Taiwan Today

Since when is 9 percent growth in an industry a cause for concern? For manufacturers and analysts in Taiwan's information indus­try, which was growing by a whopping 70-80 percent just five years ago, such worries are perhaps justified. Although a much more modest growth rate is the norm today, the industry is still the world's seventh-largest producer of information products: one out of every ten personal computers (PCs), four in every ten monitors, and seven in every ten computer mice are made in Taiwan. Last year, total production value from the in­formation industry ranked ninth among all local industries. Some sectors of the industry did better than others. Annual PC production value, for example, reached US$1.9 billion, and the hardware industry reached US$6.91 billion, making it one of the island's three largest exports.

But the world market has changed, ac­cording to Huang Chung-hsing (黃崇興), an assistant professor in the Department of Business Administration, National Taiwan University. In the past, even dur­ing recessionary periods, the information industry maintained double-digit growth. But since 1989, single-digit growth has been the rule for many sectors, including hardware. Such declines have been attributed in part to the worldwide eco­nomic slump. For example, the U.S. personal computer market, the world's largest, grew by less than 5 percent last year. There was also little or no growth in the world market for traditional desktop PCs. This led to a 3 percent drop in Tai­wan's computer exports.

The lackluster international market has also highlighted a number of problems within the local industry. "Although current economic conditions worldwide have certainly contributed to the slow­down, there are other factors within the industry itself," Huang says. In the last two years, for example, scandals, layoffs, and bankruptcies have become more common. In the eyes of many experts, these are signs of certain unhealthy trends in the industry. Among those most fre­quently cited: too much reliance on foreign components and OEM subcontracting is limiting the growth of indigenous technology; rampant price-cutting and cutthroat competition are undermining in­dustry production and marketing; high labor costs at home and an appreciating NT dollar are forcing manufacturers to relocate overseas; and, until recently, a distinct lack of industry and government cooperation has stunted long-term planning.

The island's information industry has retained its edge in the increasingly competitive market over the last few years largely by relying on strategies of speed, flexibility, and price-cutting. Some sec­tors of the industry adapt well to such methods. Manufacturers of scanners and computer mice are a good example. According to Ray Sun (孫銳剛), assistant director of Primax Electronics, which manufactures these products, because the technology is simple and the changes are rapid, they are ideally suited for Taiwan's responsive small- and medium-size enterprises. Their success is well docu­mented—Taiwan controls 70 percent of the world market for these two products.

Last year also saw other successes. Manufacturers were able to get the jump on the world giants and introduce a number of new products at low prices to keep the industry growing. For example, local companies successfully began pro­ducing color monitors and were able to gain the upper hand on South Korea, a chief rival. Notebook computers have also become a hot item in recent years. Quick to move, local manufacturers were able to fill the gap left by the decline in the desktop PC market with the new comput­ers. The year before last, production of notebook computers failed to meet de­mand; last year, Taiwan turned out 500,000 units, more than one-third of the world market.

Though Taiwan controls a substan­tial portion of the world's notebook computer market, foreign companies possess a near monopoly on key compo­nents and parts such as chip sets and liq­uid crystal displays (Leos). Because this technology is in foreign hands and must be imported, the profit margin for local manufacturers is greatly reduced. A similar situation prevails among monitor and PC manufacturers. Monitors and PCs are the two pillars of Taiwan's informa­tion industry, accounting for more than half the industry's output, and 40 percent of the world's total. Last year, Taiwan's total monitor output exceeded that of Ja­pan, but profits were 35 percent less. This difference in profit has been attributed in part to the need to import color displays from Japan.

Manufacturers are also finding that they must cut prices even further to out­sell their competitors. Cut-rate volume selling is the rule. Though price-cutting produces quick profits, it can have a negative impact on the stability of the industry. The price wars have disrupted production and marketing, creating runaway competition. Y.S. Fu (傅幼軒), vice president of Logitech Far East Ltd., de­scribes people in the industry as "guerilla fighters," who jump in on the latest trend, and when it is played out, move on to something else.

Taiwan's strategy of underselling has forced the world giants in the computer industry to cut their prices as well. Local experts see this as an attempt to drive Taiwan out of the market with high-qual­ity, inexpensive products. Last year, world PC prices dropped about 34 percent. Even the makers of expensive PCs such as IBM and Compaq have joined the price war.

What are the alternatives? The most frequently heard re­sponse is a call for better cooperation within the in­dustry itself as well as between the industry and the government. The international trend of cooperative ventures among big manufacturers—for example, IBM and Ap­ple have stated their intention jointly to develop multimedia systems—should be taken as a sign by local companies that co­operation is necessary to sustain growth.

