Morris Chang Wants Consistent FX Policy

Morris Chang is asking the Taiwan Government to develop a consistent fx policy as the strengthening of the NTD against the USD is leading to decreased profits for Taiwanese companies. Since Taiwanese companies are largely export oriented and receive payments in USD, any appreciation in the NTD against the USD will severely affed the bottom line of many export oriented companies in Taiwan. Chang explains

iPad Shipments and the Amazon Tablet

Digitimes is reporting that "Foxconn is expected to ship 20 million units of iPad 2 to Apple, a growth of 60% sequentially, and the orders should be the major growth driver for the company in the second half." This is a significant increase for Foxconn. However, in the meantime, Digitimes also reports that Amazon is about to release their own Tablet computer. As per Digitimes:

Google Purchase of Motorola

Google recently purchased Motorola Mobility for about US$12.5 billion (a staggering amount). However, some people are no seeing not only does Google benefit from the thousands of patents (nearly 17,000 as I recall) that Motorola has, but also see significant tax benefits to Google as Motorola continues to report a net operating loss on the income statement. As per a Reauters report:

By agreeing on August 15 to pay $12.5 billion in cash for struggling Motorola Mobility's vast portfolio of 17,000 patents and 7,500 pending patent applications on top of its handset business and television set-top boxes, Google is building a defensive bulwark for its Android phone software, already available on Motorola phones among others.

The acquisition, Google's largest ever, has legal tax and accounting benefits, many associated with the money Motorola Mobility has lost over the years, according to experts who have studied its details.

"The tax benefits of the deal make what was a good deal into a great deal," said Robert Willens, a New York accounting and tax expert. He estimated that through the acquisition, Google can expect to reap $700 million a year in tax deductions from future profits each year through 2019. Google also will be able to immediately reduce its taxes by $1 billion due to Motorola Mobility's U.S. net operating loss, and by a further $700 million due to its foreign operating loss, he said.

However, while some see the patent-purchase as being a good thing, others see the patents as "crap." (See report:

Google says it bought Motorola mainly for its patents. But according to one analyst, those patents are "crap" and won't help Google very much in its patent battles over Android..

The future for smartphones in the US is certainly getting more interesting.

Strategic Shifts in Taiwan's Tech Industry

A recent article on Business Week highlights that while the tech industry in Taiwan is still doing well with increased demands from China, many of the major companies such as TSMC are getting ready to change their strategies and are starting to diversify into higher margin products. Business Week says:

TSMC is stuck in a maturing industry, and its primary business of making chips for other companies is likely to grow just 8% annually in coming years. So Chang wants to boost TSMC's presence in solar power and light-emitting diodes (LEDs). The two have technological overlap with chip production, but they offer far better margins and more potential. "They are going to be fast-growth industries," Chang says.

Executives across Taiwan's tech industry are making similar strategic shifts. Shi-Wei Sun, chief at chipmaker United Microelectronics (UMC), in August launched a division focusing on solar and LEDs. Peter Chou, CEO of smartphone maker HTC, is reducing his company's reliance on Microsoft Windows-based handsets, adding more phones using Google's Android operating system. And Au Optronics (AUO) is plotting a move beyond its traditional LCD displays, which require investments of billions of dollars every few years for companies to stay ahead of rivals. "Coming out of the recession, AUO is a completely different company," says C.T. Liu, chief of AUO's consumer display business. First up, he says, will be e-readers and electronic paper, newfangled displays that can be rolled or folded. Both technologies will let AUO capitalize on its display-making expertise.

The article also highlights how recent developments in relationships between China and Taiwan have been good for Taiwan's tech industry and argues that this integration will continue to stimulate on-island growth. Later the article also describes how Simon Lin, Wistron head, intends to diversify into the PC recycling industry and how he is trying to equipe his company for the post-PC era.

None of this is surprising. I remember reading at least five years ago of how Taiwan's chip giants were looking to moving into manufacturing solar cells and these kinds of stories have been in the news for a while. The real challenge for these companies is to develop the right strategies going forward. As the article rightly states, Taiwanese companies are very strong competitors in low-margin industries as they are, within their culture, very concious of cost. A friend once emphasized the Chinese are a frugal race and know how to save money and reduce expenses. Competing in a race to the bottom in terms of cost is something they know how to do very well.

However, high-margin industries may demand different cost structures that they are not willing to adopt. A conversation I once had with an executive working at a large Taiwanese Mobile phone company said that when he talks to his managers about cost, they struggle to understand the difference between cost-competitive and cost-down strategies and whenever an issue of cost comes up, they just cost down all the time.

So to my mind this would be one of the biggest challenges for the businesses in Taiwan. It is not so much that the executives don't understand this. Rather inculcating these ideas into the nuts and bolts managers will be imperative for the companies to become world class in high-margin industries.

This problem is particularly highlighted in many Taiwanese companies that want to become global brands but refuse to spend the money on the right marketing people that can guide the strategic direction of the products and search for opportunities in nascent markets and spaces.

So well the immediate futrure for Taiwanese companies is seemingly secure, as the PC industry fades and these companies transition into other areas, there will have to be fundamental shifts in strategic thinking throughout organizations and indeed, possibly a large part of the on-island tech industry.

Business Week: Taiwan's New Tech Dreams

The Innovator's Dilemma - Book Review

A friend recommended this book to me a few months back. I read it then but after the recent discussion about Dell, Acer and the netbook market decided to read it again. I also posted a review on Amazon.

