Taiwan Today

A Taiwan couple on a recent holiday in Scotland were shocked to find an unexpected reminder of home: a wall-sized signboard advertising the latest notebook PC by Taipei-based Twinhead International Corp. suspended over a centuries-old, coal-blackened brick building near Edinburgh’s South Bridge. At the train station, another large billboard displayed the company’s latest model. If the couple had known more about Taiwan’s expansion into Western computer markets, they would not have been so surprised. Businesspeople visiting Bolivia or Chile, Cyprus or Jordan, are likely to find similar examples of the global acceptance of Taiwan computers. For example, Acer Group, now the world’s seventh largest manufacturer of own-brand personal computers, holds the lion’s share of the PC market in these four countries and ten others around the globe. And Taiwan students attending American universities are often surprised when shopping for a basic computer to turn out their term papers. Many of the latest models carried by big-name U.S. computer manufacturer’s are stamped with the label “Made in Taiwan.”

Taiwan sold 1.4 million desktop PCs and nearly 1 million laptops to North America in 1994, most carrying a U.S. brand name.

While the past decade has seen a widespread move to upgrade Taiwan’s in­dustries from production of low-tech, low value items to high-tech, value-added products, the computer industry has been the island’s biggest success story. Last year, total sales of Taiwan-made compu­ter hardware products exceeded US$11.5 billion and ranked fourth in the world af­ter the United States, Japan, and Ger­many. The island has held a position among the top seven hardware manufac­turers since 1986. Today, more than 95 percent of production is exported, with 40 percent going to the United States, 35 per­cent to Europe, and 25 percent to Japan, Mainland China, and Southeast Asia. Tai­wan holds the largest share of the world market in eight computer hardware items, including notebook computers, mother­boards, monitors, and mouses. The local software industry has seen less dramatic growth, but has increased significantly in recent years and is benefiting from many of the same qualities enjoyed by the hard­ware makers, including abundant, well­-trained local personnel and a growing understanding of export markets.

Most impressive, according to many industry analysts, is that Taiwan has held these positions despite the recent vicious price wars between some of the largest international hardware producers. In the third quarter of 1994, for example, U.S. giants Compaq and IBM launched drastic price-reduction campaigns, slashing their retail prices around the globe by as much as 30 percent and forcing competing firms to follow suit. Although hundreds of suppliers worldwide were squeezed out of the market, the local industry managed to enjoy a 19.5 percent growth rate during 1994.

Taiwan makers were not always so strong. When Compaq used the same price war strategy in 1991, an estimated twenty to fifty small or medium-sized local firms faced tremendous losses or even bankruptcy. But last year, the situa­tion was vastly different.

What happened between 1991 and 1994? A reshuffling of the global and local computer hardware industry put Taiwan in a stronger position, says Ming Chien (簡明仁), chairman of First International Computer Inc., a Taipei-based maker of motherboards and desktop and portable PCs. Chien explains that during the 1991 price slashings, many smaller-scale local makers suffered when Compaq’s retail prices dipped, forcing overall prices to sink below their profit margin. Even the Acer Group faced a precarious future. But the good news for local makers was that the global price wars pushed many small and medium-sized U.S. firms to move their production to Asia.

The result? Those Taiwan firms that survived the shakeout had new opportunities for overseas orders. Local companies had for years been filling OEM (original equipment manufacturer) orders from large Western computer hardware compa­nies by simply building products to their specifications. But in the past five years, many local manufacturers had phased out of this business in order to launch prod­ucts under their own brand names. After the price wars, many of these were forced to cut back on their brand-name products and return to contract work for interna­tional companies—but with a major dif­ference. Because the quality of local products has improved greatly in recent years, the new groups of international cli­ents shopping for manufacturers began commissioning local companies to design their computers rather than simply to build them. “Because local production has upgraded, computer firms no longer simply follow instructions given by for­eign companies,” explains Tu Tze-chen (杜紫宸), director of the Market Intelli­gence Center of the Institute for Informa­tion Industry (III). “They are able to design the specifications and appearance of the product according to a customer’s requests.” In this way, Taiwan firms picked up ODM (original design manufac­ture) contracts from a host of new smaller clients as well as hardware heavyweights such as IBM, Hewlett Packard, and Intel.

