To spur domestic demand as exports fizzle, China recently expanded its policy to promote the sale of electronic appliances in the countryside. In the PC category, 14 companies won tenders to provide computers under the program, but Acer was the only Taiwanese brand to make the cut.

Annual incomes average around 4,700 renminbi in rural China, and some question if it really is ready to splurge on computers. They are also wondering to what extent Taiwan's PC supply chain can participate in the program.

Market researcher Topology Research Institute estimates that the "PC to the countryside" campaign will boost sales by an additional 2.5 million units, creating a NT$40 billion opportunity for computer supply chains.

With prices per computer capped at 3,500 renminbi, the opportunity for brand-oriented enterprises is more symbolic than real. But when it comes to peripherals, such as connectors, keyboards and batteries, Taiwan has a number of suppliers with close ties to tender winners Acer, Dell and HP who stand to be the biggest beneficiaries of the Chinese government's initiative.

Low-cost netbooks have recently taken the world by storm and appear poised to crack China's untapped countryside through Beijing's stimulus package. Now, Taiwanese brands need to figure out how to capture the leadership role in this virgin market.

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At the beginning of March, while the first battle in the netbook war between Acer and ASUStek was being fiercely fought, a second battle between newcomers to the business was beginning. Handset giant Nokia announced it would enter the netbook market, and Taiwan Mobile introduced its own branded netbook.

Netbooks account at present for less than 20 percent of all notebook computers, but like the golden apple tossed by Eris, the Greek goddess of strife, which exacerbated rivalries and triggered the Trojan War, the netbook is about to set off a fierce confrontation between notebook, handset and communications vendors that could provide an opportunity for rapid growth to Taiwan's less well-known brands and peripherals suppliers in this field.

Why is the netbook the golden apple everybody is eyeing?

The netbook market's 80-percent projected growth has emerged as one of the few bright spots in the moribund global technology sector. Ray Chen, the president of the world's second largest notebook OEM producer Compal Electronics, who is aggressively pursuing netbook orders, estimates global shipments of the inexpensive computers this year at 25 million to 30 million units. To cash in on the opportunity, Taiwan's PC supply chain is also working closely with Acer Inc. and ASUStek, which have a combined 70-percent share of the global netbook market.

But if the market's key players are not careful, the golden apple could turn poisonous.

Never has the positioning of a new product undergone such a rapid transformation in the personal computer industry's 20-plus years of development. Netbooks have been on the market for less than a year but have already gone from being sold as a child's first computer to a businessman's second computer.

More problematically, they have eroded the market for standard notebook computers. Their rapid proliferation has also caused gross margins on the cheap computers to drop from a healthy 20 percent to single digits. Fortune magazine quoted one Silicon Valley CEO as describing the netbook-fueled PC price war as "a crap-eating contest."

But within Taiwan's PC supply chain, there is a group of small- and medium-sized enterprises preparing strategies to grab the golden apple from others' leftovers.

Celxpert: Loyal to a Good Customer

In the secluded Longtan Industrial Park in Taoyuan County lies an unremarkable factory on a small country road. It is impossible to tell from the plant's bland exterior that it houses this year's leading vendor of notebook batteries, Celxpert Energy Corporation.

Celxpert, the smallest of Taiwan's three big battery manufacturers in terms of scale of operations, has grown rapidly by supplying the battery pack for ASUS's Eee PC since the product's inception. Netbooks now account for 25 percent of its revenues, far outpacing Simplo Technology Co.'s 15 percent and DynaPack International Technology Corp.'s 8 percent.

In concentrating on meeting the many requirements of one customer, Celxpert chairman Shi-ming Huang has adopted a strategy that deviates dramatically from that of the big two.

"Simplo wants to supply the top 10 (notebook computer vendors), so it will not spend a lot of effort on some product that doesn't have a clear market potential. Dynapack has always concentrated on a few customers – HP, Apple and Dell – so it has never considered the market outside of these customers' notebooks," Huang analyzes.

