Abstract

Second-Tier Players to Spur Competition

Taiwanese WAN product lines gradually expanded from analog modems and ISDN to encompass ADSL and cable modems in the late 1990s. Several factors contributed to this shift. Firstly, Taiwanese xDSL makers formed alliances with international CO equipment vendors to secure broadband equipment procurement. Cable modem manufacturers focused on key component R&D; additionally, by rapidly obtaining interoperability certification, these makers gained a measure of control over  the evolution of product specifications. Taiwanese players further brought down costs, and outpaced competitors in time-to-market.

At present, second tier Taiwanese makers have won orders from a considerable number of new customers due to business opportunities presented by a steadily expanding worldwide broadband market. Second tier makers and smaller xDSL manufacturers have developed their businesses owing to first tier manufacturers' current focus on the North American and Japanese markets. Zyxel and D-Link have been developing in the German, French, Spanish and Italian markets while XAVi and ASUS have been concentrating on the Chinese market by filling orders for other Taiwanese manufacturers and local Chinese communications equipment vendors.

In the second half of 2002 first tier manufacturers' share of broadband equipment shipment volume fell significantly while the share of second tier and small makers rose, which is expected to aid in stimulating healthy competition between manufacturers. Makers will be encouraged to strengthen R&D and to develop new customers rather than limit their focus to price competition. In the past second tier and smaller manufacturers have primarily emphasized production on value-line devices that first tier makers were no longer producing. However, the growing competitiveness of second tier makers will accelerate an industry shakeout, paving the way for the emergence of globally competitive players.

New Opportunities in China

Provinces and municipalities throughout China launched broadband Internet access service following the spin-off of China Netcom from China Telecom in mid-2002. Provincial branches of China Telecom and China Netcom began the deployment of large-scale broadband networks in collaboration with local government authorities. Broadband subscribers in China grew rapidly from approximately 800,000 in 2001 to roughly 2.5 million in 2002. The size of the Chinese broadband market is expected to draw near that of Japan's in 2003 en route to becoming the largest in Asia. Taiwanese makers began marketing products to China in 2001 and became the leading producers for major Chinese broadband equipment vendors ZTE and Huawei in 2002.

However, Taiwanese manufacturers now face competition from small and medium-sized Chinese manufacturers. Chinese makers already constitute a threat to Taiwanese manufacturers in analog modem production and are starting to catch up with xDSL product lines. Value-line analog modem manufacturers such as TP-Link, Start, and QXCOMM are likely to pose direct competition to Taiwanese manufacturers for Chinese market share. As broadband technology reaches maturity entry barriers are increasingly lowered. Through close collaboration with IC suppliers that can provide key components, protocol software stack, and reference design, system makers can develop broadband products quite rapidly. Chinese manufacturers are anticipated to leverage the large procurement volume of the Chinese market and inexpensive labor to rapidly narrow the gap with Taiwanese makers.

As the threat from Chinese competitors steadily grows, Taiwanese manufacturers will need to evaluate their customer relationships, production strategy, and sales channels. Taiwanese makers will have to strengthen relationships with Chinese communications equipment makers such as ZTE and Huawei. In addition, Taiwanese manufacturers will be pressed to shift production to China in order to reduce labor and land costs. Although Taiwanese makers lack the local connections that Chinese manufacturers enjoy, Taiwanese makers can strengthen relationships with local system integrators and agents in order to secure business from local Chinese operators and ISPs. 2003 is expected to a crucial year for Taiwanese makers in their development of the Chinese broadband market owing to government broadband development policies and movements from Chinese operators to capitalize on growing demand.