Abstract

Although technology standardization and yield rate issues associated with LAN products have been overcome on the supply side, the industry is still heavily reliant on certain demand side factors to boost customer purchasing. For example, GbE NIC transmission speed is ten times faster than that of 100 Mbps Ethernet, and the price of 32 bit / 66 MHz GbE NIC has already dropped to US$33. However, current transmission speeds can already meet the needs of most multimedia applications and no killer applications requiring large quantities of bandwidth have appeared; in addition, there is still a very obvious disparity between the retail price of 100 Mbps NIC and GbE NIC. Consequently, 10/100M remains the mainstream NIC specification. 

The separation between LAN and WAN is no longer as clear-cut as in the past. With the spread of broadband networks and the diversification of network applications, integrated products that combine the features of LAN and WAN have gradually become more prominent. Additionally, computer network modules bundled with information and communications product platforms are adding value and broadening the scope of the computer network industry. 

Despite the global economic downturn, the number of computer network users worldwide is continuing to increase. With the ongoing innovation in LAN technology, and with maturing network applications, it is expected that the global LAN market will continue to grow, both in terms of potential markets and replacement demand.  

In the second half of 2002, although the global computer network industry will enjoy some growth compared to the first half of the year, there will be no significant increase in market demand outside of that seen during the traditional peak season. Operator expenditures remain low worldwide, and these companies continue to follow a strategy of tuning existing operations and de-emphasizing network construction. In the corporate sector, IT spending remains low as corporations try to cut back on costs to ride out the economic downturn. As far as the home user market is concerned, although new network products present considerable potential, layoffs, salary reductions, and loan repayments have reduced disposable income, hampering the strong demand originally expected.  

Although NIC shipments will contract slightly in the second half of 2002, hub, switch, WLAN and SOHO routers will continue to grow; shipment value will be slightly higher than the US$661.8 million achieved in the first half of 2002. Despite the rapid contraction of the global telecommunications market since the second half of 2000, the Taiwanese LAN industry was less affected as manufacturers are more oriented toward the SME and the home market, where the impact of the economic downturn was less severe, as opposed to the operator and large enterprise market.   

NIC

It is expected that motherboard manufacturers will become more willing to use LOM, and that LOM will be built into more mid-range and high-end models. The second half of 2002 will see a higher concentration of GbE production volume among a handful of large manufacturers. Shipment value will fall due to price competition among Taiwanese chip companies and further erosion of unit price. 

Hub and Switch

The fall of switch chip prices will become less pronounced than it has been since 2001, mainly due slowing price erosion of layer 2 10/100M unmanaged switches. It is expected that in the fourth quarter of 2002 GbE switch makers will move beyond trial manufacturing and begin mass production. 

Faced with both the shrinking profit margins of unmanaged switches and the inability to compete against the economies of scale of large manufacturers, second tier makers will switch production over to managed switches.   

WLAN

Taiwan's five leading WLAN manufacturers have all established strategic alliances or solid manufacturing relationships with leading international vendors; Taiwan will thus likely maintain its position as the global WLAN industry's main center of production. Taiwanese WLAN chip companies are beginning to see results from the effort they have invested into WLAN baseband chip R&D; however, mass production of 802.11b chips is unlikely to begin in Taiwan before the first half of 2003. 

Many IT companies will be working to develop value line Access Point and WLAN NIC products in the second half of 2002, further closing the gap between price and manufacturing cost. Taiwanese makers will encounter difficulty developing WLAN products with higher profit margins due to a number of factors:  a lack of RF (Radio Frequency) R&D capability, exclusion from involvement in the establishment of new standards, and a lack of necessary network software design capability. At the same time, Taiwanese makers are now facing fierce competition in the value line WLAN market, which will likely have a negative impact on Taiwanese WLAN industry shipment value in the second half of 2002. 

SOHO router

The lack of differentiation between basic type SOHO routers has brought about intense price competition.  However, as Taiwanese key component manufacturers improve yield rates and mass production of chips begins, SOHO router manufacturers will have some room for price reductions; in addition, branded manufacturers will be able to enhance the competitiveness of their products. 

