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 user 2005-05-07 at 11:00:00 am Views: 44
  • #9176

    Why Taiwan Matters
    The global economy couldn’t function without it.
    But can it really find peace with China?

    Want to find the hidden center of the global
    economy? Take a drive along Taiwan’s Sun Yat-sen Freeway. This stretch of road
    is how you reach the companies that connect the vast marketplaces and digital
    powerhouses of the U.S. with the enormous manufacturing centers of China.

    The Sun Yat-sen is as bland as any U.S. interstate, but it’s the highway
    of globalization. Though it snakes along the whole west coast of Taiwan, the key
    70-km stretch starts in Taipei’s booming new Neihu district of high-tech office
    buildings and ends in Hsinchu, home to two of Taiwan’s best universities, its
    top research center, and a world-renowned science park. Along the way, the Sun
    Yat-sen leads to some of the most important but anonymous tech outfits in the
    world: Asustek Computer, whose China factories spit out iPods and Mini Macs for
    Apple ; and Quanta Computer, the No. 1 global maker of notebook PCs and a key
    supplier to Dell  and Hewlett-Packard. You’ll also find Taiwan Semiconductor
    Manufacturing Co., the biggest chip foundry on the planet, an essential partner
    to U.S. companies such as Qualcomm and Nvidia. Dozens more companies dot the
    Neihu-Hsinchu corridor. There’s AU Optronics , a big supplier of liquid-crystal
    display panels, and Hon Hai Precision Industry, which makes everything from PC
    components to Sony’ PlayStation 2, and which is a fast-rising rival to
    Flextronics International , the world’s biggest contract manufacturer. Taken
    together, the revenues of Taiwan’s 25 key tech companies should hit $122 billion
    this year.

    Taiwan’s success is also China’s. No one knows for sure how much of China’s
    exports in information and communications hardware are made in Taiwanese-owned
    factories, but the estimates run from 40% to 80%. As many as 1 million Taiwanese
    live and work on the mainland. “All the manufacturing capacity in China is
    overlaid with the management and marketing expertise of the Taiwanese, along
    with all their contacts in the world,” observes Russell Craig, of tech
    consultants Vericors Inc.

    Impressive stuff. Yet for many people around the world, Taiwan
    evokes only one thing: the standoff between the People’s Republic of China,
    which considers the thriving democracy as just one of its provinces, and Taiwan
    President Chen Shui-bian, who has made little secret of his dream of one day
    declaring Taiwan independent. This cross-strait drama is now in a tense new
    phase, played out with dramatic effect in recent weeks. First Beijing passed an
    anti-secession law authorizing an attack on Taiwan in case it moves towards
    independence. Taiwan responded with a massive anti-Beijing rally. Then came the
    shocker: The late April visit to the mainland by Lien Chan, Chen’s chief
    political opponent and chairman of Taiwan’s Kuomintang (KMT). As millions of
    Taiwanese and Chinese watched on television, Chinese President Hu Jintao shook
    hands with the opposition leader at a lavish state reception in Beijing. After
    Lien returned to Taipei on May 3, Hu’s government sweetened its PR offensive
    with more goodies, including a plan to ease restrictions on Chinese travel to
    Taiwan, lift tariffs on some Taiwanese agricultural imports — and send two
    giant pandas to the Taipei Zoo. To add even more surprise, Taiwanese President
    Chen, despite some of his supporters’ fury at Lien’s visit, inserted himself
    into the dialogue. Chen agreed to send a message to Chinese President Hu through
    another opposition leader, James Soong of the People First Party, who was
    scheduled to start a China trip on May 5. Hu seems to be counting on his
    contacts with the opposition to increase pressure on Chen, forcing him to accept
    that the island is part of China. But that’s a concession Chen’s unlikely to

    Real reconciliation thus seems a long way off. Yet any serious
    attempt to lower the tension would hold huge promise for the executives who run
    America’s IT industry, which depends on Taiwan for so much of its goods. A
    shooting war between Taiwan and China would be catastrophic in human terms. And
    for the Western companies that have built their fortunes around Taiwan, the
    damage would be a direct hit to the global economy and the Digital Age. “It
    would be the equivalent of a nuclear bomb going off,” says a top executive at a
    U.S. high-tech giant. Couldn’t U.S. industry develop sources of IT supply that
    don’t involve the Taiwanese? “That’s like asking, ‘What’s the second source for
    Mideast oil?’ says this exec. “You might find it, but it’s going to cost you.”
    Insiders estimate that it would take a year and a half to even begin to replace
    the vast web of design shops and mainland factories the Taiwanese have built.
    “The IT model is not one built on second-sourcing,” says Ken Wirt, a top
    executive for the handheld business of palmOne Inc.

