taiwan-needs-more-than-geeks

Taiwan needs more than geeks

Taiwan must develop more than its manufacturing skills to secure its status as a technological powerhouse.
Despite disadvantageous global trends, TaiwanÆs technology sector has showed some resilience to the effects of higher input costs and a weakening demand for computer-related products. But this doesnÆt mean that the sector is perfect û the very nature of the technology world means that constant progress is an essential aspect of the industry. Although the Taiwanese have shown themselves to be manufacturers par excellence, many believe that a greater emphasis on design and marketing can only benefit the sector.

President Ma Ying-Jeou has said as much. In a recent speech, outlining his plans for Taiwan to become an international technology centre, he suggested that to maintain their market share, Taiwan's technology companies should focus less on working as subcontractors for international companies, which is very much the sectorÆs bread and butter, and concentrate more on innovation.

A model for success can be found in the semiconductor industry; Taiwan Semiconductor Manufacturing Company (TSMC) has a dominant market share worldwide.

ôIf you look at the semiconductor industry in Taiwan, it is very competitive globally with a gross margin of between 30% and 50%,ö says Peter Tsao, vice chairman of Deutsche BankÆs global technology group. Taiwanese semiconductor design is so effective, he says, that it has allowed Taiwan to take away market share from the US, reversing the direction of business migration: whereas US companies would set up their manufacturing centres in Taiwan, it is now the case that Taiwanese semiconductor companies are establishing their own design centres in Silicon Valley.

The situation is tougher when it comes to electronics assembly, or original equipment manufacturing (OEM), which comes with a gross margin of only around 10% û the vast majority of the value-added going to the owner of the finished-branded product, rather than to the manufacturer.

Companies that operate in this area û such as mobile phone manufacturer Foxconn û have not only faced a slowdown in demand, but also a less favourable environment in their main manufacturing base, China. Wages have crept up thanks to a new labour law and tax concessions have been removed, putting Taiwanese companies on a more level playing field with their Chinese competitors.

One thing that makes Taiwan stick out from its technological neighbours is the lack of big brands û Japan has Sony, Korea has Samsung and China has Lenovo. Taiwan does however have some companies that have gone beyond assembly to target the consumer directly.

Computer-maker Asustek Computers has recently gained some success with its Eee PC, a scaled-down notebook computer that was popular in the US last Christmas. Acer has been focusing on developing its own brand. But even though it is one of the worldÆs biggest notebook companies, it is not obvious how much of that is due to the brand rather than the companyÆs low prices.

ôAcer is one of the only Taiwanese brands that has been recognised. But does it have brand equity? Are you willing to pay more for an Acer than for another computer? No!ö says one Taiwanese tech specialist.

High Tech Computers (HTC) has quickly become a major player in the smartphone market, which in revenue terms is growing at 10 times the rate of the standard phone market. Although its phones are considered something of a second-best to AppleÆs iPhone, this may actually be an advantage says Bhavin Shah, J.P. MorganÆs head of Asia Pacific technology research. ôA lot of people are talking about the iPhone, but not all networks can use them which means that HTC is able to do deals with many network operators who donÆt sell the iPhone. This flexibility works to their advantage.ö

ôWhile companies, such as Acer and HTC, have made in-roads, there are still many challenges for Taiwan tech companies that are interested in building a global brand,ö says William Dong, head of Taiwan equities at UBS. ôIt takes both time and money to be successful. One must have the staying power to keep up the marketing campaign and expenses.ö

CY Huang, president of greater China investment banking at Polaris Securities, says Taiwanese companies are left with three options. They could eschew global ambitions and focus their efforts on marketing to a particular country, say China, thereby developing a regional brand; or they could nurture a niche brand by developing specialist products for a particular consumer base. The third option consists of Taiwanese companies going to the world market with the help of a foreign partner.

ôCompanies in Europe are willing to be bought up by companies in China and Taiwan. Why? Because these companies used to be very good, with a high-end brand, but they do not have low-cost Chinese manufacturing. These people didnÆt go to China and as a result they have suffered, but the brand value still exists. They want the Chinese manufacturing and Taiwanese companies want the branding and the global experience,ö says Huang.

But Taiwanese companies need not team up with US or European companies: ôThe win-win situation is a Chinese company buying into a Taiwanese company to take on global expansion,ö he adds.

We can expect domestic mergers and acquisition activity among the original equipment manufacturers, says Huang. ôWhat youÆre seeing is the system players are taking greater strategic stakes in the component players.ö This means that many horizontal players, which specialise in making one or two components, become vertically integrated into a bigger corporate structure û it will no longer be one company competing with another company, but entire production value chains competing with other value chains.

While it is generally believed that the sector will consolidate, not everyone believes that it will happen through mergers and acquisitions, an activity that has never been popular in Taiwan. What could happen instead is that smaller players could fail as the sector becomes more competitive, and their market share will be absorbed by bigger players. No matter how it happens: TaiwanÆs technology landscape will look very different in a few years.

This story was first published in the September issue of FinanceAsia magazine.
¬ Haymarket Media Limited. All rights reserved.

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