Even though the Republic of China's revised Copyright Law, implemented in June this year, sent shock waves through the computer industry and computer users, it is expected to help stimulate the development of the software industry. The passage of the revised law by the Legislative Yuan in May, after being stalled there for eighteen months, was prompted mainly by the threat of trade retaliation in accordance with the Special 301 provision of the 1988 U.S. Trade Act.
The United States had complained that Taiwan was the largest source of counterfeit products confiscated by its customs authorities in 1991. A total of US$370 million of such items from Taiwan were found—half of them computer products. The United States also criticized other counterfeiting practices, including the export of counterfeit compact disks and video games as well as unauthorized public showings of video tapes in the island's MTV centers.
In May of this year, during the ROC-U.S. trade talks in Washington, D.C., the government also promised to convince the Legislative Yuan to pass the ROC-U.S. copyright protection agreement and several other laws related to the protection of intellectual property rights. These include a revised patent law, revised trademark law, and an integrated circuits design protection law—all of them to be passed by specific deadlines. Moreover, the government promised to establish an export inspection system against counterfeiting for computer software and for hardware that contains software, such as PCs, printers, and video games. These measures finally prompted the U.S. government to remove Taiwan from the 301 "priority watch list," which this year also includes Thailand and India.
The revised Copyright Law is expected to establish an effective copyright protection system backed by strict criminal penalties. For example, unauthorized reproduction of books, software, and videos for the purpose of sale or rental can now bring a prison term of six months to five years (up from the maximum of three years), along with a maximum fine of US$12,000. Repeat offenders are subject to a prison term of one to seven years (up from the original six months to five years), along with a maximum fine of US$18,000. A repeat offense is now considered a crime which requires mandatory prosecution by the government. In the past, parties seeking redress had to file suit themselves.
It appears that the revised law will have the greatest impact on the computer software industry, a rapidly growing area where existing law does very little to regulate its development. For instance, the revised law forbids the reproduction of copyrighted computer software, except for personal use by those who purchased the software. Unlike the rules covering intellectual property, owners of computer software are forbidden to rent the software to others. Moreover, the utilization of illegal software for the purpose of earning a profit makes the user liable to a maximum prison term of two years.
The new regulations will drastically alter the operations of the computer industry and the previously widespread, though illegal, use of computer software. For example:
•Computer makers, notably the small-and medium-sized personal computer and motherboard makers, will have to stop utilizing pirated software in their hardware.
•Computer dealers will no longer be able to provide their clients with pirated software, sometimes done as a regular service to help solicit orders.
•Companies will not be allowed to use pirated software for their computers, or only purchase a few software packages for illegal reproduction and in-house use.
•Individual PC users are also liable to criminal penalty for using illegal software in their machines. Even the prevalent utilization of illegal software on school campuses will have to be rooted out. (Schools often use pirated software because it is inexpensive, so local and foreign software companies are offering extremely low prices to schools and students, in many cases only one-tenth of the market level.)
The extent of current illegal operations is considerable, according to estimates by Simon Huang (黃杉榕), executive vice president of Eten International System Corp., the largest package software maker on the island: "At present, for every one copy of legal software in the domestic market, there are three pirated copies in use." Yet, despite the grumbles of software users, the revised Copyright Law will be of critical assistance in the development of Taiwan's fledgling software industry. The absence of effective protection for software copyrights has long been a major impediment to upgrading the field.
People commonly believed that computer software played a subordinate role to hardware, and therefore should be obtained at low costs or even free from hardware suppliers. In computerization projects, hardware costs typically account for 90 percent of the total outlay, while software for only 10 percent.
"Of Eten's 1991 revenue of US$24 million," Huang says, "pure sales from software accounted for less than 10 percent. The rest were all generated from sales of hardware in combination with software. People just don't expect to pay for software. As a result, government agencies and schools have very small budgets for software acquisition." In the past, the contempt for software value and the prevalence of counterfeiting have discouraged investment in the software industry and have dissuaded international computer firms from establishing operations on the island.
