Taiwan's tech industry needs version 2.0

In some respects the doyen of global IT manufacturing, Taiwan faces a big challenge to renew itself as the relentless pace of new technology alters our hardware needs.

Responsible for nearly 90% of the world’s notebooks and about half of its personal computers, Taiwanese companies have for years been at the epicentre of IT manufacturing – even if the bulk of the actual making has increasingly occurred on the Chinese mainland. 

But big changes are afoot and Taiwan faces big challenges if it is to stay in lockstep with those changes. 

The catalyst is the rapidly shrinking PC market and a slowdown in global smartphone sales, both crucial to the island’s hardware manufacturing industry.

According to US research agency International Data Corporation, worldwide PC shipments in 2015 declined 8% year-on-year to 288.7 million units, falling below the 300 million-mark for the first time since 2008. Global smartphone shipments, meanwhile, barely held on to double-digit growth of 10.1% last year, which on its own sounds impressive but less so compared with the 27.5% growth achieved in 2014, IDC data shows.

In the last decade Taiwanese companies have been key suppliers of electronic components to global PC makers such as Dell and HP and smartphone makers such as Apple. 

Hon Hai Precison Industry, which assembles the bulk of  iPhones for Apple, generated about half of its revenue from the US smartphone distributor last year. Apple is also the single largest client of chip supplier Taiwan Semiconductor Manufacturing, the island’s largest company by market value, contributing to nearly 20% of its sales last year.

“Taiwan is more vulnerable to the slowdown in PC and smartphone sales because it has a much smaller exposure to the software-related industries,” George Chang, head of regional technology research at Yuanta Investment Consulting told FinanceAsia

As the internet has extended its global reach and tightened its grip on our lives, so demand for computer hardware has been eroded by newer technology including mobile apps, search engine innovations, and cloud computing.

These new technologies rely very much on ideas and virtual platforms that allow a seamless exchange of information and require less hardware support than more traditional IT industries such as computers, automobiles, and home appliances.

NEXT BIG THING

Taiwanese manufacturers of 3C products, an abbreviation often used in Taiwan for computer, communication, and consumer electronics, are aware of the trend and many have started to seek out the next big thing to fit into their manufacturing models.

For example, computer product manufacturers are gradually shifting from personal computers towards data rooms, servers, and security systems. Communication device makers are shifting from smartphones towards intelligent robots, cloud computing systems, and internet of things-related products including remote control systems and sensors, while consumer electronics companies are turning to wearables, virtual reality as well as 3D printing systems.

Hon Hai supplies Apple

Hon Hai, for example, established a joint venture last year with China’s Alibaba and Japan’s Softbank to create intelligent robots that can help with simple housework as well as pay bills.

An industrial transformation of the island is needed not just because of the global shift towards new technologies but also because Taiwan no longer enjoys the cost advantages it once did due to the emergence of competitors like Vietnam and Cambodia. These have eaten into the already-low margins of Taiwan’s original equipment manufacturing businesses.

But whether the transformation can be successful is an open question because the inherent know-how and innovative capabilities of the Taiwanese people runs up against the island’s limited demographics and historical focus on hardware manufacturing, Yuanta’s Chang said. 

CONSTRAINTS

Despite having one of the best infrastructures in the IT manufacturing sector, Taiwan has never been able to develop a global brand in such areas such as PCs and mobile phones. 

“Taiwan has not been able to develop any truly global brands because it does not have a consumer market that is large enough to create sufficient demand,” Yuanta’s Chang said. 

In some of the world’s most populated countries, big data is changing the competitive landscape in many industries and creates new business opportunities. Communication and entertainment companies collect big data to identify business targets and develop effective advertisements, banks use big data for trade analytics, while retailers use big data to analyse consumption habits.  

But Taiwan’s population of only 27 million has to a large extent limited the development of big data applications.

“In China, developing a taxi app and attracting 10 million users will require less than 1% penetration into the 1.4 billion population, which is fairly achievable,” Chang said. “If you need to do the same in Taiwan, you will have to promote the app to one out of every three people here.”

Jiann-Chyuan Wang, vice president of Chung-hua Institution for Economic Research in Taiwan, said Taiwanese’s ability to innovate is constrained by the deep-rooted hardware manufacturing mind-set and the lack of foreign private equity and venture capital investors in local small- and medium-sized enterprises.

 “Taiwan’s education system values technical skills over innovation,” said Wang. “Every year, the top graduates from universities are recruited by large tech manufacturing companies as engineers which are considered one of the most well-paid jobs. There are not many talents left for creative innovation.”

Many Taiwanese SMEs are also unreceptive towards foreign capital because they are set up by more traditional businesspersons who lack the entrepreneurial spirit to innovate and invest in new ideas.

“It’s a recurring cycle,” Wang said. “Private equity and venture capitalists do not invest here because of a lack of visibility in developing new innovative ideas, and it becomes harder for Taiwan to create an innovative business environment to attract PE and VCs.”

However, there is a glimmer of hope that the Taiwanese technological landscape might yet be transformed following the appointment in 2014 of Simon Chang as the country’s minister of science and technology, Wang said. Chang, who was been a director of Google’s hardware operations in Asia before joining the government, spearheaded the set up of the Taiwan Innovation and Entrepreneurship Center in Silicon Valley to attract creative talents to work in Taiwan.

He has also backed the set up of the Taiwan Silicon Valley Technology Fund to invest in Taiwan-related technology start-ups.

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