1 Message To Our Shareholders Message To Our Shareholders Dear Esteemed BenQ Shareholder: 2004 for BenQ was a year filled with challenges. The first half saw businesses firing on all cylinders; the second half, however, saw momentum slowed by price war on LCD monitor and customer rotation on handset. The company turned in NT$165 billion in revenue on a consolidated basis, representing a growth of 37% year-over-year; we closed the year with NT$7.7 billion in net income. We're pleased to report that branded revenue went from 29% of total revenue in 2003 to 37% in 2004. The company posted strong results across many product lines; BenQ-made LCD monitors scored solid market share gains; we became the world's top-three maker of LCD monitor in the second half of the year; furthermore, BenQ-branded monitors went from No. 11 in the world to No. 5. The company was able to execute market share wins as BenQ leveraged greater economies of scale, stronger procurement strengths, added ability to execute a world-class product portfolio, and our proprietary SenseyeTM Technology, a trademarked image-enhancing innovation. BenQ projector was another bright spot. In 2004 BenQ recorded superlative, profitable growth as the company established itself as a leading designer and maker of DLP projectors. The company enjoyed success working with its dealers in a win-win formulation. We set a new high on unit shipment; by year end, BenQ was in the global top-five. Our storage business also had a good year. BenQ was the first company in the world to introduce 16x speed DVD +/-RW drives in a collaborative effort with Philips. By Q4, BenQ had ascended to the global top-four. Innovation is central to BenQ's execution strategy, and we intend to continue creating world-class products with designs that captivate the consumer's imagination. In 2004 BenQ received 35 major global design awards and our products graced the pages of many leading global publications. BenQ followed up last year's fine showing at Germany's prestigious iF design competition, where the company secured seven top-place finishes, with another strong finish--winning ten top-place prizes. BenQ's brand equity grew 35% in value, according to Interbrand, and for two years in a row BenQ has ranked as one of Interbrand's top-10 global Taiwan brands. Reflective of the company's commitment to innovation, BenQ has over the past five years allocated about 3% of sales to research & development and currently holds over 2,100 global patents. We sponsored UEFA's EURO 2004 football championship which provided our channel partners with timely marketing support. The sponsorship helped accelerate the company's business momentum in Europe. We closed the year posting strong sales growth. Success aside, sales growth in Europe highlighted a need for better inventory management, higher sales productivity at overseas points of sale, a robust service infrastructure, and better benchmarking of marketing expenditures. We are taking immediate, corrective action steps to shore up these weaknesses and these efforts should minimize future surprises in the company's profit-and- loss accounts. With BenQ now a known brand in many markets/countries, BenQ enters a new phase of development with "Growth for Profit" as our key objective. We are in the process of implementing D.E.E.P. initiatives with the aim of boosting core-business profitability. D.E.E.P. stands for design/differentiation, efficiency, experience, and preference. To further position BenQ as a provider of differentiated, networked digital lifestyle devices, we are channeling our award-winning designs into many of our products. We are upgrading our product-delivery, service infrastructure so that we can create an impactful, dynamic BenQ experience at every turn. Additionally, we are benchmarking to shorten R&D cycles and increase supply/channel efficiency. Our D.E.E.P. initiatives are already paying dividends. To give an example, as result of better product design, we are seeing fast improving ASP on some of BenQ's higher-end handsets and LCD monitors. BenQ's product portfolio on the whole is much stronger than twelve months ago. To be sure, building a brand requires plenty of patience and hard work, and with your support, we are one step closer to becoming a sustainable global brand. We thank you for your continued support! Yours sincerely, K.Y. Lee - Chairman and Chief Executive Officer Sheaffer Lee - Chief Operating Officer 1 Table of Contents Message To Our Shareholders 01 Table of Contents 02 Corporate Strategy 03 Review of Operations and Product Strategy 10 Corporate Governance 32 Company Financials 40 Contact information 52 Corporate Strategy BenQ enters 2005 a better known brand in many Asia Pacific and European markets. The company’s strategy comprises three elements: BenQ’s Fleet-Footed Strategy to increase competitiveness, scale, and profitability; 5C strategy (computing, communications, consumer, crystal, cool brand) to better address market trends and consumers’ digital lifestyle; and DEEP (design & differentiation, experience, efficiency, preference) execution strategy to achieve brand preference. Since the inception of the BenQ brand three years ago, BenQ has achieved its initial goals of high growth and awareness. The next mission for BenQ is to become a brand consumers prefer. Fleet-Footed Business Strategy BenQ’s Fleet-Footed Strategy Increasing Overall Competitiveness BenQ celebrated its 3rd birthday in December, 2004. With the curiosity and aptitude for learning of a 3-year-old, BenQ has demonstrated a track record of excelling amidst fierce global competition. In that time span, the company has garnered 64 global design awards and numerous product accolades in Europe, the United States and Asia. In Taiwan alone, BenQ products have consistently achieved new milestones. Whether it’s cell phones or LCD TV, BenQ has consistently stayed on the leading edge in the design and manufacture of stylish IT products. The past 3 years have been a period of rapid growth for BenQ in terms of revenue, with branded and non- branded revenues alike growing every year. BenQ reached a revenue milestone in the fourth quarter of 2004: BenQ’s branded revenues surpassed 40% of total revenue. Building upon the success of BenQ’s two- legged strategy -- focusing on both branded and non-branded businesses, BenQ plans to continue racing ahead with a new fleet-footed strategy to increase scale and profitability. BenQ’s fleet-footed strategy extends from the company’s strengthening brand and improving mix of propriety innovation/technology. We are confident the company’s new strategy will ensure that branded profits continue to reach new highs while enabling BenQ to continue providing innovative technology solutions to our non-brand customers. 4 5 Corporate Strategy 5C Product Strategy 5C Strategy Better Addressing Market Trends and Consumer Digital Lifestyles 5C For a number of years, BenQ has been developing leading-edge products following the company’s computing-communications-consumer electronics (3C) roadmap. Today, BenQ is one of the few Asian brands expanding beyond the 3C technology arena; BenQ’s business/product strategy now incorporates two additional elements -- BenQ’s crystal TFT LCD technology and cool branding -- to make up what we call the 5C strategy. We are optimistic BenQ’s 5C strategy should enable the company to better address multimedia convergence trends, which we believe will center on three applications having one common element in crystal TFT LCD technology: mobile phone, laptop computer, and television. With crystal TFT LCD technology playing an essential role in all these applications and BenQ’s group of companies posessing its own TFT LCD technology, BenQ is well positioned to implement its 5C strategy of building a cool brand leveraging strong core technological strengths. 4 5 DEEP Execution Strategy Using DEEP Execution Strategy to Achieve Brand Preference Having achieved rapid revenue growth and brand awareness over the past few years, BenQ now strives to become a preferred brand. BenQ is implementing a DEEP execution strategy to further enhance the company's competitive advantage and continue to maintain growth trajectory. BenQ’s DEEP execution strategy incorporates the following elements: D: Design & Differentiation - Integration of Asian design elements into innovative technology/solutions Pre-dating the launch of the BenQ brand, BenQ already was a leading designer and maker of IT products that captivated consumers’ imagination. Today our "Meeting of Opposites" design philosophy accentuates east-meets-west design elements that have helped create a series of aesthetically pleasing, highly functional products. E: Efficiency - Shortening R&D cycles; increasing supply chain and channel efficiency BenQ aims to shorten its R&D development cycles and continue driving greater economies of scale across various product lines. In addition to building products with strong design attributes, the company is at work increasing supply-chain and channel efficiency. E: Experience - Creating an impactful, dynamic consumer experience at every contact point BenQ is executing a strategy to wow existing or potential customers with a positive BenQ experience at every turn, covering design, product packaging, functionality, point of sale, etc. P: Preference - To become a preferred brand by launching "mass-tige" products BenQ is launching "mass-tige" products that cater to consumers’ tastes , in order to further position BenQ as a preferred provider of networked digital lifestyle devices. 6 7 Corporate Strategy Computers were originally developed for office and business use only, but over time these applications are evolving and merging in form and function with solutions for personal and home applications. We've stated that BenQ's mission is to enable enjoyment in a connected IT world. And in a world enmeshed networks, there isn’t a moment in our day that is not affected by networking. As these networks become more complex, digital technology products also are becoming increasingly specialized and diverse.