Where are Taiwan’s Brands?

Just half a decade ago, HTC was riding high as a proud example of a Taiwan company that had succeeded in establishing its brand among the world’s top makers of handsets. But the Taoyuan-based manufacturer has lost 90% of its market capitalization since its 2011 zenith, when it was valued at NT$900 billion and – with a 20% market share – was the No. 2 handset vendor in the United States behind Apple. Last year the once-ascendant HTC booked a net loss of NT$15.5 billion (roughly US$478 million).

HTC is hardly the only smartphone vendor to see sales plummet. Amid a cooldown in the global smartphone sector, even industry titans like Apple and South Korea’s Samsung are feeling the pinch. But HTC’s troubles run deeper, and are indicative of a fundamental problem plaguing numerous Taiwanese companies across the consumer goods sector: Their brands fail to resonate with consumers. During boom times, Taiwanese firms often win market share with aggressive pricing strategies. Yet that serves only to boost short-term earnings and prevents the companies from building the emotional connection with consumers needed to achieve sustained growth.

Aaron Turner, president of the Taipei-based importer Chalice, was among those attracted to an HTC device by its price tag. “I needed a phone and the brands I previously used had stopped making mobile phones: Motorola, Nokia, Ericsson,” he says. “HTC’s price was right.”

HTC’s struggles with brand building are typical of Taiwanese contract manufacturers that have transitioned to own-brand products, observes Ian Wang, a smartphone analyst at the government-backed Market Intelligence & Consulting Institute (MIC). “HTC used to wow the global market with quality products and user-friendly prices,” he says. “But they have placed too much emphasis on cost performance and not on consumer behavior. As a result, their consumers are those who are more price-sensitive and display low levels of loyalty.”

In terms of customer experience, HTC focused for too long on selling its products through telecom operators rather than directly to consumers, Wang notes. By contrast, Apple and Samsung have long operated dedicated retail outlets for the delivery of the product, creating a more engaging customer experience and enabling them to transform the conversation with customers into sales. “HTC did follow in their footsteps by setting up its own-experience stores in recent years, but hasn’t quite grasped how Apple and Samsung have used this to retain customers,” Wang says.

Weak risk management is another major shortcoming that Taiwanese companies are facing. “With a manufacturer’s mindset, they have not been able to foresee risks and respond swiftly with effective countermeasures when faced with a public-relations crisis,” Wang says. For instance, HTC failed to foresee that Chinese consumers, who pay careful attention to smartphone specs, would reject the US$600 HTC 10 powered by a mid-level Snapdragon 652 processor instead of the premium Snapdragon 820. “HTC’s countermeasures to this matter were disappointing, affecting pre-orders for the HTC 10 in China,” he says. In fact, HTC sold only 251 units in the first 11 days of its pre-sale in May.

Among Taiwanese consumer electronics brands, PC-maker Acer is facing a similarly grim situation. Channeling its experience as a contract manufacturer for IBM, the company cashed in on the PC boom of the 2000s, claiming the title of the world’s No. 2 PC maker by shipments in 2010. (It is currently no longer in the top five). But by largely competing on price, and offering little in the way of innovative products, Acer failed to cultivate brand loyalty among consumers.

“Acer products give off the impression that they’re cheap and meant to be replaced in two years,” says a Taipei-based tech hardware analyst who spoke with Taiwan Business TOPICS on condition of anonymity. “There is no innovation, no high-end features. Now their margins are squeezed more than ever because shipment volume is down.”

As the global PC market slowed in the 2010s, Acer was hit particularly hard. From 2011 to 2013, the company sank into the red before swinging back to a slim profitability in 2014. Last year, earnings fell more than 66% on an annual basis to NT$604 million (US$18.43 million) from NT$1.79 billion. Consolidated revenue also declined 20% year-on-year to NT$263.78 billion.

In a March review, Laptop Magazine gave Acer an overall rating of 67 out of 100, commenting that its notebooks offered value more than ingenuity. “This year, the company rose from last place to eighth, mostly because of its competitors’ weaknesses rather than Acer’s strengths,” the editors wrote. “The brand continues to be held back by a combination of ho-hum systems, poor support and bland design.”

