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Part - 2 continuation of above article.
Chang and other tech leaders blend Western values -- Chang took liberal-arts classes at Harvard before studying mechanical engineering at MIT -- with Asian culture. One minute Jonney Shih, Asustek's 52-year-old founder, will be discussing Six Sigma best practices and the next minute he'll be evoking the Changshan snake described in Sun Tzu's Art of War. When attacked at one end, the serpent counterattacks with the other. "We need that kind of fast reaction," says Shih.
The quick reflexes of Taiwanese like Shih make all the difference. Unlike Korea, where Samsung Electronics Co. and LG Electronics Inc. dominate, Taiwan is composed of smaller and nimbler outfits. When Taiwanese companies get too large, they tend to spin off businesses and refocus. Hence, in 2001 computer maker Acer Inc. begat consumer electronics company BenQ and LCD panel maker AU Optronics. The Hsinchu-based chip design houses spun off from UMC include MediaTek and Novatek, a designer of chips for LCDs.
Some of Taiwan's most important tech companies have also grown by acquiring technology from elsewhere. Chi Mei Optoelectronics Corp. (CMO) licensed LCD technology from Fujitsu Ltd. and hired top engineers to come up with the rest of the expertise it needed to become a leading LCD producer.
All these businesses excel at serving corporate customers. Eighteen months ago, after Intel had made a big bet on Centrino, the wireless Internet system for notebook PCs, the American company sought out a partner that could quickly get Centrino computers to the market. So Intel teamed up with engineers at Acer. Within three months, says Acer CEO J.T. Wang, they not only came up with a high-end Centrino notebook sold under the Acer brand but also mid-tier and even entry-level PCs using Intel's new technology.
Taiwanese companies will do just about anything to please customers. When Quanta was first working on what promised to be a hot new design for a top client, it had to work in total secrecy. Quanta executives guaranteed the U.S. customer that all work would be done in the middle of the night. They even had the assembly line draped in concealing black. Other Taiwanese companies combine discretion with an ability to handle even the smallest orders. HP's Hsiao says he places orders for as few as 10 PCs of a specialized configuration. The Taiwanese can process and ship such an order in 48 hours. "They can change direction overnight," says Hsiao.
This do-whatever-it-takes ethos has led Taiwan's businesses to move to the mainland at astonishing speed. "In 1999 we had about 300 employees" in China, says Alexander Lee, head of operations for Asustek in Suzhou, China. "Now we have more than 45,000." Issues of loyalty don't enter the equation. Acer CEO Wang recently asked his own Taiwanese suppliers if, as good citizens, they'd keep some production in Taiwan. "Their answer was: 'No way,"' he says.
The Taiwanese also play a vital role for rivals on the mainland. Liu Chuanzhi, chairman of Beijing computer company Lenovo Group Ltd., which just completed its purchase of IBM's PC division, says Lenovo sources components from Taiwanese companies. According to THT Research, Lenovo even buys notebooks from Quanta, Compal, and MiTAC. Liu says that's not the case.
Most important of all, the Taiwanese are the real developers of China's semiconductor industry. Chinese companies such as SMIC depend on squads of Taiwanese executives for knowhow. TSMC is still far ahead but it is starting to focus on China, too. The Taipei government has allowed TSMC to invest $900 million for its own plant in China.
In effect, Taiwan is hoping to control design and innovation while giving over much of its manufacturing to China. When U.S. companies come to Taiwan today, they say, "'This is what we want. Do you have it?"' says Billy Ho, president of MiTAC, which makes smart phones, PDAs, and servers.
Increasingly, the Taiwanese do. Two years ago, MiTAC decided to upgrade the PDAs it sells under its own brand name as well as under several different names in Europe. In discussions with the sales team, Ho recalled how, when he lived near Birmingham, England, he would get baffled by the layout of the city streets. A PDA with GPS, the satellite-controlled global positioning system often found in cars, was the answer. Today, MiTAC is No. 3 globally in PDAs, behind only Dell and HP.
