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Taiwan in transition

Does Taiwan's computing industry rnstill matter to Canada?

Taipei, Taiwan – There was a time when Taiwan made cheap bicycles.

That was four decades ago, when it was one of the country’s main exports. Today, Taiwan takes in more than $16 billion in revenue from bicycles and it is the home to Giant Bicycle Inc., one of the world’s leading bicycle makers.

Taiwan is better known for being a technology manufacturing powerhouse, but the country’s high-tech leaders want to use the same tactic Taiwanese bicycles manufacturers used to re-invent itself as a technology innovator.

The country once had a reputation for producing cheap computer goods. That too was a long time ago. Today, the country’s high-tech vendors would rather be known for offering affordable computing solutions, said Michael Kuo, CEO of Avermedia, one of the up-and-coming players in Taiwan’s high-tech makeover.

Similar to Taiwan’s bicycle industry, its computing industry is going through a major transitional period. The high-tech industry has been the main engine of Taiwan’s economic growth since the 1980s.

However, that growth was predominantly in the manufacturing sector, which has moved in rapid fashion to China, Taiwan’s not so cozy neighbour. High labour costs are the primary reason for more than 85 per cent of Taiwan’s high-tech manufacturing moving to China.

According to Dr. Ing. Liang-Han Hsieh, general director of Industrial Technology Research Institute in Hsinchu, Taiwan, the country’s high-tech sector is facing a transition and re-organization. “It’s time we changed the old paradigm from industrial research to a knowledge-based research…and set up our own brand names,” he said.

The information communication technology sector has shifted production to China and to other areas, such as India and South America, that have a large population base that can support the research done in Taiwan.

“Taiwan is a small island and if we continued to do no-name products we would be squeezed by the cost challenges and so we have turned to developing more higher value segments,” Hsieh said.

To turn around the bicycle industry, the Taiwanese government provided manufacturers with government assistance. From there they changed from producing $50 bicycles to more high-value city bikes and mountain bikes along with touring and racing bikes. In the future, Taiwan bike makers will produce a fuel cell battery that will be integrated into a bicycle.

The government of Taiwan will do the same for its high-tech industry. The newly elected president, Ma Ying-Jeou, has vowed to improve political relations with China and will be putting forth more incentives to stimulate foreign investment in Taiwanese computing in an attempt to further this transition from a manufacturing to a knowledge-based innovation model.

Taiwanese manufacturers produce more than 80 per cent of the world’s notebooks and that production is now all built in China or South East Asia. “We are changing from an OEM model to developing our own products with our own designs and our own brand names,” Hsieh said.

Taiwan is in patent development mode. They are fourth in the world. Canada is at No. 7, but Hsieh said it is not about quantity, but rather quality.

Under his supervision, the Industrial Technology Research Institute has changed and is now focused on differentiation and integration. “We used to have 500 projects and that is now down to 50.

We do not do any more me-too products, but pioneering products so that we can lead,” he said.

Hsinchu Science Park, where the Industrial Technology Research Institute is based, is an hour south of Taipei and is considered to be the Silicon Valley of Taiwan. This place is a giant machine that makes electronics such as motherboards, cell phones and monitors. Taiwan has 14 science parks, but this one, established in 1980, is the biggest.

Hsieh said his mission is to attract high-tech companies to the park. More than five per cent of Taiwan’s gross domestic product comes from this park. There are two universities on this park with more than 20,000 students living and breathing high-tech innovation.Some of the incentives offered at the park are five-year corporate tax breaks, no import duty and commodity tax, R&D grants and on-the-job training.

“This park is like a small city with a clinic, post office, recreational facility, two bi-lingual schools, banks and gas stations,” Hsieh said.

The genesis of the parks came from the 1975 energy crisis, which seriously impacted manufacturing.Park revenues come from the high-tech companies themselves such as Acer. Acer, for example, leases the land from the park to build offices or plants. Or they can lease a standard factory from the park.

One of the first products created from the science park was the electronic watch from RCA.

Today there are more than 40 companies waiting to move into these science parks.

The park is also developing its own intellectual property. These new ventures are put in startup incubation areas and then spun off. The park has created 130 new companies since its inception.

Branding Taiwan

Taiwan’s high profile computing vendors are taking the lead in this transitional period.

Earlier this year Jonny Shih, CEO of AsusTek Computer Inc., put the wheels in motion to separate AsusTek into three independent business units. Asus will be the main brand, while Pegatron will be its OEM manufacturing arm along with producing motherboards and other computing components. The third business unit, Unihan, will handle non-PC manufacturing, such as cases and molding. The manufacturing of computing products has already shifted for the most part to China because of the high labour costs in Taiwan, Shih said as one of the reason for his moves.

In the past, manufacturing was a key strength, but over the years margins have gotten slimmer, and slimmer.

What some companies such as Acer, D-Link and AsusTek have done is focus on its brand, while leaving the manufacturing to the Chinese and Vietnamese.

Besides focusing on their own brand, these companies are also keeping important departments such as R&D, engineering and design in Taiwan. Kuo said Taiwan will keep its knowledge in the country and create many more high quality products.

This change in philosophy hit a high note last year with the introduction of the EEE PC notebook by AsusTek. This little machine became a major seller at Best Buy. It also created quite a stir in Europe and other nations in the Pacific Rim.

