What consistently separated winners from losers in creating blue oceans was their approach to strategy. The companies caught in the red ocean followed a conventional approach, racing to beat the competition by building a defensible position within the existing industry order. The creators of blue oceans, surprisingly, didn’t use the competition as their benchmark. Instead, they followed a different strategic logic that we call “value innovation”. Value innovation is the cornerstone of blue ocean strategy. We call it value innovation because instead of focusing on beating the competition, you focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space.

－W. Chan Kim, Renee Mauborgne《Blue Ocean Strategy》

Preface

Day in and day out, corporate world finds it face intensified competition and complex operating challenges as a result of increasing number of players, geopolitical tensions, trade disputes, as well as energy and environmental issues. In order to sustain industry leadership, instead of following the existing rules, it is recommended to redefine competition and to create new and uncontested markets.Innovative thinking is the cornerstone for today’s managers, and their attention in this regard will be highly rewarded.

Macro Economics and Taiwan’s Trade Performance

The global economy gained momentum in the second half of 2003, and the expansion continued in the first half of 2004. However, rising energy costs followed by higher interest rates in most industrial countries slowed down the economic growth in the latter part of 2004.Global GDP growth in 2004, at the end, was estimated to be only 4.1%, still a healthy growth rate, though slightly lower than most economists’ expectations.

Taiwan also made a substantial improvement during the period while world economic growth accelerating.Global economic recovery, in combination with the consolidation at domestic industries, fueled the export value, showing a record high growth of 10.1% in 2004.As domestic consumption and private sector investment remained strong, business sentiment was also encouraged.

Taiwan continued to enjoy a strong trade surplus, reaching US$6 billion in 2004. The export value hit a magnificent US$174 billion, up 30.7% year over year.China ($34.0 billion), Hong Kong ($29.8 billion), and the USA ($28.1 billion) were the top three exporting markets, accounting for 19.5%, 17.1%, and 16.2% of total export value, respectively.The import value increased to US$167.9 billion, which grew 31.9% year over year.Major sources were Japan, the USA and China.These three import sources accounted for 26.0%, 12.9% and 9.9% of total imports, respectively.

Taiwan’s textile and apparel exports in 2004 increased 6% in value, compared to 2003.Total export value was US$12.5 billion, accounting for 7.2% of national aggregate exports.The principal export item was fabrics, with a value of US$7.2 billion, comprising 57% of all textile and apparel exports.Yarn exports ranked the second with a total export value of US$2.2 billion, enjoying the highest growth among the other textile products.The value of apparel exports fell by 11% year over year to US$1.3 billion.Hong Kong (including indirect export to Mainland China) stayed as the biggest export market of Taiwan’s textile and apparel products, representing 38% of Taiwan’s textile and apparel exports in terms of value.Other major markets were the USA (14%), Vietnam (7%), EU (6%), and the others (35%).

Textile and apparel imports to Taiwan in 2004 grew to US$2.7 billion, an increase of 12% from 2003, and accounting for 1.6% of the national aggregate import value.Apparel, fabrics and fiber were the top three categories, together accounting for 74% of the total imports.Overall, Taiwan enjoyed a US$9.85 billion surplus from its textile and apparel trade in 2004, an increase of US$410 million from the previous year and ranked the second of the foreign exchange deposit among Taiwan’s manufacturing sectors.

Operations Review

Far Eastern Textile Ltd. (FETL) has delivered an excellent performance in terms of ROE, value per share, capital structure improvement, and dividend payout during the past five years.In 2004, the consolidated revenue grew 45% to NT$121.5 billion, or US$3.83 billion (using 2004 yearend rate of US$1.0 to NT$31.71), net income surged 125% to NT$9.25 billion, or US$291.7 million.Total dividend for 2004 was NT$1.8 (US¢5.67) per share, which included NT$1.0 (US¢3.15) in cash and NT$0.8 (US¢2.52) stock dividends from capital surplus.

