presentation on taiwan's economic development (1)

7/27/2019 Presentation on Taiwan's Economic Development (1)

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From Hardware

Manufacturing toValue Creation

Smart Phones, Taiwan and KoreaPeter T. L. Shih

Director, Commercial DivisionTaipei Economic and Cultural Office in Boston

February 28, 2012INNOVATION, GLOBAL COMPETITIVENESS, AND NATIONALECONOMIC DEVELOPMENT

ADMINISTRATIVE SCIENCES DEPARTMENTMETROPOLITAN COLLEGE BOSTON UNIVERSITY


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Outlines

Revis i t the Value Chain and Sm ile Curve

Path of Taiwans economic development

A story of the smar t phones

Analys isTaiwans ICT industries and

value added

Innovat ion paradigm change and the wayforward


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Smiling CurveA supply chain value analysisconcept proposed by Stan Shih, founder of Acer, Inc.
http://upload.wikimedia.org/wikipedia/commons/0/0e/Smiling_Curve.svg


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Path of Taiwans Economic DevelopmentManufacture oriented Investment oriented Innovation Oriented

Labor intensive Capital Intensive TechnologyIntensive Knowledge Intensive

AgricultureLabor-intensivelightindustriesaimed atlivelihoodneed andimportsubstitution

ImproveagriculturaltechnologyLabor-intensiveindustriesaimed atexport

Large-scale

infrastructure projectsLabor-intensive tocapital-intensiveLay

foundationfor high-techindustries

Promotehigh-tech

industriesdevelopmentICTindustriesgraduallybecame

themainstream

Internationalizationandtechnology upgradeICT andotherelectronicindustrieswellmature

Theburgeonin

g of FTAsRegionalcompetition becomefierce R&D

and highvalueadded arefocus

1952 1960 1970 1980 1990 2000 2010


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The Story of The Smart Phones

Missed thesmartphone

market

Lost thesmartphone

market

Losing thebusiness

smartphonemarket

Changed the

smartphonemarket

Changing the

smartphonemarket(?)

Game changing capabilities or design innovations - differentiated theirproducts

Products that matched customer needs

Lost touch with customers - Failed to adapt to the changing world andhold onto their market leading business for too long!

stalled innovation the original differentiators no longer matters inthe new environment

The lessons learned?Why did they fail?

What made their success?


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Dominance

by App le

In terms o fprof i ts

and added

value !


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Dominance by Apple I n terms of

profi ts and added value !


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Design (R&D), Brand & Marketing: $228 (45.7%)Apple (U.S.A), AT&T, Verizon

Component & Parts : $260 (52.1%)

Microprocessors, LCD, etc: $114 (22.9%) Korea

Bluetooth, audio chips, etc: $15 (3.0%) U.S.A

Driver, IC, connectors, etc: $130 (26.1%) Taiwan

Assembly & Labor cost: $11 (2.2%) China

Retai l Price: $499 fo r 16GB model


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Implications for Taiwans ICT Industries:

Are OEMODM model sustainable?

58.5

4.7

0.50

1020

30

40

50

60

70

Apple LG

7

2

30

0

510

15

20

25

30

35

Apple LG

The success of Apple casts doubts on Taiwan ICTs business models and strategies

Apple keeps the high value-added activities (design, software, brand management& marketing) to itself while outsourcing manufacturing to others

Apples strategy of Brand + Manufacturing Outsourcing creates huge volumes ofrevenue and high profit margin for its value chain. However, the place that Taiwan sICT industries occupy in the chain may not be ideal

The profit margin or share from OEM/ODM for Apples are not necessarily higherthan OEM/ODM for HP or DELL

iPhone Profit Breakdown iPad Profit Breakdown


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Where should Taiwans ICT industries go?OEMODMOBMBranding High ValueServices

7930

9608

7431521

37 352238 292

17382463

489 607

0

2000

4000

6000

8000

10000

12000

2010 2014

IT Service Public Cloud Services Spending Moblie Application Store PC Smart phone Server

Small growth for PCsAlmost no growth for Servers, Continue rapidexpansion for Smart phones

IHS Screen Digest: 2010 Apple Apps revenue (~$1.8B) is less than 3% ofApples revenue of $65B, and less than 1% of its profit

Gartner: 2010 worldwide IT Service revenue is about $800B, it will be$961B by 2014

Unit: US$ 100 Million Source: Gartner, compiledby III, Taiwan


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Analysis of Taiwans ICT IndustriesStructure of

ProductOrigin of

DevelopmentTechnology/

Brand

Production/

Market

ICT

Products

Highlymodulized

Support frominstitutes for R&D

Outsourcing/overseas

manufacturing bymulti-nationalbrands(OEM/ODM)

High control ofproduct systembecause of multi-national brands

licensing/authorization

Only few localbrands (HTC,Acer, Asus, etc)

Most areoverseasproduced andsold for intl

marketsICs, LCDsand somemajorcomponentsare produceddomestically

ICTManufactur

ingEquipment

Medium tohighmodulization

Linkage to local-brand companies

needs is notobvious

Some areseeking up-grade

Lacktechnology for

manufacturingcriticalcomponents/parts

Only someequipment are

utilized bylocal ICTmanufacturers

Source: Chung Hua Institute of Economic Research, Ministry ofEconomic Affairs, Taiwan


