Taiwan-based distributor World Peace Group had a little more work to do. Its
engineers had developed a 2.4-GHz cordless phone with a National Semiconductor
chip set for a mainland China OEM, which had sent them back to the lab scratching
their heads.

Nothing was wrong with the reference design; it impressed the customer and
could be readily commercialized. But the Chinese OEM wanted to see its actual
size-in a housing, with a nice color. In short, it wanted a prototype. And maybe
some assistance in getting it to mass production at the lowest possible cost.

OEMs "would like us to provide service like a design house," said
Scott Lin, head of WPG's design division. "We are a distributor and can't
really do that. But if we cannot provide services to help customers move to
mass production, we will sell nothing."

Just how deep into design a distributor should go to capture a promising customer
base is only one predicament-or opportunity-WPG faces as it sets its sights
on becoming one of the top three global semiconductor distributors by 2007.

WPG is already the largest distributor in Asia and was ranked by Electronics
Supply & Manufacturing in June as the sixth-largest distributor in the world
(see www.my-esm.com). With total revenue of $1.6 billion coming from Asia, World
Peace beats out rivals Avnet Inc., which had Asian revenue of $1.3 billion in
the fiscal year ended July 3, and Arrow Electronics Inc., which reported $820
million in 2003.

Mike Chang, CEO of WPG, forecast the company will top $2 billion in 2004 revenue
and will grow organically at a rate of 30 percent a year for the next five years.

The Fundamentals

What's fueling Chang's optimism? For one, Asia, particularly China, is growing
faster than other regions of the world. China's gross domestic product is believed
to have grown 8.7 percent this year and is expected to grow 8.2 percent next
year, one source said.

For another, design cycles are shortening, and new small and midtier OEMs are
emerging. Also, major component suppliers such as Intel and Texas Instruments
are not structured to meet customer demand through direct sales. "The OEMs
look to the distributor," Chang said. Asia's total available market (TAM)
for semiconductors, he said, is shifting more to distribution.

One rule of thumb holds that about 50 percent of the semiconductor TAM in China,
or roughly $14 billion, typically ships through distribution. Figures from iSuppli
Corp.'s Shenzhen office support that. The research firm further predicts that
China's distribution TAM will rise from about $14 billion in 2003 to $23 billion
by the end of 2006.

The ascent of an Asian distributor into the ranks of the global top tier was
just a matter of time, some argue. The region has been the growth engine for
electronics for the past few years, and WPG has capitalized on that trend. The
company's eight-country Asia footprint includes five warehouses, 28 branch offices
and 1,300 employees, about half of them sales-related personnel.

WPG's customer base consists of 60 percent small to midsize Asian companies
and 40 percent big OEMs, both Asian and foreign. By putting proportionally more
emphasis on the growing number of Asian OEMs, particularly in China, WPG hopes
to sharpen its differentiation from top-tier rivals.

Chang reasons that the giants of distribution, Avnet and Arrow, tread cautiously
in the untamed Asian markets, devoting most of their attention to the transfer
business of their meat-and-potatoes customers in the United States or Europe.
He sees World Peace as far more confident and nimble in its home territory,
shifting easily between the shared cultures of Taiwan and China and going after
the patchwork of Asian business that foreign competitors sometimes neglect or
take a longer time to engage.

"Big foreign distributors lack the local contacts, flexibility and design
services that we have," Chang said.

Chang, a former chip design engineer, previously worked in Asia Pacific semiconductor
sales for NEC, Texas Instruments Inc. and the now-defunct Chips and Technologies.
He joined WPG in 1993 as assistant to the chairman, Simon Huang.

WPG at the time was focused only on Taiwan, and revenue was $87 million. The
Asian electronics boom hadn't yet coalesced; only those companies that were
taking the long view had China on the radar.

Then Taiwan's chip foundry concept caught fire. U.S.-trained Taiwanese engineers
began returning home in droves, PC and notebook production flared, and the island
blossomed into the world's low-cost electronics factory.

