(FORTUNE Magazine) – MADE IN TAIWAN. If that label sparks an image of cheap, shoddy products, think again. In budget personal computers, arguably the hottest segment of the global PC market, Taiwanese suppliers provide a vital edge for Compaq, Apple Computer, and practically every other brand-name manufacturer. Some of the giants' fast-selling machines, as well as many key PC components, are engineered and built by Taiwanese companies that few consumers have ever heard of. The sole notable exception to anonymity, Acer, expects sales this year to hit $2.8 billion and is a leading brand name in Southeast Asia and Latin America. Fast-moving manufacturers everywhere can glean wisdom from the lean and hungry Taiwanese:

-- Time-to-market quickness counts, and so does knowing when to get out. The best Taiwanese companies can move a concept from the drawing board to the production line in 90 days -- less time than Japanese or Korean giants need just to make a decision. "Speed gives Taiwan a tremendous advantage in the marketplace," says Daniel Heyler, a senior analyst at Dataquest in Taipei, Taiwan's capital. The Taiwanese pride themselves not just on picking the right products to make -- but on knowing when to stop. Says T.C. Tu, director of market intelligence at Taiwan's Institute for Information Industry, a quasi- governmental organization: "Success depends not on one right choice but flexibility in moving from one right choice to another quickly enough."

-- Know your place in the world value chain. Taiwan's manufacturers have figured out precisely where they can prosper in the value chain of the global info-tech industry. With an average annual income per capita of about $10,000, the island is among the richest Asian economies and has no cheap factory labor. Instead, Taiwan thrives on relatively inexpensive brainpower: bright junior engineers who are lightning fast at exploiting technology obtained from abroad and who typically earn $15,000 a year, only about one-third as much as their U.S. counterparts. Their work enables Taiwan to claim the middle ground between low-end, labor-intensive economies like the People's Republic of China and the high-tech domains of the U.S. and Japan.

-- Specialize and squeeze down costs. Most of the roughly 5,000 Taiwanese computer companies are small firms devoted to making a few components on which their very survival depends. They have elevated to a fine art such seemingly workaday tasks as controlling inventory and overhead expenses. As Tu puts it, "Everyone competes for management efficiency." Dell Computer in the U.S. considers itself lean with overheads equivalent to about 15% of sales, but by comparison, overheads of Taiwan computer companies appear almost anorexic, averaging less than 10% of sales. A fascinating Taiwanese money-saving technique: "modular manufacturing," in which price-sensitive parts are left out of PCs and then shipped to distributors for installation at the last possible moment before the machines are sold.

-- Piggyback on what your customers know. Taiwanese companies have perfected the art of symbiosis: soaking up knowledge from their customers, the brand- name behemoths, like nutrients from the earth. Explains C.S. Ho, 45, vice chairman of Mitac, a computer company with $450 million in sales in 1993: "We team up with companies, mainly from the U.S., that know what customers want. It's not just a deal between buyer and seller, but an information exchange on the market and technology." American customers are a particularly rich source of basic R&D, says Peter Kurz, chief representative in Taiwan for Baring Securities: "The Americans bring Taiwanese suppliers into their inner sanctum, brief them on plans for the next generation of products, and give them the necessary specifications. As a result, Taiwanese companies obtain technology with very limited investment in R&D. They just improve existing designs and make them commercially viable."

In the development lab of one tight-lipped Taiwanese company, a new Apple product is taking shape: a compact desktop computer with a built-in fax machine and printer for the home office. Serving quietly as a design back office for computer giants, Taiwan has become a hothouse of ideas. Says Tu: "A buyer comes to Taiwan with just specifications, and our companies create the products. We call these firms ODMs, original design manufacturers." The PC price wars of the past few years, which established enduring demand for ever more economical models, have helped make the Taiwan connection indispensable for computer makers. Five top U.S. companies -- Apple, Compaq, Dell, IBM, and Packard Bell -- spent $1.7 billion in Taiwan last year on computers and parts, and this year will drop another $2.1 billion, according to Taiwanese industry statistics. That's only the rich crust of an expanding pie. Last year the island's sales of computer hardware hit almost $10 billion, having grown since 1986 at an annual compound rate of some 25%, vs. 15% for the PC industry worldwide. As computer makers try to entice consumers by constantly bringing out new and slightly more powerful models, each PC seems destined to become obsolete in a year or less -- a pattern that assures plenty of assignments for the Taiwanese. Acer, for instance, has turned out scores of machines, including Apple's PowerBook 145, IBM's Ambra line, and PCs custom-made for Data General, Canon, Hitachi, Mitsubishi, Siemens, and ICL of Britain. Taiwan accounts for fully 22% of the world's notebook computers, making it the second-largest producer after the U.S.