    Not that Taiwan and
    China aren’t also extremely pragmatic. Throughout this turbulent spring Taiwan
    Inc. hasn’t missed a step. For instance, Acer Inc., the PC maker, increased
    sales by 40% in March; its models are among the top five sellers in the world.
    Dell and Hewlett-Packard will source $10 billion and $21 billion respectively
    from Taiwan this year, estimates Chicago-based consulting firm THT Research,
    which tracks contract manufacturing. Apple is boosting its order book from
    Taiwan companies by 28% from a year ago, to $5 billion. Quanta on Apr. 8
    announced a partnership with the Massachusetts Institute of Technology to
    cooperate on research into the next generation of computing. Despite a cyclical
    downturn that has hurt profits, TSMC has embarked on a $2.6 billion ramp-up to
    produce more custom-designed chips than ever. Compared with a more specialized
    chipmaker such as Intel, “we have maybe 100 times the number of product lines,”
    says TSMC chairman and CEO, Morris Chang. “It takes a very special

    China may threaten Taiwan as No. 1 IT supplier. But for now
    it’s Taiwanese engineers who provide ever-more-ingenious solutions to
    manufacturing and design conundrums. “In Taiwan, people say the U.S.
    understanding of outsourcing is backward,” says Victor Zue, co-director of the
    Computer Science & Artificial Intelligence Laboratory at MIT. “It feels more
    like the Taiwanese are outsourcing marketing and branding to the rest of the

    The island’s high-tech industry has had to improve its skills
    sharply to get where it is today. Barely a decade ago, Taiwan made components or
    assembled machines designed elsewhere, and was only a marginal player in more
    lucrative segments of the electronics industry. Today its companies are
    increasingly proficient at original design, and dominate manufacturing in key
    categories. In LCD screens the Taiwanese have passed the Japanese and rival the
    Koreans. Taiwan is tops in routers, notebook computers, and cable modems. The PC
    industry “has really consolidated around Taiwan,” says John A. Antone, Hong
    Kong-based head of the Asia Pacific region for Intel Corp., which has 400
    engineers at work on the island. “That’s just where the best engineering is

    How does Taiwan do it? Lower pay helps. “You look at the
    engineering costs in the U.S. and compare them to Taiwan’s, and we are talking
    about one third of the cost,” says Kai Hsiao, director of global procurement for
    greater China at HP. Visit Taiwan-owned factories on the mainland, and you will
    find that assembly line wages average $120 a month.

    But Taiwan’s
    advantage goes way beyond cheap labor. The island combines an entrepreneurial
    culture with effective government involvement. The Hsinchu-based Industrial
    Technology Research Institute is a collection of labs that works closely with
    local companies. It has 4,300 engineers striving to match the best that the
    West, Japan, and Korea can offer in fields such as microelectronics and
    optoelectronics. The government-backed Institute has alliances with scientists
    from MIT, the University of California at Berkeley, and Carnegie Mellon
    University in the U.S. Companies such as TSMC and cross-town rival United
    Microelectronics Corp. have their origins in ITRI technology.

    The result
    is one of the deepest reserves of high-tech talent in the world. It starts with
    figures such as Chang, who was present at the creation of Taiwanese tech. Walk
    into Fab 12, TSMC’s multibillion-dollar facility in Hsinchu, and off to your
    left you’ll see a giant portrait of the chairman sitting, pipe in hand, in an
    armchair. Surrounding him are scenes from his life — as a child in Hong Kong,
    as a student at Harvard, and as TSMC chief at the company’s debut on the New
    York Stock Exchange. But the silver-haired Chang, 73, isn’t done yet. He’s still
    working hard to beat rivals UMC in Taiwan and Semiconductor Manufacturing
    International Corp. (SMIC) in Shanghai. He’s also pushing Taiwan’s politicians
    to build up the island’s schooling. “I wish we had a world-class university,” he

    Chang and other tech leaders blend Western values — Chang took
    liberal-arts classes at Harvard before studying mechanical engineering at MIT —
    with Asian culture. One minute Jonney Shih, Asustek’s 52-year-old founder, will
    be discussing Six Sigma best practices and the next minute he’ll be evoking the
    Changshan snake described in Sun Tzu’s Art of War. When attacked at one
    end, the serpent counterattacks with the other. “We need that kind of fast
    reaction,” says Shih.