Trapped transition

The roots of Taiwan’s branding travails lie in its long history of contract manufacturing. Rather than developing brands of their own, companies found a niche beginning in the 1970s as original equipment manufacturers (OEM) for Western companies outsourcing production to Asia in a bid to reduce costs. In addition to manufacturing, from the late 1980s many Taiwanese manufacturers began offering design services as original design manufacturers (ODM). In these endeavors, cost control is paramount as margins for both OEMs and ODMs are thin.

From the late 1980s, the Taiwanese government began to encourage manufacturers to develop brands of their own as a pathway to stronger earnings. In 1992, the Ministry of Economic Affairs (MOEA) established the Taiwan Excellence Award to represent high-quality products from Taiwan to a global audience. Since then, every year a panel of judges (both local and international) has evaluated candidates based on their R&D, design, product quality, and marketing. Winners are granted permission to use the “Taiwan Excellence” insignia to promote their products.

In 2006, the government launched the US$61 million “Branding Taiwan Plan,” a seven-year program aimed at raising the global profile of rising small and medium enterprises (SMEs). When the program was launched, Huang Chih-Peng (黃志鵬), then director-general of Taiwan’s Bureau of Foreign Trade (BOFT) under the MOEA, said in a statement: “We plan to offer Taiwan’s SMEs assistance to develop their own brands, but we won’t do it for them.”

Unfortunately, 11 years later, Taiwanese companies are still struggling to move up the value chain, flummoxed by marketing and management issues. “Many Taiwanese manufacturers don’t know what end users want because they don’t have contact with them,” says Richard DeVries, managing director of Taipei-based Geber Brand Consulting. “They have an order-taking mentality; it’s about engineering something on request. In other countries, successful brands are created by people who are passionate about certain products or services.”

DeVries notes that in some cases, Taiwanese manufacturers are victims of their own success, as they focus on short-term earnings. For instance, Geber worked with a successful headphone manufacturer that sought to develop its own brand. Geber came up with a comprehensive branding strategy for the company, but then the CEO started to have second thoughts. “Initially, he was very much onboard, but when it became clear the company would need to make significant investments to create its own branded products – and that there were risks involved – he got cold feet,” DeVries says. “It was much easier to keep the same business model, even though in theory a company with its own brand would be able to earn higher profits in the long run.”

To be sure, international customers continue to do business with Taiwan’s manufacturers, notes Mark Stocker, managing director of the Taipei-based branding consultancy DDG, who has been working with Taiwanese tech brands for more than 20 years. “They see value in a set of services and capabilities that are differentiated from Chinese or other competitors.” Yet Taiwanese manufacturers are not highlighting what Stocker calls “latent value,” the intangible elements of a company, such as research and development, copyright and patent protection or customization services.

Rather, “they continue to rely on what worked in the past: attending trade shows, promoting factory capacity, and negotiating primarily based on volume and price,” he says. “That’s a 1990s business model. The world has moved on since then.”

The outliers

Bicycle maker Giant is one of the rare Taiwanese companies to have transitioned from contract manufacturer to successful international brand. “They are one of the very few Taiwanese firms to be run as a global organization and they are healthy as a result,” Stocker observes.

“It’s limiting to just be an OEM,” Anthony Lo (羅祥安), chief executive officer of Giant, told TOPICS in an interview. “We had a lot of ideas. We wanted to do more [than contract manufacturing alone], and we decided that for it to be meaningful we had to go global.” Innovation has been at the core of Giant’s business efforts, Lo says, noting the company was among the first major bicycle makers to mass-produce aluminum alloy for use in bicycles. Giant also developed the first mass-market carbon fiber bicycle. It called that bike, the Cadex 980 C, “carbon fiber for the masses.” In order to accomplish those feats, the company spent heavily on research and development.

Giant’s retail-channel strategy has differed from most Taiwanese consumer brands as well. The company has insisted on selling its bicycles through professional retailers only, and has opened a network of exclusive Giant stores globally. “Bicycles need service, and we want retailers who are able to provide that service because they have a passion about cycling and are knowledgeable,” Lo says.

