IC design industry in Taiwan

2.3.1. Migration of IC design industry

Many firms today are outsourcing some of their value-added activities that do not belong to their competitive strengths to more cost-effective outside suppliers. To understand why chip design industry moved to Asia, Ernst (2005) interviewed with 60 companies and 15 research institutions in the US, Taiwan, Korea, China and Malaysia that are involved in electronic design.

The author concluded that there are three factors (“pull”, “policy” and “push”) driving the chip design industry to move to Asia. “Pull” factor means: (1) the lower cost of employing a chip design engineer in Asia and (2) the rapidly growing Asian market. “Pull” factor gives global

integrated device manufacturers (IDMs) and system houses the incentives to set up their Asian design centers. Besides, to attract foreign investment, many Asian governments adopted the policy of providing low-cost yet well-established infrastructure and tax deduction to upgrade their domestic industries. “Police” factor played a catalytic role in providing necessary support to attract foreign investment and upgrade technological level. At last, “push” factor depicts that chip design has become a highly complex technology system, where different kinds of knowledge and skills need to be communicated and coordinated simultaneously. However, it’s too costly to keep a large group of diverse people at the same location. Vertical specialization in the global design network provides an efficient and flexible way to exchange the required knowledge for designing chip at a lower cost. This force push chip design industry to disperse globally and move to Asia.

As a result, the migration of IC design industry brought foreign investment and advanced technologies thus helped Taiwan establish IC design industry.

Taiwanese IC design industry plays an important role in the global production network.

Breznitz (2005) proposed Taiwanese IC design industry provides complementary assets to the Taiwanese OEMs and pureplay foundries and enhances the competitive advantage of the whole Taiwanese IT industry. The successful Taiwanese system houses and OEM companies, like BenQ and Quanta, created a large demand for chips based on second-generation technology. On the other hand, Taiwanese IC design firms provide system houses and OEM manufacturers with low-cost chips to lower their cost structure and thus maintain their competitive strengths. Besides, the existence of world’s second largest IC design industry supplied pureplay foundries with stable stream of orders to help them stay profitable as well as maintain and extend technological capacities. In short, the players of Taiwanese IT hardware industry – the system houses, pureplay foundries and IC design firms – strengthen each other’s competitive advantages and create synergy for the whole IT industry in Taiwan.

2.3.2. Characteristics of IC design industry in Taiwan

The successful companies in Taiwan IC industry exhibit some common characteristics.

Fuller (2003) compared the success of pureplay foundries with failure of DRAM industry in Taiwan and concluded that Taiwan can become an innovator in the products with the following characteristics: “a high level of granularity in the production chain”, “high volume production”,

“manufacturing-based outputs” and “no requirement for large amounts of patient capital”.

Furthermore, Taiwanese companies did not try to challenge the technology leaders directly, but adopted the quick-follower strategy. Chang and Tsai (2002) analyzed the competitive strategy of Taiwan’s IC design industry and found the key competitiveness lies in “the speed to implement”,

“the quality of the design output”, “flexibility in response to changes in specification and market demand”, and the “overall cost level”. The industry-wide standards allow product architecture to become modular. Modularity enables specialized firms to develop products that fit standardized interfaces without redesigning an entire product. That is why the firms in a modular value chain can beat competitors with speed, responsiveness and customization. The success of Taiwanese IC industry demonstrates all the aforementioned characteristics. Due to the modular industrial structure, Taiwanese IC design firms can bring their core competence (niche position) – speed, quality, flexibility and cost – into play.

2.3.3. The temporary champion curse

Although Taiwan IC design industry has achieved great success in the past two decades, there are still structural limits to firms’ long-term sustainable growth. The “temporary champion curse” phenomenon, describing the short-term competitiveness of IC design firms, was observed in IC design industry of Taiwan. Under a modular production system, a firm with small capital can select a focused niche product to entry market and enjoy high profit margin and high growth

rate in early stage. As time goes by, profit margins tend to decline and growth slow down quickly due to competition from market. If the company cannot product innovative products to meet varying market demand, the competitive advantage of the firm will not last long. Besides, there is also a growth ceiling for focused firms. There are few IC design houses in Taiwan can exceed the

“one-billion” revenue barrier. To conclude, the “temporary champion curse” describes the short-term competitive edge and revenue limit experienced by most firms in IC design industry of Taiwan. Fig. 2-1 shows the revenue growth curve of top 20 IC design firms since 1999. For the past ten years, only one company, Media Tek, has grown beyond the one-billion barrier. Fig. 2-2 shows annual compound growth rate (CAGR) and average gross margins of top 20 IC design firms in Taiwan. As shown in Fig. 2-2, most of the firms’ margins are below 40%. There is only one company, Media Tek, enjoying high annual growth rate and profit margin compared to other peer companies.

Fig. 2-1 Revenue growth of top 20 IC design houses since 1999 Source: Taiwan Economic Journal (TEJ)

Fig. 2-2 CAGR and average gross margin of top 20 IC design houses between 1999 and 2009 Source: Taiwan Economic Journal (TEJ)