The Taiwan economy has undergone a sea change over the past four decades. From the first seed team sent to the United States to learn integrated circuit (IC) technology in 1976, to the dense network of small personal computer (PC) component suppliers developed in the 1980s, to companies that accounted for 70% of global PC hardware production by 1990, to the meteoric rise of Hon Hai/Foxconn in the 2000s and the crowning of Taiwan Semiconductor (TSMC) as the world’s leading IC foundry, it has been an exhilarating ride.
Yet the rise of China and the paradigm shift in the technology world from hardware to software and the cloud, as well as from the PC to the smart phone as the key communication device, have impacted Taiwan greatly. Compared to the 30 years from 1980 to 2010 when Taiwan played a prominent, even indispensable, role in the PC revolution, Taiwan today is at a crossroads.
Taiwan was the key driver in making PCs widely affordable globally, first by linking up with Silicon Valley to become a major player in the PC production ecosystem and later by utilizing China as a production center to surmount labor shortages and cost challenges.
A confluence of enlightened government decisions enabled Taiwan to seize the opportunity to become the hub in the global PC wheel. These initiatives included early promotion of the electronics assembly industry and then the IC industry, as well as construction of the Hsinchu Science Park. Equally important was an education system that produced a critical mass of well-trained engineers (many of whom obtained graduate degrees and industry experience in the U.S.); Taiwan’s entrepreneurial culture; and a skilled, hard-working, and relatively inexpensive labor force.
Intense competition among a handful of Taiwan-based PC manufacturers, plus their ability to optimize their engineering capabilities and flexible manufacturing techniques, drove down the price of PCs so fast and steeply that PCs become commodity products, used in huge quantities by businesses and consumers worldwide. Eventually Taiwan’s PC manufacturing industry consolidated, with Hon Hai/Foxconn emerging as the world’s largest electronics contract manufacturer with annual revenue exceeding US$140 billion and over one million employees in China alone.
The result was not only a win-win-win for the United States, Taiwan, and China, but perhaps also the greatest contributor to the increase in global economic growth and productivity that occurred in the 80s, 90s, and into the new millennium.
The Impact of a Paradigm Shift
The proliferation of personal computing (PCs plus smart mobile devices) and exponential growth of computing power due to Moore’s Law led to a paradigm shift from hardware to software and the internet, including social networking, the sharing economy, and the Internet of Things (IoT). A new era in technology had arrived, and it did not bode well for Taiwan.
Three major factors explain why. First, with the end of the PC revolution, PC sales went into decline. Second, new technological innovations have focused mainly on software and the internet, not Taiwan’s areas of strength. Third, Chinese technology companies systematically sought to outcompete Taiwan rivals by using governmental subsidies; building up supply chains around leading companies such as Huawei and Lenovo; and engaging in industrial espionage to poach key Taiwanese employees and gain access to technologies, manufacturing know-how, and other trade secrets. In addition, the PRC government precluded non-Chinese companies from winning bids in the world’s largest consumer market by requiring compliance with Chinese technology standards such as TD-SCDMA and CMMB.
Over the last few years, major Taiwanese business publications have been sounding the alarm about efforts by the Chinese government and companies to weaken the Taiwan economy by attacking Taiwan’s technology enterprises. In various segments of the electronics industry (PCs, tablets, smart phones, etc.), Taiwan-based companies’ revenue and profitability have continued to fall. With the major exceptions of industry leaders like the four continuing powerhouses of Hon Hai/Foxconn, Largan, MediaTek, and TSMC, many Taiwanese technology companies have been reduced to near-zombies incapable of growth or strong earnings.
Besides the impact of the Chinese government’s strategies and tactics listed above, some observers also blame the Taiwan government for committing such a large proportion of Taiwan’s resources to the electronics sector, thus failing to incubate potential emerging industries. In either case, the end result is the same – the weakening of the Taiwan economy, with potential long-term political implications.
