The Formula: Design in the U.S., Engineer in Taiwan, Build in China
BY Ted C. Fishman
How one U.S. manufacturer leverages China and Taiwan.
Imagine the competitive advantages a company might enjoy if it were structured to tap the different strengths of both the U.S. and Asia. Patrick Lo already has created a company like that. He's the CEO and co-founder of Netgear, a maker of networking equipment based in Santa Clara, Calif., with 2004 sales of more than $380 million.
"Our mission is to connect everyone on earth to a broadband connection," says Lo. "From day one we knew we needed to be a global business. You cannot have a product that is designed in the U.S., manufactured in the U.S., and marketed out of the U.S. and expect it to be a global product. It is impossible." Instead, Netgear takes advantage of the unique advantages offered by different corners of the technology manufacturing universe.
How? The answer begins with a description of Netgear's most visible products: elegant, small boxes, most the size of a slim paperback book, that sit next to millions of personal computers around the world. They come in all the varieties -- adapters, gateways, routers, access points -- needed to set up wired and wireless networks in homes and small offices. Netgear has carved a place in the crowded networking equipment market by offering products that are nice to look at and easy to set up, an important factor since change in the networking industry moves at warp speed. New standards, products, previously unknown competitors, and waves of new, mostly Chinese-made equipment find their way into stores and catalogs and onto eBay all the time. Netgear itself introduces, on average, one new product every week, either in response to a competitor's newest model or as an innovation that will be copied within weeks.
In his constant battle to move new products into the market at aggressive prices, Lo has organized Netgear to leverage the financial codependency of the U.S. and China. "Americans are more willing to spend than anyone else in the world right now," says Lo, whose products get their design and marketing in California, where the company can stay close to American tastes and needs.
Netgear, founded in 1996, began life by working with a Taiwanese manufacturer that made Netgear's boxes and helped design the technology inside them. Yet manufacturing in Taiwan ultimately became too expensive, so Netgear asked its Taiwanese manufacturer to change its function. Instead of making the products, it would engineer them and manage the manufacturing at a third site run by a company in China's booming technology corridor in Jiangsu Province outside Shanghai. A new factory there was designed from scratch to allow for highly flexible manufacturing that could change with every newly designed tech product that companies such as Netgear want to bring to market. China is full of such late-generation manufacturing facilities, which exist to be hired out by others who need floor space, advanced equipment, and a work force on call. Netgear's factory of choice was outfitted with the latest robotic equipment for assembling circuit boards and laid out so workers coping with manual assemblies could integrate seamlessly and flexibly in the production lines. Netgear would help manage the quality control and purchasing out of an office in Hong Kong.
"China gives us a way to move to the next level," Lo says, referring both to the world economy and the fortunes of his company. "Because of low-cost manufacturing, a lot of leading technology can now come out of China."
In Netgear's experience, sales of products that move to the high-production, low-cost factory lines in China explode in the marketplace. During the past three years, the basic equipment for home networks has dropped from $500 a unit to below $100, while moving data around the house much faster in the bargain. The term network effect describes how technologies gain critical masses of users and applications the more that they connect users with one another. It is not surprising that computer networking equipment has an enormous network effect when its price drops. In 2002, 9.2 million American homes had networked computers; by 2007, that number will top 28 million as low-price equipment from Netgear and others moves data files, music, and movies around the home, between computers and digital home entertainment centers.