Taiwan Aiming for Industrial Transformation

For Taiwan to maintain its competitive position, it will need to adopt new technologies and business models

Taiwan has built itself into a major player in global technology supply chains through fast, efficient manufacturing of information technology (IT) hardware. It is a leading producer of semiconductors, solar cells, display screens, motherboards, and other mid-stream components, and companies based in Taiwan assemble much of the world’s finished tech products at manufacturing sites in China. Last year, machinery and electronics comprised over 50% of Taiwan’s total exports, bringing some US$154.9 billion into the local economy. However, recent developments in global markets and technology have highlighted weaknesses in Taiwan’s current IT manufacturing business model, and Taiwan’s leaders in business and government are searching for a solution.

One concern is the volatility caused by the Taiwanese tech sector’s high degree of dependency on a few major international customers, and sometimes on a single product. The launch of the Apple iPhone 6 – assembled almost entirely by two Taiwanese firms and featuring Taiwanese-manufactured components – served to boost tech-sector performance substantially in 2014. But worldwide iPad sales declined 17% in the first quarter of 2015 and the iPhone 6 missed second-quarter sales forecasts, according to market analytics firm Trendforce, causing ripples through Taiwan’s economy.

Declining margins are another chronic issue. Relentless technology advancement results in the rapid maturation of product lines, and cutting-edge technologies quickly ripen into price-driven commodities with slim margins. Despite a lack of economies of scale, Taiwan’s renowned manufacturing prowess and skill at cost control enable it to continue to compete with China in technically advanced products like semiconductors, but labor-intensive industries have mostly fled across the Strait, taking the jobs with them. Further, while Taiwan maintains a lead over China in certain industries by leveraging higher quality and more sophisticated technology, it still faces tough competition with South Korean and Japanese exporters in terms of quality and performance.

The rising sophistication of China’s own technology sector is likewise having an impact. Taiwan has managed to retain its lead in key industries such as semiconductors, but China is rapidly throwing its weight behind such sectors, prompting some analysts to offer dark forebodings of a future when China will be able to supply its own quality components to its own technology manufacturers.

The Internet of Things is a “paradigm shift” in the global technology industry, says Stephen Su, General Director of the Industrial Economics and Knowledge Center (IEK) under ITRI.

Moreover, the sectors where Taiwan does have an appreciable lead over China – semiconductors and memory chips – are heavily automated, employing comparatively few people relative to the value of their output. Rising inequality is a growing concern in Taiwan, particularly as election season nears, and Taiwan has been racked with political protests that are attributable at least in part to young people’s pessimism about finding meaningful employment.

Consequently, Taiwan has been searching for the next driver of growth and employment. In a recent interview with the Wall Street Journal, President Ma Ying-jeou addressed the need for industrial transformation, pointing to R&D, new technologies, and innovation as essential ingredients for maintaining Taiwan’s place in the global tech industry. He told the newspaper that Taiwan’s economy needs to change from being “efficiency-driven” to “innovation driven.” Tsai Ing-wen, the opposition candidate for president in the January elections, has made similar remarks.

Industry experts advocate leveraging Taiwan’s established strengths in hardware and its budding software sector to produce not just advanced technology products but total solutions that integrate hardware, software, and a service-based business model.

“If you’re just waiting for your customer to give you specs for hardware, then they can just calculate how much value you add, but if you can develop your own system that includes software and services, then the margin of the system will be higher,” observes Wu Cheng-wen, vice president of National Tsing Hua University (NTHU) and chair of its electrical engineering department. Wu is also a longtime collaborator with Taiwan’s semi-governmental Industrial Technology Research Institute (ITRI).

In particular, industry insiders are highly optimistic that the burgeoning Internet of Things (IoT), along with advances in 3D printing, will provide opportunities not only for hardware manufacturing but also for the hardware makers to team up with service providers – or become service providers themselves – to provide integrated solutions. The IoT refers to technologies that enable appliances, devices, and even automobiles to communicate and react independently, providing increasing convenience and comfort for consumers. Wu points to Taiwan’s technological capabilities in integrated sensors, actuators, and other computing hardware – all vital to the IoT – as examples of Taiwan’s advantages in entering this sector.

Stephen Su, general director of the Industrial Economics and Knowledge Center (IEK) under ITRI, calls the IoT a “paradigm shift” in the global technology industry, transforming both consumer markets and the industries that supply them.

