Taiwan's booming electronics and electrical appliances industries attract information technology and overseas capital to the island in massive quantities. So how do foreign investors rate Taiwan's prospects of becoming Asia's next high-tech heaven?
Taro Hosono, president of Shin-Etsu Handotai Taiwan Co., has a simple explanation for why in his Japanese-based company decided to set up a semiconductor plant in Hsinchu's Science-based Industrial Park. "Our policy is to build factories where the market is," he explains. "The Taiwan market just went on getting bigger and bigger, until it reached a point where we couldn't afford to neglect it any longer."
Shin-Etsu manufactures polished wafers, which are highly specialized commodities, so the company must pay close attention to the individual requirements of each of its customers--another factor encouraging the establishment of manufacturing capabilities in close proximity to its main customer bases. "Many of our Taiwanese customers came to us and asked us to set up factories here," Hosono says. "Our goal has always been to sell our products directly into the local market, and the market here has become increasingly sophisticated over the years."
Shin-Etsu is far from being alone in its investment philosophy. According to figures supplied by the Investment Commission of the Ministry of Economic Affairs (MOEA), as of June this year, the total amount of foreign investment in the island's electronics and electrical appliances manufacturing industries amounted to US$8.72 billion, making it the sector with the largest element of foreign investment in the whole of Taiwan. So what magnet lures investors to these shores in such numbers?
Paul Zeven is president of Philips Electronics Industries (Taiwan) Co., which manufactures a wide range of electronic products on the island. He is an admirer of Taiwan. "Over the past thirty years, Philips Taiwan has grown significantly along with the healthy economy, and has become very much part of the environment," he says. "Things go smoothly, and we admire the way business gets done here." The Netherlands-based conglomerate first established a presence in Taiwan in 1966, when it created a memory board facility in the Kaohsiung Export Processing Zone in the south of Taiwan. Philips is now by far the island's largest foreign investor, and Taiwan hosts the group's Asia-Pacific headquarters for semiconductors and components, as well as the global headquarters for PC peripherals. The company has set up six factories across the island to produce a number of products, including semiconductors, monitors, and lighting equipment. Its work force numbers some 10,000 employees, and turnover is rising fast: NT$145 billion (US$4.5 billion) in 1998, compared with NT$61 billion (US$1.9 billion) in 1994.
What has sustained this excellent growth rate? Zeven points out that some years ago the ROC government identified information technology (IT) as the growth area to focus on. The result? Improved IT infrastructure. "Government support, a sound economy mainly consisting of small- and medium-sized enterprises, and excellent human resources--they are the major investment advantages in Taiwan," Zeven insists. "The government listens, then it tries to make our lives as easy as possible." He adds that Taiwan's stable economic base was of particular importance during the Asian financial crisis, which hit Hong Kong and Singapore extremely hard.
So everything in the garden is coming up roses? Well, not quite. Zeven is painfully aware of the island's Achilles' heel. "For many years, Taiwan has been quick to take advantage of existing technology," he says. "Because of its efficiency, many products cost less to make here. But if Taiwan wants to get ahead, it can't afford to rest on its laurels forever." In other words, a time will have to come when research and development play a more significant part than at present. Taiwan is at a disadvanage because it must pay heavy royalties in order to exploit existing patents. "If Taiwan wants to go on to the next phase, it will have to focus more on research and development so as to build up its own technological base," Zeven maintains. "If it wants to benefit from valuable cross-licences, it must have something to offer in return."
Again and again, the conversation turns to issues of basic infrastructure. Zeven is adamant that if the central government genuinely wants to foster foreign investment it will have to upgrade the island's transportation and electricity supply (a concern echoed by many others), accelerate development of the telecommunications network, and make the financial system more transparent.
It is not just money that Philips brings into Taiwan. Take its personnel policies, for example. The company has long judged its staff to be its most important asset. "We call it the Philips way," Zeven explains. "It's part of our worldwide quality drive." Like Shin-Etsu, Philips Taiwan places particular emphasis on customer care, encouraging its staff to build strong partnerships with suppliers and integrate them into the company's operations as part of its ongoing campaign to "make things better" for both customers and shareholders. The effort pays off: in 1991, Philips Taiwan won Japan's prestigious Deming Application Prize in recognition of its outstanding contribution to product quality, followed by the Japan Quality Medal in 1997. The company has also won awards in Taiwan, including the Outstanding Import-Export Achievement Award for the past ten years.
Taiwan's economy is doing well, and Philips plans to profit from that to the point where it is a major local supplier of consumer products such as television sets, cassette players, VCRs, and mobile phones. But the environment is changing, and the company recognizes a need to shift the focus away from labor-intensive methods to those that rely more on information technology.
In pursuit of its strategy, Philips intends to transfer manufacture of lower-value-added products to Malaysia, the Philip pines, and mainland China, because Taiwan is becoming too expensive. But it also intends to devote more resources to research and development in Taiwan, as part of its intensifying focus on high-tech products.