“From a long-term point of view, the price war four years ago was not necessar­ily bad for the local information industry,” says Ming Chien of First International Computer. “It helped to re­shuffle the market. Companies that survived proved to have a healthy structure and suffi­cient flexibility to adjust to market fluctuations.” A small number of companies also folded as a result of the 1994 price slashings, according to Chien, but he says that most were already suffering from financial troubles.

Today, according to Tu Tze-chen, 63 percent of total hardware sales are now ODM products, 35 percent are own-brand products, and only the remaining 2 percent are OEM products. First International Computer is a good example. Eighty percent of the firm’s business comes from producing ODM products for Intel and IBM, bringing in sales of US$65.4 million per year. Acer Periph­erals Inc., the world’s largest maker of monitors, regularly receives ODM orders from eight of the world’s top twenty computer firms.

But the switch to ODM produc­tion and the resulting strengthening of larger firms are not sufficient reasons to explain how Taiwan has withstood the recent tumultuous global market fluctuations. Another crucial factor has been the ability of local companies to stay at the forefront of the latest information technology. Analysts say speed, flexibility, and market sen­sitivity are essential skills in this cutthroat game.

“Today, because the life cycle of personal computers has become really short, it’s very important for a firm to re­lease new products before its competi­tors do,” says Tu Tze-chen of III’s Market Intelligence Center. When a new PC model enters the international market, he says, Taiwan manufacturers generally release clones (compatible models built after purchasing patented concepts from the original maker) faster than competi­tors in other countries—two or three months faster than U.S. or Japanese mak­ers, and six months ahead of South Korean makers. And this time period is getting shorter and shorter. In 1982, when Intel first announced its 80286 CPU (central processing unit, or the “brains” of a computer), it took three years for local firms to develop a clone. But when Intel’s latest model was released in 1993, local makers had a clone on the market in two months. “That means the local infor­mation technology is gradually synchro­nizing with the technology of advanced countries,” Tu says.

The main reason that Taiwan firms are speeding up design and production time, according to K.Y. Lee (李焜耀), president of Acer Peripherals Inc., is that they tend to enjoy a level of flexibility that the computer giants cannot reach. “As long as a client gives us the basic guide­ lines, we can find the right people to de­sign it immediately,” Lee says. “After that, the entire procedure—from develop­ing a model and testing the design to set­ting up the production line—takes us only about one week. In Japan and Malaysia, it often takes twice as long.”

But one area in which Taiwan com­panies cannot compete is in the size and scope of R&D under way at the huge international suppliers. Instead of trying to rival these firms, local companies must seek out opportunities that the major American computer makers have missed. One such opportunity has been in small-scale production of custom designed hardware. For example, the Far Eastern Economic Review reported this spring that when one U.S. electronics chain decided to market a sleek all-black home computer for the 1994 Christmas season, Acer was the only company it could find to produce ten thousand PCs in the non-mainstream color. Most large­ scale U.S. manufacturers turn down such customized projects because of the logistical difficulties and the relatively small scale of production.

The challenge today is that client re­quests are becoming more and more spe­cific. Tu Tzu-chen says customers no longer make basic demands such as for the lowest-cost desktop computer in a cer­tain category, or for the highest-quality monitor on the market. “They have a spe­cific price range, and they want the high­est quality product within that range,” he says. “In other words, clients are pursuing products with the best cost-to-perform­ance ratio.”

To meet customers’ demands, local companies must be attuned to market trends and technological breakthroughs. For this reason, many local computer ex­ecutives spend an average of one-third of their time abroad, visiting clients and par­ticipating in international trade fairs to keep an eye on competitors. The pace of life is hectic. “I often say people in this profession don’t want to live long,” jokes Ming Chien of First International Compu­ter. “I fly abroad twice a month, mainly to visit my customers and determine their specifications for products. To be able to discuss the industry with them, I have to read a lot to keep up on IT [information technology] developments.”

