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Technology Outsourcing

Can Taiwan's Tech Giants Adapt and Survive?

It was Computex 2014 in Taipei last week. If you’ve never been, think CeBit meets CES meets just about every other IT show you’ve ever been to; over 1,700 exhibitors spread out in locations across Taiwan’s sprawling capital in the baking June sunshine. The fact that the country boasts Asia’s biggest IT trade expo and the world’s second largest – this year welcoming 130,000 visitors – says something about the tech credentials of this smallish island in the South China Sea. Yet whether it can maintain its position at the heart of the global technology industry is far from clear.

Taiwan was once known as Formosa and peopled by aboriginals until the Spanish and Dutch arrived in the 17th century and the Han Chinese moved in. Its relationship with technology also goes back a long way. The government played matchmaker in the early 1970s when it created R&D body the Industrial Technology Research Institute (ITRI). The ITRI helped make Taiwan’s mark on the world by transferring technology from US firm RCA in 1976 – a move which eventually gave birth to chip firm United Microelectronics Corporation (UMC) and foundry Taiwan Semiconductor Manufacturing Company (TSMC).

Then in 1983, ITRI developed what it calls an “IBM-compatible” PC – but what could unkindly be referred to as a Big Blue clone – and transferred the know-how to five local firms including Acer. For many years the Republic of China (RoC), as Taiwan is officially known, never looked back and a huge industry of original design manufacturers (ODMs) and original equipment manufacturers (OEM) built on its prowess in the PC space to dominate worldwide production. Companies including Dell, HP, Compaq and IBM turned to these low-cost, highly skilled manufacturers, including Hon Hai (trading as Foxconn), Compal and Quanta to build their PCs and notebooks.

These firms were quick to adapt. As wage bills at home increased they built huge manufacturing plants in China, taking advantage of various Beijing-led incentives and cheap labour. In fact, they were instrumental in turning the Pearl River Delta (PRD) region around Shenzhen into the world’s pre-eminent tech manufacturing heartland.

Speaking to me from Computex, Forrester’s Bryan Wang summed up this evolution neatly.

“In the past 20 years, the growth curve of the PC industry was the primary driver for the tech industry in Taiwan to take off,” he said

“With the maturity of the semiconductor industry and consistent investment from the public and private sector in Taiwan, it created a healthy ecosystem to build an entire value chain from semiconductor to component manufacturing to the final assembly and OEM business.”

Time to change

But the good times couldn’t last forever. As of Q1 2014 the global PC market has been tanking for eight successive quarters as businesses delay purchases and consumers continue to plump for tablets and smartphones over traditional form factors. What’s more, despite its dominance in the ODM/OEM space, Taiwan has only managed to produce two major global PC brands: Acer and Asus. According to Gartner, Acer sat in fourth place with a market share of around 7%, some way behind third placed Dell’s 12.5% and a decline from the previous year of 14.8%. Asus was placed fifth globally, with a market share just under 7%, although it did post gains of 4.8% since the same period in 2013. Chinese firm Lenovo’s inexorable rise over the past few years has only served to push these two further down the global rankings.

Neither Acer nor Asus has been particularly successful either in making the transition to ultramobile computing – it’s not where their core competence lies and they’ve been slow to adapt. Even Taiwan’s pre-eminent mobile brand, HTC, is slipping into the abyss along with Nokia and BlackBerry. In Q1 it announced net operating losses of around $64m pre-tax.

“Clearly, for the branded smartphone/tablet market, mainland Chinese vendors like Lenovo and Huawei are winning,” Forrester’s Wang told me. “In the lower-end and white-label business segment [where other firms put their logos on ready-made products], OEM/ODMs in the Shenzhen area have already established a complete supply chain in the past four to five years. From a volume perspective, their capabilities have clearly exceeded any other players in the industry.”

Weathering the storm

The big ODMs and OEMs, of course, have done considerably better in adapting to the mobile computing revolution. Firms like Pegatron (spun out of Asus), Wistron (once part of Acer), Inventec, Foxconn and Compal count major players like Apple, Samsung and Lenovo among their clients. However, with margins increasingly squeezed, the transition hasn’t been a comfortable one, according to Gartner principal analyst Amy Teng.

“PC and LCD manufacturers are used to making high-volume, low-customisation products. Now they have to learn to make small-volume, highly customised products while keeping the same yield, higher cost effectiveness and faster time to market,” she explained.

Taiwan’s semiconductor players, however, have found customer relationships much more stable and prospered as a result, Teng added.

One company in particular which stands out is MediaTek, a firm which used to specialise in chips for feature phones but is increasingly moving up the stack to kit out low and mid-range smartphones. Last year it announced its first octa-core SoC, in a shot across the bows of Qualcomm.

An uncertain future

So where does this leave Taiwan’s once all-conquering tech hardware industry? Well, although Acer and Asus are struggling, the country still boasts a significant amount of R&D talent, and its contract manufacturers remain major global players. Foxconn in particular is looking to expand beyond its heritage in ODM/OEM to produce more of its own-branded goods. The firm is also looking to cut labour costs with a $1bn investment in Indonesia.

Others are also diversifying. Quanta now makes routers and servers for Google and Facebook datacentres as well as Amazon tablets, while Foxlink (no relation) is making Jawbone wristbands, according to Teng. Wearables are a potential growth market for these ODM giants as long as they can choose and nurture the right customers and invest in the right technologies, she told me.

At Computex 2014, meanwhile, ARM announced it will open its first CPU design centre in Asia in the same Hsinchu Science Park that houses TSMC and MediaTek – another confirmation of the large R&D talent pool that still exists in Taiwan.

The last time I went to Computex in 2013 I was woken from a pre-event nap by a magnitude 6.2 earthquake. It seems an appropriate enough metaphor for what’s going on in Taiwan’s tech industry today. Whether its businesses can recover their footing in time for the next major jolt could well determine if we’re still talking about them in 20 years.

 

Phil Muncaster has been writing about technology since joining IT Week as a reporter in 2005. After leaving his post as news editor of online site V3 in 2012, Phil spent over two years covering the Asian tech scene from his base in Hong Kong. Now back in London, he always has one eye on what's happening out East.

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Phil Muncaster

Phil Muncaster has been writing about technology since joining IT Week as a reporter in 2005. After leaving his post as news editor of online site V3 in 2012, Phil spent over two years covering the Asian tech scene from his base in Hong Kong. Now back in London, he always has one eye on what's happening out East.

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