Taiwan's ICT industry continues to shine in key sectors

systems powerhouse. Tony Tseng, VPfor Equity Research at Merrill Lynch in Taipei, emphasizes that Taiwan's success in laptops has resulted in a large number of international vendors outsourcing notebooks from Taiwan. These vendors now include the Japanese. 

Toshiba is one example of a Japanese company that for a long time resisted an outsourcing strategy. Times have changed. Toshiba now looks to Taiwan companies for notebook PCs. 

Last year, Taiwanese companies produced 60 - 65 percent of the world's notebooks, but this year, says Tseng, market share could climb to over 70 percent. 

According to Taiwan's MIC (Market Intelligence Center), which provides analysis under the auspices of the III (Institute for Information Industry), "Taiwanese desktop and notebook PC shipments, which are tightly linked to global PC market performance, saw sequential growth rates of 16.6% and 28.3% in the fourth quarter of 2003." 

Taiwan's notebook production also boosts demand for components, including flat-panel display modules. With a growing trend to integrated Wireless LAN functionality within notebooks, which, it is claimed, makes wireless network access much easier for the end user, this segment has also helped drive Taiwan's rapidly accelerating output of WLAN modules and components. 

According to analysis by MIC, "Taiwanese WLAN shipment value hit US$288.1 million in the fourth quarter, growing 30% from the third quarter. 802.11g promotions by retail channel players such as Linksys and Netgear and increasing adoption of 802.11g modules by notebook PC vendors such as HPQ and Dell drove up Taiwanese shipment share of 801.11g, which reached 47%." 

Motherboards

Although in the mid-1990s Intel Corp. experimented with increasing its own internal production of motherboards - and in the

process effectively cut Taiwanese production by some 15 percent - the Santa Clara giant is now pursuing a rather different strategy. Intel has closed its motherboard facilities in Puerto Rico and Mexico and is now relying on outsourcing to Taiwan, notably to Honhai Precision. Simultaneously, brand leader AsusTek has moved into OEM production while also targeting the entry-level market via its Asrock entity. 

A mixed picture emerges of growing international market share, with Taiwan now producing some 85 - 90 percent of the world's mainboards, while volume OEM production by Honhai and AsusTek has put the squeeze on some of the smaller makers, especially at the low end.

Tseng, at Merrill Lynch, thinks growth of contract manufacturing at Honhai has particularly impacted Micro-Star International (MSI), which traditionally relies on OEM production for some 50 percent of its business, despite being a well known brand within the industry.

Tseng also thinks that Intel's introduction of the BTX form factor, this year, will tend to standardize production of "XPCs," the Small Form Factor type of PC that has, until now, been largely proprietary. This will tend to drive out smaller players, including some motherboard companies that had begun to diversify into small systems.

Robust growth

The rise of broadband communications has directly benefited Taiwan's equipment makers, and both xDSL and Cable products saw robust growth in the fourth quarter of last year. According to MIC, "Taiwanese xDSL equipment shipments grew 21.3% in the fourth quarter of 2003 to reach 6.1 million units. ADSL (Asymmetric Digital Subscriber Line) modem and router aggregately comprised 90% of Taiwanese shipments."

On the Cable side, says MIC, "Taiwanese cable modem shipments grew 23.1% sequentially to reach approximately 2.2 million units [in the fourth quarter of 2003], mainly due to robust seasonal demand in North American and West European markets. Demand in these areas pushed heavy growth in shipments from Taiwanese makers to international vendors and retail channel players."

Meanwhile, Tseng at Merrill Lynch notes that growth in mobile handsets has been slower than he anticipated. In 1999, Taiwan managed to secure a 3 - 4 percent market share. Today, though, market share in handsets stands at only 10 percent of outsourced production.

There are a couple of reasons for this slow growth. First, Nokia has been slow to adopt an outsourcing model. Second, Korean makers are gaining market share. It could be only a matter of time before Nokia outsources production to Asia, thinks Tseng, since Asian producers manage to offer a better cost structure.

Digital cameras

If there is one sector where the worn-out phrase "digital revolution" still applies, it is digital cameras. This sector places heavy demands on engineering design since it integrates optical and mechanical components with digital imaging on-chip. Nevertheless, while Japanese makers tend to dominate this market, Taiwan producers have found plenty of opportunities and in 2003 secured 30 - 40 percent of the global market.

Indeed, MIC indicates that Taiwan makers are moving production into the mainstream and high end. "Taiwanese DSC makers have continued to ship higher-resolution models. In the fourth quarter [of 2003] three MP (Megapixel) cameras comprised 36.1 percent of shipment volume, surpassing a two MP camera share of 35.6% and officially rendering three MP cameras the driving force behind Taiwanese DSC growth. Models between four and five MPs respectively increased to 13.5% and 6.6%."

Tseng at Merrill Lynch confirms there has been some outsourcing to Taiwan by US and Japanese vendors but warns that this year, Taiwan market share could fall to 25 percent, and that it is still a small market in terms of total revenue. Nevertheless, some of the smaller companies could benefit within certain segments. Tseng anticipates that color modules for camera phones will see three-fold growth this year, for instance.

Flat-panel fabrication

There is no doubt that Taiwan's flat-panel display industry, which now boasts at least six major players in fabrication, is a success story. Tseng at Merrill Lynch reckons Taiwan has now broken through the Japan barrier to become the world's number two panel producer. Despite price volatility, Taiwan panel makers are securing "decent" revenues. 

Taiwan's success follows major investment, compared to the more conservative Japanese and US players. Tseng comments he would like to see these ventures result in more of a foundry model than in something akin to the DRAM industry. The foundry model would "generate more positive returns." In the meantime, he is confident that worldwide demand for LCD TVs will result in a healthy climate for Taiwan's panel producers. 

MIC certainly reported a healthy Q403. "Taiwanese large-sized TFT LCD (Thin-Film Transistor Liquid Crystal Display) panel shipment volume grew 72% year on year to reach approximately 11.2 million units in the fourth quarter of 2003, despite a continued shortage in key components."

This was one occasion when Taiwan actually benefitted from price volatility. "Due to the global panel shortage and a sequential increase in the share of LCD TV panels, Taiwanese large size LCD panel ASP (Average Selling Price) increased 16% in the fourth quarter to US$237. Urged on by the rise in prices, shipment value saw a dramatic sequential gain of 35% to reach nearly US$2.7 billion."