Taiwan has a worldwide reputation for producing state-of-the-art computer hardware. What is the secret of its success? And can even the island's best high-tech companies manage to stay at the top of the heap in times of economic and political uncertainty?
It starts to rain. Michael Douglas takes out an umbrella. It breaks. He swears. "Made in Taiwan?" Glenn Close asks. People either love or hate Fatal Attraction , but its stinging judgement on one of the Asian Tiger's propensity for manufactur ing dreck usually raises a laugh with most audiences.
But is it really funny? Not anymore, according to insiders who make money out of the latest technology. Hewlett -Packard (HP) President and CEO Carly Fiorina visited Taipei last June to attend the World Congress on Information Technol ogy 2000, and while she was here she gave voice to a common perception. "This country and these companies here in Taiwan have an exceptional track record of invention and reinvention," she said. "It's a track record that we all can learn from. Think about the difference between what 'Made in Taiwan' suggests today, which is world-class capability, and what it meant thirty years ago." Nor was this mere flattery. HP is estimated to have purchased about US$4.5 billion worth of goods and services from Taiwan during 2000, a hike of 50 percent over the previous year. "Taiwan has been a critically important part of the company's success as a global high-tech firm," Fiorina said.
At the moment (an important qualification), export statistics bear out this glowing assessment. Figures provided by the Board of Foreign Trade show that in 1999 Taiwan's mechanical appliances and electrical machinery sectors between them accounted for almost 53 percent of total exports, worth more than US$64 billion. These two categories, which cover products like data- and word-processing machines, integrated circuits, printed circuit boards, and DRAM (dynamic random access memory), have become the driving force behind the island's export growth.
In the same year, the main products of Taiwan's computer industry registered huge global market shares. These included notebook computers (49 percent), computer mice (58 percent), monitors (58 percent), motherboards (64 percent), keyboards (68 percent), and image scanners (91 percent). Overall, the island's output of IT hardware ranked third in the world, behind only the United States and Japan. And according to a projection by the Industrial Technology Research Institute, one of Taiwan's leading think tanks, the overall production value of Taiwan's integrated circuit (IC) industry rose by nearly 70 percent in 2000, compared with the average of 39 percent for the industry worldwide. Taiwan Semiconductor Manufacturing Co. (TSMC), the world's biggest contract semiconductor foundry, and United Microelectronics Corp. (UMC) together now account for approximately 80 percent of the global IC foundry business.
Do the companies responsible for Taiwan's phenomenal track record have anything in common? Globalization is one term that crops up often. "Different areas have different resources," says Miin Wu, president of Macronix International, one of the world's top ten non-volatile memory manufacturers. "Our primary operational strategy is to make the best use of their respective strengths by setting up organizations where they're needed."
Lower production costs make Asia suitable for manufacturing activities, for example, whereas Europe and the United States, with their superior technological capabilities and larger markets, are ideal choices for R&D and sales and marketing centers. So it comes as no surprise to discover that Macronix, the first Taiwanese company to be listed on the NASDAQ, currently has a presence in Europe, Japan, Singapore, and the United States. The strategy has obviously worked. The com pany is expected to reap more than US$1 billion in revenues for 2000, double the US$500 million earned in 1999.
The other from easy. Binge buying of chips in 2000 may mean a two-year slump looms. (Courtesy of VIA)
important component of Macronix's success is its willingness to spend 10 percent of annual revenues on R&D. "The pursuit of constant technological innovation and advancement in product development is where the spirit of the knowledge-based economy lies," Wu says. "Only by marching steadily in that direction can Taiwan's enterprises maintain their international competitiveness."
Another successful "global knight" is First International Computer, Inc. (FIC), founded in 1980. The company went public in 1991, and two years later was ranked as the world's number-one manufacturer of motherboards. It now makes a wide range of items, including notebook computers and servers. "A key factor in FIC's success is its sophisticated global logistics network and strong supply-chain management," says Gene Sheu, president of FIC's Networking & Information Group. "With a complete global service and support infrastructure, we have the resources to speedily resolve issues raised by customers and end users." Orders are executed rapidly through five global-supplier hubs. The rest of the network consists of eight manufacturing or assembly sites and nine branch offices in various countries, including China, Germany, Japan, and the United States. The company also places great emphasis on its network of strategic alliances with the industry's leading suppliers, including Intel and AMD, which guarantees a high degree of vertical integration in the manufacturing process.
