The Taiwanese LAN industry is expected to maintain growth in 2003. However, given slack demand anticipated in the first half of 2003, shipment value during this period is expected to decrease 7.0% from the second half of 2002. However, shipment value in the first half of 2003 is likely to constitute year-on-year growth of 6.1% from the first half of 2002, reaching US$804.7 million. Shipment value growth is expected to be fuelled by switches, WLAN, SOHO routers, firewall hardware, load-balance devices, and transceivers for xDSL and other network types.
The shipment value shares of hub/switch, WLAN, SOHO router, and NIC are expected to be 31.2%, 30.6%, 30.1%, and 8.1% respectively in the first half of 2003. Only WLAN is likely to post growth in shipment value share from the second half of 2002, rising from 24.9% to 30.6%. Plummeting prices are chipping away SOHO router shipment value, and value share is expected to drive down from 32.8% in the second half of 2002.
The main challenge for Taiwanese LAN manufacturers from 1995 to 2000 was meeting rapidly rising demand for network equipment accompanying the global Internet boom. These makers relied heavily upon technology and process innovation, acquisitions and strategic alliances, rapid time-to-market, and responsiveness to Internet user needs. Thus, Taiwanese manufacturers were able to gain a strong position in several segments simultaneously. However, the global LAN industry has been changing since 2001 and challenges currently facing Taiwanese LAN players are consequently more complex.
Taiwanese LAN players will not be the greatest beneficiaries of product generation shifts. For example, although demand for 3C Internet connection still exists, motherboard makers' LOM has squeezed NIC market share. At the same time, WLAN in notebook PCs is being modularized and built into the system. However, Taiwanese PC system manufacturers already engaged in wireless communications R&D are likely to benefit from growth of WLAN, which would aid these makers in expanding product offering and developing new business.
The trend towards modularization of network products is creating a new, integrated information, communications, and consumer electronics market. Outside of Taiwan, companies such as Dell are rolling out switches. In Taiwan, significant developments include the standardization of Ethernet, price reductions, function integration by Taiwanese manufacturers of motherboards, desktop and notebook PCs, industrial computers, and computer peripherals, as well as continuous innovation and low prices from key component suppliers. In addition, the rising number of worldwide Internet users, integration of voice and video in multimedia applications, and emergence of FTTx all signal ongoing growth in the future. The shift away from stand-alone LAN products to modules is already manifested in the roadmaps for products such as WLAN AP, SOHO routers, and multi-service switches.
With a rising number of Chinese and Korean makers and the presence of growing numbers of channel players, price competition is intensifying, thinning-out margins in ODM/OEM production. Competition from Chinese and Korean makers is growing on many fronts, including control of key components, R&D for high-end network management functions, time-to-market, and cost controls. To reduce the cost disparities between Taiwanese manufacturers and competitors, Taiwanese makers are continuing to shift production capacity to China. In addition, Taiwanese players are likely to also utilize Chinese talent for sales, R&D, and administration to further lower costs in the future. Additionally, Taiwanese makers seeking to expand into China are expected to lower administration costs through staffing posts with Chinese personnel. Taiwanese manufacturers are also anticipated to make strategic investments into technology or development of new distribution channels.
Despite the downturn in the global LAN industry, Taiwanese LAN makers are still losing employees. Not only are engineers leaving for other companies, manufacturers are also encountering difficulties in cultivating replacements for senior managers that retire. In the majority of cases, companies lose either individual managers or entire R&D teams. Several leading Taiwanese network equipment makers have been in existence for many years and are now confronted with the decision of whether to replace senior managers from within or recruit from outside the organization. This problem is likely to result in changes to industry structure.
Both Taiwanese LAN manufacturers and major international EMS providers have been establishing production facilities in China. However, while in the past these organizations built plants in China to exploit low-cost production for exports, at present these companies are attempting to secure a share of the Chinese domestic market. However, the increased number of production facilities by LAN manufacturers in China is likely to result in future excess capacity. As China emerges as a major center of LAN production, such excess capacity will give rise to intense price competition and an imbalance in supply and demand will surface throughout the entire industry.