Nations Of Notebooks

Love your laptop? No matter what brand is on the outside, the brand inside says, "Made in Taiwan." Here's the story behind Horace Tsiang and four of his top suppliers -- entrepreneurs who assembled an industry and produced a fast country.

Summer heat covers downtown Taipei like a wet wool blanket. Motor scooters swarm around masses of cars stalled in Rome-like traffic, turning the road into a linear parking lot. Horace Tisane, the 55-year-old CEO of First International Computer Inc. (FIC), a $1.1 billion manufacturer of notebook computers, motherboards, and PC systems, shifts restlessly behind the wheel of his nondescript black Mitsubishi sedan. Finally, after what seems an interminable wait, he pulls slowly onto Taiwan's only major highway, heading south to Linkou, a Taipei suburb 12 miles away and home to FIC's manufacturing facilities.

Five years ago Tsiang, a Chinese-American and former R&D chief at Wang Laboratories Inc., came here to take over the day-to-day operations at FIC, an affiliate of Formosa Plastics Group, Taiwan's largest industrial conglomerate. Today, under Tsiang's leadership, FIC is the second largest and fastest growing notebook manufacturer in Taiwan. And Taiwan has achieved its goal of becoming the center of the notebook manufacturing world. Tsiang and his Taiwanese competitors -- companies with obscure names like Inventec, Twinhead, Quanta, and ASE -- accomplished this remarkable feat by perfecting their business model. Tsiang's FIC, with its 4,500 employees worldwide, is a contract manufacturer or OEM (original equipment manufacturer) for the world's most famous name-brand computer companies.

Take a look at your own sleek, powerful laptop. If it bears the brand of Compaq, Dell, Apple, NEC, Texas Instruments, IBM or other companies modestly referred to on FIC's homepage as "the most famous names in the international computer industry," chances are it's a Taiwanese product. When it comes to notebook computers, Taiwan is the unchallenged champion, last year surpassing Japan as the world's leading notebook manufacturer.

Today Taiwan owns roughly 30% of the 12.7 million unit world notebook market. Taiwan's notebook makers and their tightly integrated circle of suppliers are on a growth tear, turning out 3.6 million units in 1996, forecast to grow 20% in 1997. In a global economy of fast companies competing in the fastest of industries, Taiwan has been willing to do what it takes to establish itself as a fast country.

"What Taiwan brings to the party is very fast development, quick time to market, low cost -- and a manufacturing capability that is very flexible and very responsive," says John Sedmak, vice president of notebook computing at Dell Computer Corp. in Austin, Texas. To drive FIC toward the top of the notebook industry's unforgiving competition, Horace Tsiang has delivered what the brand-name computer companies are looking for. And he has done it in near-record time. In January 1994, FIC shipped its first product -- a mere 14 notebook computers. By July 1996, FIC was shipping 35,500 notebooks per month. According to Tsiang's projections, FIC should pass the 80,000 units-per-month mark during 1997.

For anyone seeking lessons in -- and ultimately warnings about -- the art of industry creation and domination, Taiwan, Tsiang, and the notebook computer business offer ample instruction.

The business model here is a simple but potent mixture of speed, flexibility, cost control, connections, and attitude. One business proposition dominates: do whatever it takes to make the customer happy. Over the past decade, the Taiwanese have melded their way of working and their culture into a winning business system, manufacturing an entire industry with the same precision they use to manufacture the product itself. A notebook computer consists of 2,000 parts from 300 suppliers; FIC and the other assemblers are merely the largest, most visible link in a fast, cheap, and reliable national supply chain.

"It is better to be the head of the chicken than the tail of the ox," say the Taiwanese. The slogan defines the country's business model: More than 800,000 small and medium-sized businesses make up 95% of the country's economy. Of the 4,000 technology companies, 85% have less than $2 million in capital. The system has turned Taiwan into the world's high-tech manufacturer: this tiny island of 21 million people accounts for more than half of the world market share in keyboards, monitors, scanners, mouses, and motherboards. In 1995 Taiwan shipped more than $14 billion worth of IT hardware to the world.

