LIVING WITH INTEL (int'l edition) How Taiwan's motherboard makers survived an attack Intel will pummel us. That was the scary feeling at many of Taiwan's big electronics firms in 1995, when executives there learned some startling news. Mighty Intel Corp. planned to add to its near monopoly in microprocessors by making motherboards as well. Motherboards are the guts of a personal computer, and Taiwan companies had achieved dominance of this sector by building highly customized boards at low cost. But if Intel planned to muscle in on the business, how would the Taiwanese fare? Margins were already razor thin, and Intel could easily drive prices down even further. Managers at Elitegroup Computer Systems Co., Taiwan's third-largest supplier, slashed prices by up to 15% in anticipation of Intel's move. ''Everyone was worried,'' says Marketing Director David Liu. ''We lost a lot of profit.'' Two years later, the worst fears over, Intel's bold move has not quite panned out. Taiwanese companies such as Elitegroup are thriving. One Taiwanese motherboard maker, Asustek Computer Inc., has emerged as a star performer on the local stock market. MORE CLOUT. And Intel? It had to absorb a $475 million loss on inventory and has scaled back its assault. The Santa Clara (Calif.) company will put out around 10 million boards this year. That is 15% of world demand, but far less than industry experts had predicted. In an interesting twist, everyone thinks Intel has still gained far more than it has lost. Even at a lower production level, Intel has locked up key customers for its motherboards, such as IBM, Gateway 2000, and Dell Computer. Just as important, by staying in the industry, Intel has greatly expanded its power over Taiwanese producers. Intel now wields enormous control over PC design, a field where Taiwan's best boardmakers had begun to make a big impact. So though its foray shows that even Intel can stumble, the chipmaker has still altered the dynamics of Taiwan's electronics sector. Intel got into the motherboard business as a way to accelerate the market's transition to its new Pentium chip. The company was frustrated at the lack of support by independent boardmakers, which were still making good profits on 486-based models. So Intel decided to take matters into its own hands by making Pentium-based motherboards. The move would also throw an obstacle in the way of catch-up artists Advanced Micro Devices Inc. and Cyrix Corp., which were developing their own Pentium-class chips. To mollify board suppliers, which remain big customers, Intel insisted it wanted only to promote its own chips--not dominate the board industry. Says Stanley Huang, general manager for Intel in Taiwan, ''We never intended to occupy the whole [motherboard] market.'' But that's just how it looked from the outside as Intel ramped up production in Ireland, Malaysia, and the U.S. Then, as sales of its boards soared, Intel decided that motherboards could be a big moneymaker. But Intel quickly learned there were also hazards to the business. When PC demand fell short of projections in 1995, it was stuck with enormous inventory. Intel took a write-down and converted big debts by such customers as Packard Bell NEC Inc. into long-term loans. ''Intel realized the whole thing had gotten out of control,'' says analyst Drew Peck of investment bank Cowen & Co. ''It turned out to be an ill-conceived foray into much higher volumes than planned.'' Production plans were slashed. BLACK INK. Meanwhile, the best Taiwanese boardmakers have responded to the Intel threat by getting even better. To stay in the game, boardmakers such as Elitegroup have focused on smaller PC makers and distributors in the West and Japan that Intel cannot serve adequately. The company's motherboard business is doing so well that Elitegroup has dropped its diversification drive into other computer products such as CD-ROM drives and has recently opened a plant in Shenzhen, China, to expand motherboard capacity by 40%, to 500,000 units per month. After a loss in 1996, it is expected to post a $26 million profit this year on sales of $530 million. Asustek, founded by former Acer Inc. executive Jonney Shih, has excelled at the strategy of going even further upmarket into more lucrative niche products. With a solid reputation for innovative design, Shih markets boards under the Asustek brand to makers of high-end systems such as workstations and servers. The company is also a key test site for new Intel CPUs, enabling it to turn out next-generation boards months ahead of rivals. In fact many of Shih's customers, who are regional computer companies, have beaten giants such as IBM and Compaq Computer Corp. to the market with systems using new Intel chips. As a result, Asustek enjoys net margins of around 27%, compared with the industry norm of 3% to 5%. Taiwanese boardmakers, which had long ago learned how to survive in a cutthroat and rapidly evolving industry, feel Intel's travails proved that companies such as Intel ''don't have our flexibility,'' says Ernest Chen, senior vice-president at First International Computer Inc., Taiwan's No.2 supplier. Taiwan's resilience has also helped Intel realize that it needs to let independent producers prosper: They supply huge volumes of boards to myriad distributors that Intel would never be able to serve efficiently on its own. As a result, Taiwan's global share of boards not produced in-house by PC makers rose from 65% in 1995, when Intel jumped in, to an estimated 74% in 1996. Having more allies in the industry reduces the risk that Intel could misjudge the market and open opportunities for its rivals. ''Users are demanding a lot,'' says Shiau Wen-Shone, AMD's Taiwan general manager, ''and Intel can't satisfy all their requirements.'' Still, Intel's ability to force the entire PC industry to move in lockstep has never been greater. By keeping a 15% to 20% share of the market, Intel has speeded market acceptance of new-generation chips. It can also influence prices and force other makers to be more in sync with its own development plans, such as its upcoming MMX chip. One casualty has been product differentiation. ''There's not much difference between motherboards, because they're all using the same chips,'' says Dataquest Inc. analyst Nathan Brookwood. What's more, Intel's move into boards has secured it a solid hold on the high-end market for ''chipsets,'' packages of specialty semiconductors linking microprocessors to the rest of the circuits on the board. That gives Intel a big voice in the future of PC design. Even though they are glad to have survived the Intel threat, most Taiwanese industry executives are unhappy with heavy dependence on Intel. They have been relegated to low-end, thin-margin business or to small volumes of high-end boards. Either way, they remain vulnerable to the whims of Intel's chip-allocation policies. Taiwanese companies fear that Intel's top priority, in a time of shortage, will be to supply favored customers over those who also buy chips from rivals, a charge Intel denies. ''Most people still hate Intel, but they have to cooperate with them,'' says Derek Tien, electronics analyst at ING Barings Ltd. in Taiwan. Taiwanese producers may grumble about the relationship. But for now, they will live with it as long as Intel leaves them enough room to survive. By Jonathan Moore in Taipei, with Andy Reinhardt in San Francisco RELATED ITEMS TABLE: Intel's Power Play Return to top of story

Updated June 15, 1997 by bwwebmaster
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