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Research firm calls for Asian innovation

Asia's success with low-cost manufacturing is making IT companies there reluctant to seize their own lucrative opportunities, an IDC analyst says.

Asia's success as a low-cost manufacturing base is causing a reluctance among its best-performing companies to look outside the region for profits, at a cost to long-term financial health, a senior tech analyst says.

"All too often, Asian tech firms tend to be too comfortable operating behind the scenes supporting global IT giants," said Dane Anderson, IDC Asia-Pacific's vice president for consulting and information technology research. "In turn, these IT giants that Asia supports end up seizing the most lucrative market opportunities for themselves."

Speaking at IDC's Directions 2003 seminar last Thursday, Anderson said regional IT companies rely too much on lower production costs and lack the drive to innovate.

"Asia firms tend to follow the curve and watch lessons learned in other parts of the world," he said. "They then follow these lessons and try to harness them for local market opportunities."

Countries like China and Taiwan have long proven themselves to be low-cost production havens for global tech behemoths. Original equipment makers (OEMs) and contract manufacturers in these countries now make everything from computers, cellular phones and handhelds for global tech behemoths such as Dell Computer, Hewlett-Packard and Nokia.

According to analysts, Taiwan alone now makes over 80 percent of PC motherboards globally and more than half of the world's notebooks. However, in the high-commodity world of gadget making, margins are often razor-thin as a result of intense competition, making sustained growth for these companies a growing challenge.

In addition, Asian companies are not big on taking risks, instead looking within the company and relying heavily on domestic demand, Anderson said.

For example, he said companies like Ericsson and Nokia, which are based in relatively small European nations, rely totally on international sales; while U.S. companies, such as Microsoft and IBM, depend on international markets for more than half of their income.

This stands in sharp contrast to their Asian counterparts such as China-based telecommunications equipment maker Huawei Technologies and PC firm Legend, both of which depend on local sales for over 75 percent of their earnings.

"Even with healthy local or regional demand, it will not make these companies global challengers," he said.

To gain a bigger slice of the global IT pie and challenge the juggernauts, regional companies should step up their research and development activities and take a greater lead in the creation of intellectual property.

Using the number of patents filed with the United States Patent and Trademark Office (USPTO) as a measure for innovation, Anderson says Asia still has a lot of catching up to do.

According to statistics by the USPTO, the United States filed 87,610 patents in 2001 while Taiwan, which is the best performer in Asia-Pacific excluding Japan, lagged at 6,544 filings.

Of the USPTO total, IBM accounted for 3,200 filings--easily beating the Association of Southeast Asian Nations' 432, China's 266 and India's 179.

"R&D is a key source of innovation, but there is a general reluctance among Asian firms to get in the development and introduction phases of a product."

"Indeed, the risks and challenges are greater in these phases and a lot of the ideas and products put forward may not succeed but the rewards are also much greater," he said.

While some Asian companies, such as Sony and Samsung, have made it onto the global stage, Anderson believes these successes are few and far between.

He predicts it will take at least a decade or more before Asian companies to move into the league of the big international players, but said some regional firms are already showing promise.

Some examples Anderson cited are Legend and Huawei in China; IT services firms Wipro, Infosys, Satyam and Tata in India; and chipmakers TSMC and United Microelectronics in Taiwan.

CNETAsia's Winston Chai reported from Singapore.