Taiwan Tech Hits the Big Time

As companies break away from being merely suppliers, the island nation has a big showing in the BusinessWeek 2006 IT 100

Taiwan's high-tech industry is one of the most underappreciated marvels of the world economy. Its companies may not be global brand names just yet, but they are increasingly proficient at original design and dominate manufacturing in key categories such as LCD screens, routers, notebook computers, and cable modems.

These competitive strengths show clearly in BusinessWeek's 2006 IT 100 special report (see BusinessWeek, "The Info Tech 100"), which ranks global technology companies by such financial metrics as revenue growth, return on equity, and total return (capital appreciation plus reinvested dividends) to shareholders.

More than a dozen of the island's technology players made the cut this year. That's a better showing than Japan and the biggest country representation on this year's honor roll outside the U.S. Hon Hai Precision and High Tech Computer—computer and peripheral equipment makers both enjoying incredible profit runs— grabbed the No. 2 and No. 3 rankings on the list.

BRAND BUILDING.

 Add it all up, and this is a remarkable performance given that a decade ago Taiwan made components or assembled machines designed elsewhere and was only a marginal player in more lucrative segments of the electronics industry.

The big challenge now for Taiwanese companies is to develop the kind of profitable and well-regarded global brands that can ride out typical boom-and-bust cycles—and the non-stop pricing pressure from companies such as Dell (DELL) in desktop and notebook computers. In order to combat this squeeze, more and more of these tech companies have been branching out of their plain vanilla contract operations and building up products under their own names.

Take No. 3, High Tech Computer. The company has impressive growth and soaring profits, and investors have every reason to be pleased with this year's performance, especially as shareholder return hit 314%. Winning big contracts to make personal digital assistants, or PDAs, such as Hewlett Packard's (HPQ) iPAQ, and smart phones for T-mobile and Cingular, has been a key component of HTC's success, securing its position as one of the premier handset designers and manufacturers in the world.

But HTC has shown they're no longer content with the status quo. HTC chair Cher Wang recently acquired control of handset maker Dopod, suggesting she will now try to build up products under the company's own name.

RESPONSE TO CHALLENGE.

 Mitac, ranked No. 71 on this year's IT 100, has taken a similar branding route. As a leading manufacturer of PDAs and handsets equipped with global positioning satellite (GPS) capabilities, building products for companies such as Medion has helped Mitac. But development of Mio, Mitac's own GPS brand, has also been a huge success. As a result, GPS-related sales skyrocketed from 15% of sales in 2004 to 28.5% this past year. And more important, profit increased 130% to $150 million.

But the real question remains to be answered. As these Taiwanese companies look to build their own brands, how will industry giants respond to the dual roles of both supplier and potential challenger? That remains to be seen, but for now Taiwanese tech is on a very promising trajectory.