Taiwan’s Tesla Boom, and Looking for More

Photo: Jae Park from Pexels

Formosa Plastics founder Wang Yung-ching failed at building a car business, but his failure laid the groundwork for the country’s successful Tesla supply chain. What are Taiwan’s advantages in the electric vehicle age?

The global automotive industry is experiencing a paradigm shift, sending Tesla’s stock price soaring and big Taiwanese manufacturers scrambling to expand their production capacity.

In 2017, Chang Chun Group CEO Suhon Lin invested NT$27 billion (about US$90 million) to expand his production capacity in northern Taiwan and overseas, building nine copper foil plants in Miaoli County alone. Now just three years later, capacity is still inadequate because of the huge demand for lithium ion batteries for electric vehicles.

Even if Lin does invest more, he would still have trouble meeting the demand for Chang Chun’s copper foil, which is thinner than a human hair. Lin says that based on estimates of battery demand by international organizations, “building another 60 factories around the world to make copper foil for lithium ion batteries by 2023 would still not be enough.”

David Shen, chairman of Hota Industrial Manufacturing Co., says he was approached by Formosa Plastics founder Wang Yung-ching in 1999 about producing car engines and gearboxes. Now, Hota is the sole supplier of reduction gears to Tesla. Photo: Kuo-tai Liu, CommonWealth Magazine

Also expanding with abandon is the sole supplier of reduction gears to Tesla, Hota Industrial Manufacturing Co., whose first factory is in Chiayi County. A second plant has just gone into production, and a beam-raising ceremony was held for a third factory in May with hopes it can begin production by the end of next year. Company Chairman David Shen says that aside from supplying Tesla, Hota has completed several projects for European automakers this year.

Why the boom in Taiwan for factory expansions in the electric vehicle supply chain? One reason is that the strengths Taiwan developed when it gained footholds in major automakers’ supply chains have complemented Tesla’s weaknesses, and Taiwan’s biggest weaknesses happen to be in areas where Tesla is strong. “Aside from engines and complete gearboxes, Taiwan can produce all the other components,” Shen says.

The origins of this success story can be traced back to a seemingly unrelated meeting in 1999. Shen recalls suddenly receiving a call one day from Formosa Plastics founder Wang Yung-ching, asking Shen to meet with him at Formosa Plastics headquarters. When they met, Wang, known as the “God of Management” for his business acumen, grabbed a gearbox and asked Shen, “Can you make the exact same thing as this?”

That year Formosa Plastics had begun manufacturing cars but could not produce engines or gearboxes, and in effect was little more than an assembly plant. Wang knew that without homegrown technology, there would be no future. 

“I’m sorry, Mr. Chairman, but without the original design drawings or people to teach us how to do it, there’s no way Taiwan can produce engines or gearboxes,” Shen told Wang.

At one point, Hota bought two engines and gearboxes and took them apart, reverse engineering more than 500 components. The company made prototypes of each component to their exact dimensions and specifications, yet still could not put them together satisfactorily. “Car factories in the West and Japan have been around for more than 100 years and definitely have their own unique experience and tricks of the trade,” Shen says.

In the end, Wang gave up on his automotive dream, but the project gave Taiwanese automotive component producers the capability to market their products abroad. Shen, for example, pushed hard to expand into overseas markets, his gears and transmission shafts gaining footholds in the supply chains of General Motors, Ford, Chrysler, and BMW. That’s why when Tesla came calling in 2008, Hota was able to establish itself as the EV maker’s sole reduction gear supplier.

Mobile phone-like game

A second key to the boom in Taiwan’s electric vehicle supply chain is that electric car manufacturing has taken a page out of the mobile-phone production playbook.

Roger Liang, the chairman of cable assembly and wire harness vendor Bizlink Holding Co., says members of the supply chains of traditional car makers have had little interest in electric vehicles because EV technologies and specs are constantly changing, a major challenge for the relatively inflexible Japanese and Western vendors. In contrast, Taiwanese vendors have made their living being highly flexible, investing in opportunities as soon as they see one.

As a result, major international electric vehicle makers have gradually turned to suppliers willing to accept their style of business and need for flexibility.  

In this arena, cars resemble mobile phones with wheels. Driverless and over-the-air technologies relying on the heavy use of data have been critical to Tesla’s disruption of the automotive industry, a massive shift that has played to Taiwan’s strengths.

Bizlink Vice President Younger Wang, who is responsible for the company’s automotive customers, cited the example of electric vehicles’ batteries. When you disassemble those batteries, Wang says, you see them as a huge module assembled from 8,000 to 9,000 lithium batteries. Each of those small batteries uses a wire harness to detect temperature, power, and the discharge rate, generating a massive amount of data every second that is accurately transmitted back to the battery management system.

High-speed transmission has been second nature to suppliers in Taiwan because of its strong foundation in information technology. But century-old Western or Japanese automotive wire harness vendors, who have swatted away all rivals in the traditional car market, may not have the necessary high-speed IT to compete in this new realm.

A factory worker at Excellence Optoelectronics, which manufactures tail lights used in the Tesla Model 3. Photo: Kuo-tai Liu, CommonWealth Magazine

Electric vehicles have emerged as the IT sector’s chance to penetrate the traditional car sector, an advantage Tesla automotive light module supplier Excellence Optoelectronics has used to emerge victorious. Company president Fanny Huang says Tesla is particularly focused on LED car lights’ ability to save power, a demand that has helped her company overcome competition from conventional automotive car light suppliers.

