Posted on ZDNet News: Mar 22, 2008 5:01:00 PM
Mike Liang earns the equivalent of $37,500 a year, owns a four-bedroom apartment, and can afford to send his two daughters to English tutorial schools.
Like other employees at the Hsinchu Science Park, Liang, a marketing manager for a semiconductor company, is the envy of many on this island, where average annual salaries stagnate at around $17,000 and high property prices keep many married couples living with their parents.
But what is on Liang’s mind and that of many others in Taiwan’s high-technology industry is how it can maintain success amid growing competition from neighbors, including China and South Korea, and global price declines in products like laptop computers. The slower growth rate in sales of some high-tech goods and the economic downturn in the United States are also worries.
Many industry workers and analysts say the greatest economic challenge for Taiwan and its 23 million people is overcoming its reliance on manufacturing for other brands and focusing on innovation and building its own brands.
“We have to transform ourselves,” Liang said during a lunch break. “Otherwise, our costs will keep going up and companies will move to China and Vietnam.”
High-tech products accounted for 70 percent of the island’s 2007 exports. Taiwan is the world’s largest supplier of notebook PCs, and LCD (liquid-crystal display) panels for flat-screen televisions, according to the government.
Two of the world’s biggest contract micro-chipmakers are based in Taiwan–Taiwan Semiconductor Manufacturing Co. and United Microelectronics–and their foundries, the world’s two biggest, are based in the science park, one of three on the island.
The Hsinchu Science Park was opened in December 1980, Southern Taiwan Science Park in 1996 and the Central Taiwan Science Park in 2003. The Hsinchu Science Park is home to 440 companies and is where most of Taiwan’s top high-tech manufacturers are based.
But profit margins for many of the companies in the park have been narrowing. Some have moved production to China, while others are considering relocation to Vietnam for lower costs on labor and production.
“Back in 1999 and 2000, these companies enjoyed quite healthy profit margins,” said Ming-Kai Cheng, regional head of technology research for CLSA, a leading Asia research, brokerage and investment group. “Now the number of companies in profit stage has dropped.”
Revenue growth at Taiwan semiconductor companies, for example, has fallen to single digits from double digits. A main reason is what Cheng calls the “me, too” mentality, or too many Taiwan companies doing the same thing.
“A lot of companies think if you’re going to make something profitable, I’m going to make the same thing slightly less profitable,” Cheng said.
About 50 percent of the companies in the Hsinchu Science Park carry out semiconductor manufacturing, design or related work, with revenue from the sector comprising 71 percent of the park’s total revenue.
Taiwan companies are also largely focused on making products for global brands like Dell, Apple, and Intel, instead of coming up with their own brands, and they focus on hardware manufacturing, where only a small percentage of the price the consumer pays for a product is earned.
As little as 5 percent of the consumer price for a product like a laptop can be earned by the Taiwan companies that assemble them, while a higher percentage–about 20 percent–is earned by contract manufacturers, also known as original equipment manufacturers, or OEMs–which make chips or other parts for the brand holders, according to industry estimates.
With their own brands, the companies could earn as much as 30 percent of the consumer value of a product, analysts estimate.
Transformations are nothing new for an island that has evolved from an agriculture- and textile-dominated society after World War II to a factory for light industrial and labor intensive products like sneakers in the 1960s and 1970s to an electronics production base in the 1990s and now to a high-tech center.
Huang Der-Ray, director general of the Hsinchu Science Park Administration, said companies in the park had increased spending on research and development from 4 percent of total revenue in previous years to 7 percent in the last three years.
Companies have also begun to focus on innovation and building their own brands. Mediatek, a chip design company that initially focused on optical storage drivers’ chips, has ventured into other areas, including designing chips for wireless communications and high-definition digital televisions. The company is one of the most profitable in the science park and is considered a pioneer in its designs.
Several companies have focused on research into new technologies, including solar energy, Huang said. One, Gintech Energy, has been successful in designing solar panels, which it sells to power companies around the world.
More companies are also moving toward design instead of just manufacturing. A decade ago, only about 20 or 30 companies in the Hsinchu Science Park were chip design companies, with most being contract manufacturers. Now, there are 80 companies whose focus is design, Huang said.
Analysts said a challenge that Taiwan companies faced in developing a global brand was overcoming the label-consciousness of consumers, who prefer internationally recognized brands rather than domestically designed products. Other than Acer and ASUS, which are Taiwan laptop brands, few of the island’s high-tech products are known around the world, unlike the situation in South Korea.
Workers like Liang, while worried, say they think that Taiwan can again find a way to engineer an economic miracle.
“I’m optimistic,” he said, while adding that “to compete, Taiwan has to invest a lot of money.
“Some of it has to come from the government. That’s the only way to compete with the big companies overseas.”