MANY Japanese companies that pride themselves on assembling their own machines (and labeling them made in japan) see Taiwan as the place to contract for major components at cut-rate prices. NEC, for example, buys motherboards (the main circuitboards for PCs) from Elitegroup and monitors from Tatung, both in Taipei. Like courses in a Chinese dim sum tea lunch, component sales add up to an entire Taiwanese industry, and the island claims a surprisingly large share of the global market for computer parts. According to Institute for Information Industry figures, Taiwan supplies 83% of the motherboards not & made in-house by computer manufacturers, 80% of the mouse pointing devices, 51% of monitors, 49% of keyboards, and 30% of power supplies. Not bad for a nation of just 21 million people crowded onto a rocky island slightly smaller than the Netherlands. The Nationalist Chinese, who fled from nearby mainland China after the communist takeover in 1949, have built a world-class export economy. Until recently, mainlanders dominated Taiwan's government while the natives concentrated on business. The Taiwanese started out making cheap textiles and toys, graduated into consumer electronics and sophisticated plastics, then plunged into the computer industry with an entrepreneurial passion rivaling that of Silicon Valley. In this case, chalk up one solid victory for the union of industrial policy and free enterprise. Government planners promoted the information technology business by mass- producing engineers and giving tax breaks to high-tech startups. Even now a company with an exciting commercial idea can get a government grant for up to half the development costs; a fund of just $40 million helps scores of businesses. But most companies enjoy no direct subsidy, and there are no free rides. Some 50 to 100 companies die each month; a like number of new ones spring up in their place. In this Darwinian environment, only smart companies like Mitac survive. The company helps set the island standard for manufacturing speed, operating on what the Taiwanese term a three-six-one cycle: three months to design a product, six months to sell it, and a final month to clear out the inventory before starting over again. Remarks vice chairman Ho: "The costs of each company here are not all that different, so speed or lack of it may account for two-thirds of your profit or loss." Mitac wasn't always so nimble. In 1992 it got clobbered peddling its own brand of computers. It then decided to concentrate on what it does best, designing and building products for such customers as Apple and IBM. It supplies docking stations that enable IBM ThinkPad portables to be plugged into desktop computers, for example. To help contain production costs, Mitac relies on modular manufacturing, which has become a favorite Taiwanese technique. It assembles the frames and basic innards of its PCs at a low-wage plant in mainland China, which Ho says makes a big difference in a business where "people are struggling to save 1% to 2% on costs." Mitac purposely leaves out of its machines the microprocessor and hard-disk drive, components whose prices can drop 10% during the two to three months it will take the PCs to reach the consumer. Ever faster and cheaper computing power, one of the wonders of the industry, is a burden for companies that get stuck with last quarter's model. "It's like selling melting ice," says Ho. So Mitac buys those price-sensitive components at the last minute and supplies them to distributors for last-minute assembly in the U.S., Europe, Japan, and Australia. Acer is Taiwan's answer to Compaq -- a powerhouse that beats the competition on both technology and costs. Like Compaq, Acer was nearly crippled by price competition a few years ago and put itself through a harrowing process of restructuring to survive. The company's driving force is founder and chairman Stan Shih, 49, a visionary blessed with a strong sense of business realities. He aims to put Acer among the world's top five PC companies by next year, a goal that may not be as far-fetched as it sounds. Acer is already the leading PC brand in Southeast Asia and No. 2 in Latin America. In the U.S. it recently moved into the No. 10 spot, according to International Data Corp., a market research company in Framingham, Massachusetts. Says Shih: "Being in the top ten, according to my calculation, means that you survive. Being among the top five means that you can make a profit." ACER has flourished on audacity. Shih, who acquired his first pair of shoes upon entering high school, got grand ambitions while studying electrical engineering at Taiwan's National Chiaotung University. He became fired up with the idea, new to Taiwan, that the advent of microprocessors could create a second industrial revolution. In 1976, he and some unemployed friends scraped together $25,000 and formed a company to join that revolution. Acer initially designed hand-held electronic games. But Shih, who set the pace by working 16- hour days, inspired his partners to try to build Acer into Taiwan's first world-class computer company. One of their toughest challenges was lack of credibility: Back then, many in the computer business thought of products made in Taiwan as junk. To explode that stereotype, Acer built a reputation for technical excellence. In 1986 it beat IBM to the market (and tied Compaq) with a computer incorporating Intel's hot new microprocessor, the 80386. The company grew at a dazzling pace by introducing PCs with more features and lower prices than comparable IBM ( machines. Fashioning original products, not just cheap clones, and selling them mostly under its own name enabled Acer to distinguish itself from the Taiwanese pack. When a price war swept the PC market several years ago, however, Shih's dreams began to look more like nightmares. Acer lost money for the first time in 1991, even as annual revenues approached the billion-dollar mark. "What went wrong?" Shih likes to ask rhetorically. In heavily accented English, he ticks off the causes of Acer's woes. For one thing, Acer made "too much long- term investment too quickly." Just as profit margins were shrinking, it poured cash into its marketing organizations in the U.S. and Europe. In 1989 it teamed up with Texas Instruments in a $250 million joint venture to make memory chips in Taiwan. In 1990 it plowed $90 million into acquiring Altos, a struggling San Jose computer maker, now called Acer America. Worst, says Shih, Acer had become bloated during the prosperous 1980s: "We had too many layers of management, slow decision-making, and high overheads. There was no sense of ownership or risk sharing by employees." A shakeup, started in late 1990, has changed all that. Acer shed 400 employees, about 8% of its work force, an unprecedented move in Taiwan. Finding another job is no problem there, but being dismissed by a premier company carries a social stigma. Shih wrote a letter explaining Acer's plight to the family of every employee who was, as he delicately puts it, "asked to resign." Taiwanese society reveres seniority, but Acer now evaluates employees solely on the basis of their performance. Shih slashed the headquarters staff from 300 to a mere 85 and carved out two layers of management. Through a bold innovation, he also virtually eliminated Acer's corporate overheads, abolishing the 3% "corporate tax" imposed on operating units. Now the headquarters units, such as the legal department, sell their services to Acer's divisions at market rates. Chairman Shih himself earns his own way, hiring out as a consultant to operating units with difficulties and sharing a small portion of the additional profits that he helps them create. He cooked up this unorthodox arrangement on his own, without the counsel of high-powered (and high-priced) management consultants. Explains Shih: "I worked very hard and wondered why we couldn't make money. That pressure forced me to find a new way." Shih also looked for novel ways to motivate Acer's executives around the world. He greatly increased the autonomy of the company's divisions, so that each is responsible either for manufacturing a particular portion of the product line (such as monitors and keyboards) or for marketing all of Acer's products in a particular part of the world. Top management now consists of what Shih describes as "a network of personal relationships" among the division presidents, who have worked together for more than ten years. That is only the first step in Shih's plan to create a unique multinational company for the 21st century. He is encouraging executives and employees to buy stock in their own business units, which he expects to spin out into public companies. The goal: to transform Acer into a federation of 21 companies unified by a single brand and technology by the end of the decade.