With a series of polyester product price rises in 2004, revenues from FETL’s operations in Taiwan all showed a double-digit growth.Revenues from polyester products, including fibers and non-fiber products, rose to NT$39.34 billion (US$1.2 billion), or a growth of 13% year over year.The mid and down-stream textile products enjoyed a 20% annual growth in total revenue to NT$13.56 billion (US$427.6 million).

The acquisition of polymerization facilities from DuPont Suzhou Polyester Company Limited was completed on November 1, 2004.The acquired facilities are providing FETL with an additional 100,000 tons per annum of the polymerization capacity, removing the production bottleneck in base polymers after commencing full operations in early 2005.The acquisition, combined with the third-stage expansion at our Shanghai production site, is expected to raise our polymer capacity in China to 750,000 tons per year.

Our future development in the polyester industry will continue to focus on high value-added and specialty products to achieve differentiation from other competitors.New applications of the existing polyester products will help us better position ourselves in a different market sector, and products involving technology innovation will help us create a high barrier for others to enter.Our target is to increase the margin and return on our polyester business, meanwhile maintain a moderate growth on the top line.

With this in mind and being committed to creating and maximizing long-term shareholder value, FETL has set up ERP, SCM and CRM systems since 2002.Yuan Ze University Graduate School of Management has also designed for the Group’s high and mid-level executives AMP (Advanced Management Program) and EMBA Program to cultivate knowledge workers and manpower needed for future growth..

Rewarding Telecom Investments in Far EasTone and Other Developments

Taiwan’s telecom industry experienced another year of rapid changes and ongoing unions among operators with regional/global players.Through the merger with KG Telecommunications, Far EasTone Telecommunications (FET) improved its competitiveness and market position, continuing to show strong operational performance in 2004.The consolidated total revenue and service revenue were NT$65.62 billion (US$2.07 billion) and NT$61.29 billion (US$1.93 billion) respectively in 2004. The consolidated service EBITDA margin reached 50.8% while the net income reached NT$14.04 billion (US$443 million) and EPS was NT$3.75 (US¢12).FET’s position as the leading data transmission service provider in Taiwan was unrivalled.Compared to 2003, non-voice revenue grew 30% and accounted for 6.3% of total service revenue, compared to an industry average of 4.9%.

In April 2004, Far Eastern Toll Collection (a four-company consortium with FET as the lead, along with TECO, Systex, and MiTac) was awarded a 20-year concession to build and operate “Electronic Toll Collection” for Taiwan’s highway.Construction work is ongoing and service is targeted to commence in January 2006, allowing the Group to apply its core competence on communication in a new terroirty.

FET has successfully transferred its listing from the Taiwan OTC market to the Taiwan Stock Exchange in August 2005.Listing on the TSEC main-board will greatly enhance FET’s investor profile and allow the Company to assure its rightful place among “blue chips stocks” on the prestigious TSEC.

FET is dedicated to the convergence of mobile communications and the Internet service. To achieve this, we believe it is necessary to ally international and regional operators, forming a larger customer base and a more comprehensive service platform.One of the moves to achieve this end was to join the i-mode alliance created by NTT DoCoMo.We believe this alliance can ensure efficient and scalable service platforms with sufficient supply of supporting handsets and devices, and provide customers with a variety of contents and services.

FET is now better positioned than ever to reach different market segments, increase its service revenue and enhance its business competitiveness in the face of convergence of technologies and services for communication, information, entertainment and transactions.

Major FET initiatives for 2005 include increasing market revenue share, 3G-technology commercial launch, enhanced distribution channels, and continued development of corporate solutions.

To benefit Mainland Chinese and Taiwanese businesses, our fixed line operator NCIC sparq and China Unicom have jointly promoted the data leased line services on both sides of the Taiwan Straits.Videoconference between China and Taiwan can help businesses in Taiwan achieve a 30% savings, enabling higher-quality communications between corporate headquarters in Taiwan and other branch locations in China.

