Your Next PC: Made in Taiwan

SAN FRANCISCO (06/26/2000) - The island nation of Taiwan is tiny--not quite a tenth the size of California, with only about two-thirds the population. So why is it the world's top producer of so many computer parts and peripherals?

As of 1998, Taiwanese companies were producing most of the world's modems, two-thirds of its motherboards, almost as large a share of monitors, and two-fifths of the worldwide supply of graphics boards, according to the Market Intelligence Center, or MIC, part of the Taiwanese government's Institute for Information Industry.

Since then, while accurate figures are not yet available, those percentages have only gone up. In fact, Taiwan lags only the United States and Japan in production of computer components and peripherals, says Ashok Kumar, managing director and computer hardware analyst for U.S. Bancorp Piper Jaffrey.

In the increasingly price-sensitive PC market, a growing number of U.S. and Japanese computer companies are turning to Taiwan manufacturers known for their ability to make good products cheaply.

But while the products may come cheaply, they certainly don't come without risks. Lying on a fault zone and in the shadow of mainland China, Taiwan is a place of both geographic and political instability.

Name It, We Got It

You can find just about every PC part you need for a desktop computer in Taiwan. And when Via Technologies Inc. begins shipping its Cyrix III microprocessors this month, it will mark the first time a Taiwanese company will be able to supply the heart of PCs as well. That leaves only hard drives lacking to make a 100-percent "Made in Taiwan" PC.

According to the MIC figures, Taiwanese companies already make 66 percent of the world's switching power supplies, 85 percent of desktop scanners, 96 percent of handheld scanners, 65 percent of keyboards, 60 percent of all mice, 75 percent of cases, and 49 percent of sound cards.

One of Taiwan's crowning jewels is its notebook-computer manufacturing industry. Taiwan is expected to produce about 50 percent of the world's notebook computers in 2000, creating products for most of the top-tier U.S. vendors. Notebook production in Taiwan is estimated to have leaped from 6 million units in 1998 to 9.35 million in 1999, and MIC expects output to reach as high as 12 million units this year.

Taiwanese companies are gearing up to become major players in other computer markets, too. For example, seven companies are entering the flat-panel display market. And Taiwan's semiconductor industry--currently ranked fourth behind the United States, Japan, and South Korea--also is ramping up production.

Building an Industry

Taiwan's high-tech industry began to build up steam in the early 1990s, says Kumar of U.S. Bancorp Piper Jaffrey. At first most companies built hardware for PC companies--mostly in the United States and Japan--that then added their own distinctive touches and logos and sold the products as their own.

In the mid-1990s many Taiwanese companies moved into the more lucrative business of original design manufacturing, helping those same name brand companies create and build systems from the ground up, he says. PC maker Acer and scanner manufacturer Umax are two well-known companies with self-branded products. And today more Taiwanese companies are starting to bring their own products to market.

Taiwanese manufacturing has become even more important to United States companies as prices have dropped on the low end of the desktop PC and notebook markets and profit margins have narrowed.

Because so many components originate in Taiwan where there's a ready supply of semi-skilled labor, Taiwanese companies can create products for much less than in the United States, Kumar says.

"Taiwanese companies participate in the whole [PC] food chain," Kumar says.

"When it's all supplied locally it helps keep the costs down." Plus, the Taiwanese people are known for their incredible work ethic, he says.

The Price of Cheap Products

The computer industry has little control over Taiwan's political and geographic instabilities, Kumar notes.

"Literally, the whole island is a fault zone," Kumar says. Earthquakes will happen, but the way the country and the industry deal with them is very impressive, he says. After a major earthquake in September of 1999 that killed more than 2400 people, cleanup was completed and production resumed quickly.

After the earthquake, says John Thompson, director of communications for Dell, the high-tech industry in Taiwan "moved heaven and earth to get production levels back up."

One way to guard against similar disasters, says Thompson, is to distribute component sourcing among companies in different countries. All major computer makers operate with multiple sources, but many blamed the 1999 earthquake in Taiwan for parts shortages and their poor financial results late last year.

PC Politics

While Taiwan's high-tech industry has shown that it can withstand an earthquake, it's less clear whether it can weather political storm winds blowing from 100 miles away in mainland China, which views Taiwan as a province that needs to be reunified.

Tensions flared during Taiwanese elections earlier this year, and stocks in many Taiwanese companies fell for a time.

While China continues to express its displeasure over the political split, it has developed an interest in preserving Taiwan's high-tech industry, Kumar says, since many Taiwanese companies have begun to invest in China-based manufacturing plants.

That's because Taiwan is now turning to China and other countries where labor costs are even lower to remain competitive, he says. According to the MIC, almost 43 percent of Taiwan's hardware products are now produced off the island. (In addition to China, Taiwan suppliers also have opened production facilities in Thailand, Malaysia, Vietnam, Scotland, and Ireland.) Kumar is among those who expect that one day China and Taiwan will reunite.

"It's just a matter of time before you see something like what happened with Hong Kong," he says. When and if the two do come back together, he thinks it could be a beneficial combination for high-tech manufacturing--combining Taiwan's manufacturing infrastructure and China's labor supply.

Terho Uimonen of the IDG News Service contributed to this story.

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