Global Economics

What's In a Name? Fatter Profits


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

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.

In October, Asustek began selling its low-cost Eee PC, a mini-laptop modeled on the ClassMate PC that Intel (INTC) designed for kids in developing countries. The Eee PC sells for as little as $250 and goes up to $430 for a deluxe model. Shih figures Asustek can make money by marketing the Eee PC in Taiwan, the U.S., and other rich countries as an easy-to-use machine with superior design. But Asustek is also selling more expensive notebooks in 500 Best Buy (BBY) stores nationwide, and Shih says his computers typically cost "10% to 15% more" than Acer's or other lower-cost brands. "We don't try to grab market share quickly by competing on price," Shih says. "That's not a long-term, sustainable growth strategy."

SO FAR, SO GOOD

Investors seem supportive of the Taiwanese brand push. On Oct. 29, Acer's Taipei-traded shares rose to a 52-week high after the company said earnings for the third quarter jumped 58%, to $90 million. Asustek's share price has risen 34% this year, and it reported a 21% increase in its most recent quarterly profit, to $230 million. That's an all-time high and in large part reflects sales of the company's branded products, which Asustek predicts will continue to increase.

Still, Taiwanese companies don't have the best track record for reinvention. The most notorious example: BenQ, once one of the island's top consumer-electronics brands. In 2005 management bought the money-losing cellular division of giant Siemens (SI) and paired the BenQ and Siemens names on phones. The company went so far as to sign on as a sponsor for Real Madrid, the star-packed Spanish soccer team. The plan flopped, the German subsidiary was liquidated, and now BenQ, renamed Qisda, focuses on contract manufacturing.

Taiwanese executives say they've learned from BenQ's mistakes, but some observers are waiting to see results. "A lot of it is also driven by pride," says Sarena Lin, a managing partner at McKinsey & Co.'s Taipei office. "This is the best way to leave a legacy: having a brand everyone knows rather than being an unknown supplier hiding behind a big brand."

LINKS

Cheap Tricks

Taiwan manufacturers are tapping into the up-and-coming market for ultra-cheap laptops. On Oct. 27, Britain's Telegraph newspaper reviewed Asustek's Eee PC and found it useful as a cheap, lightweight second PC to "open and edit documents, surf the net, and write emails on the go." Set to retail for $250 to $430, the Eee PC is extremely light (under two pounds) and compact (with just a seven-inch display). It is modeled on the Intel (INTC) ClassMate PC and is similar in concept to the $200 XO laptop from One Laptop Per Child, founded by MIT professor Nicholas Negroponte. It cuts costs by eliminating a hard drive and using the Linux operating system instead of the pricier Windows. Yet it comes with Wi-Fi capability and the Firefox Web browser. The drawbacks? It has a tiny keyboard and no ability to download additional software.


China's Killer Profits
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