THAT STRATEGY is intended, in part, to amplify Acer's international marketing power. Shih figures that Taiwan alone cannot provide sufficient personnel and capital to give the company genuine global reach. So in Mexico, for instance, where Acer has been the leading computer brand for the past two years, it recently formed a joint venture with local distributors to push its products in the rest of Latin America. Explains Simon Lin, 42, president of the computer products business unit: "We don't speak Spanish or have the local business connections, so we're leveraging on the knowledge of our partners." To streamline Acer's manufacturing process, meanwhile, Shih adopted what he calls a "fast-food approach." His engineers have designed for all Acer models a standard housing without screws that can be snapped together in 30 seconds. One of the biggest users of modular manufacturing, Acer ships unfinished computers to some 60 distributors around the world. They get the price- sensitive components just in time to do the final assembly. In the American market, Acer saves 4% on tariff charges by shipping machines without the microprocessors and buying them in the U.S. from Intel. In just two years, Shih's shakeup helped Acer halve its inventories, to a 45-day supply, and boost overall revenues per employee 40%, to over $250,000. With operating costs under tight control, Acer can profit on jobs that would be money losers for most of its competitors. Making computers for other manufacturers can yield profit margins as low as 3%, says Shih, "but we turn over our inventory ten times a year." (As a boy he learned the benefit of rapidly turning over inventory by helping his mother sell duck eggs in rural Taiwan.) Last year, Acer turned in its best performance ever, earning $85 million on $1.9 billion in sales. Shih is hardly satisfied with that 4.5% net profit margin and expects to do better in 1994. Nowadays he keeps Acer's design engineers focused on challenges such as devising a desktop PC that lets users hold full-screen, full-color videoconferences. The new Acer Videoconferencing System, complete with camera, is expected to retail for around $6,000 per unit. In another demonstration of technical prowess, Acer in April became the first company to sell a machine with Intel's then-fastest microprocessor, the 90-MHz Pentium. The AcerAltos server, a computer that helps PCs in an office network to swap and pool data, incorporates two 100-MHz Pentium chips for rapid processing.

