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Taiwan’s IT edge: built on costs, speed and change

Taiwan’s rapid growth is evidence of the importance attached to specialized competitiveness and networking capability.

Mar 17,2008
Taiwan’s IT firms have recently shown notable growth. Once a source of low-end components, Taiwan has been rising as an IT power, accounting for 99 percent, 87 percent and 75 percent of the global production of motherboards, notebook PCs and LCD monitors, respectively. An analysis of the corporate performance of more than 3,000 international IT firms shows that in 2006 Taiwan’s IT firms average growth outperformed international firms. The former increased 12.6 times in sales and 5.5 times in net profit from 1997 to 2006, while the latter grew 2 times and 2.7 times, respectively. Taiwan’s IT firms saw their sales grow at an annualized rate of 32.5 percent over the last decade, beating counterparts in India (30.4 percent), Korea (22.5 percent), China (20.5 percent), the United States (7.0 percent) and Japan (4.3 percent). Moreover, Taiwan’s share of global sales jumped to 10.5 percent, third in the world after the U.S. (31.5 percent) and Japan (30 percent). In terms of sales, the number of Taiwanese firms among the global top 100 went from two in 1997 to 13 in 2006. In particular, Hon Hai, which is better known by its trade name, Foxconn, posted $40.6 billion in sales in 2006, surpassing the better known Intel ($35.4 billion), Cisco ($28.5 billion) and Apple ($19.3 billion).
The Taiwan Semiconductor Manufacturing Company, better known as TSMC, showed an average profit/sales ratio of 31 percent over the last ten years, beating both Microsoft (30 percent) and Google (24 percent).
Structural changes in the industry itself are driving the development of Taiwanese IT firms. Digitization has reduced both the life span and the prices of technology, meaning manufacturers must produce many products inexpensively and rapidly. Taiwan’s companies were well-positioned for the change. Their competitiveness is underpinned both by good corporate management and social infrastructure.
First, Taiwanese companies became cost competitive through economies of scale in manufacturing, vertical integration and the use of China as a low-cost production base. Second, well-differentiated product lines and systematic division of labor have enabled Taiwanese firms to meet short-term delivery horizons. Third, Taiwanese firms offer high value-added manufacturing solutions for the original design manufacturer market, which covers design as well as assembly and mass production.
Competitiveness is also built into the social infrastructure for Taiwan’s IT. First, linguistic and cultural similarities have made China Taiwan’s largest export market and low-cost production base. Second, the Taiwanese government has supported the development of the high-tech industry by building industrial-technological clusters. Such efforts have turned the island territory into a huge “Silicon Valley.” In addition, the government offers a range of tax incentives. Finally, small- and medium-sized IT companies have developed within a culture of challenge and coexistence that stimulates startups and inter-firm cooperation.
This rapid growth is evidence of the importance attached to a company’s specialized competitiveness and networking capability. Taiwan’s companies specialize in manufacturing areas that were once regarded as a low value-added, but they have grown by handling the needs of global IT firms. They have worked with global companies to secure the necessary resources and capabilities. They have thus established themselves as the manufacturing mecca through specialization and cooperative division of labor.
Korean IT firms are faced with a big challenge from Taiwanese counterparts relying on ultra-low prices and collaboration with leading global players. How can they respond? Obviously, Korean companies cannot compete on costs. Instead, they must improve technological and qualitative competitiveness, while exploring new ways to maintain a leading position in the global IT industry. Be alert, Korea!

The writer is a research associate at the Technology & Industry Department, Samsung Economic Research Institute. Inquiries: kdkwon@seri.org.



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