Policy implications and lessons from Taiwan

Facing external challenges such as intense global competition, fast-paced technological innovation, and the magnetic attraction of China, Taiwan must now attune to global trends, resolve internal issues, and implement through reforms and innovative plans, as it prepares to complete its march toward advanced-nation status.

After reviewing the policies and related performance of the past ten years, we might conclude that those polices played a role in supporting industry to follow the trends, especially the ABCDE program and TDP program. TDP in research institutes also helped industries to follow the emerging

technological trends of ICT. The ABCDE program helped the firms to connect more closely between Taiwan and international branding companies as well as between upstream and downstream ICT companies in Taiwan. This helped the OEM/ODM business model in which Taiwanese firms became more competitive than other areas.

Besides manufacturing, the performance of product design has also shown some major achievements in international awards. When we reviewed the cases of companies and policies, we found that it was mainly because the capabilities were built up through two national awards (SOE and NAOE, since 1989) as well as the impact from Acer. Both awards awoke companies in traditional industrial sectors to realize the importance of quality and product design and started to build up the capabilities. Then, when the ICT-related companies found that they were in a highly homogeneous product market, they invited experts in traditional industrial sectors to help and combined their product design into manufacturing processes.

As for the demand side of ICT policies, we could see the impact of deregulation of the wireless service sector in the highest density of cellular mobile telephones in the world. However, the effect of other policies, like e-Taiwan and M-Taiwan, has not yet appeared in any macro indicators, nor in the share of communication services in GDP. That means the demand side policies still need to be monitored.

6.1 Review of Taiwan’s ICT: policy problems

6.1.1 The value-added rate of Taiwan’s ICT industry is at a low ebb

Because Taiwan’s ICT manufacturing industry (computers and OA equipment; electronics and communication equipment; precision, optical, and medical equipment) has a high degree of division of labour, the supply of information and electronic products exceeds its demand and prices have plunged. In addition, Taiwan’s ICT industry is restrained by large MNC plants and threatened by catching-up countries; therefore, the added value is lower than for an advanced country on the one side, and for South Korea on the other side.

6.1.2 Domestic large plants concentrate on the OEM stage of lower value-added

Different innovative patterns and the degrees of integration of value chain activity influence the profit rates of enterprises. The operations patterns of MNC large plants in ICT, like Microsoft, Intel or Nokia, contain many value-adding activities: R&D, design, engineering, manufacturing, logistics, marketing, sales and service, and so on. R&D intensity exceeds 13.5%, and the operating profit margin reaches 17-40%. Taiwan’s large IC plants such as USMC, UMC, Media Tek, etc., are deeply committed to R&D and integrated with services; the operating profit margin also advances. In comparison, the Taiwanese IT system contract manufacturer focuses on the subcontract production mode where the rewards are lowest in value; the R&D intensity and investment are relatively low, and the gross profit rate and operating profit margin are relatively low as well.

6.1.3 Lack of original and radical R&D

ICT OEM enterprises mostly depend on the path of technology that the big international companies used. The depth of innovation is limited, which influences profit making. Because Taiwan’s ICT industry relies mainly on international OEM, its R&D and the direction of product development chiefly follow the main technological structure established by large foreign companies: “the technology of mass production” and “cost control” are much more important than “the development of original products”. Therefore, it is difficult to create new and obvious added value (Chen Xin-Hong 2005). In addition, the result of an investigation in Taiwan (TIER 2005) shows that the reasons why enterprises spend time and money on R&D but are still unable to improve the performance of management are mostly because they have no cost advantage (18.4%), the product differentiation is insufficient for meeting the needs of the market (15.7%), it is not easy to raise prices for products which are controlled by buyers (big foreign companies), and they fail to catch the most appropriate time to market (13.9%). These factors reflect that domestic ICT industries are concentrated on OEM, the scale of enterprises is too small and the homogeneity is too high. When facing the lack of bargaining chips of negotiation with large international companies and the threat of replacement by catching-up country rivals, enterprises lean towards price competition, the pursuit of low defect rates, the advantages of production cost, and winning through quantity; these enterprises neglect establishing the diversity competencies of originality and uniqueness so that profits become lower and lower.

6.2 Policy suggestions

In industrial policy, Mainland China has influenced demands in the local market for establishing infrastructure, drawing up technical standards (such as digital TV, TD-SCDMA, WAPI), installation fees and user fees for telecommunications (fixed line and mobile phones) and adjustments of household registration policy, etc., in order to support domestic manufacturers and negotiate with multinational plants. Meanwhile, on the one hand, the Government utilizes permissions to operate, the certification system, concessions for foreign investment, etc., in cooperation with policies of foreign exchange control, quotas on domestic sales and so on, to lead the local plants of MNCs to expand their local production scale continuously; on the other, it utilizes the cluster effect of local assembly industries to encourage the component industry to move in progressively by means of tax credits, proportions of domestic purchase, alternative tariffs, etc. Therefore, industrial policies play an important role in the development of ICT.

Freer and more open attitudes are necessary for Taiwan nowadays: First, the Government should cancel unnecessary restrictions on talent, funding and transportation in terms of the total planning of relevant preferential policies, actively introduce foreign technicians, and then open three direct cross-Strait links with moderate financial liberalization; these measures will encourage domestic and international enterprises to utilize Taiwan’s natural advantage of the Asian-Pacific Operation Centre to attract global resources and continuously improve the competitiveness of the industrial environment.