    The quick reflexes of Taiwanese like Shih make all
    the difference. Unlike Korea, where Samsung Electronics Co. and LG Electronics
    Inc. dominate, Taiwan is composed of smaller and nimbler outfits. When Taiwanese
    companies get too large, they tend to spin off businesses and refocus. Hence, in
    2001 computer maker Acer Inc. begat consumer electronics company BenQ and LCD
    panel maker AU Optronics. The Hsinchu-based chip design houses spun off from UMC
    include MediaTek and Novatek, a designer of chips for LCDs.

    Some of
    Taiwan’s most important tech companies have also grown by acquiring technology
    from elsewhere. Chi Mei Optoelectronics Corp. (CMO) licensed LCD technology from
    Fujitsu Ltd. and hired top engineers to come up with the rest of the expertise
    it needed to become a leading LCD producer.

    All these businesses excel at
    serving corporate customers. Eighteen months ago, after Intel had made a big bet
    on Centrino, the wireless Internet system for notebook PCs, the American company
    sought out a partner that could quickly get Centrino computers to the market. So
    Intel teamed up with engineers at Acer. Within three months, says Acer CEO J.T.
    Wang, they not only came up with a high-end Centrino notebook sold under the
    Acer brand but also mid-tier and even entry-level PCs using Intel’s new

    Taiwanese companies will do just about anything to please
    customers. When Quanta was first working on what promised to be a hot new design
    for a top client, it had to work in total secrecy. Quanta executives guaranteed
    the U.S. customer that all work would be done in the middle of the night. They
    even had the assembly line draped in concealing black. Other Taiwanese companies
    combine discretion with an ability to handle even the smallest orders. HP’s
    Hsiao says he places orders for as few as 10 PCs of a specialized configuration.
    The Taiwanese can process and ship such an order in 48 hours. “They can change
    direction overnight,” says Hsiao.

    This do-whatever-it-takes ethos has led
    Taiwan’s businesses to move to the mainland at astonishing speed. “In 1999 we
    had about 300 employees” in China, says Alexander Lee, head of operations for
    Asustek in Suzhou, China. “Now we have more than 45,000.” Issues of loyalty
    don’t enter the equation. Acer CEO Wang recently asked his own Taiwanese
    suppliers if, as good citizens, they’d keep some production in Taiwan. “Their
    answer was: ‘No way,”‘ he says.

    The Taiwanese also play a vital role for
    rivals on the mainland. Liu Chuanzhi, chairman of Beijing computer company
    Lenovo Group Ltd. , which just completed its purchase of IBM’s PC division, says
    Lenovo sources components from Taiwanese companies. According to THT Research,
    Lenovo even buys notebooks from Quanta, Compal, and MiTAC. Liu says that’s not
    the case.

    Most important of all, the Taiwanese are the real developers of
    China’s semiconductor industry. Chinese companies such as SMIC  depend on squads
    of Taiwanese executives for knowhow. TSMC is still far ahead but it is starting
    to focus on China, too. The Taipei government has allowed TSMC to invest $900
    million for its own plant in China.

    In effect, Taiwan is hoping to
    control design and innovation while giving over much of its manufacturing to
    China. When U.S. companies come to Taiwan today, they say, “‘This is what we
    want. Do you have it?”‘ says Billy Ho, president of MiTAC, which makes smart
    phones, PDAs, and servers.

    Increasingly, the Taiwanese do. Two years ago,
    MiTAC decided to upgrade the PDAs it sells under its own brand name as well as
    under several different names in Europe. In discussions with the sales team, Ho
    recalled how, when he lived near Birmingham, England, he would get baffled by
    the layout of the city streets. A PDA with GPS, the satellite-controlled global
    positioning system often found in cars, was the answer. Today, MiTAC is No. 3
    globally in PDAs, behind only Dell and HP.