Motorola Inc., one of the world's major telecommunications electronics firms, has more than sixty-five factories in forty -five countries, and can point to global sales of approximately US$30 billion. The multinational company began its profitable association with Taiwan in 1967, when it established a local branch office with an initial capitalization of NT$1 billion (US$25 million at the then rate of exchange) and a mission to market US-made semiconductors on the island. "Taiwan's economy was picking up, and its technology and talents were growing up," says Richard Tsuei, Motorola Electronics Taiwan's public affairs manager. It was a time when successive Ministers of Economic Affairs, including Li Kwoh-ting and Sun Yun-suan, were working hard to persuade major US companies to invest in Taiwan. Motorola was one of the enterprises that heard the call.
A lot has happened since then. The US-invested local company's operations now extend to wireless communications, network services, and telecommunications products such as pagers, radio systems, and mobile phones. In the course of its drive for growth, Motorola made a major investment on the island in 1985, when it set up two plants in northern Taiwan to manufacture semiconductors and communication components, together employing some 3,000 people.
With the opening of Taiwan's telecommunications market in the mid-1990s, domestic sales of mobile phones and pagers rocketed. Motorola benefited from the trend, leading it to double its investment in Taiwan. Last year, the company injected additional capital of US$15 million into Taiwan and saw its islandwide turnover leap to a record high of $1.17 billion, compared with $942 million in 1997.
Then, in the summer of this year, Motorola abruptly sold its two factories in northern Taiwan to the Taiwan-based ASE Group and the US-based CTS Co. Did this signal an imminent withdrawal from the local market? Tsuei is adamant that the adjustment is merely part of Motorola's global restructuring plan, which aims to boost its competitive edge as a whole through effective labor distribution.
But the move is bound to trigger questions about the cost-effectiveness of manufacturing in Taiwan. Motorola has discovered that it makes sense to leave the process of manufacture to trusted suppliers with which it has built up links over a lengthy period. The company is working closely with several prominent local enterprises, including Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. "The establishment of these partnerships with local concerns amounts to recognition of Taiwan's technological capability," Tsuei says. "What it means is that in the days ahead, Motorola Electron ics Taiwan will be able to concentrate on the higher-value-added and technical aspects of its operations."
Motorola's relationship with the central government provides an interesting illustration of how both sides can benefit. The tax breaks on offer undoubtedly played a part in persuading the company to set up in Taiwan, as Motorola is the first to acknowledge, but it was not slow to express its gratitude in concrete form. Tsuei heartily approves of the government's efforts to build Taiwan into a high-tech island, and says his company has always been anxious to help achieve that goal.
In 1993, for example, the company signed a preparatory agreement with MOEA to initiate a multi-step program of investment and technology transfer. The following year, Motorola teamed up with Pacific Electric Wire & Cable Co., one of Taiwan's leading wire and cable manufacturers, and several other companies in various countries to develop a global satellite telecommunications system called Iridium. Then in 1996 it licensed its patented FLEX decoder, a high-speed transmission device used in pagers, to the Industrial Technology Research Institute, enabling Taiwan companies to break into the pager market with the help of cutting-edge technology.
Investors naturally take note of where global market leaders decide to concentrate their resources, so when Microsoft Corp. made it clear that Taiwan was a place it wanted to be, people sat up. The computer software giant established a branch office in Taiwan at the end of 1989, following a high-profile visit to the island by Bill Gates, the company's chairman and founder.
Microsoft Taiwan Corp.'s Zoe Cherng points to soaring demand by Taiwan's more dynamic enterprises for state-of-the -art information technology to fuel their rapid growth as a prime factor in attracting Microsoft. She is in no doubt about what the company has to do to keep its side of the bargain. "Our most important mission is to assist the island's industries to boost productivity and global competitiveness through the introduction of advanced IT products and techniques," she says. "We'd also like to promote IT applications with the general public, showing them how it can enrich their daily lives."
The same economic factors that influenced Motorola also had an effect on Microsoft. Stable economic growth, a well -rounded IT infrastructure, and opportunities for enterprises to compete with one another on an equal footing have helped Microsoft Taiwan achieve consistently rising sales over the past decade, coupled with an expansion of its work force from just a handful of people to its current staff of two hundred.
Cherng believes that the Microsoft ethic--"work smart, work hard, get results"--appeals to the local work force. The management structure has been streamlined as far as possible, with few intermediate levels, and each employee is given considerable autonomy within his or her field. The working environment, welfare package, and ongoing training programs are all of the standard to be expected from a market leader. Employees know that working for Microsoft puts them at the cutting edge of a world trend, and their sense of pride is manifest.
It sounds like a marriage made in heaven, but every silver lining has its cloud. The island's telecommunications environment is not opening up as swiftly as Microsoft and many other companies had hoped, which in turn has led to a slowdown in IT research and development. Cherng feels that Taiwan should not content itself with being a major original-equipment -manufacturing (OEM) computer-hardware production center, because these days the profits to be made from OEM are slim. "The development of a software industry would create higher added value and generate better business opportunities," she stresses.
