Taiwan IT hardware lessons

It had all the glitz of show biz "" skimpily clad young women in silver-coloured leather skirts urging you to look at their latest mobile computer (with the software in Chinese), a magic show where the magician's hat had the company's name prominently inscribed in glowing colours and a western dance show with women dressed leaving little to the imagination.

But the glitz aside, this was also serious business "" a showcase for Taiwan's global information technology hardware prowess. Over 1,200 companies, most of them Taiwanese ones, descended on the imposing World Trade Centre last fortnight to hawk products at Computex at Taipei, the world's second largest IT show.

Up for sale were products ranging from storage devices, multimedia computers, computer body shells, MP3 players to new microchips. And over 1.2 lakh visitors thronged the exhibition halls and struck deals whose value ran to billions of dollars.

But behind the razzmatazz at Computex lies an intriguing story of how one nation rose to dominate the global IT hardware market. It's a story that India's IT companies and policy makers would be well advised to study closely because it offers several lessons for India.

Taiwan's IT companies are not exactly marquee names in the world. Certainly, few in India outside the IT industry have heard them. They supply the hardware to virtually all the world's big boys.

AU Optronics is the world's third largest TFT-LCD monitor manufacturer and hopes to become the largest by the end of this year. Quanta Computer is the largest notebook PC maker in the world.

It is an original equipment manufacturer (OEM). The big fish in the notebook business (Hewlett Packard, Dell, for example) buy notebooks from Quanta and slap their labels on them.

Taiwan Semi Conductor and Manufacturing Company (TSMC) is the world's largest chip foundry (a chip foundry produces chips that are often designed by other companies).

That's not all. Taiwanese companies together are the number one producers of DVDs, LCD monitors and get top billings in chip foundries. They are also the global number one in chip design.

They are number two in the manufacture of chipsets, PC boards and digital cameras. About 65 per cent of the world's cable modems are produced in Taiwan.

Taiwanese companies manufacture 80 per cent of the world's personal digital assistants (PDAs).

Today, several Taiwanese companies are no longer content with having become OEMs to the global market. They are sallying forth into the world to build a global brand.

After personal computer company Acer, Taiwan has not had any major global brand success stories. Agrees Jerry Wang, executive vice president at BenQ, the mobile phones and TFT-LCD monitor company: "Taiwanese companies for long did not look at creating a global brand. We are making that effort but we are spending a fraction of what the Koreans spend on advertising."

Set up just three years ago, BenQ already figures among the top three TFT-LCD monitor producers in the world. Says Wang: "We are catching up everywhere with the Koreans who lead the market."

What makes it different from others is the fact that it sells more than 45 per cent of its monitors under its own brand name. Company chairman K Y Lee has charted out an ambitious growth plan ""BenQ wants to become the number one TFT-LCD monitor brand in the world globe by 2008 and is aggressively pushing into India too.

Says Lee, who depends on China and Taiwan for 30 per cent of his turnover: "Five years down the line I expect India to contribute to 5 per cent of our revenues. It will be one of our top 10 global markets."

Let's cut to the nub of the matter, however. What has ensured Taiwan's domination in the IT hardware industry? Why is it a semiconductor industry powerhouse?

For some answers to these questions, drive for an hour on the highway from Taipei to the world famous Hsinchu Science Park. Spread over 632 hectares of land, this IT park houses virtually the Who's Who of the world's semiconductor and IT industry, from Acer, chipmaker United Microelectronics to AU Optronics and D Link, to name but a few. Indeed, the Chinese are copying the Hsinchu Science Park model for their own IT parks.

By the end of December 2004, the park had over 164 chip companies with a combined revenue of US $ 2.23 billion. They accounted for over 68 per cent of the revenues of the companies in the park.

Says a senior executive of the park, which the government set up: "You will find independent wafer foundries, IC design companies, fabricators, and packaging and testing companies for the semi conductor industry all at one place. This allows for competition as well as cooperation and integration that's unique. It's a one-stop shop for a company looking for IC products."

Backing all this is the availability of high tech professionals who form a research and development core. The Hsinchu-based, government-funded Industrial Technology Research Institute has hordes of laboratories in which over 5,000 researchers work in close unison with local companies.

The result: over 40 spin-off park companies have been set up, based on the research. Over eight universities and colleges are sited in the park area providing companies with a regular stream of outstanding people.

Even government policy is clearly aimed at assisting companies in the park. Companies here are offered bank loans at interest rates that are 2 per cent lower than for loans to companies located in other parts of the city.

Companies at the park do not have to pay duties on imported machinery or raw material. Also, the over 179-member Taiwan Venture Capital Association, offers them funding if they require money.

The very success of the park has generated a huge corporate demand, so much so that Hsinchu is setting up four new parks on over 600 hectares across the country for Taiwan's high tech industry.

How is Taiwan's IT park different from India's IT parks? A senior IT company official who is also associated with India's IT parks explains that Taiwan has product companies that are supported by component companies.

"They don't have any real software service volume," he says. But in India, few, if any, IT companies in an Indian IT park collaborate.

Still, make no mistake - Taiwan's IT hardware companies are not quite the low cost, low tech outfits that the world commonly perceives them as.

Costs have shot up in Taiwan. In Taipei's upmarket Xin Yi business district, you have to be fabulously rich to own an apartment. A flat costs anywhere between US $3 million and US $ 6 million.

A parking lot costs another US $ 150,000. Apartment prices have shot up by nearly 10 times in the last five years and you cannot buy one for anything less than US $ 300,000.

Annual per capita income is now US $ 14,500 and the monthly entry salary for a graduate is US $ 2,000. So Taiwanese companies are being forced to dramatically rework their strategies to survive in the global market.

In a multi-pronged strategy, they're shifting manufacturing to mainland China and simultaneously drawing on Taiwan's research and development and high-tech designing skills, supported by research institutes and universities, apart from attempting to build global brands, that is.

Just how significant the shift to China is, is explained by BenQ president Adrian Chang: "Thirty five per cent of the world's laptops are manufactured in the Hanzhou-Suzhou-Shanghai area in China. Interestingly, 90 per cent of these companies are Taiwanese. That explains how much of the manufacturing has shifted en masse to China."

BenQ itself set up a large manufacturing plant for monitors in China. Chang says the reason is simple: labour accounts for 15 per cent of the cost of a monitor and labour costs in China are one sixth of Taiwan's costs.

However, the monitors are manufactured in two stages "" the first capital-intensive process is undertaken in Taiwan while the second labour-intensive process is done in China. As a result, over a million Taiwanese work in China.

Taiwanese companies like BenQ also draw on other Taiwanese companies for their raw materials. For example, the plastics needed for making monitors are available from Formosa Plastics, a global leader in this area.

For all this, however, challenges exist. The Taiwanese government limits the movement of people from mainland China. Last fortnight, a huge rumpus broke out when it was discovered that many Chinese companies had colluded with Taiwanese companies and, without seeking government permission, had established a presence at Computex. They were told to get out.

The Taiwanese government has also declared that it would like to establish its independent presence on the world stage. Says a senior executive at a Taiwanese company: "Any sign of tension could jeopardise the umbilical chord of business between Taiwan and China. And that that could be really serious."

So the lessons for India are clear: establish hardware parks that have a cluster of product and companies that collaborate closely, offer access to research and development labs and ensure that the labs work closely with local companies and that they have universities and colleges close by.

Above all, encourage an obsession with high-tech products. Our guide on the 101 Observatory, the world's tallest building located in the heart of Taipei, makes it a point to tell you that the building also boasts of another high-tech marvel "" it has the fastest elevator in the world (it goes up 89 floors in 37 seconds flat).