The Taiwanese know they're good at such innovations. But they also know they are being squeezed on price even while they are under relentless pressure to be more creative. "Margins have come screaming out of the PC business because products have become very commoditized," says Michael Marks, CEO of Flextronics Corp. Net margins at Asustek have fallen to 6.4%, from 19% in 2001. The company's 2004 net profit of $484 million was 7% lower than what it was in 2001, although sales nearly tripled in the same period to $8 billion. Both Quanta and Compal have suffered from falling profit margins too, despite fast-rising sales.
Some analysts also wonder how long the Taiwanese will have the edge in chips. "I don't think Taiwan is in the driver's seat anymore," says James C. Mulvenon, co-author of a 2004 Rand Corporation study on Taiwan's and China's chip industries, which concludes that European and Japanese chipmakers will provide China with technology the Taiwanese refuse to share.
One way out is to find new markets. "We have to get into the next wave of products," says Ray Chen, president of Compal. "It can be TVs, cell phones, home digital media centers. We don't know yet." To do that better, Compal plans to double its R&D team. Quanta's beefing up too. In its $20 million partnership with MIT, Quanta is looking at using artificial intelligence to link digital devices that have different operating systems. Quanta boss Barry Lam also identifies autos as a promising area. As control and display systems in cars go digital, the Taiwanese can apply their expertise in making complex components for small spaces.
The other way to stay ahead for Taiwan is to create its own brands and maintain solid margins by delivering better performance and design. A leader in the branding effort is BenQ, which has its own brand of thin-screen TVs and MP3 players. Since its launch in 2001, BenQ has stressed in-house design to make its branded products stand out. Manfred Wang, who runs the BenQ design center, leads a team of 70 designers who have, among other things, come up with a PC monitor whose base can be folded up against it, taking up much less space in shipping. "Our designers are aware of the manufacturing process and that's a big advantage," says Wang, who learned his skills in Germany and once worked at Porsche.
At the heart of Taiwan's effort to reinvent itself is the government research institute, ITRI. It's into everything from new wireless networks to nanotubes that provide backlighting for displays. It's also trying to mix the hard sciences with something softer. Enter Room 131 of Block 53 on the main campus, and you'll find the Creativity Lab. The place looks more like an advertising agency than a high-tech center, with its stuffed animals and a comfy couch for a staff that includes artists, psychologists, and an anthropologist, in addition to engineers. The idea is that getting techies together with liberal arts types will help designers think more broadly, says Wen-Jean Hsueh, a PhD in mechanical engineering from California Institute of Technology who is the lab's head. "We know we have strong manufacturing and engineering," she says. "But we have to look beyond this."
Even this fresh effort has to build on Taiwan's engineering corps, which can't expand enough to meet all of Taiwan's needs. With so many companies expanding research and development, "we have to fight very hard to get experienced guys," says Hsiao-ping Lin, head of Faraday Technology, which specializes in chip design services. He hopes to hire Indian engineers, but adds, "in the long run, we will set up an R&D center in mainland China."
That shift to China is understandably of great concern to Taiwan's political and business leaders. But it may be inevitable. "The market here is so much more important than Taiwan's," says Lawrence Ho, the Taiwan-born owner of online music startup 8LaNetwork Inc., which has its headquarters in Beijing's trendy Jianwai Soho district. Ho also appreciates how hard his mainland employees are willing to work -- as many as 90 hours a week.
Taiwan clearly has lots to worry about, but it's also renowned for its resilience. Intel's John Antone compares Taiwan to long-distance runners who are being challenged but who are still in the lead. "As long as they're committed to run very aggressively," he says, "I don't see anyone catching them." Competitors be warned: Taiwan will do everything it can to stay in the race.
By Bruce Einhorn, with Matt Kovac in Taipei, Pete Engardio in New York, Dexter Roberts in Beijing, Frederik Balfour in Shanghai, and Cliff Edwards in San Mateo, Calif.
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