On an overcast Saturday afternoon, the computer market in Shanghai's busy Xujiahui district is thronged with weekend shoppers. The thick crowd ebbs and flows, coursing its way through two multistorey malls, each filled with dozens of small shops that hum with activity.
Demand for electronics, including IT hardware, is on the rise in China, which has a population of 1.3 billion people. Last year, PC sales rose 14.9 percent, with users snapping up 14.9 million desktops and notebook computers, according to market analyst Gartner Inc. That makes China the second-largest market for personal computers in the world -- only the U.S. market is larger.
"The market is here in China," said Marco Mora, the chief operating officer of Chinese chip maker Semiconductor Manufacturing International Corp. (SMIC), speaking to semiconductor executives at a recent conference in Shanghai.
Fast-growing domestic demand in China helps explain why companies from around the world have invested billions of U.S. dollars to set up and expand manufacturing plants here. But it's not just the growing domestic market that has brought electronics companies and IT hardware makers to China. The availability of cheap labor and close proximity to clusters of component suppliers have also helped fuel this manufacturing boom.
During 2004, the value of Chinese computer exports totaled US$83.9 billion, a jump of 51 percent over the previous year, according to China's Ministry of Commerce. And computers are just the tip of the iceberg. China exported $6.1 billion worth of printers and $20.9 billion worth of mobile phones during 2004, representing increases of 42 percent and 81 percent, respectively, over the previous year.
"China is dominating electronic systems production," Mora said.
But this surge in production doesn't mean that Chinese companies are manufacturing a bigger share of the world's IT hardware products. "In terms of IT production in China, Taiwanese companies dominate the production," said Byron Wu, director of China research at market analyst iSuppli Corp.
An island of 23 million people off China's southeastern coast, Taiwan was separated from China in 1949 at the end of a civil war. Today, China's government regards Taiwan as a renegade province and has repeatedly threatened to attack the island if the Taiwanese government formally declares independence.
Against this backdrop of political and military tension, Taiwanese hardware manufacturers have managed to thrive, taking advantage of a shared language and culture to turn China into a low-cost manufacturing base for their products.
Asustek Computer Inc. and Hon Hai Precision Industry Co. Ltd. may not be household names, but they produce a range of well-known products at their Chinese factories, including notebook computers for Apple Computer Inc. and Sony Corp.'s PlayStation 2 game console, among many others. Without these companies, and others like them, the IT industry as we know it would not exist.
Taiwanese-owned factories in China employ tens of thousands of young workers, many of whom have migrated from the small villages and towns that dot the Chinese countryside in search of higher wages and a better life.
In Suzhou, a city not far from Shanghai famous for its ancient gardens and picturesque canals, workers -- mostly young women, because they are considered easier to manage than men -- are paid less than US$100 per month to assemble LCD (liquid crystal display) monitors at a sprawling factory complex owned by Taiwan's BenQ Corp.
That's a typical manufacturing wage for factory workers in China's IT industry. Elsewhere, skilled workers command salaries of around $130 per month, while technical staff and managers can expect to be paid around $200 and $300 per month, respectively, said David Wang, executive vice president of Applied Materials Inc., which sells chip-making equipment.
These salaries are roughly equivalent to one-fifth of the wages paid to workers at chip factories in Taiwan, Wang said.
Many Taiwanese hardware makers have been around for 20 years or more and started out making cheap, low-tech products, like plastic connectors, before moving on to more sophisticated offerings. As time passed, these companies expanded and grew. Some executives left to start their own companies or to set up new subsidiaries. Over time, clusters of Taiwanese companies emerged that are closely linked by long-standing personal and commercial ties.
Today, these clusters produce most of the core components required to build a computer, an LCD TV or a mobile phone.
Similar groups have also formed among South Korean and Japanese electronics companies. "The whole supply chain in Asia has been built in clusters over many, many years," said Conway Lee, president of BenQ Europe. Re-creating these clusters in other parts of the world would take years of effort, he said.
Contract manufacturing isn't a business for the faint-hearted. The industry is brutally competitive and profit margins are kept razor-thin by the need to undercut competitors and win the high-volume contracts required for companies to turn a profit. While Taiwanese companies dominate the IT hardware manufacturing industry today, they face a growing threat of competition from Chinese manufacturers.
