1

Global Logistics -- A New Way of Doing Business in Taiwan

Chi SchivePresident

Taiwan Academy of Banking and FinanceAdvisor

Council for Economic Planning and Development

Global Entrepreneurship for the New Millennium

Syracuse UniversityAugust 21, 2000

2

Global Logistics --A New Way of Doing Business in Taiwan

Outline

I. Introduction

II. Factors behind global logistics (GL)

III. The emergence of GL in Taiwan: a brief review

IV. Taiwan’s two-way investment flows

V. Production fragmentation by Taiwan firm: an integrator

VI. GL and information industry

VII. Infrastructure for GL

VIII. A new way of doing business in the region

3

Behind the Emergence of Global Logistics

• Production fragmentation - Classic trade theory

To push cost down, vertically integrated production

processes are taking place across country borders .

• New phenomenon

Shortening product cycle is generating inventory

pressure.

• New phenomenon

ICT reduces the cost of information transmission and

goods transportation.

4

Operation Characteristics in Taiwan: from OEM to GL

R&D Manufacturing Marketing andDistribution

OEM

R D Mfg Marketing andDistribution

ODM

R D Mfg Logistics M

ODL/GL

Before the mid-1980s

In the late 1980s and early 1990s

After the mid-1990s

: Local operations

5

Japan

Taiwan U.S.

I: InvestmentM: Materials/IntermediatesQ: Finished product/commodityS: Strategic alliance

Before the mid-1980sLate 1980s and early 1990sAfter the mid-1990sASEAN

I&M

M

I&MQ

QS

Q

Q

Taiwan’s International Division of Laborfrom Triangle to Diamond

China

I&M

Q

S

6

Investment in Southeast Asia and China

Thailand Malaysia Philippines Indonesia Vietnam ChinaUp to1986

577.5 50.4 7.8 170.0 - 100

1987 300.0 47.3 9.0 7.9 - 4201988 842.0 307.3 109.9 913.0 - 5171989 871.0 815.0 148.7 158.0 - 9841990 761.0 2,383.0 140.7 618.0 107.0 1,3921995 1,803.9 565.5 181.6 567.4 1,215.1 5,7771996 2,785.2 310.3 7.4 534.6 534.3 5,141

1997 414.3 480.4 13.1 3,419.0 247.8 2,814

1998 253.6 263.4 5.4 165.5 252.8 3,118

1999 211.1 70.3 5.0 3,309.7 173.0 3,370

Rank 4 3 5 2 2 3

According to Host Country StatisticsUS$ million

Sources: Board of Investment, Thailand; Malaysian Industrial Development Authority, Malaysia; Board of Investment, the Philippines; Investment Coordinating Board, Indonesia; State Commission for Cooperation and Investment, Vietnam; Ministry of Foreign Trade and Economic Cooperation, mainland China .

7

Production Fragmentation by Taiwan Firms, 1998

% of MfgDomesticproduction

Foreignproduction

Manufacturing 100.00 89.35 10.65

Information electronics 35.71 82.03 17.97 Electronics, electrical machinery 34.90 82.06 17.94

Precision instruments 0.81 80.92 19.08

Metal machinery 23.91 97.62 2.38

Chemicals 23.35 89.05 10.95

Consumer products 17.04 93.50 6.50

%

Source: Ministry of Economic Affairs, Statistics Department, Survey on Manufacturing Activities,July 1999.

8

Foreign production

TotalJapan,U.S.

Europe

MainlandChina

S.E.Asia

Others

Manufacturing 10.65 2.37 4.42 3.38 0.49Information, electronics 17.97 4.28 8.83 4.59 0.28

Electronics, electricalmachinery

17.94 4.37 8.64 4.66 0.28

Data Storage processing 26.53 8.89 10.45 6.92 0.27Telecom 22.33 0.09 7.14 15.10 0.00Electronic components 13.01 1.95 8.15 2.68 0.23

Precision instruments 19.08 0.61 17.08 1.37 0.03 Metal machinery 2.38 0.71 1.29 0.26 0.12 Chemicals 10.95 1.44 2.46 6.00 1.05 Consumer products 6.50 1.95 2.25 1.63 0.67

Foreign Production of Taiwan Firms, 1998%

Source: Ministry of Economic Affairs, Statistics Department, Survey on Manufacturing Activities,July 1999.