Celxpert, on the other hand, directly targets one customer and satisfies that customer's every need before pursuing new clients.

When ASUS got involved in broadband, for instance, Celxpert followed in the broadband device battery pack market. When ASUS decided to develop the Eee PC, Huang preferred to sacrifice soliciting new customers in favor of supporting its old partner, without any assurance that the new netbook would be a winner.

"You can only handle as many projects as your engineers can support. So do you want to help an old customer develop a new product or work with a new customer on an old product and fight another bloody price war with the traditional big two in the industry?" Huang explains. "When you're working with a good customer, you have more room. It's not necessarily the right move for small companies to run around chasing after big birds."  

MSI: Success with a Roundabout Strategy

An unknown player has emerged out of the blue from among Taiwan's many less prominent notebook brands because of the netbook craze.

In the notebook business for a mere four years, with the first two of them money losers, Micro-Star International Co. rose from the depths of anonymity last year to reap revenues exceeding NT$100 billion, and this year expects to ship 4.5 million units, 50 percent more than in 2008.

MSI's high growth rate results from the roundabout strategy of "surrounding the city from the countryside."

It positioned its products to avoid directly confronting Acer and ASUS and their 8-inch and 9-inch netbook displays that had become the market mainstream. MSI rolled out the first netbook with a 10-inch screen display. Because of this feature that offered consumers a more comfortable viewing experience, the company shipped over 1 million netbooks in 2008 and propelled MSI into the top 10 notebook vendors in the United States, Taiwan, Japan and Russia.

"The product design skills we had accumulated were finally unleashed in the netbook and earned us entry into the game," says Sambora Chern, MSI's senior director of notebook sales.

MSI, which does not advertise heavily, first built a following through online sales before attacking brick and mortar retailers. In the extremely differentiated European market, for instance, MSI noticed that the distribution environment for information technology products was gradually changing, with more than 60 percent of IT goods being bought online in some Eastern European countries. As a result, to lower management and sales costs, MSI first sold its netbooks exclusively via the Internet in Europe. Once its sales volume expanded, brick and mortar retailers naturally came calling, and MSI products are now stocked by retailing giants Ingram Micro and Media Mart.

"In the past, everybody would shut their doors in our face, unwilling to pay any attention to us. Now, they are coming to us at their own initiative," an MSI executive says. With its newfound pull in the market, MSI can even insist that retailers order two notebooks for every netbook they sell, dramatically elevating MSI's brand recognition.

Still, Taiwanese enterprises in the PC supply chain must be careful because netbooks are a double-edged sword. Celxpert revenues may have soared, but its profit margin remains below that of Simplo and Dynapack. MSI has successfully broken into the notebook business, but it must continue to differentiate its products and resist heavy pressure from the top brands. If products are not clearly positioned or distribution channels not carefully chosen, the golden apple can easily turn toxic.

Netbook sales may be strong enough to help less prominent Taiwanese notebook brands and peripheral suppliers reverse their slumping revenues. But much will depend on how Taiwanese enterprises redeploy their inherent advantages and whether they can use their flexibility and speed to market to become the leader in this burgeoning field.

Translated from the Chinese by Luke Sabatier

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Micro-Star International Co. (MSI)

2008 Sales: NT$100.3 billion

Company Status: World's fourth largest netbook vendor

Main Products: Mainboards, graphics cards, servers, notebook computers, communication devices

Employees: 1,600 in Taiwan; 15,000 worldwide

Founded: 1986

Celxpert Energy Corporation

Sales: NT$6.26 billion (first three quarters of 2008)

Company Status: Has 7% share of world notebook computer battery pack market

Main Products: Battery packs for notebook computers, broadband communication devices, smart phones.

Employees: 240 in Taiwan; around 1,500 overseas.

Founded: 1997

Chinese Version: 四百億商機　台灣吃得到嗎？