Productivity 4.0 and “infofacturing”

The Taiwan government is promoting movement in this direction under the policy umbrella it is calling Productivity 4.0, inaugurated this past spring and based on the international concept of Industry 4.0. Conceived in Germany in 2011, Industry 4.0 refers to the “fourth industrial revolution” (following the first three of steam power, electrical power, and industrial automation) in which the digitization of industry is extended into the Internet. The concept foretells a future in which humans and machines communicate in real time across the entire value chain via IoT, enabling highly flexible, highly customizable “smart” manufacturing.

Industry 4.0 is a concept developed in Germany that highlights the “Fourth Industrial Revolution” of connected, intelligent machines and processes.

Government and industry leaders in Taiwan recognize the potential significance of Industry 4.0 in raising productivity, but have taken the vision even further in the new industrial policy. The stated goal of Productivity 4.0 is to increase competitiveness not only in manufacturing but also in the service and agricultural sectors by using the tools and concepts provided by the IoT, Big Data, and automatic systems like smart robotics. Stephen Su notes that key aspects of Productivity 4.0 include flexible value chains with information available in real time across companies, plus decentralization of modular production units. These “cyber-physical systems” – networks of intelligent, connected equipment – would be able to make independent decisions, thereby increasing efficiency, adaptability, and reliability through the entire process.

Su stresses that aside from streamlining manufacturing, Productivity 4.0 can also help to generate new market sectors, potentially enabling Taiwan to become a leader in developing automated systems for export. The export market would compensate for Taiwan’s relatively small size, providing it with a sufficiently large testbed to develop even more advanced systems.

Productivity 4.0 includes the related concept of “infofacturing,” a term coined by author Jeremy Rifkin in his book The Zero Marginal Cost Society. The author predicts that infofacturing, combining recent trends in 3D printing and Big Data, will spell the end of mass production and the beginning of mass customization. “The infofacturing term combines the essence of manufacturing with the information economy,” says Su.

Su cites shoe production as a potential example of mass customization. Consumers would be able to scan their feet and send that information to the manufacturer, who would then be able to produce a perfectly sized pair of shoes, solving the common problem of slight differences between the left and right feet. While this technology has so far been reserved for very high priced products, including the 3D printing of dentures and artificial joints, Su (and Rifkin) envision a world in which mass customization of general consumer goods will be routine.

Although Productivity 4.0 and infofacturing are just at the beginning stage, technology advances related to the IoT are already bringing the promise of new markets and higher margins. Su considers trends in hardware and software integration – such as Google’s US$3.2 billion acquisition of smart thermostat maker Nest Labs – as compelling evidence that hardware, software, and services integration is reshaping industry. “Before we talked about industry value chain – from the upstream materials to the downstream branding,” says Su. “Now we are talking about service-based applications.”


Taiwan firms taking notice

Taipei-based Advantech Corp. is an example of a service-driven solution provider. Founded in 1983, Advantech previously made only industrial-grade computer systems, but in recent years has begun supplying medical services, manufacturing solutions, and educational systems. “Application by application, industry by industry, they not only provide the computers, but also the software and systems that go with them, as a complete solution provider,” observes Su.

Quanta Computer is another Taiwan tech manufacturer that has made a similar transition. It has gone from being an Original Design Manufacturer (ODM) for notebook computers to an Original Systems Manufacturer (OSM), extending its business into enterprise cloud solutions, home entertainment, and mobile communication. The result has been higher profit margins.

 “Most technology startups require a lot of time to develop into successful companies, but now the support is too short-term, so they don’t have the chance to grow,” says Wu Cheng-wen, professor at NTHU.

A third example is Lancom Networks Group, which provides integrated solutions for business, education, medical care, and many other market segments. One system that founder and CEO Simon Lu is especially proud of is a communications terminal custom designed for hospital patients. It features a touchscreen monitor that not only enables doctors and nurses to monitor the sensors attached to the patient, but also uses audio-visual technology to permit three-way communication among the patient, nurses, and physicians. A teleconferencing function even makes it possible for patients to continue to do their jobs while in the hospital.

A Lancom communication system also enables different hospitals in affiliated networks to share information, and another enables hospital personnel to quickly trace the location of hospital resources. Although much of the core technology is imported, “we add to the original design to customize it for the local hospitals,” Lu explains. “In IoT, the key is applications. We not only provide the core systems but also provide some applications and design the software based on the customer’s needs.”