To see how Taiwan's notebook computer industry operates is to journey into the hot, crowded, and seemingly incomprehensible streets and back alleys in and around Taipei -- an Escher-like maze of places and players, each an essential piece in the national manufacturing system.

The Top of Mt. FIC

Tsiang's 12-mile drive to Linkou takes him through dreary, crowded industrial neighborhoods, up curving roads to the company's red-rimmed mountaintop plant. By any measurement, FIC is a large, successful company. It operates 11 factories and final-assembly centers worldwide. Its affiliation with Formosa Plastics, an $11 billion plastics empire, gives Tsiang substantial advantages. For example, the mountain on which FIC's plant is located is owned by Formosa Plastics. Roughly 300 foreign laborers, most from the Philippines, live here in spare dormitories and eat in the company cafeteria. Company-owned buses deliver another 1,200 employees each morning.

FIC's relationship with Formosa Plastics has also helped Tsiang find his way in the national supply chain. Taiwan, says Tsiang, is an economy of connections -- or Guanxi in Mandarin. In fact, five years ago, when Tsiang arrived in Taipei, the first thing he did was to identify the best purchasing people in FIC and, with them, call on hundreds of suppliers. "I visited everyone," Tsiang says. "I looked at their experience and quality. My key question was, Can they meet our standards?"

For all the resources at FIC's disposal, what distinguishes this company as Taiwanese is its attention to the same critical success factors as its smaller, less wealthy suppliers. FIC is just as passionate about speed, flexibility, cost cutting, and relentless customer service as the tiny mom-and-pop parts makers.

It's an attitude that Tsiang has wholeheartedly embraced, which is why he rarely works out of his impressive corner office in FIC's downtown Taipei headquarters. He prefers to be in Linkou, where his white-tiled office is decidedly un-CEO-like: the walls are bare, except for one whiteboard covered with unit shipment forecasts. He has an FIC housebrand notebook computer on a small, round conference table, and his unpretentious desk is covered with reports and updated analyses of the competition.

Just down the hall from Tsiang's office, in a small conference room, a group of 20 young FIC engineers sit around a long table with two visiting Texas Instruments engineers, plotting the trial run to take a new TI Extensa notebook into mass production. The schedule calls for the new 133 megahertz, Pentium-based, 1.3 gigabyte color notebook with built-in CD-ROM to go into production one month and debut in the market the next. Speed is everything: the entire process, from initial design to production, will take only six months.

These young, enthusiastic engineers -- the oldest is 33 -- work 80-hour weeks and earn as much as $3,000 per month, a figure that can double with year-end bonuses. They are paid to grapple with quicksilver technology, a product set that changes so rapidly it is impossible to hold. Here is where FIC's speed and flexibility are put to the test.

No sooner do the engineers design a box using Intel's 133 megahertz Pentium processor than Intel announces a 150 megahertz version. The market shifts, customers hold o/ buying, and inventories back up. Last year, CD-ROM drives running at twice the speed of music CD players were replaced as standard equipment by drives running four times as fast -- and then within months, six times. Screen sizes change, components go from scarcity to surplus, material costs fluctuate dramatically, throwing o/ pricing, upsetting inventories.

To handle this dynamic environment, three years ago Tsiang brought in a new manufacturing team lead by Michelle Hsieh, a young U.S.-trained engineer with a degree in electrical engineering from Taiwan University, to revamp completely the manufacturing operation. "There was a lot of resistance," Tsiang says. "Our manufacturing people had seen the notebook effort fail time and again, so they were just waiting for this one to be killed."

Hsieh, a diminutive, dark-haired 36-year-old, set up the first assembly line, altering what had been a desktop computer line to handle notebooks. In the modern, three-story factory, FIC builds both motherboards and notebook computers. The converted warehouse, with 20,000 square feet of space on each floor, epitomizes FIC's efficiency. Even the workforce is colorcoded: line workers wear yellow shirts, quality assurance engineers wear pink, and R&D engineers are in blue.

There are 350 workers building notebook computers, turning out 2,000 units per day. "We needed to improve quality, efficiency, and scheduling, which is a tough challenge when you have to work so cheaply," Hsieh says. Material costs drop an average of 6% every quarter -- LCD prices dropped from $500 to $400 in one month, for example -- and material shortages are a regular event, making forecasting nearly impossible.

