Boundaries Blur, Competition Mounts
Starting off with NIC, the Taiwanese LAN industry has gone on to become one of the world's leading producers of switches, SOHO routers, and WLAN products. However, with new players continually moving into the industry and with different network technologies converging at an ever faster rate, the challenges Taiwanese manufacturers must overcome are becoming increasingly complex.
With the introduction of new product form factors and the diversification of product functionalities, NICs, switches, SOHO routers, WLAN, xDSL, and cable modem have all experienced varying degrees of integration, which in turn has drawn in new competitors. NIC manufacturers now must face competition from motherboard manufacturers with LOM. Some manufacturers have already rolled out or are developing products that integrate switch and SOHO router functions, or SOHO router and WLAN functions, or broadband modem and SOHO router functions. With the blurring of the boundaries between these sectors, players with backgrounds in separate industries now find themselves competing in the same market. This situation tends to lead to a rise in the speed of product innovation. However, the fierce competition is likely to cause some smaller scale, less innovative manufacturers to be eliminated from the market.
Taiwanese LAN Industry Growth Hinges on GbE Penetration
With demand for GbE products remaining weak, 10/100M products remain the mainstream NIC and switch specification. As products become mature, customers are likely to outsource more production. However, the emergence of new network equipment manufacturers in China will put Taiwanese manufacturers under heavy competitive pressure as Chinese makers gain orders that would have previously gone to Taiwanese players. At the same time, the profit margins on ODM/OEM production will fall, limiting the contribution that ODM/OEM businesses make to the Taiwanese LAN industry's shipment value growth. In the NIC market, GbE LOM is already starting to be used in desktop PC motherboards and notebook PCs, but demand for GbE NICs remains weak. When the penetration of GbE in PCs reaches critical mass and stimulates demand for GbE switches will be a crucial turning point. The point at which Taiwanese makers achieve a breakthrough in their L3+ switch software design capability will also be key in currying favor with customers.
Taiwanese Maker Response to Growing WLAN Market Diversification
Excess production capacity in the global wafer foundry industry is causing the price of WLAN chips to fall. At the same time, with WLAN products becoming more standardized, chip suppliers are able to provide reference design, which lowers the entry barriers for WLAN equipment manufacturers. With more new companies moving into the industry, and with little product differentiation, ASP is falling rapidly. From the point of view of the WLAN equipment manufacturers, changes are taking place in both of their two major sales channels, the retail market and the desktop and notebook PC market, which will require different responses.
Renewed Upheaval in the Retail Market
The SOHO market, which is much smaller than the enterprise market, has in the past been dominated by the leading retail brands, such as Linksys, D-Link, and Netgear. Today, the enterprise market is approaching saturation, but the SOHO market is still growing fast. This rapid growth has attracted leading IT hardware brands such as Dell and HPQ to expand into the SOHO market. It has also attracted the interest of the leading network equipment vendors, including Cisco and 3Com, and was a major motivator behind Cisco's acquisition of Linksys. As a result, the existing retail brands are coming under pressure, and the retail market environment is changing. In the future, the SOHO market may once again become the preserve of the leading IT hardware and communications equipment vendors. With their large orders and extensive use of ODM/OEM production, leading vendors are able to push prices down. The main emphasis in the retail market is on flexibility and time to market; lead times are short, and manufacturers are expected to provide logistics services.
WLAN manufacturers can thus be expected to expand from manufacturing into other parts of the value chain in an effort to enhance their competitive advantage. Manufacturers will need to increase the level of flexibility in their R&D activities, build up their production capacity, and develop a global logistics capability.
The Growing Importance of Desktop and Notebook PC Markets
As the percentage of notebook PCs sold with built-in WLAN rises, desktop and notebook PC manufacturers will try to bypass the retail distribution sector by building in WLAN NIC modules. The trend towards built-in WLAN will not only put retailers under pressure, but will impact the enterprise WLAN NIC market. Desktop and notebook PC manufacturers will replace retailers as the dominant sales channel for WLAN NICs.
Under these circumstances, Taiwanese manufacturers will need to possess an in-depth understanding of the notebook PC industry and related supply chain. Taiwanese manufacturers account for around 60% of the world's notebook PC shipments. However, ODM production is the dominant business type. In order to keep costs down, leading PC vendors insist that the choice of key components be decided jointly between themselves and the Taiwanese manufacturers, which highlights the continuing importance of establishing collaborative relationships with leading international vendors. At the same time, with the notebook PC manufacturers moving production to eastern China, WLAN manufacturers will need to be able to provide RF technology service from close at hand; not only will they need to have a sufficiently high level of production capacity, they will also need to carefully allocate their production capacity resources between Taiwan and China. Additionally, notebook PC manufacturers already maintain strong relationships with analog modem module suppliers; these module suppliers have also rolled out WLAN products, and thus constitute a latent threat to the Taiwanese WLAN equipment manufacturers.