Taiwan, The Republic of China was capitalist long before Beijing embraced free enterprise – so can the mainland learn from its diminutive companion?
We all know Japan. Japan has its famous consumer technology companies such as Sony, Toshiba and Panasonic. Korea is familiar too, with its massive Chaebols Samsung and LG. It tells you much about Taiwan that it can compete comfortably with these giants of the industry, boasting its own Asus, Acer and HTC. And it could be that the island off mainland China has something to teach its vast parent nation.
The recent natural disaster in Japan has highlighted the real power of Taiwanese electronics. Taipei is more likely to benefit from Japan's misery than Beijing, because Taiwanese companies are driving innovation.
When the earthquake struck and the tsunami swept through Japan's coastal towns, tech companies across the world were concerned about their supply of memory chips, semiconductors and displays. However, many have found Taiwanese chip firms to be more than capable alternative suppliers.
Chimei Innolux, a leader in the supply of LCD displays, has recently signed an agreement with Apple to supply touch sensors for the iPad 2. The Taiwanese company has obtained the license to manufacture LCD displays incorporating the in-plane switching technology used in the iPad.
The IPS displays and touch sensors will make Chimei a one-stop manufacturing centre for panel and touchscreen components, which will include final assembly as well since Chimei is associated with fellow Taiwanese manufacturer Foxconn. Such was its technological capability, Chimei was ready to fill the shoes of Japanese suppliers at a moment's notice.
The Japan effect
In fact, Taiwanese companies may benefit from Japan's adversity in the long term. The Kobe Earthquake is often quoted as a contributing factor to Japan's economic stagnation from 1996 to 2006, which is often referred to as Japan's lost decade.
Taiwan benefits from the sound education system left behind by its former colonial rulers Japan. But the country, after the war, made a conscious decision to concentrate on science, technology and manufacturing. Distrust of communist mainland China spurred closer political and economic relations with US and allowed it to attract a wave of capital and technology investment to initiate massive growth. It also had a high supply of cheap labour due to millions of refugees from mainland China arriving by boats to Taiwanese shores.
Ultimately though, Japanese and US firms had to leave Taiwan, as labour costs have become increasingly expensive and the Taiwanese dollar appreciated. Nevertheless, by the time foreign firms exited Taiwan in the 1970s and 1980s, the country had a number of small electronic firms specialising in the design and manufacturing of electronics. These firms were to become instrumental in driving the high tech industries of Taiwan.
Technology R&D spending and the accumulation of technology, patents and intellectual property has been ramped up. This has enabled them to become as adept as the former large Japanese and American employees in marketing and branding.
The government set up the Hsinchu Science and Industrial (HIS) park at the beginning of the 1980s and gave these manufacturers tax breaks and other perks. A number of prominent assemblers and original design manufacturers (ODMs) of today had their birth in the HIS during this'period.
HIS, which had around 50 companies when it was started, is now the home to almost 500 companies generating revenues of around US$30bn a year. The 14km2 park alone accounts for almost 9 per cent of Taiwan's manufacturing segment and contributes to around 3 per cent of total GDP'(in 2010).
Almost all of Taiwan's well-known brands, such as Acer, DLink, Foxconn, Kingston, and Taiwan Semiconductor Manufacturing Company (TSMC), have R&D or manufacturing facilities in the HIS. In recent years, HIS has expanded beyond computer and peripheral makers to include more sophisticated fields such as optoelectronics and biotechnology.
In the 1970s, with Japanese consumer electronics giants casting a shadow over the region and the entire world, US and European companies found the need to expand to this region. Taiwan was an obvious place to do business. This also spurred Japan to counter-invest in the country to keep their grip on the industry.
The increasing diversity of work that Taiwan offered to western brands enabled the island to expand its manufacturing capability. The easiest way to establish a foothold was to work with talented Taipei-trained engineers.
This equipped these enterprising companies with increasing technical capability, and these companies eventually grew to challenge their clients in launching and branding new products. Some of these brands, such as HTC and MSI have become well-known household brands.
Their most recent successes have been in the mobile phone market in the shape of HTC, which is now Taiwan's top electronics firm. It and others started out as original device manufacturers (ODMs) designing and manufacturing hardware for western brands such as Motorola and Siemens.
However, with ODMs typically operating on very tight profit margins, it was in their interest to start manufacturing and branding their own mobile phones. This is a risky strategy, potentially alienating contract clients.
