They say Hon Hai is a business killer—and the victims are Taiwan's small- and mid-sized makers of computers and peripherals. Hon Hai Precision Industry Co. Ltd, which has its roots in the connector business, is now the epitome of what the island's top IT players have become in their relentless pursuit of expansion.

The leading OEMs and electronic manufacturing service firms in Taiwan now dominate the IT supply chain for products like PCs, peripherals, motherboards and network cards. Moreover, they have started to penetrate into other segments such as optical drives.

Over the years, these IT specialists have rapidly grown by boosting their manufacturing and system- building capabilities. And where does that leave the small- and mid-sized makers of computers and peripheral products? Once the bedrock of Taiwan's IT prowess, these traditional makers of peripheral products are stars no more.

After consolidation of the IT industry in Taiwan, when the PC and peripheral business reached a plateau, they temporarily sought refuge in premium products like MP3 players and USB drives. But margins became too thin here. Now they are aiming to penetrate small niches such as LAN drives.

Today, small- and mid-sized makers of computers and peripheral products in Taiwan are resorting to a strategy that entails greater focus on products that have yet to be standardized and are in the early stages of their development curve, such as portable media players.

However, such a strategy will require a lot more innovation, particularly in product design and in relationships with semiconductor suppliers and design houses.

Another challenge confronting Taiwan's PC and peripheral makers is the ongoing convergence of computing with communications and consumer electronics. In some cases, the product overlap for communications and consumer products is as high as 60 percent.

As they say in Chinese, challenge and opportunity mean the same thing. The current situation could thus create for PC and peripherals makers a new venue for product diversification. But then again, makers will have to develop greater design know-how and awareness of the underlying silicon building blocks.

While Bluetooth, GPS and VoIP rescued telecom product manufacturers, there is no killer application in sight yet for Taiwan's PC and peripheral makers.

So much is expected from the launch of Microsoft's new operating system, Vista, as it may spark the development of new product categories. And as new technologies and functions merge onto the PC platform, a plethora of devices—from game consoles to music players—are camping outside the PC door.

With about one billion PCs in use around the globe and annual sales of 200 million units, peripherals makers have a lot going for them. But they will need to be much more agile and resilient in their pursuit of new bright spots on the PC horizon. And design innovation would undoubtedly be the key at this important stage in the PC business evolution.

It would be interesting to watch how this crucial part of Taiwan's IT value chain reinvents itself on the eve of the PC's 25th birthday.

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