Taiwan's Mobile Peacemakers
By David James, Thu Sep 12 00:00:00 GMT 2002

Taiwan's rapidly growing mobile communications industry is helping to cool confrontations with China. But what comes next?


Taiwan and China appeared to be on the
brink of war in early August this year when Taiwan’s president Chen
Shui-bian renewed his rhetoric that Taiwan is a sovereign and
independent country. Beijing—which considers Taiwan a renegade province
of China, not a separate country—immediately denounced his statements as
“a brazen provocation.” The Taiwan Stock Market dropped six percent on
the news that day, and technology executives around the world caught
their breath.

Yes, caught their breath. Incredible as it may
seem, a war between Taiwan (population 23 million) and China (population
1.3 billion) could cause major disruptions in the world’s high tech
industries. This is because Taiwan companies produce a huge share of
the global markets for high tech products, many produced for
international brands such as Nokia, Motorola, Dell, Toshiba and
Hewlett-Packard. For example, Taiwan companies currently produce about
87 percent of the world’s motherboards, 64 percent of the world’s
network interface cards, 55 percent of the world’s notebooks, and 41
percent of the world’s disk drives. And they also produce an increasing
share of the world’s mobile communications products, currently about 60
percent of wireless LAN products and six percent of mobile
phones.

Taiwan’s Invasion of
China


The interesting factor in all of this
is that Taiwan companies are now producing many of their products in
China. Taiwan’s Ministry of Economic Affairs estimates that there are
probably 100,000 Taiwan companies presently operating in China. One of
them, BenQ Corporation, which produces a variety of high tech products
including mobile devices, now has about 30 percent of its production at
plants in China and expects that number to rise to 50 percent by the end
of next year. According to its CEO, K. Y. Lee, BenQ currently has
approximately 10,000 employees in China, and industry observers believe
that altogether there may be as many as one million Taiwan citizens now
living and working in China.

Economic realities, then, may well
be undermining Taiwan’s political rhetoric. On the day of Beijing’s
heated response to president Chen, Richard Vuylsteke, executive director
of the American Chamber of Commerce in Taipei, commented that “People
are kind of used to a lot of rhetoric on both sides. Basically for us,
it’s business as usual.”

Principle or
Profit


Taiwan’s dilemma lies in preserving its
political independence from China while maintaining its commanding
global position in high tech manufacturing. It won its commanding
position by developing some of the best engineering and most efficient
manufacturing capabilities in the world. But in recent years, as
Taiwan’s standards of living improved and labor costs rose, Taiwan’s
cost competitiveness began to slip and its commercial links with China
began to increase.

In order to sustain or improve its high tech
market share, Taiwan had to move more and more production to countries
where costs are lower. Despite the political impediments, China is the
low-cost country of choice for Taiwan because of a shared ethnicity,
culture and language. As to China, however, the risks for Taiwan are
not only political—disruption or even expropriation in time of war, for
example—but are also economic—in that over time China could acquire (or
appropriate) much of Taiwan’s intellectual property and manufacturing
know-how.

To minimize risks to intellectual property and
know-how, Taiwan companies operating in China typically carry out their
research and development, and produce their higher-quality products, in
Taiwan. In addition, many of them limit their China production to
labor-intensive assembly activities. According to the Market
Intelligence Center of Taiwan’s Institute for Information Industry, 51
percent of Taiwan’s mobile phone shipments last year were assembled in
China.

Taiwan’s Mobilization


Richard Brown, director of
international marketing for VIA Technologies, Inc., a leading
semiconductor design house headquartered in Taipei, believes that some
of Taiwan’s greatest opportunities for building global market share in
high tech manufacturing lie in the mobile communications space. “Taiwan
will benefit hugely from the trend of international companies to
outsource their manufacturing and R&D. In addition, key components
companies such as Intel, Texas Instruments and Microsoft have been
making significant investments in developing the capabilities of Taiwan
manufacturers through various technical cooperation arrangements. The
situation reminds me of the PC market ten years ago when major PC
companies started outsourcing to Taiwan companies,” he says.

J.
Y. Hsu, manager, components and modules for high frequency
communications, at Taiwan’s Industrial Technology Research Institute,
notes that mobile device manufacturing by Taiwan companies is growing
at a rapid pace. “The production of handsets by BenQ, DB Tel, GVC,
Arima, Quanta, Compal and Inventec will reach 30 million units this
year, about twice the production in 2001,” he says. “This production
is mainly original design manufacturing for Motorola, Sony Ericsson,
Siemens, Toshiba, Panasonic and some companies on mainland China.” In
addition, Taiwan companies are doing original equipment manufacturing
for Nokia and others.

The Taiwan government itself is spurring
the country’s mobile communications industry by supporting development
of local wireless communications. More than a year ago, in July 2001,
Taiwan’s Ministry of Economic Affairs established the Promotion Office
for Wireless Communication Industry Development, targeting mobile
phones, wireless LAN, GPS, Bluetooth, and digital content for
development. Related components—RF front-end modules, transceiver ICs,
baseband ICs, batteries and LCDs—were also targeted.

In
response to the government’s support, the Wireless Communication
Strategy Alliance, an industrial organization consisting of 149 Taiwan
companies engaged in up-stream and down-stream wireless communication
activities, was formed. “With collaboration among the various sectors,”
says Hsu, “the WLAN production in Taiwan is expected to reach about 80
percent of global production.” And it gets better. “In 2005, the
revenue of Taiwan’s wireless industry is expected to be about $10
billion, twice the amount of this year,” he adds.


The Bright Side

Indeed, many believe that
Taiwan’s high tech manufacturing future is bright. Brown of VIA is not
concerned with the political and economic risks of operating in China.
How big are the political impediments? “Very limited. Business is
going on as normal,” he says. Should Taiwan companies do R&D and
high-end manufacturing in China? “This is inevitable,” he says. “China
has some very good, indeed world class, engineering talent in the
wireless area, and Taiwan companies like VIA are already beginning to
use it.”

Brown thinks that Taiwan companies have a number of
strategic advantages that will help them build market share in mobile
communications and other high tech manufacturing areas. “First is
their flexibility and rapid turnaround times for new products. Taiwan
companies are very fast in bringing new products to market and this
will be a key factor as mobile product lives become shorter. Second,
they will leverage on the manufacturing and logistics infrastructures
that they built up in serving the PC industry. This will help speed up
the volume introduction of new products and lower costs for their brand
name customers. Finally, they have a very low cost structure that
allows them to survive on low margins. As the price of phones
continues to go down, this will be increasingly
important.”

Saturation Plus


As with manufacturing, Taiwan’s domestic mobile
communications industry is thriving. The penetration rate for mobile
phones is now 103 percent (some users having more than one phone or SIM
card), a penetration rate exceeded only in Finland. Five operators
(Chunghwa Telecom, Taiwan Cellular and Far EasTone Telecommunications
are the largest) provide GSM services throughout the country. GPRS and
WAP services, with add-on rates of about $5 per month plus 12 cents per
minute of use, are gaining popularity. “With mobile subscribers at full
saturation in Taiwan, we are focusing on value-added connectivity and
services for individuals and enterprises and on boosting voice usage,”
says Jan Nilsson, president of Far EasTone. “We expect continued strong
growth for the company.”

For the moment, Taiwan’s manufacturing
facilities—at home and abroad—are humming, and the optimism of the
country’s communications executives is high. But the political season
is upon us, and any day now Taiwan’s president Chen just might set
hearts racing again with a new assertion of Taiwan’s
independence.

David James is president of Business Strategies International, a San Francisco-based consulting and venture-development firm specializing in technology business opportunities.