Chang helped WPG ride the wave. It has grown revenue every year since then
and has stayed profitable, Chang said, adding that his company is the top worldwide
chip distributor for Philips Semiconductors and tops in Asia for TI, ON Semiconductor
and Hynix, with 1,500 active customers.

"WPG went through the learning curve earlier than competitors," said
Jessica Chang, equities analyst at Macquarie Securities in Taipei. "They
are a kind of flagship in Asia."

China's Challenges

WPG's growth engines have been Taiwan and China. Just over $1 billion in sales
were derived from Taiwan last year. WPG's sales to Hong Kong and China totaled
$272 million. The rest of Asia accounted for $270 million. Macquarie Securities
analyst Chang said WPG's China operation turned profitable earlier in 2004.

Avnet, however, outshone rivals by posting $480 million in Hong Kong and China
sales in 2003, largely by buying mainland distributor Sunrise Technology Ltd.,
the analyst said.

China is a tough market for distributors. The fragmented customer base, lack
of experienced middle management, undeveloped physical infrastructure and bureaucracy
often frustrate plans. For example, moving goods from a bonded warehouse in
Shanghai to one in Suzhou, about an hour's drive, requires paperwork procedures
that can take up to a week, according to WPG's CEO.

On the other hand, China is growing by leaps and bounds. With $53.5 billion
in foreign direct investment last year, it passed the United States as the world's
top investment magnet. ODM revenue derived from China is forecast to grow 2.5
times by 2008, to $108 billion, according to iSuppli. And some 56 percent of
global EMS production is expected to shift to Asia, mainly China, by 2007, according
to Technology Forecasters Inc. Currently the figure is 41 percent.

Mainland customers are of all shapes and sizes, most requiring tailored services.
The stew includes huge domestic OEMs such as Huawei and TCL; Taiwanese ODMs
such as Asustek Computer Inc. and BenQ; and all the big-name foreign multinationals,
such as Samsung Electronics Co. Ltd., Hewlett-Packard Co. and Flextronics International
Ltd., some with and some without design centers. Also in the mix are independent
design companies, Chinese-state-owned enterprises, global EMS companies and
small and midtier domestic OEMs.

Servicing the myriad customers has not been an easy game, even for distribution's
deep-pocketed giants. Yang-Chiah Yee, president of Memec (Asia Pacific) Ltd.,
estimates that the top four semiconductor distributors-Avnet, Arrow, Future
and Memec-hold 85 percent of worldwide market share. But in China, the top 10
distributors hold about 25 percent of the total available market, followed by
hundreds of other distributors with less than 1 percent each.

A much more competitive environment exists than in other countries, Yee added.
"The big distributor doesn't have the pricing power," he said. "When
they quote a price to a customer, he probably has 10 other suppliers to compare
the pricing to. That's a major difference."

Raymond Tsang, president of Avnet's Asia components division, adds that services
range from simple buy/sell to mix-and-match activities like inventory stocking,
material consignment, vendor-managed inventory, global supply chain program
and financial services.

"What is essential [in China] is the capability to tailor the services
to fit the customer's needs," Tsang said. "You have to run your service
offerings like an a la carte menu, delivering exactly what the customer ordered
at the lowest possible price."

WPG entered China in 1996 to service Taiwan-transfer business customers. It
only began to offer services for domestic customers in the past two years. Nonetheless,
World Peace in 2004 derived $150 million in business from domestic Chinese customers,
including Legend and TCL. Chang expects that figure to double to $300 million
next year.

WPG management believes its advantage comes from flexibility with value-added
services coupled with lower costs. For example, the company developed server-based
Enterprise Resource Planning, using the RosettaNet standard, which is automated
to connect all operations and warehouses in Asia. The system readily adapts
to fit the diverse customer mix. Software from Oracle or SAP, management said,
was expensive and too difficult to customize.

