BenQ’s CEO sees China’s IT manufacturing power rising

SUZHOU, CHINA — Taiwanese companies make most of the IT hardware produced in China for the global market, while most Chinese hardware companies are focused on making products for domestic consumption. But that will change in coming years as Chinese companies look to produce more of the world’s IT hardware, according to the chief executive of Taiwanese electronics maker BenQ Corp.

“Eventually, Chinese companies — local companies here — will grow up to become serious competitors,” said K.Y. Lee, the chairman and chief executive officer of BenQ, during an interview last week in Suzhou, China, where the company operates seven factories.

While the names of the Taiwanese companies will be unknown to most users, the IT industry could not function without them. Manufacturers such as Hon Hai Precision Industry Co.and Quanta Computer churn out millions of motherboards, monitors, mobile phones, laptop computers, and other products every year at their factories in China, under contract with better known companies such as IBM, Hewlett-Packard, Dell, and many others.

Contract manufacturing is a brutal business. The Taiwanese companies face continuous pressure from their customers to cut costs and they must constantly look for the lowest-cost ways to manufacture their products, Lee said. In coming years, this will likely mean moving their factories from China’s increasingly prosperous — and costly — coastal regions to less developed areas in China’s interior, or perhaps to areas outside of China such as Vietnam or Africa, he said.

Faced with this challenge, BenQ, which was formerly called Acer Communications & Multimedia, began a push in 2001 to build a business selling its own products, including LCD (liquid crystal display) monitors, MP3 players and projectors, under the BenQ brand alongside its existing contract manufacturing business. By selling products under its own brand, the company is able to earn greater profit margins than would otherwise be possible as a contract manufacturer, Lee said.

Taiwanese companies that decide to stick with contract manufacturing, or are unable to build a branded businesses, face the growing threat of competition from Chinese companies that understand the contract manufacturing business and have access to a pool of local executives trained by their Taiwanese rivals, Lee said.

But don’t expect to see a company like Lenovo Group Ltd., which recently grabbed headlines with its acquisition of IBM’s PC business, take a leading manufacturing role any time soon.

“Lenovo was a distribution company, they were not a manufacturing company,” Lee said, referring to Lenovo’s origins as a Chinese distributor of multinational PC brands. Only those Chinese companies with a strong manufacturing background and an in-depth understanding of the contract manufacturing business will be able to successfully step into this role, he said.

One company that fits this bill is BYD Co. in Shenzhen, China, which manufactures rechargeable batteries for laptops and mobile phones, Lee said. “They’re the largest battery maker in China and now they are trying to imitate the Taiwanese (contract manufacturing) business model,” he said.

Another contender is Guangdong Galanz Enterprise Group Co., of Shunde, China, the word’s largest manufacturer of microwave ovens, which is headed in a similar direction, Lee said.

Unseating Taiwanese dominance over PC manufacturing won’t be easy for companies like BYD and Galanz since the established players are well entrenched, Lee said. Instead of competing with their Taiwanese rivals head on in this area, Chinese companies may first try to tap into demand for other products where Taiwanese companies are not as strong, such as mobile phones, before expanding into other areas, he said.

“This is just a matter of time,” Lee said.