Hsieh's operation is remarkably efficient: she recently instituted a multifunctional production line, using 5 people to perform the tasks once handled by 25. But, says Hsieh, finding the labor force to handle such advanced production is difficult. At FIC, for example, more than 90% of the line workers are foreigners or high-school students who work in three-month internships. The Philippino workers earn NT$14,800 (New Taiwan dollars) a month, roughly U.S.$548, along with room and board.

The workers lean over the moving line of parts with unbroken intensity, hardly noticing a foreign visitor. They work 8 1/2- hour shifts with two 10-minute breaks and a 30-minute lunch break. Hsieh's attention to detail and relentless cost-consciousness are paying o/ for FIC: labor costs are less than $70 per unit or 1% of the total of the finished product; she now has three lines working in 8-hour shifts, 24 hours a day.

Tsiang's other reason for working out of the FIC mountaintop plant is to stay in close contact with his purchasing department. The manufacturing system depends on the smooth operation of the supply chain. So young associates like Peter Lee and Kevin Huang spend their days talking on the phone, greeting the suppliers who visit FIC regularly to make sure that their large customer is happy, or going out to visit FIC's multilevel tiers of suppliers. It's a management task that holds the key to FIC's future: Tsiang still travels regularly with his purchasing people to every corner of Taipei searching for the fastest, most flexible, and most cost-efficient component makers in the supply chain.

Four Levels, One Ethic

Hidden amid the grim squalor of Taipei's crowded suburbs like Shin Chuang and Taoyuan, are the remarkable factories that supply the thousands of pieces that fit together to make a notebook computer. Negotiate a labyrinth of back streets, turn down a narrow alley where drying clothes hang on lines and there, where you least expect it, you'll find a sophisticated tooling company or a flexible printed circuit board maker.

The network is a vast web of mutually advantageous connections -- Guanxi. It flourishes because of a common goal: to wring a profit out of an intensely competitive, low-margin business. Its members share a common ethic: do whatever it takes to satisfy the customer. Today the FIC supply team sets out to look in on four different suppliers, ranging from a long-standing components manufacturer to a brand new startup in the service area.

The first stop is to Hsin Chung, a Taipei district, where Sando Chen, a 43-year-old former chemical engineer, leads a tour of Pucka Industrial Co., the flexible printed circuit board maker he founded 10 years ago. Chen is an affable, handsome businessman who has traveled extensively to set up global relationships for Pucka (the name means "hard work"). He has plants in Singapore and Shanghai, and partnerships with overseas companies such as Teradyne, Parlex, and Samsung. Pucka builds circuitry for Microsoft keyboards and Mercedes-Benz car phones. But more than 50% of its business is in notebook computers.

Pucka's operation offers an object lesson in how the Taiwanese squeeze costs out of the notebook computer. The factory is cramped but tightly integrated, a testament to space management in a country where space is at a premium. Chen smiles when he talks about the notebook business. "It's very exciting," he says. "Every day there is a challenge to make things very thin, very small, very light. We think about how to reduce cost dimensions and expand our flexibility for our customers." In fact, four words define Taiwan's notebook business: ching, buo, dwan, chow -- lighter, thinner, shorter, smaller.

Inside the factory, the complex, multiple-layered printed circuits are first etched in copper, then transferred to film and onto thin plastic polymers. Using techniques developed in Japan, Pucka's workers sandwich together up to 10 layers of circuits into one board in order to fit all the needed electronics into the tiny notebook package.

The smell of film-processing chemicals is pervasive and dizzying in the intense heat. Workers in blue smocks and paper bonnets move through a hot, open room where automated etching systems dance like a robotic spider on the copper plates printing the Weblike circuits. Palettes of stacked printed circuit boards four feet high are everywhere. In an air-conditioned office, young women scan each board for defects using their own vision and automated testing equipment. Chen has 160 employees in his factory; 15 are devoted to quality assurance and control.

