Most discussions about Taiwan's future pivot along the China-Taiwan axis. With $1 of every $4 in trade going to China, that's to be expected. But a side effect of China's lengthening shadow is increasing concern about the mainland usurping Taiwan's role as a regional electronics leader. However, the island isn't ready to relinquish its crown just yet.
As the market slowly improves, the old confidence is seeping back and executives are starting to talk about the brains of one of Asia's "little tiger" economies rather than the brawn of the dragon next door.
Generally, people here believe Taiwan has what it takes to remain a regional technology force. It has high-quality engineers, broad experience in setting up regional manufacturing operations, especially in China, as well as a vibrant venture capital community and a predictable business environment. Moreover, thinking about China has undergone a change, and technology development on the mainland is no longer so much feared as applauded. More and more people here, including some government officials, believe that China's rise will benefit Taiwan's economy.
"Taiwan is sitting next to the biggest opportunity that globalization has created," said Eric Chen, president of Chinatrust Bank and an influential financier in Taiwan. "We can choose to ignore it or we can choose to leverage it."
The island is going to great lengths to develop new industries, too, such as biotechnology and flat-panel displays. The number of panel makers has risen from two to seven in the past seven years, accounting for 30 percent of the industry's revenue in 2002, up from just 2 percent in 1999, according to market watcher DisplaySearch. Taiwan is expected to take the top spot in overall capacity next year. "In the next few years, Taiwan will have three [TFT-LCD] clusters. And with this kind of cluster, and continuous capacity expansion and component localization, we can really build up a very competitive business," said H.B. Chen, president of AU Optronics, Asia's third-largest supplier of panels.
Biotechnology, meanwhile, has become the latest buzzword in Taiwan. The man most closely linked with the island's hope of making it the next technology mother lode, some 30 years down the line, is Johnsee Lee, who has taken over the mantle at Taiwan's high-profile Industrial Technology Research Institute. ITRI has spun off the likes of United Microelectronics Corp. and other tech companies that have become the backbone of the IC industry here.
Unlike his predecessor, Shih Chintay, who was well-steeped in ICs, Lee is a biotech man, and his appointment as president sends a signal about the organization's new direction. One of his biggest challenges will be restoring some of ITRI's relevance to the technology industry. During the past few years, ITRI has been the victim of its own success. The industry it spawned has become fast and adept at commercializing new technologies, leading some to wonder about ITRI's usefulness. There is also criticism of the agency's cumbersome, bureaucratic nature. Lee says he is fomenting change from within, pushing people toward more basic research and encouraging them to take greater risks. That's a big culture change, especially for junior staffers afraid of failure. But Lee asks, "How can we be a pioneer or a scout if we are running behind?"
Although ITRI still spends about 45 percent of its budget on mainstream IT research, it is expanding into nanotechnology (10 to 15 percent) and biotechnology (10 percent). This portion will probably grow as Lee gambles more on the promise of these new areas, where there is still plenty of frontier to map. "Higher risk for higher return," Lee says.
At the same time, companies like display giant AU Optronics will continue to leverage the low costs in China for more labor-intensive work, such as module assembly. The ease with which Taiwanese companies can locate reliable China-based manufacturing will continue to be an advantage, said Paul Hsu, a managing partner at law firm Lee and Li, which counts many tech companies among its clients.
Moreover, it will still take some time about 10 years, by most estimates for China to get to the point where it will begin to nibble on the higher-value products that Taiwan is offering.
Already, there are signs that the big-ticket investments in China fabs over the past few years may benefit from a slowdown, so that the technology can be absorbed. "Capacity-wise, China looks like a threat to Taiwan, but they lack breadth and depth," said Chris Hsieh, a semiconductor analyst for ING Barings who visits China frequently. "I am slightly more conservative on China's pace of progress than I was 12 months ago and that is mainly from the lack of sophistication."
Hsieh noted that more than 50 percent of the capacity in China will turn out DRAM and flash memories next year. That has prompted him to downgrade the mainland's threat to Taiwan's fab manufacturing industry, from early 2004 out to 2005 or 2006. "Each time I visit, people seem to show the same road maps, but the dates have changed," he says.
'Still the epicenter'
There are still a lot of weaknesses in the design capabilities of the Chinese fabless community, too, said Jodi Shelton, executive director of the Fabless Semiconductor Association, which opened its Asia headquarters in Taiwan last month. She believes China still faces significant hurdles to realizing its potential, such as poor innovation capability, little experience in system architecture and product definition, and lagging marketing and sales operations. Beyond that are social and structural concerns, such as high unemployment, a troubled banking system and a questionable regard for intellectual-property protection. "Although we hear a lot about what is going on in China, in terms of the number of companies there, it's still rather insignificant when compared to Taiwan," Shelton said. "Taiwan is still the epicenter in Asia Pacific."
Some go further, and argue that the China "chip gap" the difference between local demand (estimated at $27 billion in 2004) and local supply ($6 billion in 2004) isn't as severe as some China-based business people say it is.
"Why doesn't anybody point out that probably 90 percent or more of that $27.6 billion are chips going into electronics products assembled in China and immediately exported to markets such as the U.S., Japan and Europe?" said Craig Addison, a longtime China watcher and the author of Silicon Shield: Taiwan's Strongest Defense. "This is not true Chinese demand. The 'chip gap' theory is great if you are an IC assembly and test house, but isn't necessarily compelling for a fab."
Nevertheless, China is Asia's largest consumer of PCs and cell phones, and many executives believe there's great peril in ignoring this market.
The arguments regarding China are often simply stated. But in Taiwan, it is not a case of China wins, Taiwan loses, or vice versa. Indeed, there is more discussion today about how the island will work with its neighbor, and not so much hand-wringing over whether Taiwan will have a place in the new Asian Century. Clearly, the highest priority now is building a mutually beneficial relationship with China. Already an estimated 1 million Taiwanese are living on the mainland, equivalent to about 5 percent of the island's population. Nearly 70,000 Taiwanese manufacturers there have invested anywhere from $50 billion to $100 billion, according to Chinatrust Bank.
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