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Percentage of Value Added by Taiwans

Manufacturing Sectors

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%

20 0120 0

220 0

320 0

420 0

520 0

620 0

720 0

8

% of ValueAdded,Munufacturingsectors% of ValueAdded, ExportsofManufacturing

Base Year: 2001

Source: Directorate-General of Budget, Accounting and Statistics, and Council for EconomicPlanning and Development, Taiwan


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Percentage of Value Added by

Manufacturing Sectors Taiwan vs Korea

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%

200020 0

120 0

220 0

320 0

420 0

520 0

620 0

720 0

8

% of ValueAdded,Taiwan'sManufactur ing% of ValueAdded, KoreanManufactur ingSectors

Base Year: 2001

Source: Directorate-General of Budget, Accounting and Statistics, Taiwan; OECD


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Percentage of Value Added by Electronic

and Optical Goods and EquipmentTaiwan vs Korea

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

20 08

TaiwanKorea

Source: Directorate-General of Budget, Accounting and Statistics, Taiwan; OECD

Base Year: 2001


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Percentage of Intermediate Goods of

Taiwans Total Export

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%

20 0120 0

220 0

320 0

420 0

520 0

620 0

720 0

820 0

9

IntermediateGoods,Category AIntermediateGoods,Category BTotalIntermediateGoods, A+B

Category A: intermediate goods need to be further processed for consumption or used as inputs in theproduction of final goodsCategory B: intermediate goods need not to be further processed for consumption or used as inputs in

the production of final goodsSource: Taiwans export and import statistics, compiled by CEPDs study


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Disadvan tages (? ) o f Over-rely on

Intermediate Goods

Lack of the abi l ity /techno logy for sys tem

integration and development o f

software/services

Lack o f contro l /understand ing o f the markets ,

trends and consumers preference

Without ow n b rand , di f f icu l t to

divers i fy /expand markets

Intend to be capital-intens ive, and h igh in

energy/resou rces cons umpt ion

Source: Chung Hua Institute of Economic Research, Ministry of EconomicAffairs, Taiwan


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Innovation Paradigm Change

ProductParadigm

Technology Productivity

Price +Features

Productniches

Choices

Go to market- E.g. Xerox vs

Microsoft

- # of patents vs # ofproducts

Marketing leadership

+ =

Solutions +Services,Business

Innovation &Globally Integrated

Flexibility andValues

Value net ecosystem

Transforminnovations intodelivered values

Value net leadership

+ =

Knowledge /Intellectual Property(operational models,insights, assets, etc.)

Value capture &delivery

BusinessValue

Paradigm

Focuses Differentiators Through


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SWOT Analysis of Taiwans IndustriesDivision of labor(upstream/downstream) andsupply chain are quitecompleteGoodtechnique/management/intl

marketingGood legal infrastructureand labor force

Export concentrations highon China and electronics

Value added are not highEfficiency of use ofenergy/resources need to beimprovedLack of cross-sectors/industries human

resources

S W

O T


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SWOT Analysis of Taiwans Industries

The signing of ECFA helpsattract FDI to TaiwanAsian emerging marketsprovide Taiwan excellentopportunity

Demographic trend andliving environment areconducive to new productdevelopment

Burgeoning FTAs/RTAs

may marginalize TaiwanIncreasing competitionfrom Korea technology,brand and marketpenetrationSome traditional industries

need to be upgraded ASAP

S

O

W

T


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The Way ForwardA strategic thinking

The overall strategy Technology Pull andMarket Pull

Technology Pul l

Transfer

of new

technology

co-

operat ion in

R&D,

brand/mark

etingmanageme

nt

Efficiency/capability in:OEM/ODMQuality mass productionin short timeTailor-made productionas well

Supply chain/globallogistics management

Building Strength

on Your Own

Strength!


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Market Pul l= Building Strength on OthersStrength! (e. g. China)

Population: 1.3 Billion !

A market of huge potent ial /sou rce ofrevenue/profi ts

A grou nd to test/f ine-tune you rtechnology/products/servicesA plat form to b ui ld your own brandProvide you econom y of sc ale! (lower costs)Geographic vic in i ty and c ul tural connect ion

Economic Cooperation FrameworkAgreement (ECFA):Commodity and Service Trade

Liberal ization

Investment Faci l i tat ion and

Protect ion

Indus tr ial Co-operation (standards,

R&D)


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Governments Role In Fulfilling This

Strategy To lead and support large-scale, high-risk and innovative R&D

IndustrialTechnology

Research Institute(ITRI)

Founded in 1973

CommerceDevelopment

Research Institute(CDRI)

Founded in 2007

Institute forInformation

Industry(III)

Founded in 1979

Applied research in multiple Industrial technology fields Technology transfer and IP BusinessOpen lab and incubator

Industrial consultancyservices

R&D in network,multimedia,

Green ICT, ICTsecurity, etc.