Traditional suppliers’ “strengths are production tools, lamp housings, and plastic and metal parts, but they don’t have expertise in power-saving technology,” she says.

Excellence Optoelectronics can help customers with the design of their products, including how to maximize their reliability, energy efficiency, and cost-effectiveness, Huang says.

Still, breaking into the Tesla supply chain can be difficult. So why was Tesla willing to take a risk on a relatively small Taiwanese outfit rather than a big LED maker, such as South Korean giant LG?

The reason touches on the third key to the factory boom – Taiwanese suppliers’ flexibility and capacity for innovation, which have enabled them not only to win but to far outpace their rivals. “If we were only 5% cheaper, they wouldn’t have given us an opportunity,” Huang says. “So we demanded of ourselves that we lower our costs by 20%, improve our reliability by 20%, and reach 20% power savings – and be able to help clients solve problems and do design work together.”

Hsieh Lu-lin, a senior analyst with the Industrial Technology Research Institute’s Industrial Economics and Knowledge Center, says Tesla has used non-traditional thinking to build cars and lead its supply chain. It encourages vendors to work with Tesla in researching car systems to see where they can be improved, and refining those ideas to foster truly disruptive innovation.

Taiwan must seize on that approach if it hopes to continue to prosper, Hsieh says. In the past, Taiwanese manufacturers would receive orders and fulfill them well, but now they have to go a step further, helping clients score breakthroughs such as how to use fewer resources while building more cars.

Plotting the circular economy

Enter Chang Chun’s No. 9 copper foil plant in Miaoli and one notices that its raw material comes from copper extracted from waste electric wire and cable. After the material is turned into a copper electrolyte, a charge of 50,000 amperes is sent through it to draw a 5-micron thin foil. It took Chang Chun eight years to gain the experience and perfect a technology most of its competitors have yet to master. The only other company in the world that can meet this standard is Japan-based Nippon Denkai.

Another key material used in batteries is cobalt, produced mostly in the Democratic Republic of the Congo. Only 100,000 metric tons of the rare metal are produced globally a year. But when controversy brewed over cobalt mining practices, Taoyuan-based Mechema Chemicals International began researching how to recover cobalt from petrochemical catalysts to reduce dependence on mining.  

Yet even as Tesla’s stock price soars and sales of electric vehicles surge, Mechema Chairman Yen Lung-tsai seems in no rush to expand capacity, focusing instead on his next move. Lithium ion batteries currently being used in electric cars are expected to degrade by 2025 and start to be replaced, Yen says, which is why Mechema is developing technologies to recover cobalt and nickel from used batteries and recycle those materials back into the battery supply chain.

Tesla demands that its suppliers be both flexible and agile, and just as getting a foot in the Tesla door can be difficult, getting booted is equally unusual.

Quality and safety are the main tenets of any car manufacturer, and Tesla is no exception. Certifying suppliers can take three to five years, which is why Taiwanese companies, which account for 75% of Tesla’s supply chain in terms of numbers, are hard to replace.

In the future, however, Taiwanese factories may have to consider setting up shop in China because Tesla is demanding an increase in the percentage of locally sourced parts for its Chinese-made cars. For the Model 3, the goal for local content is 80% by the end of this year, up from 30% when the car was first produced there. Currently, Tesla’s production in China accounts for 20% of its worldwide output.

Alternatively, Taiwanese vendors could decide to develop markets outside of China. “Taiwan has competitive advantages in markets outside of China,” says Hota’s Shen. “The opportunity at the very least is 750,000 Tesla vehicles.”

A key part of the third plant Hota is building in Chiayi is an R&D center featuring seven divisions, with the materials, production processes, and defect strategy divisions all focused on quality issues. Shen says Taiwan should not be satisfied simply with supplying Tesla, but instead have the courage to pursue an electric car dream and develop its own brands.

Bizlink’s Liang agrees. “Because Taiwan’s electric car supply chain took off at about the same point as those in Europe and Japan, it has an opportunity to overtake them,” Liang says. “Taiwan’s signal transmission technology and electric motors have competitive advantages, and it could start with special vehicles and vehicles used to move cargo. At the very least, they could first meet domestic demand.”

Taiwan in fact is capable of manufacturing complete lithium ion batteries, as multinational home appliance brand Dyson has shown by sourcing its lithium batteries in Taiwan.

Chang Chun’s Lin cites possibilities within his own company’s areas of specialization – chemicals and materials. Taiwan is capable of developing the cathode materials, anode materials, isolation film, and electrolytes needed for lithium ion batteries, but the domestic battery industry could use some government help, he says. “The government should strengthen its support for the industry. Sales of electric scooters are growing faster in Taiwan that anywhere else in the world, and this is an opportunity that cannot be missed.”

If Taiwan fails to move in the direction of building its own industry, Lin warns, its single-minded focus on contract manufacturing will lead to a repeat of Wang Yung-ching’s fate of not having his own brand or technology – and ultimately deciding to shut down the business.

Taiwan’s OEM assemblers often serve as little more than punching bags for international brands searching for the best prices. From shoes and apparel to desktops, laptops, and mobile phones, Taiwan has never been able to escape this fate.

But with electric cars creating a paradigm shift, it may be the wrong time for Taiwan to get complacent and settle for manufacturing parts for Tesla. Instead, now is precisely the time to search for ways to reverse its destiny of playing second-fiddle to the big vehicle brands.

This article, written by Kuo-chen Lu, first appeared in CommonWealth Magazine and is reprinted with permission from the publisher. Translation from the original Chinese was done for CommonWealth by Luke Sabatier.