Taiwan: How we will rule the world’s computer industry in 50 years
Ruling the world's computing industries, from African-standard to German-standard in 50 years
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Tags: business, computers, economy, Governance, Taiwan, Technology
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In 1950, Taiwan was one of world’s the poorest country, with a per capita GDP on par with the several African states such as Senegal and Mozambique. There was not much natural resources left either; between 1895 and 1945, when Taiwan was a Japanese colony, the Empire of Japan, in a bid to compete with Western empires, intensively swept up the island’s mineral resources, as well as wild animal and forestry reserves. By the time the second world war ended, all Taiwanese resources have been virtually exhausted.
At this year, the Kuomintang (KMT) had just retreated to Taiwan after losing China to the Communist, bringing with them 2 million mainland Chinese refugees – to an island populated by 6 million inhabitants, tilting the demographics heavily towards Han Chinese in expense of the Japanese and the Taiwanese aborigines. Today, the Han Chinese accounts for 98% of the island’s population.
With that, they inherited an economically-depressed island as a result of the mass destruction during World War II. Back then, farming and agriculture were the mainstay of Taiwan’s economy, but the Chinese who fled to the island wanted an industrial economy instead of an agrarian one. The sudden absorption of such a high number of refugees also strained Taiwan’s resources, leading to hyperinflation and resentment from the natives.
The United States, wary of a communist takeover, agreed to provide financial aid and soft credit until 1965, giving Taiwan the necessary capital to restart its economy. In 1953, agriculture was the largest segment (32%) of the economy, and foreign aid made up another huge component (30%). In that sense, Taiwan at this time was an aid-dependent economy with no distinction from the states in Africa.
Immediately after their arrival, the Chinese economists decided to bring industrialization to the island. Lacking in goods and materials, the government pursued a policy of “nurture industry with agriculture”. Throughout the 1950s, the Taiwanese authorities carried out an import substitution policy, taking what was obtained by agriculture to give support to the industries, diverting money from agricultural exports to import industrial machinery, thus giving birth to a small industrial sector.
Taiwan’s economic planners chose to first focus on the textile and apparel industry, a sector known for playing a large role in the early development of countries such as the United Kingdom, the United States and Japan. Textile and apparel manufacturing is recognized as an important driver of economic growth in developing countries because making fabrics is the most labor-intensive of all major industries, and countries engaged in it typically possess a large amount of unskilled labor – fittting what Taiwan was in the 1950s.
At the end of the 1950s, textile and apparel manufacturing employed as much as 20% of Taiwanese labor force. This first industrial success prompted Taiwan to enter other simple industries such as making umbrellas or bicycles. By 1963, industry has overtaken agriculture as the biggest segment in the economy. Within less than 15 years, Taiwan managed to grown self-sufficient in many of the most essential industrial goods, both for the native islanders and the new mainland immigrants.
But self-sufficiency wasn’t enough, American credit assistance ended in 1965. Taiwan needs to sell its goods abroad to earn more foreign currencies required to power further industrialization. To cater for this, the authorities established the Kaohsiung Export Processing Zone (EPZ) in 1966. “It was the first of its kind in the world,” says Taiwan Thinktank chairman Chen Po-chih. In designing this global first, “the government was cautiously testing the waters.”
The idea of a EPZ was simple, but no one in developing Asia thought of it that time. Taiwan’s well-established neighbor, Hong Kong, had developed free trade areas where goods could be imported and exported tariff-free or transshipped. The government figured that it could differentiate itself with Hong Kong by bundling in a combination of industrial park, duty-free zone and free trade area to serve potential investors in manufacturing facilities through a single channel. This new initiative became Taiwan’s economic miracle and social innovation.
The zone’s investment incentives and other complementary measures succeeded in luring foreign enterprises to build manufacturing facilities in Taiwan and take advantage of Taiwan’s relatively cheap labor to export goods. It not only helped the country to quickly accumulate foreign exchange reserves, but also giving many Taiwanese people their first taste of making money. When China opened to the world in the 1980s, they basically copied Taiwan’s economic plan to setup the Shenzhen Special Economic Zones (SEZ).
In the 1960s, the Western economies were booming, and at the same time the factories of industrialized nations were facing problems of rising wages and higher costs. By this time Taiwan had established basic industrial infrastructure and also a pool of low cost semi-skilled labors. The island actively competed for foreign investment with South Korea, Singapore and Hong Kong. In the role of a manufacturing relay station, the island of Taiwan soon became a link in the international system of division of labor.
Taking advantage of Taiwan’s EPZ, US-based Philco initiated the local assembly of integrated circuits (IC) on the island. Germany-based Bosch set up Taiwan’s first optical lens factory in the Tantze Industrial Zone, and Japan-based camera and lens maker Canon built its first overseas production facility there.
