Taiwan's industries have managed to adapt
to changing trends over the past five decades,
but now that China has quickened its pace, the
nation must pull its resources together to
stay ahead.
When on September 21, 1999, Taiwan was hit by a devastating earthquake, the news spread quickly, causing a significant drop in the US stock market. Stock holders began panic selling because they thought that Taiwan's high-tech production levels would drop, and its supply lines would come to a halt.
Chen Chao-yih, director-general of the Industrial Development Bureau (IDB) under the Ministry of Economic Affairs, says this incident shows how crucial Taiwan's role is in the global high-tech industry and reflects the country's position as an important supplier of the world's high-tech industries.
Such an achievement did not come easily. Taiwan's rise to prominence in the high-tech sector is a result of more than 50 years of joint endeavors between government and business. In the process of sustained industrial restructuring, Taiwan's major exports have changed drastically. The country produced canned food in the 1950s, textiles in the 1960s, petrochemicals in the 1970s, information technology in the 1980s, and semiconductors in the 1990s.
In terms of production value, Taiwan ranked among the top three producers worldwide for more than 30 products in 2002, including digital still cameras, ADSL modems, flat panel displays, IC (integrated circuit) design, IC packaging, motherboards, monitors, notebook computers, optical disk drivers, semiconductors, and wireless LAN, among others.
In particular, Taiwan's two IC foundry service providers, Taiwan Semiconductor Manufacturing Co. (TSMC) and United Microelectronics Corp. (UMC), account for 73 percent of the global share. Also, the overall production value of the country's IC design houses makes up 28 percent of the world share, slightly behind that of the United States.
Meanwhile, leading international firms including Apple, Dell, Fujitsu, Hewlett Packard, IBM, Siemens, Sony, and Toshiba have all fostered close partnerships with Taiwan's enterprises, and, in addition to their outsourcing and components procurement businesses, many of them have moved to set up research and development (R&D) centers here.
Once known for its manufacture of cheap sunglasses, toys, and umbrellas, Taiwan has managed to transform itself into a high-tech center. How did this happen? "The major factor behind the booming development of Taiwan's high-tech industry is its strong downstream manufacturing capabilities, which were cultivated for decades," says Chen Tain-jy, president of Chung-Hua Institution for Economic Research (CIER). "That's its biggest advantage in building itself into a high-tech citadel."
Many countries produce high-tech items, but none offer cheaper production costs and a shorter time-to-market than Taiwan, Chen says. These two qualities, together with its mass production capabilities, have propelled Taiwan to its position as a world-class manufacturing center of high-tech products.
Lee Kuen-yao, chairman of AU Optronics Corp. (AUO), the world's third largest manufacturer of thin film transistor liquid crystal displays (TFT-LCD), says there are many reasons why Taiwan is the high-tech center it is today.
First of all, Taiwan's science parks are in close proximity to one another, and together they form a well-established industrial cluster. A fully integrated supply chain allows for support that is essential to companies operating amid a changing environment.
Secondly, as those studying and working overseas continue to return, their contributions have greatly enhanced the high-tech industry. Moreover, Lee says, the domestic environment is friendly for corporate listings and provides easy access to various financing tools.
Alex Hinnawi, director of UMC corporate communication, says one key factor of Taiwan's successful transformation into a global high-tech leader is the designation of special industrial areas such as the Hsinchu and Tainan Science-based Industrial Parks, which offer attractive infrastructure and tax incentives for companies settling in these zones. The location of many high-tech companies in close proximity benefits high-tech companies operating in Taiwan, given that such a cluster effect allows them to save time and resources.
Another factor contributing to Taiwan's success, Hinnawi says, is the high educational level of its citizens, as well as the large number of overseas-educated Taiwanese who have returned to the island to work. This has helped Taiwan quickly close the knowledge gap with more industrially advanced economies.
Likewise, Hinnawi says that Taiwan has a dynamic and flexible financial sector that has enabled its companies to develop incentive programs to attract and keep the best employees. For example, Taiwan has a share-bonus system (originally instituted by UMC) that enables its companies to control production costs and at the same time handsomely reward employees for contributing to profitability. In recent years, Taiwan also has allowed stock option programs to develop, further enhancing the methods that a company can use to encourage its employees and attract talent.
The active venture capital scene, Hinnawi says, is another factor contributing to Taiwan's competitiveness. The ready access to capital to fund innovative new companies has created a snowball effect by encouraging successful start-ups to fund other promising companies.
Nevertheless, Chen Tain-jy of CIER says, Taiwan's industrial development model, which centers on original equipment manufacturing (OEM) and original design manufacturing (ODM), is running into some bottlenecks. For one thing, the profit margins of domestic enterprises have been shrinking.
Taiwan's companies must work harder than their foreign partners like Dell, IBM, and HP, but the gains will be minimal. For example, many companies fight with one another when vying for contract orders from leading multinationals because Taiwanese interests largely dominate the market. Such competition frequently leads to price wars.
"As for the international division of labor, Taiwan plays the unfavorable role of primarily taking on OEM or ODM businesses, rather than producing brand name products," Chen says. "The lack of branding is the biggest weakness for Taiwan's high-tech companies when they compete in the global market, given that they don't have any say or control in marketing channels."
Although Taiwan is known for its high-tech products, it misses out on many of the perks that should come with its status, he says. For example, the country's per capita income has changed little over the past ten years. Last year's figure shows a per capita income of US$12,800, compared with US$10,000 in 1992.
Chen says it is high time for domestic firms to further adjust their operations and business models not by merely upgrading their production level, but by churning out products that bear their own brand names so as to create more value. All this, Chen says, calls for innovation and R&D work. "Taiwan used to follow others in product manufacturing, but now it needs to create something new if companies expect to prosper," he says. "Technological innovations only come from dogged research."