Chen's twin passions are cutting costs and boosting efficiency. Two years ago, he says, a design change would take eight weeks; today Pucka can do it in half the time because of new equipment and improved worker training. Like all the other companies in the Taiwanese system, Chen's labor practices are designed to keep costs low: he hires young, inexperienced Taiwanese and brings in foreign workers from the Philippines or Malaysia.

According to Chen, the $50 million company enjoys profit margins of 15% to 20%; the notebook business is growing at a steady 30% a year. The point, he says, is that relationships are everything: a Pucka salesman visits FIC every day to make sure all needs are met. "Our policy is 24-hour access for our customers," he says. "We do whatever they want."

The next stop after Pucka is Chan Soong Industrial (CSI), a plastic-injection-molding supplier in Taoyuan, another Taipei suburb. In the car, Tsiang says CSI ranks as one of FIC's best suppliers. When Tsiang and his team arrive, "Jaguar" Tony Chang receives them in a conference room filled with hundreds of empty plastic notebook computer cases -- representing every major notebook maker from Apple to IBM. Chang is the 43-year-old general manager of CSI, an industry veteran, who spent 17 years working in the plastics field before joining CSI in 1987. By Taiwan standards, Chang is wealthy, a man in a position to indulge his penchant for expensive European cars, particularly sleek Jaguars. His late model XJ-6 sits out front of the nondescript factory next to CSI President John Chen's Mercedes.

Chang's wide network of relationships helped pave CSI's smooth entry into the notebook field, starting with a deal with Twinhead, Taiwan's notebook pioneer. CSI now has a 50% market share, producing 100,000 units a month for a variety of notebook manufacturers. Since 1992, CSI has doubled the number of its employees to 120 and tripled its plant area; overall the company has grown 166% to $25 million in sales.

"We work very hard in the right way," Chang says. "If you don't do it right, you lose your dignity. Respect is very important in our culture. Everyone wants to get their product to market. It's always urgent and changes are not on the schedule."

CSI recently opened two new factories to meet demand. Chang says the company will work 24 hours a day, 7 days a week to meet its schedules. Its manufacturing approach, Chang says, is designed to minimize the waste and inefficiency that come with errors detected late in the process. CSI first builds 100 "try shots" or samples; it then begins production runs in incremental jumps, from 1,000 to 10,000 and on up. If there is a flaw, Chang says, CSI absorbs all the costs.

Tsiang recalls a battery-pack casing that CSI built. During the ramp-up in the production of the notebook, FIC discovered the battery pack was overheating and the engineers needed to make holes for ventilation. "CSI made the change in three days," Tsiang says admiringly. "They'll do whatever it takes. They'll redo it until it's right."

Not far away, on Fu Ying Road, a cramped, dingy sidestreet in Shin Chuang, Y.S. Chen, a 42-year-old former factory worker, sits in the second-floor office of the company he founded 16 years ago, aptly named Power Success Co. He and his family live in an apartment in the same drab gray building. Chen works from 8 a.m. to midnight seven days a week, overseeing his 28 employees who are tooling the steel molds that create the plastic cases for the notebook computers.

This visit is, in part, a chance to see Power Success Co.'s proudest corporate icon: in a glass case hangs a note of commendation from an IBM executive in the United States. In July 1995, IBM requested a design modification, through ASE, its Taiwanese OEM, for its newest Thinkpad notebook. IBM needed the modification in two days. Even under ideal circumstances, it was a five-day job. Chen set the already-stressed factory into overdrive, operated around the clock, and provided the changes on time. It never occurred to him not to meet the customer's request.

The letter is one form of religious icon. Above the shop floor where several workers cut and buff the steel molds, incense burns around a laughing Buddha and wafts into the shop. Is this a manifestation of the Confucian culture, the spiritual component of the deeply ingrained work ethic that permeates the Taiwanese economy? Chen laughs. This, he explains, is a more worldly kind of god: "He helps us earn much money."

Chen himself has a brand new Volvo 960 sitting out front of the factory and a large-screen television in his office. But he has no time to enjoy these luxuries. He has built a strong reputation for delivering high quality, low cost, and on time -- giving him connections with nearly every major notebook maker in Taiwan. Revenues have nearly tripled since 1992 to $3 million. "We're at full capacity now," Chen says. "And we expect to be for the next 30 months."

