Trouble in the modem capital of the world-Taiwan-could rattle the supply chain.
Financial difficulties at two "Big 3" modem makers based in Taipei-CIS Technologies Inc. and GVC Corp.-are forcing them to restructure or merge with other local companies.
Electronics giant Taiwan Liton Electronics Co. Ltd. has purchased a 25% stake worth $77 million in GVC, which makes analog modems for Compaq, Hewlett-Packard, and other major OEMs. GVC is also revamping its operations following a string of losses and unsuccessful product launches.
A group of new investors in recent weeks bailed out CIS, a maker of analog modems for IBM and others. The New Magnitude Group, a local construction concern and CIS' largest shareholder, has been removed from the CIS board and replaced by a group led by three local companies, A-Trend Technology Co. Ltd., Pacific Wire & Cable Co. Ltd., and Yageo Corp.
Askey Computer Corp., another big modem maker based in Taipei, seems to be in good shape. Askey-whose customers include Cisco and Compaq-expects to earn $6.8 million on sales of $247.7 million in 1999, compared with net income of $4.6 million on sales of $195 million in 1998.
But Taiwan's 30 or so smaller modem suppliers are facing difficult times due to stiff worldwide competition and falling margins, analysts said. "There's a lot of restructuring in Taiwan's modem industry now,'' said Carol Ding, an analyst with the Market Intelligence Center, Taipei. "The smaller modem makers in Taiwan will vanish or be absorbed by larger companies."
The island is the world's largest modem supplier, with a 37.9% market share in 1998, according to MIC. And Askey, CIS, and GVC represent 75% of Taiwan's modem shipments.
"It would be difficult to replace Taiwan in terms of modems in the worldwide supply chain," Ding said.
OEMs are also counting on local companies to help them make the transition to the digital world. In fact, local companies are beginning to build products such as cable and DSL modems for leading OEMs, Ding added.
Foreign OEMs, many of which source their modems exclusively from Taiwan, are monitoring the market.
"If our supplier has financial difficulties, we will examine the situation and decide whether they can deliver our orders,'' said a spokesman at HP's Taiwan operations. HP, which buys its modems from GVC, has made no decision to switch vendors, the spokesman added.
GVC, which ships more than 800,000 modems per month, ran into financial trouble after making big but unsuccessful pushes into the digital camera, monitor, motherboard, and other markets. GVC reported a loss of $94.8 million on sales of $323.8 million in the first half of 1999.
Taiwan Liton has assumed control of GVC. Michael Chang, GVC's chairman, will be replaced by Raymond Soong, who holds the same title for Taiwan Liton, a supplier of LEDs, monitors, power supplies, and other products.
GVC has also folded its monitor unit, shut its motherboard operations in the Philippines, and plans to spin-off its LAN-equipment business.
"Our modem business has been profitable,'' said Jerry Ku, vice president of GVC. We made several investments that lost money. This year, we will sell or fold unprofitable businesses and focus on our core communications and PC areas."
Meanwhile, CIS projects a loss of $14.7 million on sales of $278.6 million this year, compared with a deficit of $216.7 million on sales of $263.2 million in 1998.
CIS lost money because of bad investments in the local stock market, a spokesman said, adding that the company's modem business is still in good shape.