What strategy should Taiwan follow in the digital economy era?

In pondering the question, Google Taiwan managing director Chien Lee-feng looked at Google’s own history. Google, he said, made its name on software and the internet and then launched the operating system Android to penetrate the hardware sector, ultimately leading a global trend toward software-hardware integration.

Chien has witnessed Taiwan’s industrial development over many years, and he believes the country is facing two major divides that may hinder integration: one is the gap between new and old industrial models and the other is a generational talent gap. If the country hopes to incubate emerging industries, Taiwan’s public, academic and private sectors need to move closer to the middle, Chien suggested.

The following are excerpts of a CommonWealth Magazine interview with Chien, in which he describes in his own words (translated from Chinese) where he thinks Taiwan may have advantages in the economy of the future and the strategies that could build on them.

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As long as your island has not sunk, it indicates that you have advantages. Two million Taiwanese have moved overseas, but the island has not yet collapsed. That’s pretty amazing. Where else can you find people who have bled for 15 years and survived? Only a minority of people who are very healthy mentally can withstand such pressure; it’s just that the advantages of Taiwan’s environment have not been appreciated.

Taiwan’s most fundamental problem is that it doesn’t have emerging industries. The problem isn’t that its old industries having done poorly. Ten years ago, we were worried those industries would face problems, but 10 years later, most of those companies are still around. Despite low gross margins, semiconductors have reached new heights and the electronics sector remains alive. Very few companies have gone under; it’s quite remarkable.

So the competitiveness that has been accumulated over the past 30 years still exists. But why aren’t there emerging industries? Because talent continues to flow abroad, making it impossible for Taiwan’s emerging industries to get off the ground. Startups ultimately need entrepreneurs more than other kinds of talent.

Too Much Left Unspoken

Taiwan’s big emerging industry vacuum is actually the result of a big vacuum over the past 20 years caused by two main factors: the lure of China, causing talent to leave, and the inability of Taiwanese sectors themselves to make the necessary adjustments.

Because industries did not adjust well, the hardware sector has left behind many ill effects even it has performed extremely well. In the B2B arena, for example, there were many things that could not be said, in part because contracting orders often resulted from “close-lipped” loyalty and in part to protect commercial secrets. So only factory bosses knew the advantages of their respective sectors – outsiders had no way of knowing what they were. But if they are not talked about, you can’t create horizontal innovation.

From the point of view of support and cultivation, do hardware businesses with ample resources need to invest more aggressively in startups? No, just as the electronics sector is not responsible for investing in the software or hardware sectors.

Actually, there’s a division of labor in the electronics business, and the distances between companies are substantial. If you look at the distance between Google and TSMC, for example, there are more than 10 levels of companies separating the two, so there’s no reason for (TSMC Chairman) Morris Chang to be able to see the direction in which Google is investing. Our shortcoming is that we want to take the extreme responsibility seen at one end of the spectrum and take it to the other extreme. That’s unrealistic. Whose problem is that? Actually, the problem is that there are no financial investors or venture capitalists playing intermediary roles.

Taiwan has never had a Silicon Valley-like startup model mindset because Taiwan has relied on a contracting model.

The typical scenario was people working for companies in a supply chain spotting a high margin product and deciding to set out on their own to produce the product themselves. They didn’t need to develop a market because the market and product already existed, and they could borrow money from a bank to get their business going.

The Silicon Valley startup model involves entrepreneurs “printing money” and investors “recognizing” the “money” and giving it a valuation. Taiwan’s old economy companies never experienced a high-valuation period because they have been in the habit of determining value by the amount of capital invested. That formula does not include any value for “human capital,” and if talent does not have value, then an entrepreneur, even if he is patient, will not be able to attract and build an entrepreneurial team.

Overall, Taiwan is facing two major divides: the gap between new and old industry models and a generational talent gap. They would appear to be major problems, but to solve them, it will take money. Wherever money flows, there’s integration.

Take New Tack on Investments

What I would suggest is for hardware vendors to take different tacks in investing and not feel obliged to invest in a company that complements their capabilities. That’s too pragmatic. The new direction should be something that right now appears insignificant. If an investment is made, it should be put into talent and be considered as an upfront investment.

Considering the gap between industries and talent, both sides need to understand they’re at the two ends of the scale and need to move toward the middle. Businesses need to understand the concept of human capital, while entrepreneurs need to know that having business experience helps starting a business in Taiwan. The best kind of training is to shuttle between software and hardware companies.

To me, the most unfortunate thing about the Taiwan software talent problem is that Taiwan’s software talent has not taken notice of existing sectors’ competitive advantages and lacks industrial experience. So the ideas Taiwan’s entrepreneurs come up with are often not suited to this land. If there are startup ideas that are not appropriate right now, let them fall. Once that happens, people will change their models. Entrepreneurship is about trying over and over again.

Compared to the amount of money Taiwan wastes, the amount lost on those investments is really limited. The government’s National Development Fund has invested a few hundred million Taiwan dollars in startups and fueled tens of billions in value. That’s printing money. You have to use this “printing” process, but the new government seems to still have a GDP mentality. If that’s the case, then we’ll never see (a startup boom).

With that in mind, we don’t initially need to worry about the direction of investment. We need to be concerned about talent, because talent will decide the directions in which to go and eventually succeed after several attempts. So we don’t need to help them figure out the right direction; we should first get them to markets.

Exploit the Advantages of Democracy

In terms of education, integrating schools is more important than anything else. Emerging industries basically have to cut across different fields; there is no emerging industry that involves only one discipline. But beginning at the campus level, Taiwan has never pursued integration. At National Taiwan University, for example, its Department of Electrical Engineering and Department of Computer Science & Information Engineering have not integrated at all. Students simply follow their courses of study. If schools were to integrate, they could cultivate emerging industry talent in three or four years. When companies cultivate their own talent, it’s a slower process.

In terms of imported talent, a lot of talent from Europe is concentrating in England, which is becoming like Israel. Israel’s survival in part is because it has become an outer appendage of Silicon Valley, and London now exists as the outer periphery of  the West where investment and talent are converging. They are technology providers rather than service providers.

That’s the road Taiwan should take. Taiwan is China’s Israel, although the young generation doesn’t seem that willing to go that way.

Taiwan’s industries need to acknowledge that they are next to a big market. People who are smart enough will be able to take advantage. Cutting-edge technologies that take only 1 percent of Taiwan’s market won’t be able to survive, but they’ll do very well if they take 1 percent of China’s market. We should follow this concept. Electronics industry-related software needs to push itself to another level and then be incorporated into key technologies that can turn companies into big market technology providers.    

The biggest difference between Taiwan and China is Taiwan’s democratic form of government. Aside from allowing people to innovate, an even more important aspect of democratic societies is the sense of trust. No matter what, Taiwan’s next generation will have a high sense of trust and be of a high overall caliber and well-suited to the service sector or high-quality technology sectors such as health care.

Taiwan still has many advantages stemming from its past success, from the strength of its old industries and the high caliber of its talent to the sense of trust brought by democracy, and these advantages should be recognized by both businesses and talent.

Translated from the Chinese by Luke Sabatier