The Innovator's Dilemma is a unique approach to understanding corporate failure. Christiansen's thesis is that well managed companies with all the best processes in place do fail. The failure is not due to inefficiency, bad management or bad processes but due to companies being responsible in terms of listening to their customers, investing in technologies that their customers' demand and rationally allocating resources to high-margin products. Christiansen argues that these investments are made on sustaining technologies as opposed to disruptive technologies. He reason's established sector leaders do this because the initial market for disruptive technologies is too small to justify the investment and sustain corporate growth. This provides new entrants with time and space to establish themselves in the emerging market and that when the performance of the disruptive technology intersects the needs placed on the traditional technologies in an industry, these disruptive technologies will start to take over from the traditional sector leaders. [Read Full Review]

I feel this book speaks directly to what is happening in the netbook market. Once again, this is not a prediction of the demise of Dell but netbooks are changing the way people percieve and view computers. The growth of this sector has obviously grown due to the economic crisis due to the low price of these devices but I still cannot help feeling that by not investing in these products, they are missing something. I may be wrong but this book (even the introduction) is a mirror of the current situation in this market and also surprisingly the rise of ARM processors.

So anyway rather than reading the review read the book and let me know what you think. It will be interesting.

Are PC Shipment Volumes Meaningful

Yesterday we wrote that Acer had taken the number 2 spot in terms of volume for PC shipments in Q3 this year (Acer Rises to No. 2 in Q3 2009 ). Tony Bradley comments on this data over at PC World:

The third quarter sales figures brought great news for the PC industry-- sales are up! Following declines in the first and second quarters, global sales of PC's are up 2 percent for the third quarter, seemingly signaling a light at the end of the recession and IT spending glut tunnel. However, the news isn't all good.

See, here's the thing about statistics and numbers: they say what you want them to say. Good news can be extracted by focusing on the total number of actual devices that were bought and sold during the quarter. However, that statistic does not tell the whole story.

Bradley's perspective is that the shipments are not a significant indicator of the health of the company or the industry. His thesis is that absolute volumes are not as important as say revenue or overall profit and that while the small marginal increase in sales and the growth of Acer is not unimportant. There are other issues that need to be addressed. When speaking about Dell, he quotes Michael Dell who said "If we [Dell] wanted [market share], we'd go and sell a whole bunch of netbooks." The point being that Dell are focusing on long term revenue growth, profitability and not looking at incremental market share as it changes each quarter (quarterly myopia is an obsession and has played its part in the economic downturn).

When reading his article a couple of things sprang to mind.

First, while I do agree with Bradly that it is good for companies to focus on "long-term strategy and profit" it is unfair to say (or imply) that Acer or the Taiwanese companies aren't doing that. Of course they are. Getting into the netbook game was a long term strategy for both Acer and Asus and right now they are reaping the rewards of their planning and the advantage they are gaining from their strategic foresight when they launched the netbooks a few years ago.

Second, what is is Dell's long term strategy? No doubt they have some plans but as we have commented here before some industry observers believe Dell's business model is struggling to survive . Admittedly I haven't kept up and a lot might have changed since 2008 when the article was first published, but still, have they managed to realign the organization and their entire business model to be able to drive growth?

Third, what about the share prices? YTD Acer's shares have climbed from NTD40 per share to NTD80 per share (that is a %100 climb) whereas Dell has gone from US$10.54 to US$15.43. Certainly Acer is seeing the reward for their growth strategies (and to think I was thinking of buying Acer at NTD25 way back when, DAMN!)

Fourth, netbooks are a disruptive technology. Both Acer and Asus are aware of this. In "The Innovator's Dilemma" Clayton Christensen has highlighted the way disruptive technologies can bring down market leaders very quickly if they do not invest in these technologies. Yes, right now Dell does have very strong relationships with businesses around the world, but when the push comes to the shove and the netbook computers are increasingly adopted by businesses accross the board, Dell won't be in the game.

To stress, I am not here suggesting that Dell will fail. The world of business is too uncertain for such radical proclamations. The point here is this: Dell can carry on running along the lines they are going but right now technology is moving towards flexible, mobile devices that can be easily moved around and connected anywhere. I dare suggest that although sitting and doing nothing may be a long term strategy, innovation right through the value chain, gaining new market share, and becoming dominant in new market spaces is a valuable long term strategy that will reap reawards later. The experience curve suggests that as Acer, Asus and the others continue to grow in the netbook space, their cost structures will decline and when and if Dell do decide to enter the market space, they will be blown away.

PC WORLD: PC Shipments on the Rise, But at What Cost?

Acer Rises to No. 2 in Q3 2009

In Acer Climbing to No. 2 we noted that IDC reported Acer was the second largest PC distributor behind HP with a market share of 18.5%. Today Reuters reports Acer has surpassed Dell in Q3 2009 as well. Reuters says:

Taiwan's Acer Inc (2353.TW) surpassed Dell Inc (DELL.O) to become the world's No. 2 PC maker in the third quarter as worldwide industry sales proved surprisingly strong, spurring hopes that demand is rebounding.

According to Reuters Acer now has a PC market share of 14% while HP leads with a market share of 20.2% and Dell at 8.4%. Are Dell in trouble? ASUS and Lenovo will be fighting for more market share and both those companies may start to attack Dell's position in the market. Only time will tell.

Reuters: Acer passes Dell as global PC shipments rise