This philosophy is shared by VIA Technologies, the world's third-largest fabless IC design house after US-based Xilinx and Altera. The company works closely with TSMC and UMC in Taiwan. "These partnerships allow for the most up -to-date production and testing technologies, they remove the need to purchase expensive equipment, and they provide the flexibility our customers need," says Frank Jeng, the company's marketing manager.
VIA, founded in 1987 with its headquarters in Taipei, is yet another big fan of globalization. "We've created a network of R&D centers linking the high-tech centers of Silicon Valley and Texas with the 'Greater China Manufacturing Engine,'" Jeng says, the last phrase being a reference to Taiwan and mainland China viewed as a unit. VIA has also expanded its product lines and R&D capabilities through a combination of acquisitions and strategic partnerships. With the purchases of the Cyrix and Centaur processor divisions from National Semiconductor and IDT respectively, for example, VIA gained entry to the rapidly growing processor market for value PCs and Internet appliances.
Acquisitions also played an important part in the growth of Advanced Semiconductor Engineering (ASE) Group, cur rently the world's biggest independent tester and second-largest packager of microchips. According to group chairman Jason Chang, the most significant events in the group's development were the completion of four major purchases: ISE Labs, the largest US independent front-end engineering test company; Motorola's two factories in Chungli, Taiwan, and Paju, South Korea; and Universal Scientific Industrial Co. in Taiwan's Nantou. "These acquisitions marked a significant milestone in the implementation of our growth strategy, and cemented our international competitiveness," Chang says.
So much for the good news. The rest of the picture is far from rosy, and many analysts are predicting that the boom times are over. Taiwan's electronics industry is mostly still engaged in OEM (Original Equipment Manufacture), where profit margins have been on the decline for years. Binge buying of chips in 2000 may mean a slump next year and the year after that. Moreover, the chip industry is slowly moving to China. Motorola, for example, already has 80 percent of its microchips manufactured there. Taiwan's high-tech lead is eroding fast. "Time is not on our side," a bleak Minister of Economic Affairs Lin Hsin-i told legislators at the end of last November. Michael Wang, manager of Chung Shing Securities Corp.'s research department, agrees. "If the government doesn't adjust its 'go slow, be patient' policy toward the mainland soon, the island's electronics industry will be dead in the water." Why?
There are basically three reasons. Land and labor in China are cheap--labor is perhaps as much as one-third cheaper than in Taiwan--so overheads are correspondingly lower. The ROC government maintains burdensome restrictions on high-tech industry investments in the mainland. And there are not nearly enough incentives promoting R&D projects here in Taiwan. But knowing the reasons is not the same as solving the problems. The industry says it sees what has to be done; so far, the government has largely maintained an enigmatic silence.
Stan Shih, chairman of the Acer Group, is typical of the critics. Last November he addressed a technology forum attended by Economic Affairs Minister Lin Hsin-i, and his message to the government was uncompromising: open up capital investment in China, let the manufacturing sector migrate across the strait, and focus on promoting R&D in knowledge-based industries in Taiwan itself. "The government is not aggressive enough in embracing the new economy," he said bluntly. "US manufacturing capacity has all but moved overseas, and yet the US economy is the strongest in the world, because the nation has moved on to bigger and better things--semiconductors, software, biotechnology, research and development." Japan's mistake was to do the opposite. "Afraid to lose its manufacturing, the nation held on tightly, and that led to a decade of economic depression." Now, though, Japan is moving its manufacturing to the mainland. It is time Taiwan followed suit.