But there is a change in the wind. The government is vigorously promoting greater awareness and respect for copyrights and intellectual copyrights, and the idea is gradually catching on with the public. Coupled with the increasing computerization of society, this has in recent years helped bring about a boom in the software industry.
The quasi-government Institute for Information Industry reports that the total output of information services—a broader definition for the computer industry—grew 16.4 percent to US$830 million in 1991. During 1988-1991, the software industry recorded an average annual growth of 25 percent, compared with 9 percent for computer hardware. In 1991, exports of software topped US$5 million.
Some pain, lots of gain—protection of international copyrights benefits Taiwan's own companies, such as the growing number of firms now targeting the potentially huge Chinese-language software market.
Of the total output of the information service industry, the 350 software firms accounted for around 70 percent, while the software services provided by hardware suppliers was 30 percent. Software products, mainly system software and application software, are the largest earners, with 1991 sales topping US$226 million. The second-largest category is turn-key computer systems with 1991 sales of US$170 million. These provide system solution programs to specific clients by providing the integrated services of customized application software, consulting, training, and after-sales services. One example is the post-point sales (POS) system for convenience and fast food chain stores. Likely clients for turn-key systems are the fifteen new banks that have opened in this year.
Value-added network (VAN) is the software business registering the fastest growth in recent years, mainly because of demand from stock businesses, futures trading businesses, and other financial companies. In 1991, VAN sales shot up 46 percent to US$83 million.
Foreign software companies have occupied a conspicuous presence in Taiwan's expanding software market. There are no definite figures, but it is estimated that 75 percent of the system software products and 50 percent of the application software products are imported products, mainly from the United States.
Software firms, domestic and foreign, are cheered by the passage of the revised Copyright Law, and many have already reported growth since the implementation of the law. Initially, foreign software firms will be the major beneficiaries. They can expect to pocket handsome royalties from local computer hardware makers, as well as from millions of computer users.
At present, there are roughly 1 million PCs and twelve thousand medium- and large-sized computers in use on the island. Moreover, Taiwan annually exports 2.5 million PCs and 4 million motherboards, of which 1.2 million PCs and 1.5 million motherboards are for the U.S. market. "The majority of Taiwan's PC exporters have signed contracts to buy our software for use in their products," says Yang Shaw-kang (楊紹綱), former general manager of Microsoft Taiwan. "But many smaller companies still pirate our software. In fact, 90 percent of the pirated PC software we uncovered in the world market originates in Taiwan." Yang was recently promoted to be the general manager of Microsoft's newly established Greater China division.
Despite its booming development in recent years, Taiwan's software industry is still dwarfed by its hardware industry, whose output topped US$6.9 billion in 1991, the seventh largest in the world. But the potential for software industry development is tremendous. Everyone expects that computer software will be at the heart of information industry expansion in the years ahead, and it has thus become a priority target for promotion by many countries. But a survey conducted by the Information Service Industry Association of the ROC shows that the protection of intellectual property rights remains the most important issue for its member firms.
Yet, local software producers may have some strong advantages in the local and regional software markets. At present, most imported software has to be adapted for the specific cultural, organizational, and language needs of Chinese businessmen. Taiwan's software companies are therefore in a good position to compete in the Chinese-language software market, which K.T. Li, senior advisor to the President, estimates may become the world's largest software market.
In order to win that market and overcome the serious manpower shortage in this field, some software firms have begun to utilize the abundant talent in mainland China. The Institute for Information Industry estimates that the local software industry, which currently employs some eleven thousand software engineers, will suffer a shortfall of thirty thousand software engineers within the next several years. For instance, First International Computer Inc., Taiwan's fourth-ranked computer maker, has commissioned a Shanghai software laboratory to develop software products. Eten Information System Corp. has also farmed out some software projects to mainland software laboratories.