WPG helps customers without IT systems set up the capability to link with its
own systems. Chang estimates the company has assisted 40 Taiwanese customers
so far. Depending on the customer, the service may be free. "Other big
distributors will wait for customers to set up the system themselves,"
Chang said.

About 70 IT people in Greater China maintain and monitor inventory on the customer
side. The company runs 21 VMI hubs at customer sites in ASEAN (Association of
Southeast Asian Nations) countries, including 15 in China, where four more are
expected to be added in 2005.

Payment terms, meanwhile, can stretch to varying lengths depending on the customer.
A Hong Kong customer may get 30 days, a Chinese customer up to 60 and a Taiwanese
customer even longer. Payment terms can go to 150 days.

Most persuasive, though, is probably WPG's low overhead costs-a mere 3 percent
of revenue in Taiwan-that can be passed on as cost savings to customers. "Our
operating costs are probably the lowest in the world," Chang said. "It's
about big volume and high productivity." The company claims that for every
employee in Taiwan, it earns $2 million per year. In China, the figure is $1
million.

Two Design Streams

WPG has 150 engineers in Taiwan and China doing complete system design. By
contrast, Avnet says it has 40 engineers in Asia who focus on system solution
support.

"No one has a design team the size of ours," Chang insisted.

WPG is zeroing in on two market segments: digital consumer and wireless apps,
which include GSM, CDMA and 3G mobile products.

"Every investment in terms of people, resources and equipment is aligned
with these two streams," said Lin of WPG's design division.

Some completed reference designs for Taiwanese customers include PDAs, cordless
phones, DVD players and digital still cameras. The company has designs in the
works for a host of other products, including a set-top box, DVD camcorder,
media player and digital TV.

To ease the engineering burden, WPG also owns major equity stakes in four Taiwan-based
independent design houses (one spin-off and three startups): Omniblue, for Bluetooth
applications; MasterIA, for RISC-based CPU and Linux OS; Lighten, for DSP-based
MP3 applications; and Lab 105 for network-attached storage servers. These IDHs
act as design partners and facilitators, guiding the OEM to mass production.

WPG is pursuing IDH alliances in China to serve its demanding OEMs. "As
a distributor, our strength is not industrial design," Lin noted.

In 2004, WPG set up two design labs in China, one in Shenzhen, with 23 engineers,
and the other in Shanghai, with four engineers and plans to expand. WPG had
already made inroads: A 20-inch LCD TV designed for a Taiwanese customer was
purchased by a mainland OEM.

Lin sees 2005 as the big year when China design will begin paying dividends,
particularly in LCD TVs. Each TV will require a different interface, logo and
industrial design. WPG will get involved in showing the customer how to make
those modifications and offer to hook up the customer with third parties.

Chinese OEMs have an insatiable appetite for new designs. Their market windows
are short, and the distributor has to offer a range of design services to accommodate
them. "If the customer simply needs a sample or data sheet, we can [do
that]," said Avnet's Tsang. "Troubleshoot on application issue? No
problem. How about, 'Give me the system?' OK, we can talk. 'What product should
I build?' Let's bring in our segment marketing expert to share the market trends
and technology road map with you."

WPG, Avnet and Memec aggressively go after demand creation, which involves
distributor-supplied engineering training and guidance for a specific product
or system. The distributors train OEM engineers to use the latest parts from
suppliers, aiming to get them designed in. Sometimes the training is free. Demand
creation elegantly interlocks with China's need: Thousands of engineers pour
out of universities annually and go right to work at OEMs, lacking commercial
design experience.

WPG isn't stopping with China. Asia-Pacific is its domain, and it is bolstering
investments in the region. In August, it announced a joint venture with Teksel,
a subsidiary of Japan's Mitsui & Co. Ltd., which hopes to leverage WPG's
distribution networks to expand its chip business in China.