Up to now, efforts to introduce co­operative order into production and marketing have been largely unsuccessful, although manufacturers remain hopeful about the possibility. Everyone remem­bers when the Industrial Research Insti­tute planned and organized an alliance to produce the first generation of notebook computers. Though forty-six companies took part in the enterprise, not every manufacturer participated. As a result, many members cut prices on alliance products to outsell one another. The venture turned into a fiasco.

With this lesson in mind, the Com­puter Monitor Manufacturers Association was formed with the goal of avoiding the same problem. Of the approximately sixty monitor manufacturers in Taiwan, close to fifty have joined the association. Besides exchanging information and conducting research to improve design, they also hope to stabilize market prices. A number of local manufacturers, including Macronix International Co. and Picvue Electronics Ltd., have formed an alliance to develop key components and parts for notebook computers. Liquid crystal displays and chip sets, key components in notebook computers, are the top priorities. But judging from the large-scale R&D investment in Japan and South Korea by large financial groups, Taiwan's enter­prises may well be left in the dust.

Many people in the industry com­plain that the government has not done enough to formulate a comprehensive policy to cover production and marketing standards and pricing. H. L. Chen (陳輝龍), general manager of Digital Equipment International Ltd., Taiwan Branch, feels the ideal model is for "the government to take the lead in investment to develop basic technology, to be joined later with commercial production plans from individual manufacturers."

In fact, this model is already being adopted by the government. The Executive Yuan passed a five-year development plan for the information industry in April this year. The Ministry of Economic Af­fairs and the Institute for the Information Industry, the office in charge of carrying out the plan, have selected a total of forty­-two products as a focus for development. The government is expected to invest US$560 million, and the private sector US$400 million in these hardware, soft­ware, and telecommunications products. Late in 1991, the government also se­lected computer software as one of the island's key emerging industries, targeting it for special attention in the years ahead.

Although such cooperative R&D ventures may keep Taiwan highly competitive, the industry is still prey to other problems. Erratic quality control, for example. The assembly of components has not improved because the local industry has yet to implement international stand­ards. Moreover, manufacturers have not rid themselves of the OEM subcontracting development model. The manufacture of cheap generic components for name-brand manufacturers is a remnant from the electronics industry which has continued in the information industry. Of the 2.5 million PCs sold abroad last year, only 49 percent were exported by companies as original manufacturers.

The case of motherboards is worth examining. Taiwan controls 67 percent of the world market. Although many foreign information companies purchase their motherboards in Taiwan, the quality is of­ten below specifications. But because of low price, speed, and flexibility, foreign companies find dealing with local contrac­tors an attractive proposition. They dis­patch experts to Taiwan to help improve quality to ensure that their customers get a reliable product. Because of the time and expense involved in sending representatives here, it is widely believed that the most urgent task confronting the industry is to improve quality. Making cheap, low­-grade components is profitable now, but as production costs continue to climb, the fu­ture looks less certain.

If local computer companies hope to find a place among the giants of the in­dustry, they will have to upgrade produc­tion. But profitable OEM subcontracting has prevented local companies from developing high-quality brand name products. In fact, dozens of companies which have attempted to upgrade and develop such products are returning to subcontracting. One reason manufacturers have not been able to switch from low value-added products with a low profit margin to high value-added products is the dif­ficulty of entering the market against established companies. Acer Sertek In­ternational Inc., the Taiwan computer maker known best in the United States, has only 1 percent of the U.S. market. To date, Acer and its U.S. affiliate have suf­fered losses in excess of US$30 million.

The high cost of labor and a sharply appreciating NT dollar are two other seri­ous problems confronting the local in­dustry. To reduce rising production costs stemming from high wages, many manufacturers are moving their operations overseas. Acer and other companies have purchased companies in Europe and the United States to eliminate tariff and shipping costs.

If the industry is to remain viable, it seems certain that the assembly process must be upgraded through automation. But local manufacturers will have to take the initiative. Enoch Du (杜全昌), secretary-general of the Taipei Computer Association, points out that because Taiwan has a great deal of experience in assembly production it should not give up without a fight—and automation is one way to win. Logitech Far East Ltd., for example, has recently completed factory automation. "Local production is essential," says Y.S. Fu. "Automation must be carried through to the end for greater standardization and systemization of the production process." Tai­wan's future position in the information industry market will depend largely on efforts of this sort.

(This article is adapted from "The Information Industry" which appeared in Commonwealth (Taipei: 1 May 1992).)