Wednesday, October 15, 2008

Hi-tech Taiwan: Upgrading and Innovation

A couple of interesting pieces out this week on the problems Taiwan is facing in the global economy. First Businessweek has an article discussing the problems Taiwanese makers in branding and innovation...

"If you look at the semiconductor industry in Taiwan, it is very competitive globally with a gross margin of between 30% and 50%," says Peter Tsao, vice chairman of Deutsche Bank's 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% – 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 – such as mobile phone manufacturer Foxconn – 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 – 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 world's biggest notebook companies, it is not obvious how much of that is due to the brand rather than the company's low prices.

"Acer 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!" says one Taiwanese tech specialist.

The article is quite interesting, and one expert cited opines that the best route to take is for Taiwanese firms to be bought up by Chinese firms interested in globalizing themselves.

Meanwhile the always excellent Jon Adams writes on Taiwan's manufacturers as they fight falling exports (Ma save us!) with small PCS:

An upstart Taiwanese company blazed the trail. Now, the world's top three computer makers are hot on its heels. The prize: dominance of the emerging market for low-end, mini-laptop computers.

The big three — the American companies Hewlett-Packard and Dell, and Acer of Taiwan — are betting that such products will have broad appeal. They are offering these laptops, also known as netbooks, in the developing world as an affordable alternative to desktops and high-price laptops, and advertising them in the United States and other advanced markets as a second or third computer used mostly with the Internet.

And in belt-tightening times like now, they are hoping consumers in mature markets will also snatch them up as a more affordable option.

"It's a potentially exciting area, particularly when people worry about the U.S. economic outlook, in which people might want to cut spending," said Steven Tseng, an analyst at ABN AMRO in Taipei. "So it fits into the macro trends quite well."

There is no clear-cut definition for the segment, and analysts say the lines get blurry. But most of the new crop of minicomputers have screens that are less than 10 inches, or 25 centimeters, across diagonally and priced from about $300 to $600, but still have full operating systems like Windows XP or Linux that can support third-party applications.

The new market reflects a broad shift toward mobile devices and away from desktop computers, and changing tastes in mature markets like the United States and Europe, analysts say.

"Three or four years ago, this kind of product couldn't have had such a big success, because people were still purchasing their first laptop," said Eszter Morvay, a researcher at the technology consulting company IDC in London. "Now, their needs are becoming more sophisticated — the consumer has evolved. They might just need an Internet device, or a second or third laptop for work, or for mom or the kids. So this is giving a boost to the market."

Until recently, the big computer makers paid scant attention to this niche. They had built mini-laptops — like Toshiba's Libretto — but they were either too expensive (the Libretto costs about $2,000) or poorly designed to catch on in the mass market.

Then, about a year ago, Asustek, a Taiwanese computer maker little known outside the country, introduced the Eee PC. Priced under $300, the first version featured a seven-inch screen and used the Linux operating system. The idea was simple: Consumers are increasingly using laptops for surfing the web, checking e-mail messages and viewing photographs, and do not need all the bells and whistles of a full-blown computer. The Eee PC was also an attempt to offer a commercial version of the XO laptop, the product of the nonprofit One Laptop Per Child project, which aims to distribute computers in the developing world.

The Eee PC was a surprise success. Last year, it hit the top of the "most wished for" laptop list on That got the industry's attention. Now, the three leading computer makers have released mini-laptops.

Actually, Taiwan's firms are very innovative in technology, but the problem is that many of the small and medium sized firms that drive Taiwan's economy lack similar innovativeness in financing, management, and administrative practices. Though I hear they are quite clever in the accounting department....


Anonymous said...

Asus's strategy is to win through branding and design. Acer's strategy is to win through low-price, higher margins for retailers, and quality service. Maybe a brick-and-mortar version of Dell (hopefully with better service...).

Asus hit really, really big with the Eee PC, which everyone and his mom has been copying. They have some brand equity in the innovative department. On the high-end, they have very nice looking often leather-clad product (especially compared to how ugly the new Macbooks are), but they aren't well-known.

Acer has some brand equity in Europe and through its acquisition of Gateway. But, yeah, it's definitely known for being primarily low-cost.

The strategy is quite different, and it's not necessarily true that going for the low-price point is "wrong" and given the economic environment for the the next 18-24 months, it's probably the sweet spot (as sweet as you can get for this horribly consumer electronics environment).

Tommy said...