9

Geographic Distribution of Sales of Domestic Production, 1998

Information electronicsElectronics

Electrical machinery

Man

ufa

ctu

ring

Datastorage

processing

Telecomdevices

Electroniccomponents

Precisioninstruments

Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Domestic 59.21 31.97 32.03 13.94 36.01 33.49 29.58

Foreign 40.79 68.03 67.97 86.06 63.99 66.51 70.42 Japan 3.33 5.45 2.09 4.22 4.14 5.08 2.42 U.S. 15.31 28.93 29.18 43.77 36.19 23.62 18.09 Europe 7.85 15.41 15.48 25.42 11.28 11.73 12.27 Mainland China 3.98 2.10 4.95 1.08 4.36 2.30 27.41 Southeast Asia 6.52 10.76 10.84 6.15 4.17 17.50 7.16 Others 3.80 5.37 5.42 5.43 3.85 6.26 3.08

Source: Ministry of Economic Affairs, Statistics Department, Survey on Manufacturing Activities, July 1999. In Chinese

%

10

Sources of Materials/Intermediates of Taiwan Domestic Firms, 1998

Information electronicsElectronics

Electrical machinery

Man

ufactu

ring

Datastorage

processing

Telecomdevices

Electroniccomponents

Precisioninstruments

Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Domestic 57.84 47.70 47.32 49.76 44.95 32.29 64.26 Foreign 42.16 52.30 52.68 50.33 55.05 60.71 35.74 Japan 12.19 17.91 17.93 12.85 9.00 23.15 16.97 U.S. 9.19 14.06 14.29 17.58 22.40 12.87 3.78 Europe 5.26 7.28 7.39 2.95 6.59 15.09 2.46

MainlandChina

1.95 1.85 1.86 1.73 3.59 2.06 1.50

Southeast Asia 4.85 6.71 6.82 8.44 13.18 5.57 2.16 Others 8.73 4.49 4.39 6.79 0.28 1.97 8.87

Source: Ministry of Economic Affairs, Statistics Department, Survey on Manufacturing Activities, July 1999. In Chinese

%

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Production Sharing of Taiwan’s Information Industry

1995 1996 1997 1998 1999*

Total 100.0 100.0 100.0 100.0 100.0

Taiwan 72.0 67.9 62.6 57.0 52.7

China 14.0 16.8 22.8 29.0 33.2

Thailand 5.0 5.5 5.9 5.4 5.3

Malaysia 7.2 7.4 5.6 4.5 4.0

Other 1.8 2.4 3.1 4.1 4.8

%

* Estimates.Source: Market Intelligence Center, Institute for Information Industry.

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Exports to Mainland China

1998 1999

Share Share Growth

Electrical machinery and parts 18.9 23.7 45.1

Machinery tools and parts 14.1 14.3 16.7

Plastics 11.2 11.8 20.9

Iron and steel 5.6 5.7 17.8

Synthetic fibers 6.8 5.6 -6.3

%

Source: Board of Foreign Trade, ROC.

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Imports from Mainland China

1998 1999

Share Share Growth

Electrical machinery and parts 28.2 31.0 20.7

Machinery tools and parts 9.2 9.1 9.2

Iron and Steel 10.6 7.9 -17.9

Mineral fuels, mineral oils andrefined products

4.7 4.5 5.7

Zinc and products 2.8 3.3 29.6

%

Source: Board of Foreign Trade.