The last stop of the day is in the Taipei suburbs of the Pau-Tou-Tsuo Valley near Linkou, where the smallest supplier is headquartered -- and where the Taiwanese business model is in full relief. There on a quiet hilltop is GesTek, the global EMC Standard Technology Corp. GesTek is a one-year-old startup with 17 employees and revenues of $1.5 million whose job is to test the electromagnetic interference, or EMI, levels of notebook computers. EMI is one of the most serious problems facing notebook makers: the tight design and high speed of the processors make the EMI far worse than in desktop PCs. Because these units can interfere with communications on airplanes and interrupt radio, television, and emergency broadcasting, both the United States and European nations have issued strict regulations governing EMI.

Raymond Chang, a 37-year-old engineer and entrepreneur, saw a business opportunity in this technological problem and came out to this rolling open space outside Taipei to set up shop. By positioning the test center in the center of a deep valley, Chang's company cuts down on radio waves and other interference, improving on the tests and delivering superior results to his customers.

In many ways Chang typifies the young Taiwanese entrepreneur. He is highly educated and experienced. He is also willing to do whatever it takes to succeed -- including working from 8 a.m. to midnight, seven days a week, as he did for the first six months of GesTek's life. Chang already has plans for the growth and expansion of his young company. Today he says 40% of his business comes from the notebook computer industry -- but he tests all types of electronic equipment. "It is dangerous to depend on just one product," he says.

Offshore Moves Offshore

It has taken Taiwan the better part of a decade -- and Tsiang half that time -- to rise to global dominance in the notebook business. And yet, for the uniformity of the country's business model and the singleness of purpose with which companies at all levels of the supply chain participate, Taiwan's position seems fragile and tenuous -- a lesson in what it takes not only to achieve competitive leadership but also to sustain it.

For one thing, as hard as the Taiwanese work at every level of the supply chain, success delivers little in the way of security or comfort. Notebook manufacturing as an OEM has unlimited pressures and limited rewards. The OEM deals are almost always structured so that the Taiwanese manufacturers assume all the risk and carry all the inventory. If prices shift, markets veer, or technology changes, the burden falls on the Taiwanese, not the U.S. or Japanese computer companies. Even when times are good, the margins are always thin: with net profits of 3% to 4%, the Taiwanese measure prosperity in small increments.

More troubling, the business model on which Taiwan's success is built has little or nothing that is globally distinctive. Tsiang, who saw more complex competitive dynamics in his years at Wang Laboratories, looks at the notebook manufacturing business as virtually a turnkey operation. In fact, says Tsiang, a savvy entrepreneur armed with a lot of cash could get into the notebook business without a single employee. All the parts can be purchased from suppliers, the design contracted out to design firms.

Even the tightly knit relationships that make the Taiwanese system run are subject to the relentless cost pressures of global competition. United States producers look at Taiwan and think of it as "offshore" production; the Taiwanese know that offshore is already moving offshore. The big notebook players in Taiwan have established manufacturing plants in Malaysia, Thailand, and mainland China, looking for new ways to squeeze costs. FIC, for example, ships pieces of entry-level notebooks to assembly plants in China where workers receive one-eighth the pay of the Taiwanese. At the moment, cost savings are slim: the efficiency in China is half that in Taiwan, the quality is still poor, and the supply chain has yet to materialize.

Nonetheless, farsighted players in the Taiwanese network can see the trajectory of the future. "Jaguar" Tony Chang, for example, understands what it will take to keep his place in the production chain. When he hears of impending competition from China or other new entries in the manufacturing network, Chang smiles. "It will be at least three years before they get this capability," he says. "And we will follow our customers. Where they go, we will go."

For his part, Tsiang casts an experienced eye on the toll that competition takes. When he came to Taiwan five years ago, there were more than 50 notebook computer makers. Today there are 22. "There will be a big shake-up in the notebook industry in Taiwan," says Tsiang. "There are more companies than customers."

Glenn Rifkin (grifkinb@aol.com) writes about business and technology from Boston.

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