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 Amazon.com. 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....

[Taiwan]