In terms of active measures, as for the communication industry which has entered Mainland markets extensively, an interview with III Adviser Chen Wen-Tang brought up the tactical thinking of “letting bulls into the wild, training calves and entrapping cows”; that is to say, when facing ICT downstream assembly manufacturers that consider factors of cost and market (“bulls” such as PC, Monitor, Notebook, cell phone, desktop, printer, scanner, keyboard, mouse, etc.), the Government should take an attitude of open freedom, letting them advance on the Mainland and seizing the market there. The ICT midstream industry, which refers to key components manufacturers for the needs of the “bull industries” (such as LCD, IC, battery, LED, RF, etc.), the key point for cultivating the “calves industry” depends on governmental policies. At present, except for fields/industries stipulated in the Statutes for Industrial Upgrading, there are no clear specific fields/industries setting foresight values. These midstream industries are just like growing calves; one should plant a lot of pasture, and foster it actively. Accordingly, Taiwan’s government should strategically encourage the development of core industries that suit Taiwan with preferential policies: such as encouraging and promoting R&D alliances and R&D service industries, providing high-quality information services, encouraging enterprises to develop toward R&D design, brand marketing and logistic services, etc., increasing its added-value, and keeping the “calves industry” in Taiwan. What the Taiwanese government recommends as “trapping” refers to the ICT upstream industry such as materials and equipment, which are much closer to encouraging foreign manufacturers or large domestic plants to set up R&D centres; in this way strengthening high-level R&D design.

As for the communication industry, seeing that Mainland China discourages Taiwan manufacturers from setting up factories there out of considerations of national defence, the Government should assist Taiwan manufacturers in developing new technological innovation and product integration ability, and grasping business opportunities of the telecommunication service industry by helping Taiwan manufacturers cooperate with indigenous manufacturers. As for the consumer electronic industry, with enormous assembly capability in Mainland China, Taiwan can make the best of a weak key component industry and grasp relevant market chances such as digital TV and DVD through supplying the raw materials.

Taiwan’s own information industry has developed rapidly in recent years, becoming one of the main motive forces in its economic development and making up, in a timely way, for the industrial gap left by the out-migration of labour-intensive industries. This has facilitated the smooth readjustment and transformation of Taiwan’s industrial structure and laid down a foundation for the development of the knowledge economy. Nevertheless, as said above, with the steady innovation of Internet technology and the deepening of applications of information, the ability to develop the knowledge economy can no longer be assessed on production value alone but must also take into consideration the influence of information application capability on overall national competitiveness.

6.3 Future problems in the socio-economic field

6.3.1 The management problems which Taiwan faces in the future

With the sky-rocketing price of land and wages in recent years, Taiwan has gradually lost cost

competitiveness. It is not easy to find a large area of land near the airport and harbour, altering the relevant “land category” and administrative efficiency cannot easily cooperate with the development speed of enterprises, local governments often resist the extensive development of enterprises with topics such as environmental protection, etc.; all these could accelerate the departure of enterprises from Taiwan. On the contrary, Mainland China has the advantage of low production costs, vast markets and tax preferences. Its government actively solicits business from foreign manufacturers (including Taiwan), and plans to structure the industry systems by means of measures like proportions of domestic sales and domestic purchases, and alternative tariffs, etc.

Therefore, the scale and speed at which Taiwan manufacturers enter the market of the Mainland have become larger and faster in recent years.

6.3.2 Environmental improvement

Since 2002, although Taiwan government has breakthrough practices in the residence restrictions on overseas talented people (including Mainland Chinese) and the investment restrictions on foreigners (including Mainlanders) in Taiwan. However, in a situation where the cross-strait relations are not good and the restrictions of ‘Three Direct Links’ across the Taiwan Straits are not deregulated on the one side, with the lack of an effective international airport (and seaport) on the other side, there is apparently a very long way to go if manufacturers are to regard Taiwan as the gangway which opens up Greater Chinese economic markets (China, Taiwan, Hong Kong and Macao).

Secondly, even though Taiwan has largely relaxed restrictions on foreign investment (especially the Mainland), the continuous depression of the Taiwan stock market restricts the feasibility with which enterprises raise funds in Taiwan’s financial market because of political infighting, capital outflow and global depression. Moreover, seeing that each administrative department cannot integrate opinions among themselves, many preferential measures (like offering a courteous reception at customs) fail to be put into effect; slow legislative speeds and unclear direction will influence the investment will of manufacturers. Lack of administrative efficiency has become one of the obstacles which influence the competitiveness of the industrial environment.

6.3.3 The quality of life has to improve

At present, though economic levels have improved, Taiwan still lacks a living environment where talented people are glad to live; therefore, it is still a dream that Taiwan could become a logistics centre where senior talents of enterprises get together.

Table 6.1: The S&T Competitiveness of Asian countries

Note: technology index for core innovators (e.g. Taiwan, Korea, Singapore) = 1/2 (innovation subindex + ICT subindex) technology index for non-core innovators (e.g. China, India ) = 1/8 innovation subindex + 3/8 technology transfer index + 1/2 ICT index.

Source：WEF, Global Competitiveness Report 2005-2007

Indicators Unit Taiwan China India Korea Singapore

Rank

collaboration score : 1-7

8 6 4.9 26 3.9 36 3.3 10 4.8 5 5.0

US Utility patents, 2004

cases per

technology licensing score : 1-7

71 4.2 7 5.5 Quality of competition in the

ISP sector score : 1-7

12 26 5.6 40 4.4 24 5.2 3 6.0 15 5.5

Government prioritization of

ICT score : 1-7

5 6 5.8 56 4.4 9 5.6 7 5.7 1 6.1

Government success in ICT

promotion score : 1-7

3 4 5.4 40 4.1 11 5.0 6 5.3 1 5.9

Laws relating to ICT score : 1-7 19 21 5.2 56 3.6 43 4.0 10 5.5 1 5.9