As basic-type SOHO router profits fall, international vendors will be forced to focus more on either providing value added network functions or hastening the development advanced-type routers using WLAN, VoIP, or VPN technology. However, market demand for these products is limited, and Taiwanese manufacturers will need time to acquire both the necessary network management software design capability, which chip design companies cannot provide, and production process tuning capability. It is thus unlikely that the Taiwanese manufacturers will be receiving any significant quantity of orders for advanced-type SOHO routers from international vendors in the second half of 2002. 

Competition from EMS Providers and Chinese Makers

The completion that Chinese LAN manufacturers pose to the Taiwanese LAN industry is becoming increasingly obvious. Chinese LAN makers began manufacturing value-line 10/100 NIC, taking advantage of economies of scale and the large domestic market that helps incubate branded manufacturing. Chinese makers have subsequently taken market share from Taiwanese LAN manufacturers. 

Some Taiwanese LAN manufacturers have tried to overcome the limitations imposed by the small size of the Taiwanese domestic market by moving branded manufacturing to China, as well as gaining closer proximity to the Chinese market.  These manufacturers are aiming to gradually build up experience in market demand appraisal, production specification design, marketing, distribution, and after-sales service. However, given the vastness of China, market demand varies between regions, and most Taiwanese manufacturers have been unable to go beyond the formation of strategic alliances with local Chinese companies. As for those companies that have been able to establish brand recognition in China, as they try to expand their business they encounter problems with funding, inventory, and personnel turnover. At the same time, Chinese LAN companies are becoming steadily stronger. Some Taiwanese companies find themselves forced to abandon their collaboration with local Chinese firms and abandon plans for developing the China market. 

Taiwanese manufacturers have competed with European and US EMS providers for years. With the global economic downturn and consequent reduction in demand, EMS providers were occupied with restructuring and adjusting global production capacity and product lines. The Taiwanese LAN industry was thus able to secure more orders from leading international vendors in 2001, giving Taiwanese makers a temporary advantage. However, EMS providers are likely to make a comeback once global production capacity adjustments are completed.  

Taiwanese LAN manufacturers are particularly strong in materials purchasing, manufacturing/assembly, as well as warehousing and distribution. EMS production facilities in China are already beginning mass production, and component industry clusters have started to form in Shenzhen, Dongguan, and near Shanghai. If Taiwanese LAN manufacturers are unable to strengthen R&D and design capabilities, gain more control over the setting of standards, or develop branded manufacturing and after-sales service systems, they will take on losses and not make effective use of their distribution channels. They may even need to sell production sites in China to EMS providers. 

EMS providers are unlikely to compete with Taiwanese manufacturers in mature product sectors such as 10/100M NIC, hubs, layer 2 switches and basic-type SOHO routers given the low profits these products entail. By contrast, GbE NIC, layer 3 switches, optical switches, and advanced-type SOHO routers all require network management function design capability. In the short term, demand for these products will likely come from telecommunications operators and the corporate sector, with small-scale production of a wide variety of different products. In order to maintain their core technology, leading international vendors will be wary about outsourcing production of these products; these product sectors will hence become the main focus of competition between EMS providers and Taiwanese LAN manufacturers. 

One key factor impacting competition between Taiwanese LAN manufacturers and EMS providers will be Taiwanese LAN industry's ability to extend the existing level of vertical integration. Taiwanese networking chip production lines have been diversified to include NIC, hub, switch, and SOHO router chips. It is expected that this expansion of key component production will help Taiwan's LAN manufacturers to reduce the cost of materials purchasing, while also accelerating product upgrades and the adjusting of production capacity to manufacture new generations of products. 

Both leading international brand name vendors and distributors have also outsourced manufacturing to Taiwanese makers, and the downturn in the global LAN market has encouraged the leading international vendors to outsource more of their production. However, the relationships with international vendors that EMS providers have built are both broader and closer than those of Taiwanese LAN manufacturers, and they are thus better positioned to develop these potential LAN markets. It is anticipated that LAN manufacturing models will become more diversified, and in the short term EMS providers will assist non-LAN customers with LAN production. EMS providers will then be able to leverage their "one-stop shopping" service to secure LAN orders from vendors that want to develop other products in addition to LAN, which is likely to pose a substantial threat to Taiwanese manufacturers in the long term.

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