Taipei is home to the world's largest contract manufacturing firms, accounting for 65'per cent of the world's contract electronics manufacturing business and contract manufacturing is likely to remain a core component of many Taiwanese companies.
Taiwan's Foxconn is a good example. The company, which started as a board supplier for the PC industry has a global workforce in excess of 920,000 and has emerged as the world's largest contract electronics manufacturing (CEM), controlling almost half the world's market share.
Typically, a CEM does not provide design services for its customers, but provides the manufacturing and assembly for consumer-electronics giants. Not having as strong a brand as its customers, though, has presented some serious problems. There have been well-publicised suicides at Foxconn's manufacturing facility relating to its manufacture of Apple's iPad. Much of the blame has been laid at the door of Foxcon as it does not have the same market muscle as the mighty Apple.
Over the past two years, revenue at Foxconn has doubled, primarily due to massive growth at Apple. But its sheer size gives it advantages over its competitors. The company also employs around 50,000 toolmakers and 2,000 workers, who design and fabricate moulds and dies. Very few competitors can match Foxconn for this. The company's nearest competitor, Flextronics of Singapore, the second largest CEM, is only one third of Foxconn's size in terms of revenues.
Delta Electronics is a Taiwanese company that you may not have heard of, but if you own a major branded laptop, you're most likely to already own one of their products – for this company is the market leader in power adaptors.
The company plans to capitalise on its success by moving headlong into the manufacture of electric vehicle charging points. It already has a lucrative solar panel business and is moving fast into the area of renewables.
Taiwanese firms have also scored well on the technology used to produce low-end mobile phones. The Taiwanese firm MediaTek is a case in point. Until 2004, the firm was engaged in just the production of chips used in CD-ROMs and DVD players. But the firm is moving up the value chain by bundling chips with the necessary software to manufacture mobile phones. MediaTek's technology revolutionised mobile phone technology and reduced the barriers of entry to the mobile phone market by decimating the cost of production.
MediaTek's revenue has doubled in a matter of three years to around US$3.5bn. The company has also made an important foray into consumer software with its acquisition of the Power DVD. The company primarily supplies PC manufacturers directly and has the largest footprint of any optical drive software manufacturer. With the Power DVD brand familiar to many consumers, the company is planning a big retail move.
Taiwan and China's tensions
Taiwan is a major investor in mainland China, but maintaining good relations is somewhat of a balancing act. For example, Taiwan's TSMC currently has an 8 per cent stake in China's Semiconductor Manufacturing International Corporation (SMIC), but it has in the past accused SMIC of stealing trade secrets. This has now been settled and SMIC has failed to emulate the success of TSMC.
But can the People's Republic of China learn from Taiwan's example? Can these emerging economic superpowers create brands of their own? So far, the results have not been good. China has acquired Swedish car manufacturer Volvo. Lenovo also merged with the PC division of IBM. But home-grown brands remain elusive to these emerging powers.
There is little evidence of brand building – particularly in Beijing. The importance of this cannot be underplayed because the most innovative products coming out of mainland China are from the back street counterfeiters from Shenzhen. These 'Shenzei' products – mainly mobile phones steal the brands of the major electronics companies (including Taiwanese).
Interestingly though, the counterfeiters do not slavishly copy the specifications of the originals. Often they will add an extra sim card slot here, more internal memory there, a faster processor and other features. In fact most Shenzei consumers are aware they are buying fakes, but do so because they want the extra capabilities available on these devices.
Why not brand these products? The simplest explanation for China's failure to build global brands is cutthroat domestic competition. In most sectors, thousands of firms compete for domestic market share at the budget end of the spectrum, leaving profit margins razor thin.
Foreign brands have taken over much of China's high end and therefore most companies are forced to compete on cost, leaving little room for investment in R&D or marketing. China's weak protection for intellectual-property rights – the patents and ideas that are the solid core of any brand – makes it risky for companies to invest.
Taiwan is a smaller entity and therefore there has always been less competition. Even so, the ability for Taiwan to create so many well known technology brands is perplexing – considering the fact that it has found it very difficult to create a brand of its own. Is it an independent sovereign state? Is it the 'legitimate' Chinese Government in exile? Is it a territory of mainland China? Politicians in Taiwan have been debating this for more than 50 years. But consumers are more likely to know of the Acers, Asus and HTCs and less likely to have heard of China's Huawei, Zoomline and Wahaha brands. *