Award Recognitions and Corporate Citizenship

Far Eastern Textile has consecutively been selected by “CommonWealth Magazine” as Taiwan’s Most Admired Company in the textile industry in 2003, 2004, and 2005 given its core competence, forward vision, extensive innovation, customer-oriented products and service quality, financial capability, operating efficiency, investment in R&D, successful international operations, high revenue productivity, and long-term investment value.

We are particularly pleased to report that the Group’s U-Ming Marine Transport (marine industry) was the winner of the prestigious “Forbes Asia’s Annual Best Under a Billion” special award with the fastest five-year earnings growth percentage.In addition, our Asia Cement Corp. (building material industry) was also awarded among the 200 most successful smaller public companies in Asia and the Pacific whose spectacular growth-and-profitability figures validate the managerial and entrepreneurial savvy of the top executives.

On the social responsibility side, Far Eastern Memorial Foundation, Far Eastern Medical Foundation and Y. Z. Hsu Memorial Foundation established by the Far Eastern Group have continued to make significant grants in support of various worthy causes.These Foundations seek to ensure the meaningfulness of their grants in the areas where the Group is an active participating corporate citizen.

Outlook and Innovation

In the long term, there will be four main businesses remaining as core assets in the Far Eastern Group－polyester, telecom, cement and retail.In these business sectors, we have enjoyed a leading market position, lower costs and other competitive advantages over our peers, and we will generate stable cash flows from operations in these industries.

In the near term, we are determined to focus on these core competences, in order to improve the return on invested capital.We will try to create new applications out of our existing products, in the hope that we can define a new, uncontested market and achieve higher margin.We also plan to enhance efficiency and competitiveness through the integration of our polyester producing facilities with PTA, dying and finishing, spinning, garments and apparel plants in China.Moreover, in order to raise the return on equity, we will continue to improve asset turnover through our land-developing project, the Far Eastern Telecom Park.

To enhance core competence, FETL has established the Far Eastern R&D Center to develop proprietary technology.Our R&D efforts focus on new applications of our products on four main areas: optoelectronics, biotechnology, specialty polymers and functional textile products.  In 2004, the Center has developed 16 new products/technologies in the lab, such as water permeable TPU and polyester films, biodegradable polyesters (FEPOL), wide-viewing film for LCD flat panel display, PLA fiber, deep dyeable polypropylene fibers, etc.  We are happy to report that two patents were granted and six more under examinations in 2004.FETL has invested NT$580 million, or 1.5% of its revenue on R&D in 2004, up by 15% compared to that in the previous year.  To meet our internal demand, the Center has planned its second-stage building expansion in 2005.

In 2003, FETL together with its affiliate, Oriental Union Chemical, formed a new company to construct and operate a grass-root PTA plant adjacent to its existing manufacturing facilities in Pudong, Shanghai.This PTA plant has been under construction and targets to commence operation in the first quarter of 2006.As PTA is a fundamental raw material for manufacturing polyester products, the successful start-up of this plant, we believe, would allow us to better control the raw material supply, reduce the volatility at raw material costs and gain flexibility in operations in the long term.

Summary

As aforementioned, Far Eastern Textile turned in outstanding results in 2004, registering a 45% growth in revenues and a 125% growth in net income compared to 2003.Value innovation, we believe, will help differentiate ourselves from the conventional competitors in the long term. Specific moves described above, especially enhancing proprietary R&D ability and creating new applications for our products could help open up a new and uncontested market place for us. Development of idle land should raise our asset turnover and, in turn, improve the ROE.Furthermore, increasing contributions from the telecom sector would reduce our exposure to raw materials and the earnings volatility.

We are confident our efforts will result in continuous satisfactory performance in 2005, showing our commitment to creating “blue oceans” through constant value innovation so as to achieve higher value for our shareholders.Meanwhile, we would like to thank our colleagues for their dedication, and our customers and shareholders for their continued support.