Abstract

Broadband Network Industry Moving into Mature Phase

The Taiwanese broadband network industry started to get off the ground in 1999, and by 2002 had entered the period of peak growth. In 2003, the rate of increase in the number of broadband subscribers worldwide started to shift from high rates seen previously to slow, steady growth. At the same time, broadband network products are starting to become standardized, technologies are becoming more uniform, and the disparities between the different manufacturers' products are rapidly disappearing. Prices are hence being pushed down, further thinning out profit margins.  

In the xDSL market, the efforts of standards organizations have brought about the standardization of ADSL, G.shdsl, and VDSL, and interoperability has been achieved between most manufacturers' products. ADSL has become operators' preferred xDSL technology; strong market demand has led to the extension of ADSL technology in the form of ADSL2 and ADSL2+, the standards to which ADSL will be upgraded in the future.  

DOCSIS has become the dominant cable modem standard, and the need to secure certification from CableLabs has caused the different manufacturers' products to become increasingly homogenous. These trends are causing prices to fall, and the leading international vendors are outsourcing more and more of production in response to concentrate resources on product design, marketing, and distribution channel development. While Taiwanese manufacturers continue to benefit from a steady stream of contracts from leading international vendors, falling ASP is eroding profit margins. 

In response to the fall in profit margins, in the first quarter of 2003 Taiwanese manufacturers began to adjust production locations to reduce the cost of factory building construction and labor. For some manufacturers, the share of total production taking place in China is already higher than that taking place in Taiwan. This migratory trend to China is particularly noticeable in the xDSL industry. At the same time, China has become the third largest broadband market in Asia after Korea and Japan. Shifting manufacturing across the Strait aids Korean, Japanese, and Taiwanese manufacturers in securing Chinese customers as part of a long-term strategy for developing the Chinese market. 

Taiwanese makers have also been focusing on production line planning to combat falling profit margins, and are aggressively developing next-generation products. Given current market demands, the majority of Taiwanese maker shipments are ADSL modems and ADSL routers. However, several Taiwanese manufacturers, including Ambit, Askey, D-Link and Zyxel, are developing VDSL and IP-DSLAM products; with VDSL in particular, shipment volume rose significantly in the first quarter of 2003. Although Taiwanese cable modem manufacturers failed to secure DOCSIS 2.0 cable modem, wireless ADSL router, or wireless cable modem procurement in the first quarter of 2003, demand is likely to increase in the second quarter, and most manufacturers are already working on the development of such products.  

The Choice Between Branded Manufacturing and ODM/OEM

Amidst the global competition that characterizes system products, distribution channel management is a key area manufacturers cannot afford to ignore. For many years now, Taiwanese makers have been riding on leading international vendor coattails, and lack the necessary distribution management experience and talent. However, with Taiwanese manufacturers' WAN products starting to enter the mature stage of the product life cycle, manufacturers must decide whether to develop autonomous distribution channels and their own brands as a means of exploiting new opportunities for growth. The most important broadband markets, North America, Western Europe, and Japan, are dominated by leading international vendors, presenting barriers difficult to surmount for new entrants. Taiwanese makers have therefore been forced to adopt a more roundabout strategy: gradually building up distribution channels into Eastern Europe, Southern Europe, Scandinavia, Central and South America, the Asia Pacific, and other developing markets. However, outsourcing from large international vendors is still the main cash cow for the Taiwanese manufacturers, and as such often find themselves expending limited resources on competition with their own customers. Nevertheless, with the price of analog modems having already fallen to rock-bottom levels, and with the price of broadband products also starting to fall, manufacturers will need to start thinking about their company's long-term positioning. If they are going to focus on ODM/OEM businesses, securing contracts from leading vendors will be necessary to leverage economies of scale to offset low profit margins. If they are going to develop branded manufacturing, then building up in-house product design and marketing capabilities as soon as possible is paramount. The process of transforming into a branded manufacturer is bound to be a difficult one, wherein companies experience a falling off in orders and rising costs.