On the face of it, that suggestion looks a little strange. Many high-tech companies have already managed to establish a presence in China, despite the very restrictions Shih railed against. Investing across the strait is an integral part of their globalization strategies. According to the latest statistics released by the Ministry of Economic Affairs (MOEA), Taiwan -funded investment in the mainland soared 98 percent between January and October over a similar period a year ago to hit more than US$2 billion. The electronics and electrical appliances sectors accounted for 55 percent of this. So why are domestic firms calling on the Taiwan government to relax restrictions on China-bound investment in order to maintain competitiveness?
"Taiwan enterprises will face elimination if they don't visualize the world as their market, given that the island is small in size and has limited resources," ASE's Jason Chang says. "The booming mainland market is now being targeted by business enterprises around the world. If we continue with a policy of 'go slow, be patient' and maintain our current hostile attitudes toward the mainland, both traditional and high-tech manufacturing industries will lose out."
But that is only one side of the coin. Critics object that an industrial exodus to the mainland could result in the "hollow ing out" of Taiwan's high-tech industrial base. Chang counters their fears by reference to Silicon Valley, which is still boom ing despite the relocation of key production lines elsewhere. But he is careful not to put all his eggs in one basket. Compared with China, Taiwan's infrastructure and general competitiveness are strong, so ASE is constructing new plants in Kaohsiung and northern Taiwan's Chungli at a combined cost of NT$55 billion (US$1.7 billion).
Frank Jeng, VIA Technologies' marketing manager, has a similar take on the need to reduce restrictions. His company plans to become the world's largest IC design house by 2002, but to achieve that goal the company will have to employ many more R&D and engineering staff. VIA has therefore decided to set up a branch office and three R&D centers in the mainland, at a total cost of US$16 million. Another advantage is that the company will be able to provide timely technical support to its customers there. But in spite of its aggressive expansion across the strait, Jeng knows how important it is to ensure that key research, core technology, and know-how remain in Taiwan.
Miin Wu of Macronix International agrees about the importance of securing research and know-how, pointing out that Taiwan does have one major advantage over China: highly educated professionals. He acknowledges that with continued technological development and rapid industrial growth, the talent pool is shrinking fast, but as yet, and somewhat unusually, he sees no pressing need to establish an operation across the strait. "Containment isn't an effective approach," he says. "It's more important to encourage business enterprises to repatriate the money they earn overseas. That's better than asking them to keep all their operations here without having regard to practical economic considerations."
There are a few signs that the government may be starting to see things industry's way. "Some ten years ago, Taiwan's major exports were shoes, hats, toys, and clothes," says Tsai Lien-sheng, executive secretary of MOEA's Invest ment Commission. "Then later those industries migrated to the mainland. Did that cause our industrial base to be hollowed out? No. Instead, we've transformed ourselves into a realm of information technology."
In the past, enterprises invested in the mainland in a bid to survive, but now most of them are going there to expand and maintain a competitive position in the global marketplace. "China has become an important part of the global economic and commercial network," Tsai says, although he is careful to add: "The competitiveness of our enterprises will suffer if they're barred from going there, but since the two sides are still in confrontation mode, we need to be cautious. We mustn't let the mainland use the economy to hem us in."
This raises the difficult and important topic of national security, something on which different ministries and other government agencies hold conflicting views. For example, Central Bank of China Deputy Governor Chen Shih-meng has gone on record with a warning that China is becoming something of a black hole that could swallow the local economy. But businesspeople are generally unimpressed by such arguments, and they are becoming increasingly frustrated by the cross -strait stalemate. "The biggest headache we have is the lingering hostility between Taiwan and the mainland," ASE's Chang says . "Lack of a stable political environment has discouraged domestic and foreign concerns from investing here. What worries the industrial sector most is that too many resources have been burned up in the confrontation with China."
Another source of dissatisfaction that figures frequently in discussions with industry leaders is the island's infrastruc ture. Since he returned from the United States around a decade ago, Macronix's Miin Wu has witnessed the Taiwan economic miracle. But at the same time he has seen the emergence of problems that threaten growth. "The stability of electricity and water supplies has been deteriorating year in, year out," he says. "In the past, you used to get a major problem every twelve months. Now it's every two months. That's a serious blow to wafer production lines that rely heavily on a steady supply of high-voltage electricity."
