Taiwan contract makers add to choices for end users

Some of Taiwan's contract manufacturers, who have long toiled behind the scenes, are trying to make a name for themselves

When it was founded in 1997, a Taiwanese firm with the drab, generic name High-Tech Computer did what almost everyone on the island does: It made its money doing contract manufacturing work for bigger-name brands.

That changed in 2006. Today, the company known worldwide as HTC designs its own smartphones and tablet PCs, chipping away at the market shares of giants such as Apple and Nokia. It sold 24.67 million smartphones under its own brand last year, more than double the number in 2009.

Now, after years of keeping a low profile, other firms in Taiwan have realized from watching the likes of HTC and Taiwan's branding pioneer, Acer, that they can use the expertise accumulated from contract work to design and sell their own products, under their own brands.

Newer entrants include the huge contract PC maker Quanta Computer, which has started to sell its own notebooks and smartphones, and Micro-Star International, which will release its first tablet PC on June 1.

Their efforts to move up the value chain are providing end users with new supplier choices for their PCs, smartphones and peripherals, at prices often lower than those from established foreign rivals. Local firms are already known for keeping costs down through cheap labor, the use of factories in China, and quick, flexible means of sourcing components.

"When you're an up-and-coming brand, you compete on price," said John Brebeck, head of Taiwan research with Yuanta Investment Consulting. "Taiwan's edge has always been that they take costs out of the manufacturing process. But we also have really good engineers here."

The island's makers also face challenges, however. Taiwanese firms accustomed to operating behind the scenes may struggle for years to market their own products to a point where customers know and trust them. Some have no experience building a brand, while others put too little money into the effort.

Taiwanese firms targeting consumers "can't be successful unless they have very good marketing to accompany their brands," said Mike Clendenin, managing director with RedTech Advisors in Shanghai. Otherwise, he said, "consumers are going to be confused and stick with [what] they had before, like the HPs, Samsungs and Apples."

They must also be careful about competing with their contract manufacturing customers. Some deal with this by setting up separate companies that have almost nothing in common but the board of directors, and by avoiding markets where their top clients are most active.

Gigabyte Technology, for example, one of the island's biggest motherboard manufacturers, has a separate business unit that makes its PCs. "There would be a conflict for sure, otherwise," said company Senior Vice President Richard Ma.

Acer, which established itself as a PC maker 15 years ago, was the most valuable of Taiwan's high-tech brands in 2010, according to the consultancy Interbrand. HTC was second, and Asustek, known for pioneering the worldwide market for netbook PCs, was third.

HTC made its name when Microsoft enlisted it to make smartphones based on its Windows Mobile operating system. These days, Google's free Android OS has made it easier and more affordable for manufacturers to develop their own smartphones and tablet PCs.

CyWee, a four-year-old Taiwanese company that makes devices for motion sensing and video streaming, wants to enlarge the 20 percent of its business that it gets today from its own branded products, said marketing Vice President Paul Liu.

"This is most likely a typical scenario for almost any company," Liu said. "Self-branding gives CyWee more options to get our products to end consumers. It has always been our company goal to innovate, and self-branding speeds up that process."

Selling products directly to end users can sometimes mean higher profits for manufacturers, but there are other reasons as well. Contract work suffers during a global economic downturn, and even in good times, profit margins are shrinking as contractor manufacturers emerge in developing countries where labor is cheaper.

The branding efforts often start in Taiwan, which has a population of just 23 million. The products are sold more cheaply than those from overseas vendors, and Taiwanese consumers seldom have to gripe about gaps in quality.

Buying products from a local vendor means there are "lots of repair shops or places to get parts," said Wang Te-hua, 42, a notebook PC shopper at Taipei's Spring Computer Fair in early April.

The next step is often the vast China market, where buyers associate Taiwan with quality electronics and can easily recognize the Chinese-language company names.

The top brands aspire to more mature markets in Europe and North America, where they hope consumers will be willing to take a chance on a lesser-known name if it means paying a lower price.

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Tags business issuesQuanta Computerhardware systemsMicro-Star InternationalCyWeeinvestmentsAsustek ComputeracerGigabyte Technologyconsumer electronicshtc

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Ralph Jennings

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