ROC government-backed Industrial Technology Research Institute announced March 3 it has established the world’s first Open Compute Project Certification Testing Center in Taiwan. The center is expected to help Taiwan manufacturers rapidly enter the global Internet data center market, estimated at more than US$100 billion annually.
The OCP Foundation for open sourced hardware was established by Facebook in 2011 to boost standardization of hardware used by the cloud industry and allow cloud equipment buyers save on costs and energy consumption. The standards are gradually being adopted by many in the industry. The establishment of this OCP test center in Taiwan is expected to create a domestic clustering effect and an opportunity for Taiwan to become a hub for exporting the technology needed to build Internet data centers.
But there are different views. Some manufacturers say that from the suppliers’ perspective, OCP is just the concept of an open specification and public bidding, which, although it may reduce procurement costs, will not result in more product or service innovation. More worrisome is that the result of an open specification could cause Taiwan’s server makers to repeat the same mistakes made by PC original equipment and original design manufacturers, where competitive price slashing resulted in vanishing profits.
Domestic hi-tech OEM/ODM industries face a similar dilemma in their efforts to restructure. They seek to boost added value by achieving product differentiation through innovation, but they cannot let go business generated from widely adopted specifications. Maturing PC production has seen IBM withdraw from the market, Dell restructure, Acer register huge losses and HP cut staff. All of this is bad news for Taiwan’s contract makers, resulting in sleepless nights worrying over long-term plans for the industry.
At the same time as the PC industry faltered, the iPhone and iTunes restored Apple to its former glory, Google’s move into hardware sent its stock price to a record high, long-time loss-maker Amazon became the benchmark of the cloud industry, and social media such as Facebook and Line captured the greater share of young people’s time online. Local contract makers should take the strategic content of these new business models as a point of reference for their further development.
What the new tech giants Apple, Google, Amazon and Facebook have in common is the provision of platform-based services that connect mobile applications to the cloud, recruit a crowd of innovative young dreamers and build a fan club thoroughly familiar with social networks. This brand new industrial ecology is rewriting the game plan, subverting the past linear value chain model of R&D, production and marketing while creating an explosion of innovative possibilities.
Social networks and big data analysis technology based in cloud structures can effectively reduce the variable risk involved in R&D and marketing, destroy the value of brand marketing and R&D at the two ends of the traditional smile curve, redefine the concepts of branding and R&D and reshape the value-added structure of the industry.
These open, innovative business models provide a new direction for creating brand value. This kind of structural transformation is a development opportunity for Taiwan’s contract manufacturers.
Manufacturing is not something that can be digitalized. Open and innovation can weaken the value-added effect at the two ends of the smile curve, but they could raise the added value of the manufacturing process because the bargaining power of these new enterprises and laboratories is far less than already-established global brand name companies. Also, these corporate are struggling to find reasonably priced factories able to turn their innovations into reality.
Taiwan’s manufacturing capability long ago progressed to rapid and flexible production, along with such extended support services as logistics, distribution and maintenance. The manufacturers can effectively respond to the demand from innovative business models for diversification and non-mainstream design.
Taiwan manufacturers have accumulated much precious knowledge of the manufacturing process, and innovation experience for components and modularization, as well as ingenuity in product design and process engineering. On the basis of the existing ODM capabilities, local PC industry can exploit the advantage of such acquired knowledge to create excellent platform-style services that go beyond cloud computing, namely, cloud manufacturing.
The value of cloud manufacturing is not determined by product-centered production, but by technology-centered platform services. The profit model is not linked to the quantity of standard products sold, but to the offering of diversified services to meet customer demand. These technological services can cover every stage of the product life cycle and the target customer base is broader, possibly including Internet giants, major designers, pop stars, universities, film industry and multinational companies in various sectors.
In conclusion, from the perspective of the new business models and extended advantage base, the open, hi-tech, service-oriented cloud manufacturing platform presents an opportunity for Taiwan contract makers to upgrade. This requires a joint effort by businesses, government, academia and researchers. (SDH)
(This commentary first appeared in the Economic Daily News March 16, 2014.)