    The Taiwanese know they’re
    good at such innovations. But they also know they are being squeezed on price
    even while they are under relentless pressure to be more creative. “Margins have
    come screaming out of the PC business because products have become very
    commoditized,” says Michael Marks, CEO of Flextronics Corp. Net margins at
    Asustek have fallen to 6.4%, from 19% in 2001. The company’s 2004 net profit of
    $484 million was 7% lower than what it was in 2001, although sales nearly
    tripled in the same period to $8 billion. Both Quanta and Compal have suffered
    from falling profit margins too, despite fast-rising sales.

    Some analysts
    also wonder how long the Taiwanese will have the edge in chips. “I don’t think
    Taiwan is in the driver’s seat anymore,” says James C. Mulvenon, co-author of a
    2004 Rand Corporation study on Taiwan’s and China’s chip industries, which
    concludes that European and Japanese chipmakers will provide China with
    technology the Taiwanese refuse to share.

    One way out is to find new
    markets. “We have to get into the next wave of products,” says Ray Chen,
    president of Compal. “It can be TVs, cell phones, home digital media centers. We
    don’t know yet.” To do that better, Compal plans to double its R&D team.
    Quanta’s beefing up too. In its $20 million partnership with MIT, Quanta is
    looking at using artificial intelligence to link digital devices that have
    different operating systems. Quanta boss Barry Lam also identifies autos as a
    promising area. As control and display systems in cars go digital, the Taiwanese
    can apply their expertise in making complex components for small

    The other way to stay ahead for Taiwan is to create its own
    brands and maintain solid margins by delivering better performance and design. A
    leader in the branding effort is BenQ, which has its own brand of thin-screen
    TVs and MP3 players. Since its launch in 2001, BenQ has stressed in-house design
    to make its branded products stand out. Manfred Wang, who runs the BenQ design
    center, leads a team of 70 designers who have, among other things, come up with
    a PC monitor whose base can be folded up against it, taking up much less space
    in shipping. “Our designers are aware of the manufacturing process and that’s a
    big advantage,” says Wang, who learned his skills in Germany and once worked at

    At the heart of Taiwan’s effort to reinvent itself is the
    government research institute, ITRI. It’s into everything from new wireless
    networks to nanotubes that provide backlighting for displays. It’s also trying
    to mix the hard sciences with something softer. Enter Room 131 of Block 53 on
    the main campus, and you’ll find the Creativity Lab. The place looks more like
    an advertising agency than a high-tech center, with its stuffed animals and a
    comfy couch for a staff that includes artists, psychologists, and an
    anthropologist, in addition to engineers. The idea is that getting techies
    together with liberal arts types will help designers think more broadly, says
    Wen-Jean Hsueh, a PhD in mechanical engineering from California Institute of
    Technology who is the lab’s head. “We know we have strong manufacturing and
    engineering,” she says. “But we have to look beyond this.”

    Even this
    fresh effort has to build on Taiwan’s engineering corps, which can’t expand
    enough to meet all of Taiwan’s needs. With so many companies expanding research
    and development, “we have to fight very hard to get experienced guys,” says
    Hsiao-ping Lin, head of Faraday Technology, which specializes in chip design
    services. He hopes to hire Indian engineers, but adds, “in the long run, we will
    set up an R&D center in mainland China.”

    That shift to China is
    understandably of great concern to Taiwan’s political and business leaders. But
    it may be inevitable. “The market here is so much more important than Taiwan’s,”
    says Lawrence Ho, the Taiwan-born owner of online music startup 8LaNetwork Inc.,
    which has its headquarters in Beijing’s trendy Jianwai Soho district. Ho also
    appreciates how hard his mainland employees are willing to work — as many as 90
    hours a week.

    Taiwan clearly has lots to worry about, but it’s also
    renowned for its resilience. Intel’s John Antone compares Taiwan to
    long-distance runners who are being challenged but who are still in the lead.
    “As long as they’re committed to run very aggressively,” he says, “I don’t see
    anyone catching them.” Competitors be warned: Taiwan will do everything it can
    to stay in the race.