Computer firms also point to another vital quality for ensuring success in the hardware business: abundant, well­-trained personnel. “Undoubtedly, it’s the local specialists in this field who are mak­ing Taiwan’s information industry suc­ceed,” says K.Y. Lee of Acer Peripherals. Lee is proud that 20 percent of the 160 employees at his company have either a master’s or Ph.D. degree. “This is why Taiwan is far better than our competitors such as Japan, Korea, and Hong Kong.”

Ming Chien explains that computer science has become one of the most popu­lar fields of study in Taiwan. “Since 1965, when I entered the department of infor­mation engineering, computer science has steadily held a position as one of the most sought-after majors,” Chien says. “Many students who study overseas also major in computer science. When these high-tech specialists return to Taiwan, they cluster into a remarkable human resource.”

Another boost to computer man­power comes from the large number of youth who studied in the United States in the 1950s and 1960s and then began careers in the computer business there. Many are now high level executives in major American firms. This vast network of overseas connections has proven in­valuable for making business contacts and tracking new developments and market trends. “The Japanese are saying, ‘Hey! Silicon Valley is full of Taiwan computer engineers!’” says Chien. “They are now regretting that they didn’t send more stu­dents to the States thirty years ago.”

Another secret to success in the inter­national marketplace has been Taiwan’s well-developed information industries infrastructure. Virtually all local hardware manufac­tures, whether produc­ing integrated circuits, motherboards, PCs, or pe­ripherals, are concen­trated within the narrow, 80-kilometer stretch be­tween Keelung, Taipei, and Hsinchu, in northern Taiwan. They thus enjoy a strong support system from nearby upstream and downstream manu­facturers. According to Tu Tzu-chen, this creates the highest density of information industry manu­facturers in the world. “This just fits the require­ments for a tech-intensive industry such as the information industry,” he says. No wonder compu­ter tycoon Stan Shih (施振榮), chairman of the Acer Group, likes to tell reporters, “If Acer had not originated in Taiwan, it could not be what it is today.”

Even though many computer firms have moved basic manufactur­ing operations to lower cost locations overseas, the island’s combination of highly qualified man­power and a well-developed infrastructure have convinced many to keep their R&D and high-tech operations onshore. Although offshore production rose by about 80 percent during 1993 and 1994 and now accounts for more than 25 percent of Taiwan’s hardware revenues, most firms still divide manufacturing be­tween local and overseas operations.

“The decision of whether we move manufacturing offshore is mainly deter­mined by the life cycles of the products,” says K.Y. Lee of Acer Peripherals. “A product’s life can be divided into budding, growing, blooming, and withering. Basically, what we do is manage the life cycles of products rather than just assemble them.” He explains that when a product shows signs of de­clining, Acer increases the life span by moving its manufacturing base over­seas, reducing production costs, and then revising promotional strategies to target lower-priced mar­kets. Acer Peripherals, for example, has shifted many of its manufacturing bases for its basic 14-inch moni­tor to Malaysia and Main­land China, and will shift production of its 15-inch model overseas by the end of this year. Meanwhile, the company continues to research higher value­ added products in Taiwan.

But some companies are not moving offshore at all. For example, UMAX Data Systems Inc., the world’s second-largest producer of scanners, has kept all operations in Taiwan. “We do not plan to shift or expand off­ shore in the near future,” says company chairman Frank C. Huang (黃崇仁). He explains that because scanner production de­mands cutting-edge technology, one­ third of the company’s employees are engaged in R&D, making it nearly impos­sible to shift research overseas.

Perhaps the biggest problem ham­pering the growth of the hardware in­dustry is the dependence on foreign suppliers for a large number of high­ technology key components not yet in large-scale production. According to a 1994 III survey, hard­ware production rev­enues reached US$11.5 billion in 1994, yet firms spent US$2.4 billion importing cathode ray tubes (CRT), liquid crystal dis­plays (LCD), and dy­namic random access memory (DRAM). The hardware industry im­ports 80 percent of the memory chips and 43 percent of the CRT used in production, mainly from Japan, the United States, and South Korea.