The Taichung-based company raised its global profile after the winning team in the 2002 Tour de France rode to victory on Giant bicycles. “The pro teams initially came to us and asked for a specialized bicycle,” Lo says. “We learned a lot from the pro racers in terms of what they needed in a bicycle.”

If the company lacked a compelling brand story for the first 25 years of its existence, that all changed in 2007 when founder King Liu (劉金標) cycled around the island at the age of 72. The 15-day odyssey converted Liu into a cycling enthusiast, and he became the leading advocate for a cycling lifestyle in Taiwan. Observers say Liu’s journey inspired the Taiwanese people and global cyclists alike, and helped spur the emergence of a cycling culture on the island. Giant has since funded Taipei City’s YouBike bike-sharing program that has become one of the most successful programs of its kind globally.

In another positive example, computer-maker Asus has held up well despite the flagging PC market, moving its notebook line upmarket and emerging as a viable smartphone maker. Unlike Acer or HTC, Asus’s market capitalization has held steady, standing at roughly US$6 billion since 2011. In 2015, it recorded net income of NT$17.1 billion, a slight fall from NT$19.5 billion the previous year. Revenue rose to NT$436.5 billion from NT$436.3 billion in 2014.

Notably, Asus has become a successful smartphone brand despite arriving late to the game. “Asus set foot into the smartphone market with its Transformer Infinity, a device that is a hybrid between a smartphone and tablet, and gained enormous market attention and brand awareness,” says Aaron Lin, a senior analyst at MIC.

He notes that Asus has been considerably more effective than Acer in penetrating Taiwan’s domestic low-priced smartphone market.

In its promotional efforts, Asus has been adept, Lin says, noting the company’s adroit celebrity marketing campaigns and use of social media – for instance, a buy-one-get-one-free program for handsets pre-ordered via the popular messaging app Line. Additionally, customers who buy Asus smartphones receive free Web storage for a limited time period, a marketing strategy similar to one employed by Samsung. By comparison, “Acer is relatively quiet,” Lin says.

Asus has even made inroads into the surging PC gaming market, which generated about US$21.5 billion in hardware sales in 2014, according to data compiled by Jon Peddie Research. Unlike the ailing broader PC market, gaming PC sales are projected to increase over the next couple of years. The company’s long-established Republic of Gamers brand has become well respected in the gaming community, providing a platform for Asus gamers to participate in global gaming tournaments, Lin notes.

In the PC sector, which still accounts for the majority of Asus’s revenue, experts give the company high marks. Laptop Magazine, which lambasted Acer for its lackluster notebooks, recently ranked Asus third overall behind No. 2 Dell and No. 1 Apple, up from seventh place in 2015. “The company is always among the first to embrace new technologies like Nvidia G-Sync or Core M while maintaining strong build quality and attractive designs,” the report said. “Asus also shows that low prices don’t have to mean poor quality, offering a sub-$400 Windows laptop with 1080p and a sub-$100 system with over 12 hours of endurance,” it continued.

Necessary change

Experts say Taiwanese companies must focus on user experience if they expect to succeed as global brands. The success of Samsung’s smartphone business is instructive. Some observers have noted that Samsung has enjoyed a number of advantages not available to HTC, including comparatively vast financial resources, the vertical integration of its supply chain, its prior experience in LCD panel manufacturing, and the benefits it has enjoyed thanks to the backing of the South Korean government.

But others consider that those factors were not the most crucial. “We think the reason Samsung has been more successful as a smartphone brand than HTC is because the company pays a lot of attention to enhancing user experience,” says MIC’s Lin, noting that users of Samsung’s S2 smartphone are entitled to a free extra battery after two years of use, with a third battery also provided free of charge when needed. Samsung’s alliances with cloud-based service providers such as Dropbox and Evernote are also appealing to business users, he observes.

To be sure, Samsung spends big to promote its products. It shelled out US$4 billion in advertising and promotion in 2015, outspending Coca Cola by US$1 billion. That money is well spent, Lin says. He notes that Samsung has successfully boosted sales of its flagship Galaxy series by targeting female office workers with celebrity endorsements.