Taiwan is between a rock and a hard place. While only a few Taiwan-based companies, such as those mentioned above, have sufficient scale or world-leading technologies, its small and medium-size companies generally lack the scale, unique technologies, or marketing power to long withstand the onslaught of Chinese competition. Even among the currently successful Taiwan-based companies, only TSMC, which earns 50% gross margins and dominates the chip foundry industry (even replacing Samsung as the manufacturer of Apple’s key application processor) could be considered a global leader in its segment of the electronics industry. By contrast, Hon Hai/Foxconn operates with gross margins of 7%, compared to 40% for its biggest customer, Apple. With the smart phone market maturing (like the PC market before it), Taiwanese companies face declining fortunes in high-volume electronics manufacturing.
At the same time, however, some notable success stories illustrate how companies and industries have been able to beat back the Chinese challenge and become stronger.
What Should Taiwan Companies Do
Although economic pessimism has permeated Taiwan in recent years, Taiwan continues to possess valuable characteristics and core competences that cannot be easily copied or emulated. They include: 1) speed, 2) flexibility, 3) value (price/performance ratio), 4) customization (ability to serve niche markets efficiently), 5) concentration of supply chain members in compact areas (clustering), and 6) international connectedness (with the world, not just China). Taiwan needs to fully utilize these competitive advantages and forsake the mindset and practices that have plunged certain Taiwan industries and companies into crisis.
Taiwan’s negative attributes have been 1) short-termism, 2) over-reliance on the Chinese market, 3) blind focus on cost cutting, 4) emphasis on volume production, 5) lack of attention to design, R&D, and innovation, and 6) failure to pay employees globally competitive wages. The sooner Taiwan can shed these negative approaches and adopt positive ones, the better off it will be.
Due to Taiwan’s remarkable past achievements in the IC and PC industries, there is great temptation to try to find another star industry or two with massive revenue potential. But Taiwan’s forays into the DRAM, LCD panel, solar panel, and LED industries have met with failure for various reasons. In the DRAM and LCD panel sectors, Korean companies such as Samsung and LG dominate. In the solar panel and LED industries, with a few exceptions Chinese companies enjoying big government subsidies have destroyed the markets. Collectively these four industries have been referred to as the “Four Big Disastrous Industries.”
Instead of hyping new fields such as biotech or IoT as saviors, Taiwan should focus on industries in which Taiwan’s unique characteristics and core competences can be leveraged and amplified to provide a competitive advantage.
Germany could serve as a good reference model. While Germany has world-class corporations such as Daimler, Siemens, BASF, and SAP, some 99% of its companies fall within the category of “Mittelstand” – small and medium-sized enterprises, which are mostly family-owned. Around 1,000 of these companies are world market leaders in their particular segment and are called “hidden champions.”
Taiwan also has a good number of these companies making products ranging from shoes and golf clubs to bicycles and industrial compressors. Although the Taiwan companies often fall short of German precision, they are faster and more flexible, provide better value, and have deeper market knowledge in certain areas.
By leveraging Taiwan’s unique characteristics and impressive skills in electronics, machinery, and other industries, Taiwan companies could apply the “just enough” mindset to carve out many defensible niches. In fact, for customers in developing countries an affordable “just enough” product is more desirable than an expensive, over-engineered German product. Also, these smaller niches are less likely to be destroyed by high-volume, subsidized producers from China.
Leveraging Supply Chain Clustering
An inspirational example is the story of the Taiwan bicycle industry. In the late 1990s it found itself under siege when China started flooding the international market with lower-priced products. In response, the two leading companies, Giant and Merida, together with a dozen or so members of their supply chain, formed the A-Team in 2002. Members of the group leverage the power of clustering; improve the quality of their products by cooperating in R&D, management, and marketing; make use of the Toyota Production System (TPS), Total Quality Management (TQM), and Just in Time (JIT) methodologies; find outside help for creativity and innovation; and focus on high-value-added, more customized, higher-quality products. Within five years, the Taiwan industry had not only survived but doubled its revenue.
