Can Taiwan leap forward? As technology and jobs flow to China, Taiwan faces a critical economic challenge

Chief Executive, The, Dec, 2005 by Sheridan Prasso

The entrance to Taiwan's high-tech corridor known as Hsinchu Science Park is deceptively green. Subtropical shade trees line a traffic-islanded parkway dotted with shrubs and flowers. But when the promenade gives way, it reveals the monolithic headquarters of the park's tenants, companies with celebrity-status names in the tech industry but with little name recognition among American consumers who use their products. This, it turns out, is the high-tech heart of Asian manufacturing.

Your iPod, Apple or Dell computer and Sony PlayStation likely have been made by one of these companies whether in Taiwan or at one of their many factories in China. And take a look at your cell phone, your PDA, your laptop, or the dashboard of your car (if it has a GPS system). Booming demand for the small color screens in modern devices has put Taiwan in a race for world leadership with South Korea and Japan. In liquid crystal display (LCD) monitors for televisions and computers, Taiwan is already tops, ranking No. 1 with a 68 percent share of a $21 billion market. It's also leading in the markets for PDAs, semiconductor packaging, notebook computers, cable modems, CD-Roms, DVDs and computer networking equipment. Taiwan officials like to tout a stunning array of figures to prove their manufacturing prowess, such as that Taiwan produces one motherboard every 0.374 seconds, 24 hours a day.

But that pride of place has been starting to falter, and even its most ardent proponents are worried. "In terms of information technology products, Taiwan is the leading nation," boasts Taiwan's Vice President Annette Lu. "However, we feel we have to upgrade the IT industry. Now we are encouraging R & D in order to innovate and to create our own brands."

That's a key point, and how Taiwan handles this transition is critical. Unless it transforms itself from a manufacturing center into an island that innovates, designs and markets its own products, Taiwan faces an uncertain future. For 30 years, Taiwan's economic growth has hinged on making components and products for others, using a combination of shrewd government policy, incentives for local companies to grow, and an autocratic government that could channel resources into manufacturing. One example of that strategy was the government's decision to create Taiwan's version of "Silicon Valley"--the Hsinchu Science Park--clustering Taiwan's leading companies, researchers and engineers in an area outside of Taipei.

But now, Hsinchu is overflowing with mature--and not all rapidly growing--companies. Margins are falling. And like the United States and Europe before it, Taiwan faces the harsh "Rust Belt" reality of its manufacturing jobs moving to the mainland. In that sense, perhaps, the economic "threat" posed by China is of greater worry to Taiwan than the military one. Under pressure to keep product prices ever lower as manufacturing costs rise at home, the Taiwanese have no choice. To make up for job losses and re-employ the local work force, they must try to develop service-related industries. And they must invent their own technologies and try to build brand names out of their homegrown successes.

Can they do it? Does Taiwan have the capability to invent, create and sell brand-name products and services for which it can charge a premium? Or will the continuing transfer of manufacturing to the mainland leave Taiwan a hollowed-out shell of an island?

Next Step

Those are big questions, and Taiwan's leading thinkers are trying to come up with answers. For a business leader such as Stan Shih, the retired founder of computer manufacturer Acer and its two off-shoots, Asustek Computer and BenQ, the solution is clear: "So what is the next step for Taiwan? What is the next economic miracle? I cannot think of anything except branding."

Shih, in fact, has been the only Taiwanese entrepreneur to develop a leading consumer brand, and he recently started a venture capital company that aims to help other companies do it as well. (BenQ, where Shih still serves as a director, recently acquired Siemens Mobile in a move toward building a larger consumer brand market.) Shih's vision is to transform Taiwan into more of an R & D center than a manufacturing base, with land devoted to laboratories making new innovations that are then manufactured on the mainland. He and other business leaders believe that the only manufacturing that should remain in Taiwan is pilot lines for testing R & D ideas.

Companies in Taiwan say a freer flow of labor is another part of the solution--bringing in software engineers from places such as India--as well as a move toward more IT training in services industries for Taiwan's work force. "The trend will be that we're going to see people wake up to the fact that jobs lost in manufacturing can be sopped up by services--not by making dumplings, but by areas such as health care and elder care," says Richard R. Vuylsteke, executive director of the American Chamber of Commerce in Taipei. Vuylsteke cites a futuristic plumber who must show up with a laptop, show the customer which options of faucets he or she can buy online, order them over the Internet and return later to install them. "Every profession is now high tech," he asserts.