Chen says the industrial sector and academic circles rarely interact. Most people who hold doctorates work at universities. They focus on training students and publishing research papers, but often do not take part in the industry.
As a remedy, Chen says that domestic enterprises should take an active role in financing the research work of academic institutions, that the two should foster close interactions to take advantage of their R&D results, which in turn can be used as a foundation for developing technology.
In the face of growing market competition, many domestic high-tech companies are recognizing the importance of innovation and R&D by increasing their investments in related activities. Michael Wang, executive vice president of Quanta Computer Inc.--the world's largest notebook computer contractor--says that the OEM/ODM business models lead to fierce competition and slim profits. "Taiwan's companies should upgrade their operations to increase their value. They should, however, avoid disrupting prices, which is an easy strategy, but it will eventually be detrimental to the industry because it will cause profits to fall," he says. On top of advocating a push for brands, Wang says upgrading technologies, operational systems, and product development are good approaches for generating higher profits.
Wang says Quanta has been progressively expanding its product line, which includes cell phones, game consoles, servers, and LCD TVs, as well as enlarging its design, distribution, and after-sales operations as a whole.
To remain competitive, Wang says his company has launched a NT$5 billion (US$147 million) investment project to build a large-scale R&D center, which is scheduled to begin operations by the end of the year. Dubbed "Dreamland for Engineers," Quanta's new R&D center will accommodate up to 7,000 engineers in a state-of-the-art working environment. The company now has 1,600 R&D staff.
Similarly, Lee Kuen-yao of AUO says Taiwan holds a unique position in the world as a key manufacturer in the value chain, traditionally importing new technologies from abroad. Lee also says that Taiwan should push to develop new technologies. AUO has been cooperating with government agencies, universities, and academic institutions, particularly with the Industrial Technology Research Institute on numerous R&D projects. Lee says he hopes to see more efforts in this area. AUO has also substantially increased expenses on R&D and production equipment. For example, last year the company increased its R&D staff by 58.7 percent from the previous year, much higher than the 6 percent growth of the company's overall staff over the same period. AUO poured over NT$3 billion (US$88 million) into R&D last year, an increase of 37.4 percent from 2002.
Lee says one major task faced by high-tech companies here is to cultivate talent. "To compete with our peers in Japan and Korea, one of our primary challenges is to attract more talent with international expertise and R&D capability," Lee says. "In addition to aiding our search for well-educated researchers, the government could improve the infrastructure and ease related rules to lure qualified professionals."
Wang also calls on the government to further relax regulations governing foreign labor, as well as the entry of professionals from abroad including China. He also says the government should lend national land to local businesses and offer low rental rates to stimulate growth. These measures, he says, will help the companies reduce costs and keep their roots here in Taiwan where the country still significantly outperforms China and other neighbors in manpower and R&D capability.
CIER's Chen says that in order to transform Taiwan into an innovation and R&D base, the government needs to improve the environment, infrastructure, and English education--all areas where Taiwan is lagging behind, compared with many industrially advanced nations.
Chen says Taiwan should place a greater emphasis on English by building a bilingual education system from primary schools all the way up to the college level, which would establish a close link with the international community and lure more foreign talent to Taiwan. As long as the government continues to improve these things, Taiwan will not have to worry about capital flight to China because it will be capable of constantly producing new enterprises. If there are good business opportunities here, investment capital will naturally flow back, Chen says. He says that for the time being, Taiwan's capital market remains vigorous and raising capital is not a problem.
IDB Director-General Chen Chao-yih says the government is offering various incentives and assistance measures including low-interest loans, subsidies and tax reductions, manpower training, and R&D equipment to encourage industrial upgrading and R&D activities. The government is also striving to remove investment barriers, while helping companies forge strategic alliances.
One goal of the government's Challenge 2008 National Development Plan, which began in 2002, is to make R&D spending 3 percent of the gross domestic product--comparable with other advanced countries--within six years. To achieve these goals, the government has set aside US$1.43 billion in loans for R&D activities, as well as provided tax and investment incentives to entice international companies to establish R&D centers here. The government has also been promoting a "Two Trillion and Twin Stars" program that aims to drive the production value of Taiwan's semiconductor and flat-panel display industries to NT$1 trillion (US$29 billion) each and build the digital content and biotechnology sectors into star industries, all by 2006.
Chen says the government understands the necessity of upgrading manpower to transform Taiwan into an innovation base. Consequently, relevant government agencies including the IDB and the Council of Labor Affairs' Employment and Vocational Training Administration have launched technical personnel training. They have also teamed up with academic and research institutions to open on-the-job training and specialty training courses that cater to industrial development requirements.
The government's efforts have yielded faster-than-expected results. For example, the Challenge 2008 calls for major R&D centers to be set up by 30 multinationals and 40 local companies by 2008. Moreover, by the end of 2003, 13 international companies and 64 domestic concerns had responded to the government's call to set up R&D centers. Also, an estimated 182 companies have established their headquarters or regional operation centers in Taiwan.
Chen says Taiwan's location, given its easy access to markets in Northeast Asia, Greater China, and Southeast Asian economic zones, has been key to its becoming a high-tech or operations center. Foreign businesses can use Taiwan as a springboard to tap into other Asian markets, including China.
"China has gradually taken on the role of the world's factory," says Chen. "That is a part Taiwan used to play, so Taiwan must adapt to the change. With an increase in R&D activities, Taiwan should have good chances to evolve from a high-tech manufacturing hub into an innovation stronghold, further enhancing its presence in the international high-tech community."