A recent study of development trends and strategies in the Hsinchu Science-based Industrial Park, conducted by Na tional Chiao Tung University at the request of the park administration, lends weight to his views. The enterprises that contrib uted to the survey thought that the most urgent tasks facing the government were an erratic power supply, a shortage of available sites, and traffic.
As far as power is concerned, state-run Taipower claims to be on the job. The company hopes to complete the first stage of a project to lay more underground high-voltage lines by March this year, with the second stage scheduled for completion by December. This should result in a more reliable supply of electricity to the park. There are also plans to build another two power plants within the park itself, each capable of generating 450,000 kilowatts, which should come on line in 2004. But this is only part of the picture. Pundits differ about the effect of canceling the fourth nuclear power plant. Some say the island will not be able to find alternative sources of power in time to prevent a mass exodus of industry, while others disagree.
The government hopes to deal with the shortage of land by tempting more companies to relocate to a new science-based industrial park in Tainan, southern Taiwan. This covers an area of 638 hectares, with a planned expansion of a further 440 hectares. In comparison, the Hsinchu industrial park is only 605 hectares. Construction of the basic infrastructure is not slated for completion before 2006, however, despite the fact that thirteen companies have already begun commercial operations there. Moreover, the low-lying site has a reputation for flooding problems, although the park administration claims to have remedied them.
What should these science parks be aiming to achieve in the next decade? The communications, optical and electronics, and semiconductor sectors are predicted to achieve the highest rates of growth--30 percent each--during that period. Chu Po -yung, the National Chiao Tung University professor in charge of the survey commissioned by the Hsinchu park administra tion, points out that added value is an important index of Taiwan's future industrial development. In his view, the park should concentrate on R&D, then on the manufacture of higher-value-added key components, and lastly innovation.
The same survey found that more than 75 percent of the firms polled had already initiated overseas investment projects, mainly in China and the United States. "Internationalization is poised to become a trend, and apart from that, building an overseas plant is one way of diversifying your risk," Chu says. "Given this trend, the government should be offering better incentives in order to keep high-tech industries on the island."
What do investors make of this big but complex picture? Michael Wang of Chung Shing Securities finds it hard to be optimistic, at least in the short term. He acknowledges that Taiwan is but one victim of a worldwide slowdown in the global economy that has affected many other countries far worse. But he points to significant differences between Taiwan and countries such as the United States. The later has numerous other industries, including automobiles and pharmaceuticals, and raw materials to help sustain the economy, often by selling at home rather than abroad. Taiwan has fewer economic engines, and its domestic markets are weak by comparison.
Wang believes that the future growth of Taiwan's high-tech industries hinges on what the government does with regard to infrastructure improvement and the stabilization of the domestic operational environment. He wants to see tax reductions and lower interest rates, for a start. "The government should have geared up its efforts to develop other promising industries, biotechnology for instance, ten years ago," he goes on. "It missed a good opportunity. At the moment, I really don't know what the future holds for Taiwan's high-tech sector."
It is certainly no time for complacency. "Taiwan's environment is deteriorating faster than we think, and its competitive ness is declining," ASE Group Chairman Jason Chang says. "Normalization of cross-strait relations will contribute to politi cal stability and is one of the keys to relieving Taiwan's current economic woes." He would like to see the government take more aggressive steps to resume talks with the mainland authorities, but thinks there should be greater room for cooperation once both sides have entered the World Trade Organization. "At the moment, Taiwan's problem is one of confidence, rather than fundamentals," Chang says. "Many high-tech industries are still very competitive, with revenues and profits constantly hitting new highs."
Such optimism is rare. In the present climate, the attitude of FIC's Gene Sheu is probably more representative of main stream thought. "The government has claimed it will exert all-out efforts to build Taiwan into a technology island," he says with a shrug. "We'll just have to wait and see if it means what it says."