Because of the huge global potential for Chinese-language software and the establishment of an effective system for intellectual property protection in Taiwan, international computer firms are expected to set up software operations here, thereby upgrading the technological level of the local software industry. Some foreign firms have already set up operations, encouraged by the attractive potential of the domestic market and the high quality of local software talent.
For example, in cooperation with the Institute for Information Industry, IBM has already set up Integrated Systems Inc. The firm employs three hundred software engineers, mainly for designing IBM's subcontracted software products, as well as developing the Chinese versions of IBM's packaged software. In April, Hewlett Packard set up Open Systems Software Inc. in cooperation with the Institute and Pacific Electric Wire & Cable. The joint venture is mainly for the mass production of module-based software products, which will be sold initially to the domestic market then expand into the global market.
Moreover, Microsoft set up a Greater China regional headquarters in June of this year to tap the potentially huge Chinese-language software market of mainland China, Hong Kong, and Taiwan. The new organization will be based in Taipei and will establish a branch in mainland China by the end of 1992.
According to Kuo Yun (果芸), president of the Institute for Information Industry, "The revised Copyright Law will result in a major overhaul of Taiwan's environment for intellectual property protection, which is beneficial to the development of our software industry." Yang Shaw-kang of Microsoft Taiwan has a similar assessment: "The revised law is a necessary ordeal for the metamorphosis of Taiwan's software industry from a pupa into a beautiful butterfly."
The development of the software industry is considered critical for helping expand and upgrade the computer hardware industry. Insiders point out that with the gradual maturity of hardware technology, makers will rely increasingly on competitive software in order to secure their position in the domestic and foreign markets.
"In the Taiwan market," Yang says, "PCs are purchased primarily by families and schools. Companies buy comparatively fewer PCs, mainly because there isn't enough good software to make them useful in their operations. The revised law will induce more people to buy more software, and the higher profits will stimulate more investment in the industry. This, in turn, will increase the utility of hardware and encourage more people to buy the machines. The result is a healthy circle of development."
Moreover, an expanded software industry will help manufacturers automate their production and will provide them with information on market trends, competitors, and technological advances which is indispensable for their upgrading. Software development is also critical for the automation and upgrading of the service industry, as well as improving the efficiency of government agencies.
In view of its critical importance, the ROC government has given the software industry priority promotion in its Sectorial Development Plan for the ROC Information Industry (1990-2000). The plan aims to raise software industry output to US$6.8 billion by the year 2000, compared with US$21.2 billion for the hardware industry. To achieve that goal, the government has selected forty-two products as strategic items of development: twenty software, fourteen hardware, and eight telecommunications products.
The twenty software products include operational systems for PCs, software development tools, computer-aided instruction, educational computer games, and systems for personal medical care, integrated financial banking, Chinese-language document processing, Chinese-language office information, and integrated management and production information for manufacturers. The government will provide tax incentives, financial support, and even investment capital for the development of these software products.
Moreover, the government plans to spend US$600 million to build a 12-hectare (a hectare is 2.47 acres) software industrial zone in Nankang, a suburb of Taipei, which will employ an estimated eighteen thousand software engineers. The zone is part of the 88-hectare Nankang economic and trade zone, which will also include the second exhibition hall for the Taipei World Trade Center, a shopping mall, and nearby business and residential districts. First-stage construction on the software zone is expected to begin in September this year and will take approximately eighteen months to complete.
All these developments augur well for Taiwan's computer industry. Chen Ke-lin (陳科霖), chairman of the association of Chinese software engineers in California's Silicon Valley, pointed out the overriding importance of establishing a complete system for protecting intellectual property rights during a recent trip to Taiwan. He told reporters that with such a system in place, Taiwan may someday become a leader in the global software industry.—Philip Liu (劉柏登) is editor-in-chief of Business Taiwan, a weekly English-language newspaper published in Taipei.