Without formation of the A-Team, Taiwan today would not have a bicycle industry that is the unquestioned leader in the world. Even famed Italian bicycle maker Colnago and Trek from the United States rely on Taiwanese counterparts to do joint R&D and build their bicycles.
R&D and Manufacturing Techniques
Until recently, Largan was a little-known company making camera lenses for Apple’s iPhone and others. Its success is the result of a relentless pursuit of perfection in lens-making techniques. Over a decade ago during the mass exodus of Taiwan companies to China in search of lower costs, Largan’s then-chairman Scott Lin committed to staying in Taiwan and automating the company’s production.
To meet its customers’ ever more demanding specifications, Largan often resorts to making its own customized machinery for its production lines – an option that is possible only because of the speedy, robust, highly skilled, relatively inexpensive, and flexible machinery industry cluster in Taichung.
The result is a world leading company capable of staying ahead of its competition and supplying Apple and other smart-phone makers with ever higher resolution lenses at reasonable price. In recent years, Largan has become the king of the Taiwan Stock Exchange.
It is remarkable that such a relatively young company (Germany’s Carl Zeiss, in contrast, has a 171-year history) can out-compete the German and Japanese lens makers. Its performance shows that even when a Taiwan-based company goes deep with R&D, it can still apply Taiwan’s unique industrial characteristics of offering “just enough” features at optimal price points. Japanese and German manufacturers could undoubtedly match Largan’s technical quality, but they cannot compete on price and/or speed.
Diversifying Industries and Markets
For the last 40 years, the Taiwan economy has been heavily weighted toward the electronic and computer-related industries, and many of the best and brightest have chosen to study electrical engineering. It is high time for Taiwan to decrease its reliance on the IC and computer-related industries, as well as on the China market. Moore’s law has passed its 50th year and China’s spurt of economic growth is approaching its 40th year. There are signs that both are stalling.
Because of the paradigm shift discussed above, it is crucial for Taiwan to diversify into non-IC or computer-related industries where Taiwan could leverage its core competences and reach a critical mass. Three potential industries come to mind: 1) high-value-added agriculture and aquaculture segments such as fruits, flowers, and seafood, 2) biotech and medical-related industries as Taiwan has one of the most efficient healthcare systems in the world, and 3) sustainability industries such as green building technology as Taiwan boasts the first Green Building Rating System in Asia – EEWH – and the greenest building in the world with the lowest Energy Use Intensity (EUI).
Whether these industries will prosper will depend on many factors, luck being one of the most important. But there are good reasons to believe that Taiwan companies have a better than fair chance of doing well in each of them.
First, agriculture and aquaculture. Fifty years ago Taiwan was known as the “Kingdom of Fruits” and had a highly evolved agricultural sector. Due to years of neglect and mismanagement, this sector not only remained dormant but actually shrank as fruit exports declined. In October 2016, the government formed the Taiwan Agriculture International Development Corp. and recruited Chen Yu-Jan, ex-president of Zespri Kiwi’s global sales and marketing arm, to head up this effort. Chen is known to have saved Zespri’s failing business by successfully turning around its market in Japan and is well connected in this industry. Zespri Kiwi earns New Zealand more than US$1 billion per year.
Second, biotech. Taiwan is well known for having one of the most efficient healthcare systems in the world. Just as importantly, researchers such as Professor Chang Ming of National Cheng Kung University (NCKU) have come up with various breakthroughs including the anti-IL 20 antibody whose patent was licensed to a drug company for over US$13 million.
Can Taiwan succeed in this sector? Whether there is sufficient critical mass and whether the key factors enabling Taiwan companies to prosper are integral to this industry are important questions. Many countries, including a city-state as small as Singapore, are eyeing the biotech industry. Further, drug development and the drug approval process take a long time. As speed, one of the most important competitive tools for Taiwan companies, is not a factor here, this may well be a challenging sector for Taiwan companies.
