Nations Of Notebooks

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.