Taiwan's unique business culture is driving it to the top of the world's semiconductor industry.
Silicon chips are at the heart of almost every piece of modern equipment--not only computers, but also automobiles, cellular telephones, and toys. After over thirty years of continuous development, Taiwan's semiconductor industry has hit the big time. The island now makes about ten percent of the world's silicon chips--a proportion expected to rise to forty percent in just over ten year's time. In the process, Taiwan is in a position to overtake such established chipmakers as Japan and South Korea.
The semiconductor industry has been a success story for Taiwan. They are called "semiconductors" because the silicon wafers at the heart of the chips are not totally efficient conductors of electricity. As such, they are a development of the transistors that make the ubiquitous transistor radio work. Someone has to make semiconductors, but why Taiwan?
Taiwan's success as a manufacturer of computer equipment--third only behind the United States and Japan--is now being replicated in the semiconductor area. More and more Japanese and US companies are having their semiconductors made in Taiwan. At the core of Taiwan's success is a unique strategic partnership between Taiwan and Silicon Valley. "One day the Taiwan semiconductor industry will be like our notebook PC industry," says Powerchip Chairman and President Frank Huang. "Taiwan companies will make everything and US companies will sell it."
Speaking at the twenty-second joint conference of the ROC-USA and USA-ROC Business Councils held in Taipei last November, Dick Mou, secretary-general of the Taipei-based council, said that as far as links between the United States and Taiwan are concerned, "the model for emulation is the strategic alliances developed between chipmakers in America and Taiwan. With the strength of its established American links to support it, the Taiwan chipmaking industry is in far better shape than its counterparts in South Korea and Japan. Industry giants like Intel and Microsoft have helped make Taiwan a world leader in the computer industry."
What are the factors that have created this unique relationship? A lot of it can be put down to trust. The most successful Taiwan chipmakers are the foundries. These foundries do not design their own chips, they make them on contract to other companies. Other Asian regional chipmaking powers such as Japan and South Korea have "fabs"--that is, they design and produce their own chips, often the dynamic random access memory chips, known as DRAMs, that store information when a computer starts up. DRAMs are at the heart of a computer, but if foundries are manufacturing their own designs and at the same time working on contract, what is to stop them from taking a peek at the technology involved and transferring it to their own product--at the expense of the designer? Justified or not, this suspicion has led designers to believe their products are in far better hands at a Taiwan foundry.
Many factors have helped develop this strategic partnership with the United States. Going to the States for graduate studies is a strong tradition in Taiwan, and with the island's electronic engineering schools turning out some of the world's most talented engineers, these graduates are welcomed with open arms by US universities. Instead of going into lucrative (but in Taiwan, less-developed) fields like law or business management, much of Taiwan's top academic talent goes into engineer ing and computer-related disciplines.
Not so long ago, only about one-in-ten of these overseas students returned to Taiwan--US entrepreneurs in Silicon Valley and other such places eagerly gobbled them up. However, there are now far more opportunities for these computer whizzes in Taiwan, and many are returning to help develop their homeland. Both the United States and Taiwan are entrepre neurial cultures that reward and respect business success, so it is easy to make the jump from the United States to going into business in Taiwan.
With much of Asia mired in a severe and persistent downturn, Taiwan has shown some hope for the region. While the recent growth rate, at four percent, is less than what Taiwan is used to, it is still growing while other economies are shrinking. Many South Korean chipmakers are weighed down by up to six times their capital in debt; Japanese firms are also scaling back, or abandoning and selling out, their chip plants. Finally, the worldwide trend to globalization allows each country to concentrate on its own strengths. With the US industry moving to a "fabless" model--that is, producing designs and engi neering know-how, then transferring it to a partner for manufacture--Taiwan has found a niche in the global economy.
