What's In a Name? Fatter Profits

Largely unknown Taiwan contract manufacturers are trying to reposition themselves as consumer brands

by Bruce Einhorn

Thinking of buying Sprint Nextel's (S) new Touch touchscreen phone? Or AT&T's (T) Tilt or the Shadow from T-Mobile (DT)? Peter Chou has one request: Make sure to flip these ultra-sleek phones over and look at the back. That's where High Tech Computer (HTC), the Taiwanese company that makes those handsets for the big phone companies, now puts its logo. Like many other Taiwanese electronics manufacturers, HTC "used to be very discreet," says CEO Chou, producing phones anonymously for customers to sell under their own brand names. "We were just a supplier."

No more. Under pressure from low-wage competitors based on mainland China, more Taiwanese electronics companies are exploring ways to win acceptance as global consumer brands. HTC is a prime example. Last year, Chou hired an Italian design firm to come up with a new, snazzier logo. HTC launched its first-ever advertising campaign to promote products such as its Touch phone, which Chou boasts came out before Apple (AAPL) unveiled its touchscreen iPhone. HTC also has cut deals with cellular operators in the U.S., Europe, and Japan to co-brand its phones. Most have agreed—though many insist on putting their names on the front. For now, Chou is willing to go along: "You have to offer some value to your partner. We are perfectly happy having HTC on the back."

Such marketing forays are just one tactic Taiwanese tech giants are employing as they move away from their manufacturing roots. Taiwanese engineers are coming up with innovative products that carry names of local companies such as PC maker Asustek Computer or Wi-Fi equipment maker D-Link rather than multinationals like Hewlett-Packard (HPQ) or Cisco (CSCO). Some Taiwanese companies are investing in design. And the most prominent of them, Acer, is buying its way into the U.S.

On Oct. 17, Acer announced it had completed a $710 million acquisition of Irvine (Calif.) computer maker Gateway (GTW). Acer is the fourth-largest PC maker worldwide, with profits last year of $315 million on revenues of $7.3 billion; Gateway is tenth-largest globally but No. 5 in the U.S. Acer has shed its manufacturing arm and now focuses exclusively on name-brand products. Acer has been strong in Europe and parts of Asia. It also sells two lines in the U.S., but Chief Executive J.T. Wang admits Acer still has low awareness there.

That's why he's banking on Gateway. Acer is likely to keep the Gateway brand in the U.S., as well as most of the company's 1,000 American workers. "Building a brand is very different in the U.S.," says Wang. "The investment at the initial stage has to be very big—otherwise there is almost no impact."

Acer's biggest Taiwanese rival, Asustek, also is spinning off its low-margin manufacturing business. CEO Jonney Shih and other executives will focus on the more lucrative brand business. One of the world's top producers of PC components, Asustek enjoyed a 418% jump in sales from 2003 to 2006—but with only a 66% rise in profits. That reflects the shrinking margins in PC manufacturing as Dell (DELL), HP, and others have pushed suppliers to hold down prices.