MOST STARS of the Taiwanese computer industry, though hardly household names, have become invaluable supporting players for the PC giants. For firms like Elitegroup, a $300-million-a-year maker of motherboards in Taipei, success depends on how quickly they can translate a message from the market into a finished product. Founded mainly by engineering veterans of Acer, Elitegroup specializes in doing speedy jobs for such American customers as Digital Equipment Corp. and Rolm. Explains K.C. Tsai, 41, president of the company's U.S. subsidiary, Elitegroup can turn out a prototype motherboard within two to three weeks, about half the time that a U.S. computer maker requires to do the job. "The Japanese take even longer," he adds. "When the marketing department of a Japanese company has a new design, it will spend two weeks just discussing it with engineers." No wonder NEC has also turned to Elitegroup for motherboards. The allure of PC profits has prompted Formosa Plastics Group, Taiwan's largest private enterprise, to move into key parts of the business. Y.C. Wang, 77, the group's billionaire founder and chairman, provided initial backing for First International Computer, which his daughter Charlene, 45, and her husband Ming Chien, 46, started in 1980. A big producer of motherboards for companies like AT&T and Unisys, it earned $13.5 million on $447 million in sales last year. Though the company is now publicly held and largely independent, the Wang family tie gives it a rare advantage among Taiwanese computer companies: strong financial backing and automatic credibility in the international banking world. Making the most of its connections, First International acquired a U.S. PC company called Everex and invested in two factories in mainland China that turn out low-cost components. Chairman Chien's goal is to make First International another Acer. The lack of a well-known brand name doesn't bother him: "Our customers, American and European computer companies, know First International, and that's what counts." A Ph.D. electrical engineer trained at Berkeley, California, Chien says that the motherboard is a splendid cash cow. He explains, "The profit margin is low, but if we produce a good number and have stable operations, the cost of manufacturing will just drop and drop." First International has diversified into such profitable activities as testing integrated circuits for other companies.

EVEN AFTER scores of Taiwanese companies have been shaken out of the highly competitive notebook computer market, First International is jumping in. The company's financial cachet helps it wrest from suppliers hard-to-get components such as liquid-crystal displays. "The LCDs are controlled by Japanese companies, and their terms are very tight," says Chien tersely. The company's laptops are cleverly designed, with modules that snap apart for maintenance, which Chien says is the biggest headache with notebooks. While defective machines usually must be returned to the manufacturer for repair, says Chien, "if a screen or a disk drive goes bad on our notebook, the distributor in America or Europe can plug in a new one and send the defective module back to us." Chien is negotiating with several U.S. and European companies to sell those little wonders under their own labels. In Asia, First International will market notebooks bearing its own Leo brand. Formosa Plastics is directly grabbing a potent place in the computer parts industry too. Nan Ya Plastics, a key member of the group with nearly $2.7 billion in sales last year, largely of such products as artificial leather, has already become Taiwan's biggest producer of printed circuitboards. Moving up the technological ladder, the company is building a $600 million plant to fabricate memory chips with technical assistance from Oki Electric Industry Co. of Japan. Says Winston Wang, 43, son of Formosa Plastics' founder and senior vice president of Nan Ya: "Memory chips are a commodity product based on both technology and management, which is what we already do well." He's also building a plant to try to break Japan's virtual monopoly on LCDs for notebook screens. Predicts Wang: "Computer electronics will be more than 50% of our sales pretty soon." The resourceful Taiwanese are not only allies of American companies but potential challengers as well. United Microelectronics Corp., a chipmaker spun off from a government research lab, is the first Asian company to design a microprocessor to compete with Intel's current top seller, the 80486. UMC's marketing strategy is to focus mainly on Europe and Asia. Explains executive vice president Ming-Kai Tsai, 44: "In the U.S. the promotion costs and legal expenses may not make it worthwhile for us." While UMC maintains that its chip is compatible with the Intel 486 but not an illegal copy, it expects Intel to sue. The Taiwanese chip manufacturer, for its part, plans legal action in Europe to challenge Intel's patents. Intel says it isn't worried. UMC's challenge to Intel symbolizes an ambition shared by many on an island crammed with clever engineers. Like South Korean manufacturers that first learned to make small microwave ovens as suppliers to U.S. companies and went on to become the lowest-cost producers -- and ultimately take over the business under their own brand names -- the Taiwanese computer makers have big dreams. For now they are content with serving as fast followers of technology mainly developed in the U.S. But as other Taiwanese follow Acer's example and learn global marketing, they could transform themselves from backroom developers to purveyors of products proudly bearing their own brand names right alongside the phrase MADE IN TAIWAN.