Taiwan is already a leader in the output of personal computers, monitors, scanners, motherboards and computer mice. The value of the output of Taiwan's information technology business was US$33.7 billion in 1998. In 1997, the semiconduc tor industry accounted for US$7.93 billion, or about ten percent of global output. This is expected to grow to forty percent of global output by the year 2010. The world semiconductor market is currently valued at US$121.4 billion, and Taiwan's share of it is growing.
In this, Taiwan is aided by the move to fabless output. Local force Taiwan Semiconductor Manufacturing Corporation (TSMC) and its fierce competitor, United Microelectronics Corporation (UMC), are the world's top made-to-order foundry chipmakers and hold a sixty to seventy percent market share. The outlook for basic DRAM chips is good and prices have gone up considerably over the last year, with some chips tripling in value over the same period. What TSMC Chairman Morris Chang has described as a "price slaughter" is turning around. The fabless output of chips will rise from ten to forty percent, and this can only benefit Taiwan manufacturers.
But manufacturers are not just order-takers. Consider the case of UMC and Xilinx, a fabless company from San Jose. Xilinx needs cutting-edge technology because its main product is very compact, with about 75 million transistors, about ten times that of an Intel Pentium III microprocessor. Xilinx will dispatch engineers to work with UMC to help design new manufacturing processes, using email, teleconferencing and face-to-face meetings for analysis and feedback. When this work is done, Xilinx gets a new chip and UMC has a manufacturing process it can use for other companies.
Consider how the Taiwan foundry industry got started. Morris Chang was an engineer with giant US firm Texas Instru ments. He returned to Taiwan to establish the first foundry here in 1987, a purely contract, made-to-order manufacturer of chips. Many doubted that he would make it--after all, he had no product of his own--but it turned out to be a brilliant move. Sales tripled and net profits more than quadrupled from 1993 to 1996.
What accounts for the success of the local chip industry? As previously mentioned, many local engineers are returnees from the United States who for a variety of reasons could see a world of opportunities in their island homeland. Because Taiwan entrepreneurs work on the principle of "better the head of a chicken than the tail of an ox"--meaning it's better to be your own boss, even if you start off small--many different firms have emerged. Thus, the industry is very flexible with an entrepreneurial culture that suits the fast-moving and risky world of information technology. The industry is uniquely verti cally integrated, with a full range of services from circuit design to chip manufacturing and testing. Because of Taiwan's entrepreneurial culture, money is always available for a good deal, and the venture capital industry has been evolving into a major engine to support the financing of new projects.
For a variety of reasons, costs are lower in Taiwan, and the firms are less constrained by the bureaucratic cultures that bind larger companies with taller corporate hierarchies. Government support has also been important, with the establishment of the Hsinchu Science-based Industrial Park nurturing an entire industry. The government backs other organizations such as the Industrial Technology Research Institute and the Institute for Information Industry. Government-sponsored groups like the China External Trade Development Council (CETRA) sponsor trade shows such as COMPUTEX Taipei and Semicon Taiwan, which serve as meeting places for international equipment suppliers and local manufacturers, but the industry is so big and vital that it has developed a momentum of its own. The social conditions that prevail in Taiwan--a respect for material success, hard work, and hard savings, plus a desire to better oneself and one's family--have all played a part.
All this has placed the island's chip industry in a productive position. Companies are speeding up investment plans and the two giants, TSMC and UMC, are both adding capacity after a two-year downturn. "I am cautiously optimistic. But more on the optimistic side than the cautious side," Chang, the industry's godfather, told a gathering of international investors earlier this year. And events have certainly justified his optimism. A combination of new chips needed for Y2K upgrades, the fact that almost half of all US homes have computers, the need for new equipment to cope with the introduction of the Euro, personal computers becoming consumer items with the rise of the sub-US$1,000 (and even free) computer, the popularity of intranet systems, and advanced telecommunications have meant an increased demand for chips.