Then there is the thorny problem of intellectual property rights and their protection--a big headache for software developers all over the globe, but also for governments like Taiwan's that are seeking to boost a high-tech economy. Nobody wants to be involved with technology transfer unless there is some guarantee that what is transferred will remain secret. Cherng does not deny that the government has made some headway in its crackdown on pirated products, particularly where cassettes and compact disks are concerned. But according to a 1998 survey conducted by the worldwide anti-piracy organization Business Software Alliance, no less than 60 percent of software products used in Taiwan are pirated. "That's of serious concern, and it deals a great blow to the development of Taiwan's software industry," Cherng says. "If Taiwan wants to advance, it's going to have to face this problem and make improvements." Such as? All Microsoft can do is urge the government to heat up its enforcement measures and continue to monitor the situation closely.
Fear of piracy is not going to drive Microsoft away, however. This August marked a milestone for Microsoft Taiwan when the company launched a joint-venture project worth NT$100 million (US$3.1 million) in association with Compaq Taiwan and Systex Corp. The new company will focus on coming up with solutions in the realm of business-to-business e -commerce. "Overall, we still see Taiwan as a place with huge development potential, particularly in the field of information technology," Cherng says.
Why Taiwan? That always has to be the first and main question for CEOs who want to invest and have the whole of Asia to choose from. Shin-Etsu's Hosono notes the differences between the factors that led to his parent company's first overseas investment and its current operations in Taiwan. Fifteen years ago, Shin-Etsu established a presence in Malaysia, influenced by a number of purely internal domestic factors: the appreciating Japanese yen, high wages and a labor shortage in Japan, and an enormous trade imbalance with the United States. "But our investment target in Taiwan is simply to sell our products directly in the local market, which has become increasingly sophisticated over the years," he says. "Then you have to remember that many of our Taiwan customers were expressing an interest in having us here."
It helps that, according to Hosono, Taiwanese and Japanese concerns tend to operate in similar fashion. One difference, however, centers around the special sense of urgency that characterizes so much of the island's economic growth. "People in Taiwan go all out to invest in production facilities, expand capacity, and introduce new technologies," he observes. "One reason might be that Taiwan's semiconductor industry is a relative newcomer in this field, and thus needs to move quickly." By contrast, Japan went for the long haul, building its semiconductor sector over a thirty-year period.
Another difference is that local people tend to change their jobs every three or four years, a phenomenon that is especially prevalent in the island's science-based industrial parks. In Japan, on the other hand, employees change jobs on average just once a decade. Hosono emphasizes that nobody can really master a technology-related job unless willing to stick with it for at least five years. "My biggest headache is that my company isn't big enough to cover all the bases and still have some backup," he says. "I never know when my secretary's going to come to me and say she wants to quit."
At present, Shin-Etsu employs 177 workers. Hosono would ideally like to have 500--quite a discrepancy. But he stresses that the people he does employ are well-educated, well-trained, and quick to learn. "Taiwan people are always on the lookout for higher education opportunities and on-the-job training. I'm really satisfied with worker performance here." Actually, Hosono believes that one of the best arguments for investing in Taiwan is that investors can recruit highly skilled staff with potential for professional growth.
He is a fervent advocate of the government's policy, now a good twenty years old, of concentrating on the development of high technology. But the very success of that policy contains within it seeds of weakness. Richard Kuo, Shin-Etsu's vice president, bemoans the way government officials incessantly trumpet rises in domestic economic indices, including exports and imports, while conveniently neglecting to mention things like water and electricity shortages. High-tech industries use a lot of energy, being wholly dependent on reliable supplies of water, electricity, and transportation. But Taiwan is still weak in those areas and has a long way to go before it can catch up with private-sector demand. Power outages are particularly dangerous for semiconductor manufacturers, but the newly built Tainan Science-based Industrial Park had already suffered several even before September's devastating earthquake, while at the same time having to cope with the threat of being built on a flood plain. Hosono cites a major islandwide power outage that occurred without any warning at the end of July, halting production for seventeen hours at catastrophic cost. And then there is the perennial problem of rush-hour traffic that never seems to go away.
"Without a good, comprehensive backup system, it's hard for companies to sustain and improve their competitiveness," Hosono notes. "The government needs to look at this and come up with some improvements." For specifics, he suggests the construction of bigger dams, the construction of an efficient water distribution network, and even another nuclear power plant. He also wants to see the government devise policies that will have the effect of encouraging employees to stay with one employer rather than dart from job to job.
Hosono concedes that the 1991 implementation of the Statue for Upgrading Industries, which introduced generous tax holidays and capital allowances for investors, gave encouragement to many high-tech firms, and his company has certainly benefited from it. Despite last year's slowdown in the global semiconductor market and a consequent fall in prices, he remains optimistic. Last year, Shin-Etsu registered around NT$1 billion (US$31.2 million) in sales, whereas this year the corresponding figure is expected to be between NT$2 and 2.5 billion (US$62.5/78.1 million). "Our main customers are growing ever stronger in the global marketplace," he says. "All we have to do is go on offering them better service and top -quality products."
The many converts to the Taiwan way of doing business are vociferous in their support of the island as a center where things get done both fast and well. But one common thread runs through all their stories: Taiwan needs to upgrade its infrastructure if the golden era of foreign investment is to continue.