Government procurement can play a key role in developing Taiwan’s software market.
Taiwan has excelled at the development of information-technology (IT) hardware, in part due to the financial and other assistance provided by the government over the past two decades.
But support on the same scale has not been extended to companies on the software side of the business, and many in the software sector have struggled to get off the ground in the highly competitive East Asian and world markets. Even software multinationals have found Taiwan to be a less welcoming market than might be expected. They note the low proportion of government IT expenditure allotted to software and computer services compared with most other countries.
“Taiwan is basically the only developed nation that still has proportionally more of its IT investment in hardware,” says Roan Kang, general manager of marketing and operations for Microsoft Taiwan. That procurement imbalance has contributed to a business environment that is challenging for up-and-coming software developers and large software multinationals alike. Some 70% of public IT investment is allotted to hardware, while only 30% goes to software and computer services. The opposite ratio is the norm in the United States and most other developed economies.
Countries tend to emphasize hardware manufacturing when first building up their information systems infrastructure, but as the infrastructure matures, most gradually shift focus to software development. A major reason is that a well-developed software and services sector generates greater economic growth and more white-collar jobs than IT manufacturing. It also brings higher margins. Another factor is that software investment enables hardware investment to be exploited to the greatest extent possible, as was confirmed by a joint Korean-U.S. study published in the International Journal of Information Management.
“Taiwan is basically the only developed nation that still has proportionally more of its IT investment in hardware,”
“Investment in software and services will generate much higher GDP impact than buying hardware,” says Vincent Shih, general manager of legal and corporate affairs at Microsoft Taiwan, particularly since the hardware increasingly is not built in Taiwan. “But if you buy software and services, you need people to do the services, and the money will stay here. If you want to help your unemployment rate, you should put more investment into software and services.”
Adding to the problem has been Taiwan’s declining overall spending on IT procurement in recent years. While the U.S. government’s annual expenditure on IT increased 2.1% from 2012 to 2014, from US$80.28 billion to US$81.99 billion – and is set to increase further – the Taiwan government’s annual spending on IT fell 28.5% between 2011 and 2015, according to National Development Council (NDC) statistics. In addition, while IT spending comprised 2.17% of the U.S. Federal budget in 2014, NDC data shows that IT spending as a proportion of Taiwan’s national budget fell from 0.84% in 2011 to 0.60% in 2015.
Government procurement is considered vital to the development of IT markets, as government – including the military, public schools, and other public institutions – tends to be the largest single consumer of IT products. Creating a large market for both domestic and international suppliers makes it possible for the market to serve as a testbed for new IT products. Moreover, government procurement can provide an index enabling other buyers to evaluate price and quality, a function that is particularly important for intangibles such as software. Plus, better software allows the government to more efficiently administer services to its citizens.
“Investment in software and services will generate much higher GDP impact than buying hardware,”
The massive success of Taiwan’s hardware industry over the years is partially responsible for the low government expenditure on software. Taiwan’s IT hardware and machinery makers have been primary drivers of Taiwan’s economic growth for 30 years, contributing over 50% of Taiwan’s exports – US$84.32 billion out of a total US$165.97 billion in the first seven months of this year. IT firms such as Taiwan Semiconductor Manufacturing Co. (TSMC), United Microelectronics Corp. (UMC) and the world’s largest electronics manufacturer, Hon Hai (Foxconn), are bedrocks of Taiwan’s economy.
This successful experience with hardware, coupled with the risk-averse nature of the business environment in Taiwan, has made for a slow transition to investment in software. Conceptually, says Microsoft’s Kang, many businesspeople in Taiwan find it to be a “big and difficult shift to think that something you can’t see or touch is actually worth more than this beautiful piece of designed hardware that you know has substantial value.” In addition, those intangible software products tend to be much riskier investments, even if they potentially can deliver greater profit at much lower marginal cost. “The high-tech industry here tends to take a very hardware-centric view, and as a result the government has adopted a rather hardware approach to technology,” Kang explains.
Perpetuation of that historical imbalance can partially be attributed to bureaucratic practices that have had the effect of discouraging software procurement. For many years, responsibility for overseeing government procurement, including IT software, was in the hands of a Joint Procurement Platform run by the state-owned Bank of Taiwan, but the staff at the bank lacked the technical expertise to analyze the merits of different software products. Tenders were frequently delayed due to internal difficulties.
The high-tech industry here tends to take a very hardware-centric view, and as a result the government has adopted a rather hardware approach to technology
An article entitled “A Government Software Procurement Crisis” published in the April 2014 issue of Taiwan Business TOPICS noted that the government software procurement had practically ground to a halt, and the amount of purchases in that fiscal year was but a fraction of the normal level of US$130 million, which already was low by international standards.
The August 2014 establishment of the Software Procurement Office (SPO) under the Ministry of Economic Affairs was designed to remedy the situation. Industry sources regard the change as a move in the right direction, but are still uncertain about the new system’s efficacy.
Many complain that government-contracted software projects tend to be too small and too few. In discussing the problem, one veteran of the Taiwan tech sector uses the metaphor of a cake that is large enough for everyone to have a bite, but too small to provide any significant nourishment. The solution, the expert says, is for government procurement to play a role in making the cake bigger. Procurement on a larger scale would enable companies to sustain project teams for longer periods. For startups, it would mean having sufficient manpower to engage in the R&D needed to be competitive, not just in Taiwan but in the global software market.
To achieve this goal, say knowledgeable sources, certain provisions of the procurement law would have to be amended. Under the current law, specifications for ICT procurement must be written in terms of hardware requirements. Altering the system to include language that more specifically references software and services would lead to a much greater volume of contracts for such products and services, the sources say.
Many in industry and government see the future of Taiwan’s IT sector in the close integration of software and hardware. For instance, the burgeoning Internet of Things (IoT) – the network of everyday devices connected both to the Internet and to each other – demands close linkages between software, cloud services, and advanced hardware devices.
“What we’re advocating for Taiwan industry is a transformation from hardware-only business to hardware-software integration,” says Stephen Su, general director of the Industrial Economics and Knowledge Center at the Industrial Technology Research Institute (ITRI). “Taiwan cannot do software only.”
Such an emphasis on combining hardware and software opens up the possibility that Taiwan’s well-established hardware giants can best evolve for the IoT era by devoting resources to software R&D. That shift may be easier to accomplish than might be imagined. “About one-third of the software talent and software resources in Taiwan can be found within the so-called hardware companies,” says Sam Shen, senior director of the Market Intelligence & Consulting Institute (MIC) under the government-backed Institute for Information Industry. “If you count them in the total, the number of personnel doing software-related activities is actually much, much bigger than what is seen in just the software industry alone.”
The challenge in propelling Taiwan into the era of integrated systems will be to spark the necessary creativity and alter the prevailing risk-averse mindset. Those issues are just beginning to receive attention. In fact, the procurement imbalance problem remains outside the mainstream of economic research in Taiwan. “This is the first time someone has approached me to ask about software procurement,” Darson Chiu, a research fellow at the Taiwan Institute of Economic Research (TIER), told this reporter.
“Taiwan still has a very good reputation in terms of technology,” says MIC’s Shen. “The problem is whether we can leverage the resources needed for the new type of business model to succeed.”