Third, sustainability-related industries. Global warming is probably the single biggest challenge facing mankind, and new technologies and new approaches are needed to counter it. Yet the current U.S. President and Congress appear to believe otherwise, as Trump’s proposed budget seeks a massive cut for the Environmental Protection Agency (EPA).
In the last two decades much progress has been made in the areas of green building as well as automobile design and technology. Advances in solar panels, wind turbines, smart electric grids, hydrogen fuel cells, battery storage, etc. have made the dream of achieving net zero carbon emission possible. In fact, California has mandated that new homes must meet the net zero requirement by 2020. As hydrogen fuel cell cars hit the road, the promise of a hydrogen-based economy is becoming a reality.
Lin Hsien-Te, an architecture professor at NCKU whose life work has been to minimize carbon emissions from buildings, has succeeded on multiple fronts. His crusade led to Taiwan promulgating the first green-building rating system in Asia – EEWH –in 1999, and he designed and built multiple green buildings with impressively low energy consumption. He also developed a system to calculate carbon emissions for buildings efficiently, formed a Low Carbon Alliance to implement this system, and published numerous books and articles. Because of his work, the topic of green building is now part of Taiwan’s education curriculum and daily conversation.
Half a century ago when Taiwan was trying to develop its IC industry, the vision of a few seminal figures guided the rise of that sector. Professor Lin may be such an influential figure for the green building technology sector. In addition, Delta Electronics, a Taiwan-based global leader in power-supply technology, has the potential to play a leading role in promoting sustainable development in Taiwan. Its founder and Chairman Emeritus, Bruce Cheng, is deeply committed to addressing the global warming issue, and has donated substantial amounts to sustainability causes including NT$100 million to enable construction of the Magic School of Green Technology, the greenest building in the world, designed by Professor Lin.
Taiwan’s competitive characteristics appear to be a good fit for the green building technology sector. Speed, flexibility, value, customization, clustering, and Taiwan’s strengths in IC, hardware, and machinery are all critical attributes that could allow Taiwan to compete effectively in this segment.
Education and Language Capability
Taiwan needs to quickly revamp its education system to address the challenges it faces. The recent attempts at education reform have proven controversial, especially the de-emphasis on technical and vocational schools in favor of expanding four-year universities.
What Taiwan needs most is to improve the foreign-language capability of its citizens. It is curious that Taiwanese do not speak English more fluently, as many have been doing business globally for years, and English is the world’s de facto business language.
For years, children started to learn English too late and many found it difficult. But with current language-learning technology, it would be relatively easy to rectify this problem if the government makes it a national priority and approaches the issue creatively. But it has to be a concerted, persistent, decades-long effort.
Beginning in the 1980s, those returning to Taiwan after receiving advanced education abroad contributed greatly to Taiwan’s economic boom. In recent years, however, fewer and fewer students have been going overseas. Similarly, relatively few Taiwanese scholars participate in international conferences. As a result, Taiwan is becoming more insulated – which may make it harder for Taiwan to take optimum advantage of the next great global economic opportunity.
As Taiwan faces unprecedented economic challenges, it needs to take stock of its strengths and unique characteristics as it seeks the best path forward. Given the global paradigm shift to software, Taiwan needs to adjust both its capability and mentality so as to focus more on software, innovation, and creativity.
The cross-Strait economic relationship also needs some rethinking. While companies like HonHai/Foxconn have leveraged China’s inexpensive and almost unlimited supply of labor to grow into global giants, many have unwittingly transferred their technology and know-how and trained their current competitors. By taking what seemed to be the easy way out and setting up plants in China to lower costs instead of upgrading their products and building their brands, many have lost the opportunity to move up the value chain.
Taiwan has faced adversity before, but each time managed to find ways to overcome it. As daunting as the current situation looks, Taiwan will meet the crisis head on. With the right government policies, a resilient spirit, renewed focus on internationalization, and a lot of effort, Taiwan can secure a position of prosperity, innovation, and economic freedom for many years to come.