For now, that threat is not imminent. Chinese contract manufacturers lack the sophisticated supply-chain management systems, manufacturing expertise and quality-control mechanisms required to compete head-to-head against Taiwanese companies for contracts from companies like Dell Inc. or Hewlett-Packard Co. (HP).
Instead, Chinese contract manufacturers today mainly produce low-end electronics, like DVD players and televisions. However, this will change over time as Chinese companies gain more manufacturing experience and compete for contracts to produce more sophisticated items, observers said.
To stay ahead, Taiwanese companies began in the late 1990s to also offer product design in addition to manufacturing and assembly services. High Tech Computer Corp. (HTC) of Taoyuan, Taiwan, was one of the first companies to offer sophisticated product development services and has since grown to become the world's largest manufacturer of handheld devices based on Microsoft Corp.'s Windows Mobile software.
"Our competitive advantage is our R&D capability," said Martin Liu, special assistant to the president of HTC, noting that nearly one-third of the company's 3,000 employees are working on research and development for new products. "We have the biggest R&D team in Taiwan focused on converged devices," he said.
Largely unknown outside the contract manufacturing industry, HTC is the company behind HP's successful iPaq line of PDAs (personal digital assistants), which are both designed and manufactured by HTC in Taiwan. The company also produces handheld devices and mobile phones that are sold under the brands of other companies, including mobile operators like Vodafone Group and T-Mobile International AG & Co. KG.
But you won't find these devices sold anywhere under the HTC label. "We don't have any plans to offer our own brand," Liu said.
Other Taiwanese hardware makers, including BenQ, have taken this step, offering for sale products that they have designed in-house, such as mobile phones and notebook computers, under their own brand names, even as they continue to develop and manufacture products under contract for other companies.
These companies hope that offering branded products will generate higher profit margins than they might otherwise earn by producing the same products as a contract manufacturer. "We believe having our own brand name is the right way to guarantee our long-term survival," BenQ's Lee said.
Branding is unfamiliar territory for most Taiwanese hardware companies. Except for Acer Inc., a sister company of BenQ that has long been among the world's best known PC vendors, most Taiwanese hardware makers haven't bothered to build strong consumer brands. The decision to create their own brands has required Taiwanese companies like Asustek and BenQ to rework their strategies and cultivate closer relationships with business partners.
For BenQ, developing a brand name for the company meant changing its name from Acer Communications & Multimedia Inc. (ACM) and adopting a new corporate image in 2001. The next step for BenQ was to build up a market for its products in China, which would serve as a springboard for the company's international expansion plans. "We had to have a certain position [in China] in order to create a level of economic scale," Lee said.
While Taipei-based BenQ focused most of its energy on expanding sales in China, Lee and his team worked for several years to lay the groundwork for a planned expansion into Europe. There was much to be done. Distributors were familiar with ACM before the company became BenQ, but they had to be convinced the company would deliver on its ambition of becoming a major provider of branded electronics products. "That took us one or two years," Lee said.
During this period, BenQ opened nine offices in Europe and set up the basic logistics pipeline and service operations required to support a European network of distributors and resellers for its products. These efforts have already yielded promising results, with the company taking the number-two spot among LCD TV vendors in Germany during the critical fourth quarter last year, Lee said.
One of the reasons BenQ chose to begin its international expansion effort in Europe is that the European market was seen as easier to break into than the U.S. market. "The acceptance of Asian brands here [in Europe] is much higher," Lee said. In addition, there are fewer European companies that directly compete with BenQ across the breadth of its product range, which includes LCD TVs, notebook computers, digital projectors, mobile phones, digital cameras and MP3 players, he said.
As BenQ and other Taiwanese companies look to build their own brands, new opportunities have opened up for European resellers and distributors.
The blurring distinction between consumer electronics, computing and communications devices is an opportunity for resellers to increase their revenue and earn higher profit margins, Lee said. For example, shops that once sold only mobile phones now also offer consumer electronics, like MP3 players and digital cameras. The same is happening at stores that used to only sell PCs and computer peripherals.
"If you're looking for more revenue with higher margins, better margins, than you must capitalize on this convergence," Lee said.
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