Industry think tank Science and

technology law Incubation Technology transfer

and Patents

Research inmarketing,

consumerbehaviorand lifestyle

Promotinginnovativebusiness models

Business policy

recommendations

Flexible Display Technologyby ITRI
http://www.itri.org.tw/chi/news/detail.asp?RootNodeId=060&NodeId=061&NewsID=530


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Governments Role

To help and facilitate, if it is necessary, the

collaboration (M&A) among businesses

(DRAM, LCD panel)

To create an environment conducive to the

introduction of high quality human resources

(in particular R&D and global management

talents and skills, for example:http://hirecruit.nat.gov.tw/english/index.asp )
http://hirecruit.nat.gov.tw/english/index.asphttp://hirecruit.nat.gov.tw/english/index.asp


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Governments Role

Help diversify the markets by introducing the right

products2005

Population

2015

Population

Growth

%

200 300 50%

600 700 17%

1,200 2,200 83%

4,00 3,800 -5%

Unit: million

TOP

MarketsTaiwancurrentlyfocuses on

New potentialmarkets:quality yet

inexpensive products

Poor and least-developedmarkets

US$20,000

US$5,000

US$1,500

Source: ITRI(IEK) and III(MIC)

BRICs(Brazil,Russia, India,

China, S.Africa,

Indonesia,Middle East,

etc.)


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Governments Role

Level the playing fields for Taiwans businesses

by concluding FTAs with key trading partners

(US, EU, Japan, ASEAN, etc.)

Promote and encourage the development of new

industries (to diversify in order not to over-rely on

ICT): medical care, biotech, green energy (solar,

wind power, electrical car, LED), tourism(incorporating medical care), cloud computing,

etc.


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Thank you!

Comments, Q&A


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Aide-memoire to P. 5: Path of TaiwansEconomic Development 1949 - 1960

Policy goals: stabilize the agricultural sector, increase agriculturaloutputs and import substitution

Agriculture: land reform rent reduction to 37.5% (1949), sale ofpublic land (1951) and land to the tillers (1953)

Import substitution:

1. Encourage labor-intensive industries, textiles, food processing,cement, glass, etc., to satisfy domestic demand

2. Impose import restriction measures to discourage import

3. Two-tiered exchange rate system disadvantaged to import4. Preferential loans to targeted industries, e. g. textiles

US official aide (1950-1965): staple foods and raw materials


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1960 1970 Policy goals: export-oriented expansion to accumulate capital and

technique for the next stage development

Act of Encouragement of Investment (1960 1990 with various

amendments at different stages): tax and duties deduction, tax

deductibles for investment, accelerated depreciation of equipment,government fund support or investment in targeted industries,

preferential loans, development of industrial parks, etc., with emphases

on local contents of manufactured products and export.

Exchange rate reform: uniform pegged exchange rate and

depreciation of NT dollars to encourage export. Establishment of Export Processing Zones (EPZs, first of which

established in 1966) preferential treatments and incentives for

investors inside the zones to export


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1970 1980

Policy goals: government investment and expenditure tocounter economic impact by the 1970s oil crisis and 2nd Import

Substitution

10 Major Construction Projects: 6 of transportation, 3 of heavyand petrochemical industries, and 1 of energy supply (nuclearpower plant). The results of these investment-led Projects areimmediate improvement of Taiwans infrastructure and

transformation to capital- or technology-intensive industries

2nd Import Substitution: encouraging petrochemical and steelmill industries to meet domestic demand of raw materials


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1980 1990Policy goals: industrial upgrade and economic transformation by

promoting development of targeted strategic industries

Strategic industries: high value-added, high technology-intensive, low inpollution level, low energy-intensive

R&D support by ITRI, III, etc. : 25% of non-military governmental R&Dexpenditures were by ITRI between 1983 to 1994, and more than 165spin-off start-ups

Semiconductor industry development:

1. Initiated by MOEA in 1974 with initial funding of US$ 12 millions, incooperation with RCA

2. 1980: establishment of Taiwans 1st semiconductor manufacturer,UMC

3. 1987: worlds 1st dedicated semiconductor foundry manufacturer,TSMC

Science Parks: 1st of which established in Hsinchu in 1980, with supportfrom the government development fund, state-run banks and venturecapitals for investors inside (the 2010 total revenue of Hsinchu SciencePark accounted for 10% of that of Taiwans manufacturing sectors)

Statute for Upgrading Industries enacted in 1989


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1990 2000Policy goals: deregulation and liberalization to prepare Taiwans

businesses for internalization and foreign competition

1987: deregulate foreign exchange market

1989: amend the Banking Law to release control of interest rates

and approve establishment of 15 new banks in 1991

1989: allow indirect import from China

1990: allow indirect Taiwanese investment in China

1990-2002: GATT/WTO accession to align Taiwans trade and

investment regimes with international norms and get equal

treatment in other WTO members marketsPrivatization of state-owned enterprises: still mill, shipyard,

petrochemicals, fertilizer, civil construction, etc.


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2000 present

May 2010: Act of Industrial Innovation retain taxincentives for R&D, human resource development,regional operation centre and intl logistic centre in

Taiwan

(For the rest, please refer to P. 21 to P. 26)

presentation on taiwan's economic development (1)

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