One thing that amazed me during my vacation to Japan two weeks ago was the number of backpackers I saw in the guesthouses where I stayed using laptops. My first thought upon seeing them was, "there have been some changes in user mentalities since I traveled last".

Most of the backpackers were not using mini-notebooks, but the trend itself was interesting to contemplate. I doubt you would see the same thing among travelers in, say, India at the moment, but there is definitely a market for these things out there.

Chekgiau Ng said...

It seems like that ASUS and Acer are causing troubles for HP -

Dixteel said...

|0| Best option is to be bought by Chinese firms?!?

Is this Huang guy on drug? Not that it couldn't happen but is that really the best option when the Chinese stock market is itself unstable,...and is Chinese brand really shiny on the international market when they got tainted milk, pet food, faulty electronic components, and copyright problems? And that recent incident with the UK business secretary Peter Mandelson is a joke. Not that Taiwan is all innocent in terms of quality branding. For exmaple Acer is viewed as low quality product by some. But choosing to brand with China will only make the situation worse in my opinion, like adding ink to a coffee will only make it darker.

Taiwan has some nice brand like Asus, Giant bicycle etc. Taiwan has a lot of creative people and some solid foundations. Build on those and expands. Don't just rely on China and turn to China whenever there is some challenge. I think.

Fortune favors the brave. Peace, brother.

Anonymous said...

Yeah HP are a bunch of low-life scum bags. Their other strategy was to try to sue Acer into submission. HP is a far cry from the innovator it was at its beginning.

Anonymous said...

"Actually, Taiwan's firms are very innovative in technology, but the problem is that many of the small and medium sized firms that drive Taiwan's economy lack similar innovativeness in financing, management, and administrative practices."

Agreed on this one. However I wanted to add one point: lack in understanding of human resource management. Working in long and undesirable hours are common practice in Taiwanese high-tech industry, especially for the R&D department. Nowadays there was really no incentive for engineers to work 22 hours a day due to the fact that the bonuses had dried up yet strangely, the upper management still work in normal 8 to 6 hour and get paid a lot more than those engineers. As a result, engineers started slack of during work hours. Upper management guys treat engineers like shit yet get away with shitload of money, it is kinda expected for engineer to begin resenting upper management and the company they work for.

Just some random thoughts

Anonymous said...

Just wanted to point out for other readers that aren't so familiar with Taiwan: there's a really good frequently-updated blog on the tech industry in Taiwan--one word different from the title Hi-tech Taiwan, it's called Hi Tech Taipei. For anyone interested in following the tech industry here, I'd recommend that blog, as well as Digitimes.

Tech in Taiwan of course meaning semiconductor manufacturing, IC design, electronics, LCD panels, and more recently, LEDs and solar panels.

I believe Michael has them listed on the side, but there being so many links, might be easy to miss.

Wealey's dad said...

Taiwanese tech companies are certainly doing better in innovation than in other "soft" areas. However, most of the tech firms lacks the ability to understand the mass customers, a key component of new product development.

ASUS and VIZIO are two very nice surprises to me. The latter may even have become the first true household brand from Taiwan.

Anonymous said...

el keridge: Vizio actually is a company started by Taiwanese-Americans. Their insight was the opening given by national distributors (Best Buy, Circuit City, online, etc.) to previously unknown brands, the access to the latest flat-panel technology provided through the success of Taiwanese panel manufacturers AUO and Chimei, and the market "sweet spot" of large-size medium quality low-cost LCDs. LCDs are such a big improvement in some ways that the extra premium you'd pay for a Sony LCD versus a typical AUO manufactured panel (well actually Sony outsources some panels to AUO) isn't worth it to most Americans and to the mass consumer in many other parts of the world.

Gilman Grundy said...

Dude, I worked for Foxconn, and let me tell you:

1) They use a lot of mainlanders and Americans in their R&D wing. Hell, one of our biggest R&D operation was the joint centre we have doing research into Nanotechnology with Qinghua university up in Beijing.

2) Even if things are getting a little bit tougher on the mainland (and people over-blow this), this doesn't mean that anyone's going to be moving stuff back to Taiwan. More likely they'll move where things are even cheaper - like Vietnam where Foxconn were in the process of opening up a 200,000 worker campus when I left at the end of last year.

3) Taiwan still has a lot going for it, but manufacturing is not it. Innovation could be (or as the sign said in the airport when I first arrived there "Taiwan: Innovalue!").