In just over a decade after the first EPZ was created, Taiwan had emerged from the ranks of least-developed countries and was quickly narrowing the gap with advanced nations. The island has not much natural resource, but an innovation called EPZ successfully turned Taiwan’s sandy silt into an inexhaustible gold mine, swiftly developed a worldwide reputation. Foreign leaders, economists, and businessmen from around the world, including countries as diverse as South Korea, Indonesia, Guatemala, El Salvador and Saudi Arabia began to visit Taiwan.
South Africans not only came to learn. They even hoped a Taiwanese team would help them develop, operate and manage an EPZ in South Africa. When Shenzhen in southern China took its first development steps, it headhunted old hands from Taiwan’s EPZ and even appropriated the term “export processing zones” for their industrial parks.
Going into 1970, Taiwan is now comfortably above Africa in per capita GDP, but still below other developing Asian states like Malaysia. In 1971, Taiwan achieved a foreign trade surplus for the first time, signaling its industrial policies was heading in the right direction. The issues was that although the EPZ earned Taiwan’s first fortune, investment remained inadequate, capital markets were weak, and the country was still poor.
The 1970s was a period of challenges for Taiwan; in 1971 it was expelled from the United Nations in favor of the Communist government in China; the US was normalizing its relationship with Beijing, ultimately to dump Taiwan and recognized China in 1979; in 1973, angered by Israel’s victory in the Yom Kippur war, the Arabs initiated an oil embargo against the world, leading to the 1973 energy crisis which hit Taiwan hard.
In a sudden, the industries, security and economy of Taiwan were threatened. With its political status in dispute, foreign investment had slowed and will clearly not become an important component in the Taiwanese economy, unlike Singapore or Hong Kong. The government of Taiwan decided that it could not depend on American or Japanese companies anymore, and proceed to shape its own economic destiny.
The process of industrialization and the development of foreign trade and exports were accelerated. The Taiwanese quickly developed small firms that copied or licensed technologies from multinational corporations. Due to the perception that locally produced electronics items were of inferior quality, Taiwanese firms targeted emerging markets in Southeast Asia, the Middle East and Latin America. Revenues from those exports were re-invested into technological innovation, subsequently enabled the companies to reach economies of scale and eventually produce quality products.
American diplomatic shift means Taiwan is now exposed to aggression from China. There is an urgent need to modernize the military, something that would require a strong technological sector. But the economy was falling back due to high oil prices, and foreign investments were retreating over the island’s uncertain political future. The Taiwanese authorities then decided to take a big gamble.
The government borrowed heavily from international institutions to work on its carefully drafted ‘Ten Major Construction Projects’, building up key infrastructure which Taiwan believed the country lacked such as highways, seaports, airports, and power plants. The projects ultimately cost over NT$300 billion in total, and Taiwan paid back all its foreign debts in 2011.
Amid catastrophic high oil prices during the 1970s, the Taiwanese massive nationwide construction projects sustained the economy and re-balanced the slowdown. The national building projects were completed in 1979 and are later proven to be highly essential in the country’s economic transformation; they resulted in Taiwan having one of Asia’s most developed infrastructure, conducive to the subsequent high-tech development and serving as the basis for heavy industrial development. Taiwan’s economy began to stabilize in 1980, and eventually became one of the Four Asian Tigers.
By this time, there were 3 other rapidly growing Asian economies; Singapore, Hong Kong and South Korea. The Koreans posed the biggest threat as they were twice as populous as Taiwan and hence more labors to power their industrial growth. South Korea is also looking forward to grow its technological industries, same reason as Taiwan, to fend off North Korea’s aggresion. A head-to-head competition is unwise and impractical, instead Taiwan ventured into industries the Koreans were weak at.
Building technological competitive edge must be done fast, but it takes time to train Taiwanese technicians and engineers, not to mention playing catch-up with Japan and the West. To promote industrial research and development, the government began establishing science parks and economic zones which provide rent and utility breaks, tax incentives and specialized lending rates for start-ups. The first of these, the Hsinchu Science Park, was established in 1980.
To kick-start the progress, Taiwan created the Industrial Technology Research Institute (ITRI), headquartered within the park, to nurture its tech industry. State-owned technology groups such as Electronics Research and Services Organization (ERSO) were also established, with the two having sole mission to acquire foreign technologies and integrate them back into Taiwanese industries.
ITRI played a vital role in transforming Taiwan’s economy from a labor-intensive industry to a high-tech industry. It has offices in the United States, Japan, Russia and Germany to secure the transfer of technologies into Taiwan. In 1977, it transferred IC (integrated circuits) manufacturing processes from the US to Taiwan, leading to the foundation of the nation’s semiconductor industry. Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC), both traced their origin to the ITRI, are the world’s largest and second largest contract chipmakers today.
