving down margins. The Koreans could dominate 3G globally in the coming years--or fall on their faces, in the way rivals in the West did. While the Taiwanese want to push boldly beyond PC products, many previous attempts at new product lines have flopped.
Nonetheless, Asian companies have endured many challenges since the 1997 financial crisis and the global crash in tech stocks that began in 2000. And they remain highly competitive. Sean Debow, Asia tech strategist at UBS Warburg, notes that even after last fall's stock market surge, Taiwan's computer hardware makers are actually quite cheap, trading at an average price-earnings ratio of 16 times next year's earnings (compared with 37 times for the sector globally). The Asian part of the sector "is dramatically less expensive than the rest of the world," says Debow. While the Asia companies may fade a bit as U.S. and European tech titans recover and regain the limelight, there is growing confidence that Asia's IT sector will remain a powerful force.
By Bruce Einhorn in Taipei, with Moon Ihlwan in Seoul and Irene M. Kunii in Tokyo