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Source: Atlanta Journal Constitution
Date published: 23 March 2008
Reporter: Craig Simons

Taipei, Taiwan — Until recently, few Americans had heard of Asustek Computer Inc., a Taiwanese company that labored anonymously as the world's top producer of motherboards, the main circuit boards for PCs.

But last year a simple idea propelled the company into the global limelight: Build a lightweight notebook computer that retails for about $350 and can connect to the Internet, produce documents and allow simple gaming.

Along with growing sales from other notebook computers, the Eee PC (for "easy to learn, easy to play, easy to work") has helped Asustek more than double its share of global computer sales since 2005, making it the world's ninth-largest computer maker.

The rise of Asustek, which markets computers under the brand name Asus, highlights a growing challenge to industry leaders, including Dell and Hewlett-Packard.

As profit margins for contract manufacturing have shrunk, Taiwanese companies responsible for making most of the world's personal computers have leveraged their manufacturing strengths to market their own brands, a trend that has ramped up competition, analysts said.

Acer, the most successful Taiwanese computer brand, surpassed Lenovo in the fourth quarter of last year to become the world's No. 3 PC vendor. Last October, executives bought computer retailer Gateway for $710 million, a move seen as boosting sales in the United States.

Selling their own brands

Several other Taiwanese contract manufacturers have recently begun to sell branded computers.

Micro-Star International, one of the world's top manufacturers of computer servers and graphics cards, began selling branded notebook computers in 2004, and executives plan to sell 2 million PCs this year, said Helen Chiang, a market researcher at IDC's Taipei office.

Clevo, a Taiwanese contract manufacturer founded in 1983 that produces notebook computers for more than 100 companies worldwide, began to sell laptops under the Clevo brand in Taiwan last year.

Asustek sold 4.7 million computers last year, up 62 percent from the year before, according to data from market research firm IDC. The most recent IDC data showed the company made 2.1 percent of all computers sold in the fourth quarter last year.

For Dell and HP, strong sales of Asus and other Taiwanese computers brands in China and other developing markets may be particularly troubling.

Dell has focused on China's growing market to build sales. Last year, the Round Rock, Texas-based company introduced a low-cost computer designed for first-time Chinese buyers and partnered with a Chinese retail chain to sell home computers.

During the company's fiscal fourth quarter, revenues in China grew 32 percent compared with the year before, well above the worldwide growth of 10 percent year over year.

Sales grow quickly

But Taiwanese computer makers have benefited from low-cost products and by selling through traditional retail stores instead of online. Asustek surpassed Dell in 2007 to become the No. 3 notebook vendor in China, said Bryan Ma, a Singapore-based IDC analyst.

"Consistently over the past two years they've been making a concerted effort to build their brand name, and that's paid off," he said.

Tracy Tsai, an industry analyst at the Taipei office of research firm Gartner, said sales by Taiwanese PC makers are "growing very quickly" in China and other developing markets and are likely to continue to win market share from Dell.

"There's a different marketing strategy," she said. "Dell can be very successful in developing markets but has not done as well in emerging markets."

The shift by Taiwanese companies into selling brand-name computers has been driven by shrinking profits as manufacturing has moved from Taiwan to China and competition for large contracts has increased.

At most Taiwanese companies, profit margins on sales of branded computers are roughly five times higher than on sales of computers and parts to resellers like HP and Dell, said Jerry Shen, Asustek's chief executive officer.

As they have moved into selling their own brands, Taiwanese companies have also been able to capitalize on their proximity to the supply chain to expand profit margins, reduce risks and increase delivery speed.

In January, Asustek split off its contract manufacturing arms — Pegatron Technology Corp. and Unihan Technology Corp. — from its brand business.

But the relationship between the two sides remains strong. When the company decided last year to market the Eee PC, executives realized that if the product failed, they could use $50 million worth of raw materials to build computers for other companies, Shen said.

"The risk is so low, so I could do it," he said.

Production switch easy

Taiwanese companies with brand-name products and contract manufacturing arms also benefit from the ability to quickly change production lines they own to meet market demand and from strong research and development teams set up to serve contract clients.

Asustek employs more than 3,000 "research and development engineers," some of whom helped reduce the cost of the Eee PC series by designing innovative circuit board technology and software that runs on the free Linux operating system, Shen said.

The company also has increased investment in the softer areas of style and image. A design team tasked with producing prototype exteriors for the Eee PC line "tried to make the computers less intimidating by keeping things simple," including by reducing the number of buttons on the machines, said Jimmy Chu, who managed the team.

Since the Eee PC hit store shelves last fall, sales have been strong. Between October and the end of last year, Asustek sold more than 300,000 Eee PCs and executives expect to sell between 3.5 million and 5 million of the computers this year.

Dell, HP and Acer have responded by developing low-cost notebooks that will be released this year, Shen and analysts said.

Shen is optimistic Asustek can maintain dominance in the market segment. The company will release a second generation of the Eee PC line in June and is building other Eee-branded products, including an all-in-one desktop computer similar to Apple's iMac that will retail for $499.

Reference:
Taiwanese PC makers thrive with own brands | ajc.com  http://www.ajc.com/business/content/business/stories/2008/03/22/taiwanpc_0323.html
accessed on Oct 21, 2008