Quotes of the Day

Taiwan is the world's premier electronics factory, but the world doesn't know it. The island's nimble manufacturers produce more than two-thirds of the globe's LCD monitors, nearly three out of four notebook PCs, and four-fifths of PDAs. Yet most of this digital gear is made under contracts with big foreign tech companies like HP, Apple and Dell and is resold to consumers carrying those well-known brand names. No longer can

Taiwan's electronics makers thrive in anonymity, however. The relentless decline in tech hardware prices is putting pressure on the bottom line—profit margins on a Taiwan-made notebook PC, for example, have fallen by half, to 5%, over the past three years. Caught in the big squeeze, Taiwan's tech companies "can't just fly under the radar anymore," says Flint Pulskamp, an electronics analyst at consulting firm IDC in San Mateo, California. "If they're going to survive, they need to step out and get recognition for their brands."

Taiwan is reaching for the limelight. Earlier this month, Taiwan consumer-electronics company BenQ, a relatively unknown maker of everything from notebook computers to LCD TVs to MP3 players, agreed to acquire the mobile-phone business of German behemoth Siemens, thereby becoming the world's fourth-largest mobile-phone company with total annual revenues of nearly $11 billion. Not only is the firm gaining size, it is gaining marketplace visibility. BenQ gets to use the top-notch Siemens brand name for five years. K.Y. Lee, BenQ's ceo, plans to mark his phones BenQ-Siemens, pumping his own brand more than ever before. "The only way for us is to be closer to the customer and to build up our brand," says Lee. "To be in the global market, you need to have global scale."

Of course, selling household-name merchandise to the world does not guarantee success. Companies with great brands and global reach can still lose money. But a well-respected brand can often persuade customers to pay more for its product, which helps maintain margins in the fight against lesser-known rivals. Without brands, Taiwan's contract manufacturers are forced to compete with one another almost exclusively on price as they seek to land deals to supply the Apples and HPs of the world—and that kills profits. According to Macquarie Securities in Taipei, the net profit margins at six major Taiwan tech companies fell to an average of 2.9% in 2004 from 7% in 2002. One solution to this high-tech death spiral: get big quick, through acquisitions that produce economies of scale along with brand recognition. Other Taiwan companies are striking deals similar to BenQ's. Earlier in June, Taiwan's TPV Technology agreed to buy part of the computer-monitor-and-LCD-TV operation of Dutch electronics giant Philips for $358 million. The deal solidifies TPV as the world's largest maker of computer displays.

Most Taiwan firms, however, still have a bad case of stage fright. Branding their own products means they may wind up competing with their multinational clients in some markets, which is a great way to alienate their best customers. Taiwan's electronics companies "don't have the courage or commitment to do branding," says Ereca Chen, co-founder of Taipei-based Atelligent Global Consulting. "It's hard for them to take that first step." The companies that do sell products under their own names often stick to tiny markets or small-time campaigns. Mitac International, which manufactures a wide range of PC gear, limits its branding efforts to PDAs with built-in global-positioning systems. Asustek Computer, which sells notebooks under the Asus name, shuns expensive sports sponsorships and concentrates on advertising in PC specialty magazines to reach a geek audience. "If you compare us with HP and Dell, we still belong to the small potatoes," says Sunny Han, Asustek's marketing director. "We focus on niche marketing, to niche people."

BenQ's Lee, 52, is one of the few in Taiwan taking on the industry's heavyweights. An easy-going engineer, Lee began using the BenQ brand in 2001 when his organization was spun off from Acer, Taiwan's well-known computer company. The BenQ logo can now be found on MP3 players, LCD TVs and monitors, notebooks and mobile phones. An 80-person design team, led by a former Porsche designer, has created trendy gadgets aimed at Asia's youth, such as a coin-sized MP3 player that can be worn as a pendant and sleek laptops called Joybooks. In May, the company launched a square phone, the Qube, with functions that include an MP3 player and a high-quality camera. A clever TV spot for the Qube, featuring popular Taiwan pop band Mayday, shows typically round objects becoming square, like a basketball being dunked through a net. Lee also followed his bigger competitors into sports marketing by sponsoring the Euro 2004 soccer tournament.

BenQ is getting noticed. So far this year, its branded products generated 44% of its revenues (the company still produces projectors, LCD monitors and mobile phones on a contract basis). But Lee's bold strategy has serious risks. According to consulting firm Gartner, Motorola last year discontinued buying phones from BenQ because the Taiwan firm had started selling its own mobile phones. (Neither Lee nor a Motorola spokesperson would comment.) The acquisition of the Siemens unit is also risky. Burdened with stodgy phones, high costs and falling market share, the German operation is losing about $1 million a day. To seal the deal, Siemens management agreed to pay BenQ $300 million—cash that will help BenQ to shore up the business, according to the companies. Siemens also agreed to buy $60 million in BenQ stock. Despite the fact that Siemens virtually paid BenQ to take the troubled phone unit off its hands, Lee says he is "confident [BenQ] can turn around the operation." He plans to add handsets with fresher designs and more features, and use his new leverage in the industry to extract better deals from component suppliers. But cutting costs quickly will be tough. BenQ promised to keep a German factory employing 2,000 highly paid workers open at least until mid-2006.

No one in Taiwan doubts Lee's chutzpah—Mitac's president Billy Ho praises him as "full of courage"—but a turnaround will take more than guts. Lee must repair the German unit while tussling with Nokia, Motorola and Samsung for global market share. Even Lee admits that how successfully he integrates his new handset business "will determine the destiny of BenQ." But the reality for BenQ and the other Taiwan tech outfits is that high-risk ventures may offer the best chance at survival. "They realize they have to do something very drastic," says IDC's Pulskamp. For Taiwan, it's take center stage, or else.

• Michael Schuman | Taipei
• As global competition intensifies, Taiwan's largest electronics makers are fighting back with their own brands