Before this device, the Taiwanese computing vendors’ strategy was just that – strategy. It has not yet produced any real results. This small device has put a spotlight on Taiwanese vendors again. It showed that these companies can be innovative and provide real value.

The channel has taken notice with Acer, but look for more resellers to partner with AsusTek.

The EEE PC is available in Canada and Shih said there will be many models of the EEE PC so that it can be more than just a consumer notebook. There will be more robust EEE PCs for business and the enterprise.

Bob O’Donnell, vice-president, clients and displays at IDC, forecasted worldwide ultra low-cost notebook shipments will grow from less than 500,000 units in 2007 to more than nine million in 2012.

Average selling prices for this category will be less than $3 billion in that same year.

The EEE PC is priced anywhere from $195 to $399. The three “E”s stand for economical, easy-to-use and excellent Internet experience, according to Shih, who came up with the name.

The original design manufacturer is in the midst of dramatic change led by Shih’s vision of creating a worldwide brand for Asus.

Shih said that the new vision for Asus would not necessarily mean a new channel strategy. But he did say there would be a new approach towards its channel. Its motherboard channel in North America gives Asus a base to work with. Asus plans on training this base to attend to the needs of the local market.

“The most important thing for the channel is to blend together and provide the best value products to the local market. Get feedback from customers and then respond quickly. We have to combine this together. This is a challenge for Asus and to be very honest we do not do this very well and need to drive this hard,” Shih said.

“We will pursue technology and aesthetics to perfection,” he said.Shih describes Asus’ innovation approach as a DaVinci Code of experimentation; imagination and dreaming that can be quickly created into a prototype.

“I ask employees to think about creating a masterpiece,” he added. In fact, Asus displays a portrait of the Mona Lisa made up solely of motherboards in its front desk reception area.

Called the Motherboard Mona Lisa, it symbolizes the transition happening in Taiwan from manufacturing to innovation.

Since Asus is late to market with its notebook products, industrial design has become important. The company has put the finishing touches on its first leather bound notebook and is also working on an energy efficient notebook made from bamboo.

“This is disruptive and this is my first notebook that I travel with. It is stylish and bullet proof. It gives me a pleasant Internet experience (over a smart phone). There is a blue ocean of innovation in a powerful PC market,” he said.

But Shih is not stopping at just notebooks. He wants the EEE brand to be on gaming consoles, the EEE stick gaming remote, EEE TV, EEE monitors and two other EEE products that are confidential, he said, but will be released later on this year.

Web 2.0 has created a new market for Asus, Shih said. The EEE PC is targeted as a second notebook and for emerging countries. “The EEE PC is a whole new concept and is not seen as a replacement for the original notebook,” Shih added.

O’Donnell concurred in his report, saying that ultra low-cost notebooks are a potential solution in developing countries and as a secondary devices in mature markets. He also said these types of notebooks would do well in the education market.

This switch in philosophy has also changed the way Taiwanese vendors look at Canada and the U.S.

Take, for example, GigaByte Technology Group, which is known to North Americans primarily for its motherboards. GigaByte is expanding its product line to include notebooks, smart phones and a few other products that are unimaginable.

Similar to AsusTek, GigaByte has a separate OEM/ODM business unit. Over the past few years GigaByte has been busy creating a diverse product line including communications products, desktop servers, multimedia devices, peripherals, the G-Style notebook and sub-notebook and its GSmart smart phones.

But unlike Asus, who’s slugging it out with better known brands in Canada and the U.S., GigaByte is choosing to stay away from the North American market for now.

Richard Ma, senior vice-president of corporate strategy for GigaByte, said the North American market is the last priority for the company.

GigaByte is a half billion dollar world player in computing and one of its more innovative new products is a smart phone called the GSmart.

This device has a GPS, motion sensors, a five mega-pixel camera and finger touch screen capability.

You won’t see the GSmart in Canada or the U.S., and the reason is that GigaByte does not want to compete on price with RIM, Nokia, Apple, Motorola or any other vendor.Ma said he considers GigaByte pricing to be affordable, but the company isn’t interested in slashing prices to compete with other vendors.

Sarah Su, the GigaByte marketing manager, said the phone would cost more than $500. Ma wants to sustain margins for this product and he said the company has a better chance of that happening domestically and in Europe than in North America.

“North Americans are too price sensitive,” Ma said. “Consumers can buy this product and return it in 30 days and IT products have narrow margins. The market is big, but many different channels always let the products widen and go into the price competition.”

GigaByte intends to make innovative products and not price-competitive products, Ma added.

Su said they would eventually enter the North American market, but it would take at least another year. She said GigaByte does not have the resources to mount a competitive assault on the Canadian and U.S. market places. They would rather concentrate on markets where customers are willing to pay more for more features.

Ma said that, as it stands now, GigaByte hardly makes any money in Canada or the U.S. on motherboards. He believes South American, Russian and India markets provide more growth opportunities.

Taiwan computing used to be known for making other company’s stuff.

Foxcon in Taipei makes Apple’s iPhone for example.

But that is not the case any more. The country is standing on its own, not just geo-politically, but in the high-tech marketplace as well.