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Weighing in on Taiwan's evolving manufacturing industry

Posted: 03 Jan 2014 ?? ?Print Version ?Bookmark and Share

Keywords:Brookings? manufacturing industry? IT? electronics?

Brookings, a U.S. think tank, has released a report indicating that Taiwan's economy has shifted to a virtual dependency on IT supply chain businesses. The paper also highlighted some serious implications for OEMs and for the greater East Asian electronics supply market.

For most of the second half of the 20th century, Taiwan built an economy on basic manufacturing. That's long over: the textiles and plastics with "Made in Taiwan" labels, a l970s cliche in the rest of the world, no longer fit the island's highly evolved economy. The numbers are starting to reflect that. Exports to the European Union, Japan and US are down broadly, and more than half of Taiwan's exports go to neighbors in Association of Southeast Asian Nations (ASEAN), the Southeast Asian trade body. And more and more are from electronic components, part of an industrial policy shift stressing supply chain businesses rather than retail. From 2006 to today, IT grew to represent a massive 30 percent of all Taiwan industrial activity.

The Brookings investigation found IT a focus, despite strong competitors all around Taiwan. There's a danger in that, but also an opportunity, they found that overall, Taiwan's industrial structure has increasingly come to be dominated by the IT and electronics sector. As a result, IT and electronics products now account for an excessively large share of Taiwan's overall exports. Electronics manufacturing now accounts for as much as a third of Taiwan industrial activity. The study found IT has been replacing previous export businesses in Taiwan at a fast pace for the past six years, starting in 2006.

If true, what does this mean for offshore OEMs? The clearest shift is likely to be seen in research and innovation. Taiwan manufacturers had to steeply undercut competitors so far, because they didn't have the savvy to compete on innovation.

"...For many years, Taiwan manufacturers relied mainly on an OEM contract manufacturing business strategy," the Brookings team noted. "The main focus in contract manufacturing was on raising the efficiency of production processes, rather than on developing key technology or researching the end-user market."

That's likely to change, if Taiwan is to continue betting so heavily on IT. Innovation in both efficiency and in component quality and speed is more central to electronics manufacturing that other traditional Taiwan manufacturing. That means if Taiwan is to really get in the game, it will have to catch up to competitors not just on capacity, but also on research and development.

It hasn't yet, the Brookings report found. "Even the IT and electronics industry, which has been the main focus of the government's industrial policy and guidance efforts, has largely failed to move beyond the contract manufacturing model," with a lack of "their own brands and distribution channels" handicapping Taiwan efforts to compete.

For Taiwan, that's a challenge for today. For OEMs, however, it may be an opportunity for the near future. Taiwan suppliers have an enormous incentive to move beyond traditional contract relationships, and partners that help them do that would be well-positioned in the long term.

It's not often we see the early stages of a giant manufacturing force's move into IT. And long term, it's hard to bet against Taiwan, if history is a guide. Chances to make those kinds of bets don't come along often.





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