Relying on overseas sources for such components places companies at the mercy of overseas fluctuations in price and supply. Besides the high costs incurred, the system can cause cash-flow problems because many Taiwan makers must keep a stockpile of necessary com­ponents in inventory as a hedge against shortages. For a producer of notebook PCs, for example, this means keeping a large stock of LCDs, each of which runs US$200 to $500. First International Computer is one company feeling the finan­cial impact. The firm introduced its first port­able PC in January 1994. “We suddenly found that our inventory of compo­nents became enormous. This is equivalent to freezing capital,” says Ming Chien. “Improving cash flow has become very important.”

To secure the supply of key components and to increase profits, several industry associations have banded together to invest more than US$3.3 billion during the next three years into establishing ten new semiconductor-fabrica­tion facilities to create chips, semiconductors, and microprocessors. Meanwhile, five compa­nies are investing in the production of LCDs, and six are investing in DRAMs. Nan Ya Plastics, an affili­ate of Taiwan’s largest conglomerate, Formosa Plastics Group, has in­vested a total of US$1.6 billion in the two products. Most of these projects in­volve teaming up with Japanese firms to promote technology transfer. In late 1994, UMAX paired with Mitsubishi Electric Inc. in a venture called Power Semiconductor, which will produce DRAMs under the Mitsubishi name. The Japanese electronics giant has agreed to sell their know-how to UMAX and to buy 30 percent of its output.

Some industry analysts think local in­vestors are entering into a risky business. They warn that price wars could erupt in late 1996 because the market could be satu­rated with chip makers. According to a Feb­ruary 1995 report in the Far Eastern Economic Review, fifty new semiconductor-fabrication facilities will be estab­lished worldwide within the next five to seven years, posing a threat to new Taiwan facilities coming on line at that time. But most local investors and infor­mation industry analysts are optimistic.

“There are no obsta­cles in developing our semiconductor business,” says Frank Huang of UMAX Data Systems. Tu Tze-chen of the Market Intelligence Center pre­dicts that the period from 1993 to 1996 will be “the blooming age of key components.” He fore­casts that after 1997, 70 percent of local demand for key compo­nents will be met locally.

If such forecasts are correct, Taiwan will gain a critical measure of self-suffi­ciency. Within global information indus­try circles, the island will also move up the technology chain and erase the vestiges of its image as a simple assembler of PCs. “In a sense, the chips we are making now are just tactical products that perhaps won’t make big waves in the market. But we have to pass through this stage to be able to control the fundamental technol­ogy so that our later development can go faster and faster,” says a manager at United Microelectronics Co. The com­pany, the world’s biggest supplier of chip sets for motherboards, released the first local 486SX CPU in May 1994. But because the mainstream CPU on the market at the time was the more powerful 486DX, the United Microelectronics model was relegated to low-end markets. But by the third quarter of 1995, the company plans to release its own 486DX model. “When that happens,” says the manager, “the big international CPU suppliers will feel the impact.”

Another significant obstacle con­fronting Taiwan manufacturers moving to high-technology production is the necessity of obtaining rights to use patented concepts in the design process. Large computer compa­nies such as IBM often hold thousands of patents, and according to Acer Peripheral’s K. Y. Lee, it is common for local companies to pay 2 to 3 percent of their revenues in royalties to such firms. For example, all PC makers pay IBM for use of a technique called direct memory access, a basic method of transferring data from the main memory to a peripheral component without going through the computer’s central processing unit.

To combat these costs, many larger Taiwan companies are seeking their own patents in order to cross-license or trade patent-use rights with international com­panies. At Acer Peripherals, the two hundred engineers in the R&D department are given a quota for obtaining patents. Those who succeed receive a bonus of about US$1,200 per patent. In 1994, the company acquired more than thirty pat­ents. This year, it is applying for fifty more.

