The Tech Industry and the 1996 Taiwan Missile Crisis

Last week in Trip Down Memory Lane.... we took you back to 1994. Today we take you back to 1996 when Taiwan just after the first democratic election in Taiwan and shortly after China decided to lob missiles into the South China Sea (a mere two years before I crossed the ocean). At that time the only significant Taiwanese player was Acer. The foundry industry was still uncertain and scanners were still a big deal. Business Week described the state of the tech industry in Taiwan in 1996 saying:

Calm has returned to Taiwan. From the bustling convention floors and overbooked hotels that are teeming with foreign executives, it is hard to imagine that just one month ago it seemed to the outside world that Taiwan was at the brink of war with China.

But inside the labs and corner offices in Hsinchu, the site of Taiwan's version of Silicon Valley, a sober reassessment of the island's industrial future is under way. To many business leaders and government officials, China's menacing war games underscored vulnerabilities of Taiwan's $21.3 billion information-technology industry. For the past five years, Taiwan has been going gangbusters exporting computers, peripherals, and chips to the West and Japan (chart, page 26). Its industry is now as large as France's and Germany's combined.

Taiwan's success rests on its role as a low-cost contract manufacturer to foreign companies. The whiff of military conflict, says Shintay Shih, president of the Industrial Technology Research Institute (ITRI), may cause foreigners to "question their confidence in Taiwan as a supplier." The crisis also raised doubts about whether it is wise for Taiwan manufacturers to locate operations on the mainland to take advantage of its immense lower-cost labor pool. At the same time, it's increasingly clear that the Chinese are challenging Taiwan's manufacturing prowess for many commodity-type electronics products such as motherboards, certain peripherals, and for personal-computer assembly.

Add it all up, and the message to Taiwan Inc. is now clear: To guarantee the island's economic relevance to the world, it must move toward the top of the technology food chain. Instead of merely supplying commodity items such as computer hardware and printed-circuit boards, Taiwan must rely more on its innovation. And rather than simply catching up to Japanese, American, and European rivals, Taiwanese want to be on technology's cutting edge. Says Vincent Siew, a key adviser to President Lee Teng-hui: "The more we operate the economy on a high-tech basis, the less we rely on China."

Lets reiterate: To guarantee the island's economic relevance to the world, it must move toward the top of the technology food chain.. Twelve years later and Taiwan has done just that. We have continued to share reports with you about the strength of the tech industry in Taiwan. In the Business Week InfoTech 100 18 Taiwanese companies were listed in the top 100 tech companies in the world. They were second only to the states. The tremendous growth of this industry over the past decade is a tribute to the far-sighted planning of the government in the 1970s. Although the PC and peripherals industry developed independently, the semiconductor industry was selected as the strategic industry in Taiwan and has grown into a dominant force.

A little further on in the article we read:

Taiwan's importance won't diminish with by the Internet revolution, either. Design teams at Acer are looking into making an Internet terminal for $500, while dozens of other Taiwanese companies are tinkering with prototypes of cheap Internet PCs, TVs, and personal digital assistants. Oracle's Lawrence J. Ellison and Sun Microsystems' Scott G. McNealy made the rounds of Taiwanese manufacturers in recent months to whip up interest in budget Net appliances. Says Douglas Farber, Oracle's director of Asia online services: "The Taiwanese have the critical mass to speed up the development of the Internet and help it take off."

Well, it took them another 12 years to develop the netbook (low cost PC), of which the first was the Eee PC, and it came from ASUSTek, not Acer. Everyone else is following. I guess some ideas just get shelved and others are grown. Well, the netbook has recently found a huge market sector and is expanding very rapidly. I am surprised to see though it took 12 years to do.

Later in the article Business Week notes the marketing challenges and hurdles these companies face:

One of the greatest challenges the Taiwanese face is marketing. With a few exceptions, Taiwanese companies have yet to demonstrate that they can make it globally with their own brands and product designs, much less establish new industry standards. Despite its success in serving some of America's most innovative chipmakers, for example, Taiwan has produced few important design houses of its own. Even though Taiwan-made scanners account for two thirds of the world market, most Taiwanese brand names have failed to impress U.S. consumers, says William Krause, chairman of Mountain View (Calif.)-based photo imaging company Storm Software Inc. "They design things too quickly," he says. "So when they try selling directly to the consumer, they fall on their face."

It seems not much has changed, right! We have mentioned the lack of branding in the past and it seems this little monster has been lurking around for a long time. To be honest though, I think the branding and marketing has improved over the last 12 years although I think the pace of brand development has lagged behind what Taiwan needs. So, although branding and marketing experience has improved, there is still a lot of room to improve and many more international brands to grow and develop.

