‘Invisible Champion’ Model Taiwan’s Way Out
Small- and medium-sized enterprises have been instrumental in making Taiwan a key link in the global manufacturing network. These invisible champions developed an industry model unique to Taiwan, making their products indispensable.
‘Invisible Champion’ Model Taiwan’s Way OutBy Sara Wu, Shu-ren Koo
From CommonWealth Magazine (vol. 628 )
Dr. Cheng-shu Kao, current Chairman of the Board of Trustees at Feng Chia University in Taichung, is a pioneer in Taiwan’s academic community of research on small- and medium-sized enterprises (SMEs). In his view, Taiwan’s development from a poor, backward agricultural society to its present position as a critical link in the global manufacturing industry chain was driven not by large corporations or the high-tech industry, but rather chiefly by the synergetic efforts of a large group of SMEs. Relying on their keen sensitivity to the global market and rapid response to customer demands, they continually refine their products and have established a global network to become invisible champions the competition cannot hope to replace.
Making Money: How Taiwanese Industrialists Embraced the Global Economy, a book that Kao co-authored with University of Washington professor of sociology Gary Hamilton, is scheduled for publication by Stanford University Press later this year. The work is the culmination of the authors’ more than 20 years of empirical research and interviews with over 800 Taiwanese SMEs, from which Taiwan’s distinct model for industry development has emerged. In this exclusive interview with CommonWealth magazine, Dr. Kao discussed the core content of his new book. The following are excerpts from our conversation, edited for brevity and clarity:
Taiwan’s industrial development experience is unusual, and differs from that of South Korea, Japan, Germany or China. I don’t like to use such terms as OEM or ODM, because I feel they do not do justice to our friends in small- and medium-sized businesses.
The term my co-author Gary Hamilton and I prefer to use is “contract manufacturing.” This is when Taiwanese parts and component manufacturers sit down with overseas customers and discuss design, manufacturing, and cost.
This is a highly demand-responsive model characterized by rapid and effective response to global market demands, and it has served as the core of Taiwan’s economic development.
Contract manufacturing is not that simple; it is rather complex. Most reasonably successful SMEs share something in common, namely products with a high degree of irreplaceability. Not that they rely on exceptional patents, but rather the capacity for being the only one able to make it happen under certain conditions of time, price, and manufacturing procedures. This is what Taiwanese companies do best, and something at which they continue to excel.
Served Global Market from Initial Industrialization
Taiwanese companies adopted this approach as the country began industrializing in the 1960s and purchasing agents for overseas companies began calling, first from Japanese and then American companies. Taiwan was still under martial law at the time, and it was difficult for local citizens to go abroad. Consequently, it was foreign companies that came to Taiwan looking for factories to manufacture for them, rather than us venturing out ourselves.
When a Taiwanese factory got its hands on a foreign sample, everyone got together to try and figure out how to make it. Without government subsidies or advanced degrees, they relied on trial and error, starting from the most entry-level products and becoming more sophisticated over time.
During that period, the Japanese and American companies were Taiwanese industry’s teachers, showing Taiwanese how to manufacture. The Pou Chen Corporation (one of the world’s largest manufacturers of athletic footwear) is one such example, starting from the production of flip-flops and working its way up to athletic shoes.
This model subsequently became the pillar of Taiwan’s economic development, largely made possible by the retail industry revolution that began in the U.S. in the 1970s with the emergence of such large retailers as Toys ‘R Us, K-Mart, and Walmart. In order to keep merchandise prices low, they searched abroad everywhere for low-cost production plants, which led them to Taiwan.
The response of Taiwanese SMEs to the new demands of the American market drove Taiwan’s economic prosperity. Although the products were not at all sophisticated, without that foundation we would not be where we are today.
Of course, it takes talent to respond quickly to market needs, or one would not know what to do with the information. Over the past several decades, Taiwanese small- and medium-sized enterprises have honed a keen sensitivity to markets and products. With their eyes open and ears to the ground, they are constantly on the lookout for any movements in the global economy and market, and can get right to what makes anything tick as soon as they get their hands on it.
Trusting You with the Job
This is what sets them apart. Otherwise, with just a few people, little money, and no natural resources, how else could they have staked out so much territory? They don’t compete with their adversaries in scale or capital; they instead go up against them in terms of response.
Apart from manufacturing know-how accumulated over the decades and rapid response, foreign brands have been willing to partner with Taiwanese companies for another key reason - Taiwanese trustworthiness.
Brands like Nike, adidas, and Under Armour maintain cooperative relationships today with Pou Chen and Feng Tay - instead of going to Chinese vendors whose manufacturing capabilities are rapidly improving and can offer lower cost - because they feel they can trust them to get the job done. The close relationship between Taiwanese enterprises and their clients goes beyond the economics of supply and demand; there are many non-market-related factors.
The most important factor is a foundation of mutual trust, Taiwan’s most precious asset and something that should be carried forward.
Many people are under the impression that, although Apple buys a lot of parts and components produced by Taiwanese companies, those companies only get a very small portion of the profits for every iPhone sold, most of which is made by the brand. So they conclude that Taiwanese companies should operate their own brands or else they will lose their future competitiveness.
This claim is partially correct. However, brands must bear sales pressure and absorb the cost when products fail to sell. They must also spend massive amounts on marketing, advertising constantly for fear that consumers will forget you the moment you stop selling to them.
Taiwan’s population of 23 million people is a limited market, with limited capital. It is too difficult to run a brand, so Taiwanese enterprises came up with this approach under such restrictions, opting to compete on responsiveness rather than size, capital, or ability to control markets.
Don’t Create Trends, Just Follow Them
Some people also like to say that Taiwanese enterprises are not innovative enough and cannot come up with innovative products. As a result, profits are not high enough, and they will be unable to compete in the future.
Innovation is important, I agree. However, inventing new things is not the only form of innovation.
Your value does not necessarily have to be in making something that no one else has ever made before, but could be making something better than anyone else, or more sophisticated. When you add new elements to an existing foundation, people will buy it.
I have an EMBA student whose company makes key parts and components for automobile directional lights. His clients include Audi, Ford, and BMW, and he has to make several trips to Germany each year. That kind of story is common in Taiwan - they don’t need their own brand as long as they work with clients and continue to refine their products.
Back when Taiwan had nothing, it was able to find its own way, and it can do so again in the future. We are not equipped to make trends, but we have what it takes to follow trends closely.
How have Taiwan’s SMEs managed to stand out and distinguish themselves? It comes down to one word: “learning.” Open up a world atlas and you can see that backward and declining nations either stopped learning or slowed down their learning. As long as Taiwan can keep learning, there will always be opportunities. (Compiled by Shu-ren Koo)
Translated from the Chinese by David Toman