Those who have never climbed back from failure may find it difficult to teach others how to turn defeat into victory. That is why as Taiwanese companies search for ways to fend off the threat of China's predatory rise, the experience of four-decades-old electro-acoustic products specialist Merry Electronics Co. may be instructive.

Merry Electronics has experienced the heaven of annual revenue growth of 30 percent and the hell of 30 percent declines in earnings per share.

The company's 68-year-old chairman, president and founder, Liao Lu-lee, says that as the years go by, the outside world is only getting more treacherous, putting greater pressure on the strategies companies embrace. 

"Companies today have to reposition themselves every five years," says Liao, whose grandfatherly demeanor belies a strict management style that stresses discipline and self-study.

An avid reader and a frequent invited speaker at universities, Liao easily rattles off the wisdom of others to underscore his point.

"Management guru Peter Senge said that only learning organizations that understand how to think systematically will be able to survive long-term in the 21st century," he says.

Constantly Overthrowing One's Past Self

Looking back over the past 10 years, one can see from Merry Electronics' many internal upheavals that the price of survival is constantly overthrowing your past self.

Liao and his older brother founded Merry Electronics in 1975. Liao had graduated from Tatung University and worked at Tatung Electronics as an engineer before going out on his own. The Tatung Baby figurine displayed in Liao's office is a reminder of that era.

The new start-up began as a speaker manufacturer, producing the same thing as about 400 other companies in Taiwan. Liao realized that for Merry Electronics to stand out, it would have to make something distinctive. The challenge for Liao was how to identify that distinctive "it."

"In 1983, I read in the magazine Communications that the era of mobile phones was coming, and IBM, Motorola, General Electric and AT&T would become the new 'Big Four,'" Liao recalls. "I began thinking about how a small Taiwanese company could get involved with them."

He concluded that his company could catch the mobile phone wave by producing speakers of smaller dimensions. At a time when the trend for speakers was to go bigger, Merry Electronics bucked the conventional wisdom and emerged as the wonder of the industry. 

Decades later, the company's rivals from that earlier era have all disappeared, with Merry Electronics the lone survivor because of Liao's acumen for spotting trends and finding the right role for his business.

Strategy Involves Trade-offs

In the first half of the 2000s, Taiwan became the king of notebook computer contract manufacturing, and Merry Electronics' speakers were the number one choice of the major brands at the time – Hewlett-Packard, Dell and Compal. From 2001 to 2007, the company's revenues grew at an annual rate of 30 percent.

As Liao predicted, the mobile phone craze had also begun sweeping the globe, and a surge in orders kept Merry Electronics busier and more prosperous than ever. But a crisis was looming just around the corner.

The global financial meltdown arrived in 2008, paralyzing the world economy, and disruptive innovation began changing the face of the smartphone sector, leaving venerable brands Nokia and Sony-Ericsson in the dust. Then, Chinese rival AAC Technologies Holdings Inc. grabbed some of the orders Apple had with Merry Electronics. These blows left the Taiwanese supplier's once heavenly world in tatters. In 2011, its earnings per share had plummeted to a new low of NT$2.08, about a third of what it was in the company's heyday just a few years earlier.

There was widespread speculation on why this "model company" had fallen so precipitously. One securities analyst says that Merry Electronics wanted to reposition itself in the market, but its supply chain could not respond quickly enough. It was also said to be hurt by a patent authorization dispute and insufficient production automation, resulting in less competitive pricing that cost it business to Chinese rivals.

But Liao has a different recollection of those difficult times.

"Any strategy involves trade-offs and making choices," he says. "You have to know yourself and know how much you can do and how well you can do it."

Chinese manufacturers are experts at undercutting competitors on price, and Liao knew he could not beat them at their own game, and that it was not even worth trying.

He saw Taiwan's advantage as having more international exposure than China and being better positioned to identify niche markets that allow for relatively high profit margins, an edge he decided to capitalize on.

"We only get involved in products that put a premium on technology and can only be made by a learning organization," Liao says. "These included high-end earphones. We're also thinking about making wearable devices, which is why we're developing power bank-related products."

Learning – The Only Constant

AAC Technologies, which had at one point had stolen Merry Electronics' thunder, was downgraded in early August to "neutral" from "outperform" by Daiwa Research. Daiwa said the company's non-acoustic business was generating growth, but that its core acoustic business was suffering from weakness on delays in the production of Apple's new iPhone. 

Merry Electronics, on the other hand, has emerged from the gloom of the previous few years to achieve rapid revenue growth in 2013. Sales last year rose 46 percent from 2012 to NT$11.3 billion, and its net margin was just over nine percent. Orders for mini-speakers, gaming headsets and power banks have surged, and analysts estimate that the company's growth momentum can be sustained into 2015.

Liao, however, is in no mood for complacency. Knowing that any lead in such a competitive market is short-lived, he has collaborated with universities in offering scholarships and building laboratories to fuel R&D activity that will help the company prepare for its next transformation.

"In the past, only Japan, South Korea and Taiwan did contracting work. It was 200 million people serving 600 million people in Europe and the United States," Liao says. "After the rise of China, you now have 2 billion people trying to cash in on the 600 million-person market.

"Anything that Taiwan does, China can learn it and do it," said this veteran of four decades in high-tech, still seeing a fiercely competitive battlefield when he looks to the future. "Small countries have to stay active and constantly develop distinctive new strengths if they want to keep the behemoths in pursuit at bay."

Translated from the Chinese by Luke Sabatier