Revenues grew at a gradual pace but profitability continued to decline for CommonWealth Magazine's Top 500 service enterprises in 2007, reflecting the sector's urgent need to upgrade and overcome its "regional" limitations.

The needed breakthrough could be geographical, as Taiwan's companies start to look beyond the domestic market and expand into the Greater China and global markets. Or it could involve greater integration or cross-border cooperation in their business models. What is clear is that only those companies not satisfied with their existing markets and brave enough to blaze new trails will emerge successful.

The revenues of Taiwan's Top 500 service enterprises finally exceeded NT$6 trillion in 2007, growing 8.9 percent to reach NT$6.51 trillion. Although the growth rate was higher than the 2.4 percent rise in revenues in 2006, it lagged behind the 13.5 percent recorded in 2005.

Although 316 of the top 500 companies saw revenues rise in 2007 – a higher number than a year earlier – most of them experienced declines in profitability. Average profit margins have fallen from 4.9 percent in 2003 to 3.1 percent in 2007 (Table 1). Net income also lost ground, and dropped from NT$250 billion in 2005 to NT$200 billion last year.

Acer No. 1 for the First Time

The reshuffle in the Top Ten (Table 2) provides some revealing hints on how Taiwan's leading service companies have continued to grow and maintain their edge. Even more noticeable is that after monopolizing the top spot for all 17 years that CommonWealth Magazine has conducted the survey, state-run Taiwan Power Company was finally knocked off its perch. Acer Inc., one of the world's top five branded PC vendors, overtook the utility with revenues of NT$460 billion to become Taiwan's leading service company.

 In the biggest acquisition in its history, Acer acquired Gateway, the fourth largest PC vendor in the United States, last August. The takeover not only shored up its presence in the U.S. market, where it was relatively weak, but vaulted it ahead of Lenovo to become the world's third largest PC vendor. Even a powerful company like Acer needed to resort to the strategy of "offense is the best defense."

"Acer is no longer just a 'European company,' " said Acer chairman J.T. Wang after the acquisition, noting that after the merger, the U.S. and Europe would each account for 40 percent of Acer's revenues.

Electronics distributor WPG Holdings Limited also drew attention by climbing two spots in the rankings to eighth. To overcome the cutthroat competition and declining gross profits plaguing the industry, World Peace Industrial Group, Silicon Application Corporation and RichPower Technology joined together to form WPG Holdings Limited in 2005. Having weathered post-merger growing pains, and enjoying gains from its long-term expansion into China, the company finally tasted success last year. 

Marine Transportation Profitability Unrivaled

If profitability rather than revenues is used to rank the top service companies, then marine transportation companies and shipping agencies dominated, accounting for six of the ten most profitable service businesses in the CommonWealth Top 500. Among them, U-Ming Marine Transport Corp., Shih Wei Navigation Co., and Chinese Maritime Transport Ltd. took the second, third and fourth spots, respectively, with profit margins of 50-60 percent.

Although this group of bulk carriers clearly benefited from the surging worldwide demand for commodities last year and saw their earnings climb higher, opportunities in the industry are still subject to severe market fluctuations. Only companies that grasp trends ahead of anybody else and manage risk will be able to earn more than their rivals. U-Ming Marine Transport is the best example of that, with after tax net income growing 90 percent in 2007 to NT$9.05 billion.

Tourism Industry Developing International Brands

Just as the marine transportation sector can operate around the world, the tourism industry, which many see as primarily oriented to the domestic market, no longer has to limit itself to Taiwan. Even with the potential for added prosperity from the expected opening of Taiwan's market to Chinese tourists in the near future, Taipei-based Formosa International Hotels Corporation has decided to position itself as an international service brand.

The company, which had a margin of 20.6 percent and saw revenues grow 46 percent in 2007, acquired the China and Taiwan operations of Domino's Pizza Inc., the world's second-largest pizza company, in December 2006. It has also broken away from the traditional hotel industry's capital-intensive business model and begun to export its five-star hotel management experience. It set up a joint venture with China's Tomson Group to manage a high-end residential complex in Shanghai, and plans to open 20 new hotels in the Greater China area over the next two years under the new brand name "Silks."

"Different from the manufacturing sector, the service sector interfaces language and culture. The ethnic Chinese population is big enough, and Taiwan's service enterprises must redefine their home market," stresses Lee Ji-ren, a professor in National Taiwan University's Department of International Business. In an environment of new ideas, new markets, and new competition, Acer founder Stan Shih said he was optimistic about the future prospects for Taiwan's service industry in the emerging markets of China, India, and Southeast Asia, because "Taiwan's experience, rather than that of the United States or Japan, is the most valuable to those countries."

In the immediate future, however, many in the service sector are banking on the new cross-strait dynamic likely to emerge in 2008 as the best opportunity to deliver even better results.

Translated from the Chinese by Luke Sabatier