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Shipment Distribution of Taiwan-based Companiesby Countries of Major Investment

Total From TaiwanFrom

MainlandChina

FromElsewhere

ForCompaniesInvestingMostly in 1997 1998 1997 1998 1997 1998 1997 1998

U.S. 100.0 100.0 88.3 86.5 6.1 7.2 5.6 6.3

Hong Kong 100.0 100.0 77.6 77.0 13.8 13.8 8.6 9.1

Mainland China 100.0 100.0 63.2 59.3 34.7 38.4 2.2 2.2

Malaysia 100.0 100.0 80.1 78.3 7.6 8.5 12.4 13.2

Singapore 100.0 100.0 86.7 85.9 7.6 8.8 5.7 5.3

Thailand 100.0 100.0 80.5 75.4 3.8 5.1 15.6 19.5

Indonesia 100.0 100.0 69.5 67.4 3.3 4.3 27.1 28.3

Philippines 100.0 100.0 78.1 75.5 2.4 2.9 19.5 21.5

Vietnam 100.0 100.0 66.1 62.4 4.1 4.3 29.3 33.3

Source: Ministry of Economic Affairs,. Survey on Foreign Investment by the Manufacturing Industry, 2000. Taipei, Taiwan.

%

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Central Geographic Position

Sydney Singapore Tokyo Seoul6:15 4:55 4:15 4:00

Manila Shanghai Hong Kong Taipei3:30 3:25 3:05 2:55

The average flight time between Taipei and other Western Pacific cities is the shortest.

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High-Tech Share of Taiwan’s Exports

20

30

40

50

60%

52.1

26.0

Manufacturing Strength

17

666158

4954

38 39

0

20

40

60

80

1996 1997 1998 1999

UPS66

Unscheduled flights

Unit: flights/week

FedEx

Source: UPS, FedEx

No flight prior to the establishment of transit hubs

63

70

Achievements - Air Transportation

Flights by foreign couriers up 42% in 4 years.

18

16.6 16.414.3 13.1

9.27.2

4.0 3.7

-8.3%-5.8%

-9.1%

-3.9%

0.4%

-6.7%-2.9%

-25%-30

-20

-10

0

10

20

30

Air cargo volume(100,000 tons)

Growth Rate（％）

Source： ACI (Airports Council International).

CKS Airport was the only Asian airport that maintained a positive growth of air cargo in 1998.

CKS Airport was the only Asian airport that maintained a positive growth of air cargo in 1998.

Hong Kong

Tokyo Seoul Singapore Taipei Bangkok Kuala Lumpur

Manila

Performance of Asian Airports after the Crisis

20

3.4

7.7

21.7

14.3

27.8

13.4

10.1

1.7

4.4

18.1

12.48.6

0

3

6

9

12

15

18

21

24

27

30

1996 1997 1998 1999

Taiwan

Hong Kong

Singapore

Source: Institute for Information Industry, TAS homepage, OFTA homepage

％

Unit：％

Achievements - Telecommunications

Popularization of Internet use

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1. DELL sends a request to Taiwan upon a Singaporean client order

2. The U.S. firm sends CPU to Taiwan

3. China sends cases and power supplies to Taiwan

4. China sends semi-assembled parts to Taiwan

5. Malaysia sends PCB to Taiwan

6. Taiwan sends DRAM mainboard and semi-asembled parts to Singapore

7.China send monitors to Singapore

8. Singapore assembles and sends the finished PC to the client

9. DELL sends the payment to Taiwan

Singapore

China U.S.

DELL

5

PCB

6

1

2

4

Order

CPU

MO

NIT

OR

9

DRAM main-board

8 PC

7

Source: Prepared by CEPD.

3

Taiwan as a Global Logistics Center

Taiwan

Malaysia

Steps 1 to 8 take 2 to 5 days to complete

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A New Way of Doing Business in the Region

30

35

40

45

50

55

60

65

1980 1985 1987 1989 1990 1991 1992 1993 1994 1995 1996 1997

NAFTA

East Asia

Taiwan

EU

Intra-regional Trade as a percent of Total Trade