Taiwanese Blunder: Taiwan PC Makers Going in Wrong Direction

Within the past few days, I read an article in the Wall Street Journal (WSJ) about how Taiwan PC makers, who have until now been making most of the PCs manufactured in the world, are feeling price pressure competition from China. The feeling in Taiwan is that their PC manufacturing business, as it is currently constituted, is starting to die. The main indication of this is shrinking profit margins.

Clearly, the Taiwan PC manufacturers need to respond in some way. Their response however, as reported in the WSJ, looks like a classic blunder to me. The WSJ reports that they are planning to start branding their PCs themselves. The general form of this blunder is as follows. A manufacturer starts to be forced out of a previous niche. The company responds by saying, "I am about this type of product. What new skills can I acquire to remain competitive in this market?"

The response should be, "I am about these types of skills. What new product can I find to apply these skills to?" Clearly, the skill set would probably need to be modified somewhat to be applied to a new type of product.

In regard to the specific situation of the Taiwan PC manufacturers, the manufacturers see themselves as "PC people." They are going to respond to the crisis by learning how to brand and market PCs, which would largely be done in the United States, Europe, and Japan which make up the bulk of the world market. Their reasoning probably go something like this. "I understand the PC product well. Until recently, I have been manufacturing them profitably. This is something that HP and Dell haven't been able to do for years in their own factories. Compared to manufacturing, branding and marketing seems pretty easy. And there's a bigger mark up in that part of the business."

This is a recipe for disaster. Anyone competing successfully in today's competitive world market, possesses a set of sophisticated skills that they developed over time with considerable effort. Everything is considerably more difficult than it looks. The Taiwan PC manufacturers will fail in their effort to brand and market PCs because they know nothing about how to do it and there is no reason to think they will be able to catch up with those who do. The advantages of vertical integration will prove marginal.

What should they do? It seems to me that one possible good answer would be to look for technical manufacturing niches they can evolve into. They should look for a number of products to replace their current single product because none of the new products will be as big as the PC. Learning how to manufacture more technically difficult products will require the development of new skills and the purchase of new equipment. But the skills needed would be an extension of skills they currently have so expanding into these areas would be an organic and natural progression.

Another possible good the answer would be to try to move into the novelty manufacturing area, possibly by forming partnerships with current novelty manufacturing companies (for products such as alarm clocks). These companies excel in things like plastic manufacture, rapid realignment of assembly lines, and stringent price control. However, they are relatively unsophisticated in the area of electronics. A strategy could be developed to upgrade the sophistication of electronics and novelty products while containing costs.