The industry, however, is not just about big companies. While business in the Hsinchu Science-based Industrial Park generated US$12.3 billion in turnover last year, at least eighty percent of the 262 high-tech companies located there have fewer than 200 employees. Nicky Lu, a graduate of Stanford University, acquired his entrepreneurial skills in California's Silicon Valley. Now he runs his own successful integrated circuit company, Etron Technology, employing 150 people and turning over US$63 million. Another successful entrepreneur, Albert Lee, who specializes in chip design, started his com pany, Analog Integrations, on his return from the States. Last year, net profits amounted to US$1 million.
Manufacturing in Taiwan, however, can present problems. Two vital resources for the chip industry are electricity and water, and both can be in short supply. The Hsinchu Science-based Industrial Park is chronically lacking water, which has had to be trucked in at great expense, and recently an electricity substation blew up, causing a loss of production worth millions of US dollars. Although it would seem that it is not beyond the wit of man to solve these problems given the enormous importance of the chip industry to the island, both these issues have been around for some time. Labor in Taiwan is also getting expensive, but chipmaking requires skilled manpower more than anything. The industry is unwilling to transfer high -level manufacturing offshore--for example, to mainland China--as is occurring with older technologies where innovation is not so important.
Stories of prosperity in the chip industry abound. Chang recently sold US$35.5 million worth of TSMC shares in the United States. The sale of about twenty-two percent of his holdings in TSMC was due more to personal financial planning than a lack of confidence, Chang says. "I was a little surprised the sale created a stir. I am almost sixty-eight years old. Many people decide to do some personal financial planning long before the age of sixty-eight," Chang told the Taiwan News (formerly the China News), a local English language daily.
Even apparently unrelated businesses have created a success story for the Taiwan industry. "Furby," the top-selling toy last Christmas, was a boom item for local chip design firm Sunplus Technology. Sunplus, Taiwan's biggest designer of chips for consumer use, saw its share prices rocket as the Furby doll took the toy world by storm. The plush, gremlin-like Furby, one of the most sophisticated consumer toys ever made, can talk, appear to learn a new language, and say hello--and it all depends on the Sunplus chip. Because the local chip design industry, located mainly in the Hsinchu Science-based Industrial Park, can easily contract work out to nearby foundries, it is another example of the synergy that exists in the Taiwan industry. Sunplus's revenues are expected to reach US$83 million this year.
But business can cut both ways. Idaho-based Micron Technologies, one of the world's largest producers of DRAMs, has launched dumping charges against Taiwan chipmakers. Taiwan, however, accounts for fourteen percent of the world's DRAM production value, far behind the United States, Japan, and South Korea. Foreign producers supply eighty percent of Taiwan's DRAM market. Micron Technologies itself supplies half of Taiwan's US-made chip imports.
The island's chipmakers counter-attacked by launching their own dumping action in Taiwan against US producers. According to local newspaper reports that quoted sources in the industry, the anti-dumping charges are regarded as an aggres sive countermeasure against the action fueled by US makers--notably Micron.
Pricing policies are always a complex issue and each party is making essentially similar allegations against the other, but according to Genda Hu, president of the Taiwan Semiconductor Industry Association, the price-slashing strategies are aimed at grabbing market shares from local makers, and imports have damaged Taiwan's DRAM manufacturers. However, if the island's companies are going to play with the big boys, they have to learn to play the game as hard as foreign companies do.
Taiwan's accomplishments as a chipmaker rest on a combination of circumstances that are unlikely to be replicated elsewhere. Some of this success is due to Taiwan's business culture, some to farsighted government policy, and some to the strengths of traditional Chinese culture. A lot has to do with the unique relationship Taiwan entrepreneurs have developed with US industry leaders. And now that the world economy, and Asia in particular, seems to be pulling out of its slump, things can only get better.
Jeffry Babb is a Taipei-based freelance writer. His work can be seen regularly in The China Post and Discover Taipei.
Copyright (c) 1999 by Jeffry Babb.