Despite Acer’s own efforts to seek patents, K. Y. Lee believes the current protection term of seventeen years given to patented items is unreasonable. “The time period may have fit the slow pace of technological development in the past, but it doesn’t fit today’s fast-paced progress,” he says. “Before, when a new design concept was announced, it took about five or six years to release an inno­vative product on the market. Then the product could have a ten-year life span. Nowadays a concept may well be obso­lete in five years. Worse still, there are many gray areas as far as a technological invention or design pattern is concerned. Sometimes, it’s not clear whether it’s an encroachment on intellectual property rights or just an accidentally similar design.”

To avoid any IPR violations, most companies take many precautions during the design stage. “We thoroughly investigate any patents that our product might in­volve before beginning our design,” says a manager at United Microelectronics. “We won’t leave any chance for accusation from the big companies.”

The weakest link in Taiwan’s com­puter hardware industry remains market­ing. Nearly all large-scale firms creating their own brand-name products have overseas branch offices, but most concen­trate on maintenance and customer serv­ice rather than promotions.

Ming Chien of First International Computer says the biggest problem in marketing overseas is Taiwan’s physical distance from its major consumer bases in the United States and Europe. “For promoting one’s own brand name, we must put out more effort and spend a lot more money than our American counter­parts,” he says. “And even then, the re­sult is not necessarily as good. As a result, our strategy is to promote brand­ name sales in Southeast Asia. But for the distribution in Europe and the United States, ODM products are still our first choice.”

Most companies are adopting this strategy. Even Acer Group has increased its ODM production in recent years, although its overseas marketing campaign for its own name-brand products is still the most aggressive among local firms. The company spends an estimated US$100 million on marketing each year through a network of more than 70 branch offices worldwide.

One sales channel the company ex­ploits is selling directly to Western-based retailers. In Europe, it provides several product lines through the French-based hypermarket chain Carrefour. In the United States, it sells through computer chain stores including Best Buy and through mail order suppliers such as American Express.

But Huang Chin-yung (黃欽勇), vice di­rector of the Market Intelligence Center, believes Acer is the exception. “Local manufacturers will still produce ODM products in five years, because it is not easy for a new product to break into the competi­tive markets of the United States and Europe,” he says. Huang believes that makers should stick to ODM rather than divert their focus onto building up their own brand­ name products. “Right now, the most important thing for local companies is to in­crease efficiency,” he says.

Manufactur­ers such as Lee Ing-jen (李英珍), vice chairman of Twinhead Inter­national Corp., believe they can both improve efficiency and focus on develop­ing and promot­ing their own products. Since 1987, Twinhead has been aggres­sively pursuing overseas mar­keting for its notebook and value-added “workstation” PCs.

To overcome the general short­age of marketing executives in Tai­wan and the lack of understanding of overseas consumers, Twinhead has hired seventy local employees at its branch offices in the United States, England, France, and Germany. Another part of their strategy has been to compete for industry awards and press recognition. Twinhead products have received nineteen awards in local and international competi­tions since 1992. Last year, the SlimNote 5100T was listed as the number one note­book by Management magazine; this year it was ranked among the top 20 mobile per­sonal computers in PC World and was named Best Value by PC Computing.

Although Twinhead still engages pri­marily in ODM work, it hopes eventually to increase production of its own brand-name products to 50 percent. Lee Ing-jen believes such moves will be part of a trend among hardware producers. “In five to ten years, the market for Taiwan’s products will improve,” he says, “because local makers are upgrading their own brands and improving their marketing skills.”

Such rosy predictions embody the spirit of optimism prevalent among Taiwan’s hardware suppliers. Many feel certain that by continuing to develop the industry’s speed, flexibility, and market sensitivity, Taiwan hardware makers have a workable strategy for continued growth. This year could be an especially good one. “In 1994, the difference between the total production value of computer hardware in Germany and Tai­wan was only US$500 million,” says Sheu Lai-fa (許來發), director of the sec­ond division of the Industrial Develop­ment Bureau, Ministry of Economic Affairs. “If the industry grows at the pre­dicted annual rate of 20 percent this year, the production value of the local information industry will exceed US$13 billion, pushing Taiwan into third place worldwide.”