Bridging academia and industry

In order to bring more technologies to market, ITRI has taken an active role as the “bridge” between academia and industry. For example, it invites students and academic researchers to participate in research projects on the research center’s Hsinchu campus. NTHU’s Wu, who took a sabbatical from teaching in 2007-2009 to serve as an officer at ITRI, praises the research center for extending access to academia. “ITRI doesn’t just provide funding, it provides equipment and an environment,” he says. “My students can go there and work with the engineers, which is very important, especially when we’re developing real technologies for industry.” The university researchers take on industry’s challenging research problems, and if they can find a solution, “then we take it back to ITRI and work together to set up a prototype,” Wu explains.

Taiwan’s Industrial Technology Research Institute (ITRI) is leading Taiwan’s industrial transformation.

ITRI’s deep relationships with both industry and academia give researchers access to business professionals, while ITRI’s familiarity with markets and business practices is a valuable resource for academics. “Through ITRI, it’s much easier for us to approach these companies,” Wu says. “ITRI will handle the details, talking to companies, talking about contracts, or maybe product details, specifications, and so on. That makes it easier for us to collaborate with industry and release our technology.”

ITRI is behind some of Taiwan’s biggest and most successful companies, including such early spinoffs as Taiwan Semiconductor Manufacturing Co. (TSMC) and United Microelectronics Corp. (UMC). Since its founding, ITRI has averaged about two spinoffs a year, but over the past four years that rate has increased. Last year ITRI launched 10 spinoffs, and the number this year is expected to be the same. Of the 260 startups ITRI has launched over its 43-year history, however, only 18 are currently listed on the stock market.

The low success rate points to some lingering issues with Taiwan’s support for startups in general, according to Wu.

“Government support is not as strong as before,” he says, referring the backing given by the government in earlier decades that enabled TSMC and other semiconductor makers to develop into the world-class companies they are today. He suggests that budget constraints and political friction between the legislative and executive branches of the government have resulted in governmental inertia, leaving government unable to make the bold moves that he considers vital to strong economic progress. “Most technology startups require a lot of time to develop into successful companies, but now the support is too short-term, so they don’t have the chance to grow,” Wu observes. He urges the government to do more to help the spun-off companies survive.

 “IOT at this point is just a scenario, but how to make it happen?” asks Lancom’s Simon Lu. The answer is step-by-step implementation of both software and hardware. “We will make it happen.”

ITRI has taken major steps to try to improve the odds for the organization’s startups. Working in conjunction with the Ministry of Economic Affairs and Ministry of Science and Technology, it has established several programs that bring in leading Chinese- and Taiwanese-American venture capitalists from Silicon Valley to consult on ITRI’s startups. It also sends representatives from ITRI-affiliated startups to the Taiwan Innovation Entrepreneurship Center (TIEC) that Taiwan has set up in Santa Clara, California, to hone their technologies and business models. In addition, last year ITRI sent personnel from five spinoffs to the United States to get training from different venture capitalists.

“Most of them feel this is very good experience and found it quite educational,” says Su. “Most startups are technology people first, but they are trying to be business people as well, so it’s a big challenge. But with this type of setup, the potential risks will be minimized and their vision will broaden.”

As a result of the program, one such startup, Gemini Open Cloud Computing, concluded that while it has viable technology, its business plan was not viable. It is now reconsidering its aproach to the market.

ITRI also engages in matchmaking with U.S. firms that have good ideas but need help with of hardware and systems integration. “Instead of trying to duplicate the success of Silicon Valley – not too many countries are successful in doing that – we connect the innovation drivers from the U.S. with Taiwanese manufacturers, while at the same time using this opportunity to promote and stimulate innovation in Taiwan,” says Su.

Despite Taiwanese firms’ experiencing growing success in systems integration, whether Taiwan will be able to take full advantage of the opportunities for generating advanced IoT systems remains to be seen. “IOT at this point is just a scenario, but how to make it happen?” asks Lancom’s Lu. The answer is step-by-step implementation of both software and hardware, he says. “We will make it happen.”

Wu points to perhaps an even more fundamental challenge to Taiwanese firms looking to enter the IoT sector: “How can you come up with a product that the market really needs? This is the question.”

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