Japanese companies traditionally have preferred working only with Japanese
distributors, but Chang believes that's changing. "We don't expect to do
sales in Japan, but we expect to do business with the Japanese in Asia-Pacific."

In the rest of Asia, WPG management believes India looks promising. India's
government has become investor-friendly and recently removed import duties on
semiconductor components. WPG has offices in Bombay, Bangalore and Delhi but
did only $5 million in business there last year, Chang said. By comparison,
revenue in tiny Singapore for the same period was $200 million.

In the United States and Europe, Chang wants Asia-bound business-the designs
that originate in other regions but will come to Asia for manufacturing. If
WPG can get its suppliers' components designed into products developed in the
States, it would realize the revenue when the products are manufactured in China.
Chang's goal is to build up a 30-person team of field application engineers
in the United States by the end of 2005, though no concrete steps have been
taken in that direction yet.

Avnet and Arrow currently dominate European and U.S. OEM transfer business
to EMS companies in Asia. "We are not big in this area yet, but we are
trying to go after this segment," Chang said.

WPG is seeking U.S. partners. The company had an alliance with Pioneer-Standard
Electronics Corp.'s Industrial Electronics components division, but that ended
in 2003 when Arrow bought the division.

The European presence consists of a 0.2 percent equity stake in Eurodis Electron
PLC, Europe's third-largest distributor, based in Surrey, England. Chang's tactic
is to target customers with design work in Europe and volume production in China.
He would not disclose details, but he said he's confident the relationship will
pay off next year with "some significant European transfer business from
a top company in Europe."

Growing Like a Giant?

Analysts believe WPG has put itself on the right course. The Asia-focused business
model offers differentiation, and the emphasis on digital consumer and wireless
sectors aligns with market trends, they said.

Their estimates for revenue growth in 2005, however, are no more than 15 percent-far
from CEO Chang's forecast of 30 percent. To become one of the world's top three
distributors, WPG will need to acquire companies, said Christine Wu, equities
analyst at KGI Securities Co Ltd. in Taipei. Organic growth alone would make
reaching Chang's growth target difficult, she said.

Acquisitions would require cash reserves. Lifting the hood on WPG, analysts
find the same strained financials that typify other Asian distributors. WPG
is profitable and has been so in every quarter since it was founded in 1981,
management said. The margins, though, haven't been robust. Operating profit
in 2003 was low, at 2.6 percent of revenue, because of a previous emphasis on
the PC market, Wu said.

She sees WPG's new focus on consumer and wireless communication as lessening
exposure to commodity products. Memory ICs, including DRAM, SRAM, flash and
E2PROM, represented 19 percent of revenue in 2003. But products like the LCD
TV that the company thought would help margins have seen a market slowdown,
she added.

WPG also has a 60 percent debt-to-equity ratio, a little higher than most Asian
distributors, Wu said. The company is not operational positive in terms of cash
flow, meaning it needs to borrow money or get credit terms from banks and suppliers
to sustain business.

"The company is in a rapid growth stage and needs lots of working capital,"
added Chang of Macquarie Securities. "This is not only [a problem for]
World Peace; the whole distribution sector faces the same issue."

Meanwhile, WPG continues its mainland expansion. In 2003, the company had 300
China employees. Chang estimates 600 at year's end and predicts 1,000 in 2005.
Four new state-of-the-art automated logistics centers are expected to be up
and running in Shanghai, Suzhou and Shenzhen by December.

When all is said and done, Chang believes his company can still grow 30 percent
annually and will close in on Avnet and Arrow in the next three years. He reasons
that Asia chip sales are expected to grow about 25 percent annually, faster
than worldwide sales at 10 percent. Slightly exceeding market growth is achievable,
putting WPG right where Chang wants it to be.

He has a point. Industry sources noted that the three top players in Asia represent
only 25 percent of the total distribution market in the region. At the end of
the day, there's still a lot of room at the top.