Taiwan's top 1,000 manufacturers had to endure a turbulent 2008, and many simply hunkered down during the storm – much like a submarine that takes refuge in the depths of the ocean – to wait until the tsunami passed. The catchphrases for manufacturers last year were "inventory minimization," "debt ratio reduction," and "organizational streamlining," all signs that local producers used the downturn to reinvent themselves and strengthen their internal structures, revamp their priorities and pursue flexibility instead of growth.

In 2008, Taiwan's top 1,000 manufacturers achieved combined revenues of NT$20 trillion (Table 1), 6.1 percent higher than a year earlier. But that growth was less than a third of the 18.5 percent revenue growth recorded in 2007.

(For a look at Taiwan's Top 10 Manufacturers of 2008, see Table 2.)

Last year was also a year in which the top 1,000 manufacturers generally disappointed their shareholders.

Net profit fell to NT$229.14 billion in 2008, not even one-fifth of the amount registered in 2007 and the lowest in seven years.

Taiwan's biggest manufacturer, Hon Hai Precision Industry, had been trading at above NT$200 per share for much of the second half of 2007, but fell to a low of NT$52.60 last November 21. At its shareholders' meeting in April, Chairman Terry Gou not only apologized, but also made his shareholders a promise: "I'll only retire when the stock price comes back up."

(Hon Hai rose back to over NT$100 per share May 5, buoyed by an overall surge in the market.)

The average profit margin for the top 1,000 manufacturers also took a beating, falling from 6.8 percent in 2007 to 1.1 percent last year (Table 1). The biggest reason was the abruptness of the economic slide in the fourth quarter, leaving companies no time to make adjustments.

"It was like playing a basketball game. We played pretty well for the first two quarters, but we collapsed in the final quarter to lose the game," recalls Ray Chen, president of Compal Electronics, Taiwan's sixth biggest manufacturer, and known as an economic soothsayer of sorts. "Now, the first quarter has just ended, but the real game this year will be in the fourth quarter."

Taiwan's two star industries – flat panels and semiconductors – have been particularly hard hit by the global slowdown. AU Optronics and Chi Mei Optoelectronics, the world's third- and fourth-largest TFT-LCD panel makers, posted losses of NT$26.59 billion and NT$31.4 billion, respectively, in the fourth quarter of 2008, giving back the gains of the previous nine months. Taiwan's five top panel makers – AUO, Chi Mei, Chunghwa Picture Tubes, HannStar Display Corp., and Innolux Display Corp. – lost a combined NT$138 billion in 2008 Q4 and 2009 Q1, proof of the industry's excess capacity.

Dragged down by DRAMs, the semiconductor sector was no longer a high-margin industry. Average profit margins in the industry turned negative for the first time ever at -3.61 percent. Taiwan's top four DRAM producers – Powerchip Semiconductor Corp., Nanya Technology Corp., Inotera Memories, and ProMOS Technologies – lost NT$150 billion in 2008, an average of NT$100 million per day per manufacturer.

Beverages, Precision Machinery Most Profitable

In looking at the earnings breakdown by industry in 2008, the beverage, precision machinery, and pharmaceutical and biotechnology sectors were the three most profitable industries in Taiwan.

Buoyed by stable demand for daily necessities and continued growth in China's domestic market, the average margin of beverage makers was 18.94 percent and that of food processors 6.11 percent, both outpacing the semiconductor and IC design sectors.

The electronics industry, which had long seen high margins for upstream suppliers and lower margins for downstream finished goods makers, underwent a structural reversal in 2008. 

The normally high-margin computer peripherals and components sector posted an average margin of 0.34 percent last year, lagging well behind the downstream computer system sector's average 6.2 percent margin.

"In the first half of last year, the components sector suffered from rising costs for labor in China and for raw materials. In the second half, demand suddenly dropped off, so they were squeezed hard at both ends, supply and demand," explains Wang Wan-li, head of research at HSBC Securities (Taiwan) Co. Because upstream suppliers absorbed some of the impact of the economic slump, downstream computer suppliers were able to pull through without too much damage by carefully managing their supply chains, Wang noted.

The recession has engendered a "no sacrifice, no gain" mentality among local companies. The top manufacturers have capitalized on the economic slowdown to refocus their priorities, with many steering away from the blind pursuit of growth.

When one of Taiwan's oldest electronics manufacturers, Lite-On Technology Corporation, sold its Digital Display business to Wistron Corporation last year, it was losing a division that contributed the most to corporate sales. But because the sale enabled Lite-On Technology to concentrate on power supplies and LED products and merge its business departments to more tightly control operating costs, the company's gross and net margins actually improved in 2008.

"Flexibility is number one. In March this year demand had already returned to October 2008 levels, and with business now running in three-month cycles, enterprises are competing based on how quickly they can meet customers' unpredictable requirements," says Lite-On Technology CEO K.C. Terng.

In another example of shifting priorities, Taiwan's fourth largest manufacturer, Quanta Computer, decided last year to emphasize innovation rather than growth. Although its revenues still grew by 5 percent, surpassing NT$800 billion, the company got back to basics by adjusting its corporate structure and deepening its commitment to research and development.

"This year, we won't adopt a strategy of using low pricing to get orders. Instead, we'll use applications and innovations to get orders," said Quanta Computer chairman Barry Lam at a news conference before the company's 2009 Q1 earnings conference call on April 29.

With the global economy yet to recover from the worldwide recession, Taiwan's 1,000 top manufacturers, like the submarine riding out a storm, have yet to rise to the surface. But they have begun the painstaking process of trading sacrifices for gains, moving pragmatically forward as they follow the currents at the bottom of the ocean and leaving themselves poised to pounce when the economy begins to rebound.

Translated from the Chinese by Luke Sabatier

Chinese Version: 度過風浪　聚焦後再出發