TAIPEI, Taiwan - Think of most tech gadgets, from the iPod to the PlayStation, and an engineer on this island of 23 million has probably had a hand in its creation.

While India and China share the spotlight as emerging giants, Taiwan is already a huge behind-the-scenes maker of the world's tech products.

Taiwanese companies produce three-quarters of the world's notebook computers, two-thirds of its personal digital assistants and nearly 70 percent of its liquid crystal display monitors, according to Taiwan government statistics. The island is home to Taiwan Semiconductor Manufacturing, the world's largest made-to-order chip manufacturer. Civic leaders like to point to the jade-green Taipei 101, the world's tallest skyscraper that towers over the densely packed city, as a sign of Taiwan's economic prowess.

Now Taiwan is making strides in moving to a more visible role as tech innovator. As China muscles its way into more and more sophisticated manufacturing, Taiwanese companies are elevating their research and design skills and creating their own brands that can be marketed globally to stay a few steps ahead of its intimidating neighbor.

The Taipei government, as well, is concerned that Taiwan's tech economy -- traditionally strong in chips, PCs and other hardware and electronics -- is at risk. So it is encouraging development of industries new to Taiwan, including digital content and biomedical devices.

And it's looking to its longtime business partner, Silicon Valley, for inspiration and help. Taiwan government officials are working to strengthen relations with the valley, hoping to import its entrepreneurial culture and form new partnerships. Last year, the Taiwan government's Industrial Technology Research Institute, or ITRI, started an incubator in San Jose to link Taiwanese venture capitalists and tech suppliers with valley entrepreneurs.

In need of new model

``If we do not come up with a new value, a new business model, a new way of making money for Taiwan or a new way of contributing to the world, we will be marginalized,'' said Johnsee Lee, president of ITRI, a government-sponsored incubator. ``It still remains to be seen if we will be successful.''

Indeed, the island's tech industry faces many challenges in this era of shifting global fortunes. Taiwanese companies that try to succeed with their own branded products run the risk of butting heads with foreign companies that hire them to build and design products sold under the brands of the overseas companies. These relations have been key to the island nation's stunning economic rise over the years.

Furthermore, Taiwanese companies don't have the advantages of U.S. companies and, increasingly, those in China, which have large domestic markets that can be a springboard for creating a global brand.

``Innovation is the key to survival,'' said Yen-Shiang Shih, a deputy minister with Taiwan's Ministry of Economic Affairs. It is, he said, the only way to position Taiwan in the midst of the rising ``mega-power'' of China. ``We need mega-power protection,'' Shih said.

Taiwan is as worried about the growing economic and tech prowess of its cross-strait neighbor, which claims the island as its territory, as it is seen by China as a military threat. The Taipei government, for instance, permits Taiwan semiconductor companies to operate foundries, which make chips under contract to others, in China only if they produce less sophisticated chips. (However, Taiwanese businesses have invested billions in mainland Chinese factories, and countless Taiwanese have relocated to the mainland to manage companies in recent years.)

Lee's institute, which has offices in the prestigious Hsinchu Science Park on the northern part of the island, recently established the Creativity Lab to ignite innovation and help Taiwan create new products. ITRI, which has spun off 130 Taiwanese tech companies, acts as a research-and-development center for many of the island's medium-size companies.

Forging a global brand

Creating global brands -- and the design and marketing skills that it entails -- is seen as one way to elevate Taiwan's tech economy.

Many eyes are on BenQ, the maker of cell phones, digital cameras, LCD screens, laptops, MP3 players and other tech products. Last fall, it acquired the money-losing cell phone unit of Germany's Siemens -- one of the largest takeovers of a European company by an Asian business.

BenQ, which acquired a brand more than a century old, believes it can make the gamble work through streamlining, cost-cutting and creative design and marketing.

``This transaction turns BenQ into a worldwide player,'' said Jerry Wang, chief marketing officer of BenQ, which, like most Taiwan tech companies, is not well known in the United States. The company, founded in 1984 by the Taiwan tech conglomerate Acer Group, was spun off in late 2001 and had revenue of about $5 billion before the Siemens mobile merger.

Last week, BenQ launched the new brand with the first three mobile phones to carry the BenQ-Siemens logo. BenQ has the rights to use the Siemens name for five years.

For BenQ, the strategy to step out from the anonymity of being a behind-the-scenes manufacturer and designer is a bold move. The acquisition of the Siemens mobile group is also something of an acknowledgment that it has to buy a brand name, much like Chinese computer maker Lenovo, which acquired IBM's PC business last year.

As BenQ's branding strategy first became public a few years ago, ``Everybody in Taiwan was watching us and thinking, `Those guys are crazy,' '' Wang said. Today, bookstores carry dozens of books on the subject and Wang is in demand as a speaker on how to build a brand, he said.

BenQ's former parent, Acer, moved away from manufacturing in late 2000, spinning off its PC manufacturing unit, Wistron, and focusing on creating a global identity. Acer, the world's No. 4 PC company, just a few years ago made computers for companies such as Hewlett-Packard and Dell, but now focuses on its own brand. It has had success in Europe with its brand and is trying to make inroads in the tough U.S. market with the Acer label. Acer named Gianfranco Lanci, an Italian who has headed company operations in Europe and the United States, as president in 2004.

``Acer will focus on becoming a truly global marketing company and maximize outsourcing,'' said Acer Chief Executive J.T. Wang.

Profits under pressure

It is the fear of profit margins being squeezed that is driving companies like Acer to move away from manufacturing under contract to others.

The shift can be tricky, observed Roger Kay, president of research company Endpoint Technologies Associates. When BenQ took over Siemens' cell phone business, it lost its contract with Motorola, which now views its former Taiwan partner as a competitor, he observed. ``If you can't replace that business immediately, you will be hurt,'' Kay said. ``So it's delicate.''

Asustek Computer is making a similar move upward. The Taipei company, another Acer offshoot, is a world leader in manufacturing computer motherboards and also makes notebook computers for Apple Computer and Sony. In recent years, Asustek has assembled an international design team to create its own brand of sleek laptops.

``If you have your own branded products, you have the responsibility that comes with it -- usability, integration,'' said Markus Wierzoch, manager of the design team. ``You can't just deliver products anymore.''

While it may be impractical to think Taiwanese companies such as Asustek can crack the U.S. market, they can make gains elsewhere, said IDC analyst Richard Shim. Asustek, he said, has made headway in China with its brand.

``It's possible to be a major force, even if you don't concentrate on the U.S.,'' Shim said.

Meanwhile, the Taipei government is using tax incentives and other assistance to lure Silicon Valley start-ups to the island.

5V Technologies, a chip-design company for Voice over Internet Protocol, or VoIP, and WiFi networks founded by valley veterans in 2004, relocated from Cupertino to the Nankang Software Park in Taipei last year. It is receiving funding from Taiwan venture capitalists. Subsidies from the Taiwan government, including rent, are equal to about $3.2 million.

Taiwan is also attractive because, unlike China, it has strong enforcement of intellectual property laws, said Chief Executive Jackson Chang, who still has a home in Silicon Valley. Taiwanese engineers also are better trained than counterparts on the mainland, said Executive Vice President Allen Lyu.

``Taiwan,'' said Michael Cheng, vice president of engineering, ``is taking the next step to reinvent itself.''

--------------------------------------------------------------------------------
Contact John Boudreau at jboudreau@mercurynews.com or (408) 278-3496.