ERSO moved to acquire the complementary metal oxide semiconductor (CMOS) technology used in IC chips from US-based RCA Corp., serving as Taiwan’s admission ticket to the global semiconductor industry. The success of Taiwan’s technocracy-centered economic planning can be seen in 2007, when the Taiwanese semiconductor industry overtook that of the United States, to be second only to Japan. Later in 2011, Taiwan surpassed Japan to become the world’s largest semiconductor manufacturing nation. Taiwanese companies currently hold a 69% market share in the world’s production of semiconductor wafer foundry.
The government also established China Development Corporation (later renamed China Development Industrial Bank) and the National Development Fund to provide new sources of long-term financing for Taiwanese businesses. The nature of China Development’s loans differed markedly from those of ordinary banks, and its staff needed to be highly familiar with the industrial sector, technology and financial analysis. Technology giant Acer Inc. stands out as one of the major success stories of this financing initiative.
Done with semiconductor, in 1983 the ITRI developed a clone of the IBM PC, in which it later formed an alliance with the island’s notebook-PC companies. Led by Taiwan’s Quanta Computer Inc. and Compal Electronics Inc., Taiwanese companies eventually went ahead to produce 89% of the world’s laptops for multinationals the likes of Apple, Hewlett Packard (HP) and Dell, with its own domestic brands include Asus and Acer. By mid-1980s, multinational electronic firms were flocking back into Taiwan.
Following the success of the first park, the Southern Taiwan Science Park (STSP) was established in 1996 with a focus on optoelectronic. The second park likewise, succeeded in its goal. The Taiwanese optoelectronics industry output (including flat panel displays and photovoltaics) went from negligible to a total NT$2.2 trillion in 2010, representing 20% of the global market share. Among them, led by AU Optronics, Taiwanese companies are responsible for producing 69% of the world’s LCD monitors.
Of the biggest Taiwanese tech companies is Foxconn, who single-handedly account for 50% of the world’s EMS (Electronics Manufacturing Services) market, and together with other local EMS firms, Taiwan-based companies now produce 84% of the all tablet computers on the planet. The twenty top information and communication technology (ICT) companies in the world today all have international procurement offices set up in Taiwan.
The election of independence-leaning President Chen Shui Bian in 2000 however, angered China, who restricted trade and investment. For the next 8 years, Taiwanese technological firms would lost their competitiveness against their South Korean peers like Samsung, who took over Taiwan’s lead in smartphone, memory chip and display panel markets, but is unable to undermine the island’s semiconductor, computer and computing peripheral industries.
Taiwan and South Korea are highly competitive with each other, just like Singapore and Hong Kong, whether it be in sports, brand names or economic performance. In the past 20 years the two countries’ economic growth rates were on a par, but since 2000, South Korea has been trumping over Taiwan. Fearing they will lose more ground, a number of Taiwanese manufacturers are carving out alliances with high-tech companies in Japan and the United States that are also facing off against Samsung.
The Taiwanese has an advantage though, it has a diverse base of companies which include Foxconn, HTC, Acer, Asus, BenQ, Gigabyte, Mediatek, Pegatron, Quanta, Realtrek, TSMC, UMC, VIA and Wistron. These companies maintain a relatively good relationship with other international technological firms.
In contrast, Samsung Electronics alone already made up 15% of South Korean economy. The company has previously been known for its position as a manufacturer of components such as lithium-ion batteries, semiconductors, chips, flash memory and hard drive devices for clients such as Apple, Sony, HTC and Nokia. But in recent years, it actively stepped up to become their deadliest competitors. In any event the emerging Taiwan-Japan-US technological alliance manage to push back Samsung, the Korean economy may suffer serious setbacks.
Taiwan technological sector today dominate the world’s computing industry – forming an indispensable partner in the global value chains of the IT industry. Information and communications technology now makes up one-third of GDP and high-tech exports allowed Taiwan to build up the world’s 6th biggest foreign reserves at $406 billion, for an island of 23 million with little natural resources. In essence, it is the second richest resourceless nation after Switzerland.
The transformation of Taiwan from an aid-dependent state on par with Africa to a world-class developed economy, is popularly termed as the ‘Taiwan Miracle’. In 1962, Taiwan had a per capita gross domestic product (GNP) of $170, placing the island squarely between Zaire and the Republic of Congo. But by 2012 Taiwan’s per capita GNP, adjusted for purchasing power parity (PPP), had soared to $38,749 – nearly similar to that of European industrial powerhouse Germany’s $39,028.
How Taiwan did it? “You absolutely cannot ignore the importance of the strong will among government officials at the time to develop the country,” says Chu Wan-wen, a research fellow at the prestigious Academia Sinica. “The financial officials who drove the initiatives saw industrial development as the country’s savior. They weren’t interested in development simply for the sake of development, but rather for Taiwan’s salvation and to help it catch up with the West. They were always careful and always thinking 20 years ahead.”