By contrast, “HTC seems relatively inexperienced in branding and marketing,” Lin says. “Its decision to distinguish products for Chinese and overseas markets has caused huge controversy and its large investment in celebrity endorsements such as hiring Iron Man Robert Downey Jr. could not be called a success.”

As a general observation, DDG’s Stocker believes Taiwanese corporate culture has thwarted companies’ ability to build global brands. Part of the problem lies in what Stocker refers to as the “high power distance” in Taiwanese companies, using a concept devised by Dutch scholar Geert Hofstede. According to Hofstede, employees in a high power distance culture are rarely involved in the decision-making process because they look to the business owner to make all decisions.

This corporate culture served Taiwan well during its years as a global manufacturing hub, Stocker observes. “The business owner only had to actively manage a small number of external-facing relationships (with key customers), while employees understood the basis for decision making was to meet those customers’ requirements and bring costs down,” he says.

International branding is a different game altogether, Stocker says. It requires a business to “expand the points of contact from a few long-term customers to hundreds of channel partners and, in many cases, millions of consumers. A global brand’s decision-making requirements are exponentially more complex, which makes it near impossible for a single business owner to be successfully involved in all decisions.”

However, the same executives who led companies during Taiwan’s contract-manufacturing heyday often remain in power today. Alibaba founder Jack Ma (馬雲) highlighted this issue during a visit to Taipei in December 2014, telling the audience at a Taipei technology forum he had first noticed the problem when he attended a similar forum in Taiwan in 2001, and that he had seen little change since then.

Ma likened Taiwan’s elderly corporate emperors to the aged characters in the works of the Chinese novelist Jin Yong (金庸), a leading figure in the wuxia (martial arts and chivalry) genre. In Jin’s works, elderly characters typically are depicted as having infinite martial acumen because of their age and experience. That idea is illogical, Ma told the audience at the forum, adding that Taiwanese society needs to empower its younger generations to create a brighter tomorrow.

“The right people to lead companies 15 or 20 years ago might not be the right people today,” says Geber’s DeVries. If Taiwan is to build more viable global brands, “this is something cultural that has to change.”

In addition, questions remain over whether Taiwan has a big enough domestic market for consumer brands to grow, and recent efforts by the government seem to focused on generating excellence in B2B brands, such as Taiwanese heavyweights Taiwan Semiconductor (TSMC), Hon Hai Precision Industries, and Compal Electronics.

Chen Shi-kuan (陳禧冠), vice president of design at Compal, was enticed from his previous job at an international branded tech company to start Compal’s efforts to rebrand itself as not merely an OEM contract manufacturer but an R&D and marketing consultant for the world’s major tech brands.

With a team of approximately 200 people, Compal has established excellence in an array of design and marketing related fields, including industrial design, graphic design, user interface design, user experience design, consumer marketing intelligence, and CMF (color material finishing). Chen calls this approach “ODM 2.0.”

“ODM 1.0 is about cost-effective factories, but 2.0 means providing research and development and view of the consumer market and the manufacturer,” he explains. “We have a factory but we are also an R&D consultant. We are helping our partners – our clients – to come up with a business approach, portfolio approach, and method approach, and finally to manufacture for them.”

He says that the top tech companies now come to Compal “because we really give them the vision and roadmaps and portfolios that they wish for and don’t have the time to explore, and the holistic view of where the trends will go.”

The approach has been successful, and Compal has been able to establish itself as a high-value B2B brand in the tech world, enabling it to raise its margins substantially.

Chen regards the B2B branding approach as playing to Taiwan’s strengths while avoiding its weaknesses. He offers TSMC as another example of a high-value B2B brand. “Nobody calls them just a factory. Because of their great R&D, people respect them as a brand,” he observes.

He questions the feasibility of Taiwanese companies succeeding in consumer branding. “If you’re not good at ODM, why would you make money as a branded company?” he asks. “I’m not so sure if brand is the problem. To me, it’s more about where we see our value as a Taiwanese company, and to emphasize and enlarge on that value.”

The News Lens has been authorized to repost this article. The piece was first published by Taiwan Business TOPICS.

(Taiwan Business TOPICS is published monthly by the American Chamber of Commerce in Taipei.)

First Editor: Edward White
Second Editor: J. Michael Cole