The final paragraph of the article was spot-on:

Other Asian manufacturing havens such as Malaysia, Singapore, and Thailand lack enough skilled engineers. South Korea and Japan aren't as flexible. And China's coastal cities seem years away from matching Taiwan's high-tech infrastructure. So even though Taiwan's electronics mavens are feeling jitters, the odds are that they will continue sprinting toward the top of the technology heap.

Taiwan is indeed at the top of the technology heap and have already climbed ahead of everyone apart from the United States. Taiwan branded products have continued to increase and ever more powerful companies have come into existence and the product lines have expanded dramatically in telecommunications (High Tech Computers), in fabless chipset design (MediaTek, ITE Tech, RealTek) and other niche sectors such as RAID (Infortrend) and industrial PCs (IEI Technology). Taiwanese entrepreneurs have poured a lot of money into the tech sector and I would bet on them continuing to dominate for a while yet.

The article is a good, insightful read. If you are interested in the development of the tech industry in Taiwan I recommend reading it.

Business Week: Taiwan's High-Tech Race

Trip Down Memory Lane....

Yesterday I found this great 1994 New York Times article about the Hsin Chu science park. It provides a great historical perspective on the origins of the high-tech industry in Taiwan. At that time some of the big companies (e.g. HTC) had not even been born and TSMC was still only a regional player. The article says:

After a slow and hesitant start, the Science-Based Industrial Park, home to 150 high-technology businesses, generated nearly $5 billion in sales last year, propelling Taiwan into the ranks of major high-tech producers. It has, for example, about half the world market in scanners and monitors, about 30 percent of the market in network cards and terminals and about 10 percent of the personal computer market.

The park is also changing the kind of goods Taiwan makes. In the last decade, much of the labor-intensive, low-tech industries such as clothing, shoe and toy manufacturing that spurred the island's economic growth have been displaced by high-tech industries, which make up a rapidly growing percentage of its exports.

"I think the park is very important for Taiwan, especially during industrial restructuring," said Wu Rong-i, the president of the Taiwan Institute of Economic Research, a private research and consulting firm. "It took five or six years really to see a response. But then it started to demonstrate good performance."

The idea for this park -- about 1,000 acres of silicon chip factories, computer and telecommunications manufacturing, research labs, office buildings, schools and restaurants -- sprang from the early successes of the Silicon Valley, the swath of computer industries that spilled south from Palo Alto and Stanford University.

"The original thought was that since there were so many Taiwanese scientists and engineers in Silicon Valley, that if we could get some of them to come back and start businesses, they could help us start a high-tech industry here," said H. Steve Hsieh, the director general of the science park and a Ph.D. from the University of Wisconsin. "Many people went to the United States and stayed forever, many for political reasons because Taiwan was under martial law. Some of these people got into middle-age crisis. So we've tried to recruit them to come here and start high-tech companies."

Today, the 150 companies here cover an array of high-tech industries, including the manufacture of personal computers and peripherals, the fabrication of integrated circuits, specialized telecommunications equipment and design, optical-electronics and, less successfully, a handful of biotechnology companies.

Since over the next year I will be doing a dissertation looking at the the influence of Chinese culture on strategies in Taiwanese high-tech companies, I found the following statements really interesting:

Yau You-wen was one of the 1,004 who returned home last year. "I was at Stanford in applied physics," he said, "and went on to Honeywell, and later I.B.M. What brought me back were the opportunities. The gap is disappearing between the U.S. and Taiwan." Now, Mr. Yau is the director of quality and reliability at the Taiwan Semiconductor Manufacturing Company, the largest fabricator of integrated circuits in Taiwan. Hybrid Corporate Culture.

Mr. Yau said that the corporate culture of Taiwan Semiconductor was more American than Taiwanese. In part, this is because the company has an American president, Donald W. Brooks, and because of the predominance of American customers. Indeed, the company's success has come not from creating its own chips but from building the factories and the technology to manufacture designs for integrated circuits created elsewhere, usually in the United States.

This was 14-years ago. What will be interesting is to see if the American culture has survived or if the advent of more and more homegrown talent moving into these companies has turned the corporate culture more towards a Taiwanese corporate culture. What will also be interesting, if it is possible, is to examine the difference between the semiconductor companies that employed many returning Taiwanese and the home-grown companies like Hon Hai Precision Technologies and Tatung.

Anyway, I thought the article was interesting and worthwhile sharing. You can read the whole article at the link below.

New York Times: High-Tech Taiwanese Come Home