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Taiwan's Tech Sector Shifts Gears

Taiwan's Tech Sector Shifts Gears

The current financial tsunami is sweeping the entire business landscape, not even sparing Taiwan's once glittering technology industry. With no bottom in sight, how can tech companies snatch survival from the jaws of doom?

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Taiwan's Tech Sector Shifts Gears

By Benjamin Chiang
From CommonWealth Magazine (vol. 408 )

As soon as the news of the financial collapse of Lehman Brothers broke on September 15, Gintech Energy Corp. president Ellick Liao, then on a roadshow in Europe, made an urgent phone call to Gintech chief financial officer Guo Yan-chen in Taiwan.

"Get to the bank as soon as you can and borrow whatever you can," Liao advised, unable to mask his anxiety. "The banks will soon be putting the squeeze on the money market."

Early the following morning, Guo and a number of employees hustled to the bank to borrow the cash, raising the company's cash position in preparation for the soon-to-break global financial tsunami.

A month later and half a world away, a surreal atmosphere was taking hold among Taiwanese businesses in China.

"A lot of businesses were setting new records for operating revenue but were really beginning to worry about the future global economic situation," observes Wang Shun-sheng, president of Synnex International China.

As the director of the China Merchants Bank met with a number of Taiwanese businesses in a Suzhou restaurant, one could not sense any wave of consumer spending brought on by the extended holiday marking the October 1 national day.

Lots of Loans, Lots of Mistakes

Amidst the current global financial crisis, banks are drawing financing from the money market, putting even more pressure on small- and medium-sized enterprises already starved for financing. Or as the China Merchants Bank director put it: "If you've made lots loans, you've made lots of mistakes. With fewer loans come fewer mistakes, and with no loans, no mistakes."

He noted that China's banks have been quietly reining in commercial lending to avoid being sucked into a wave of business failures. So even China Merchants Bank, which in the first half of this year was the world's most profitable bank, is beginning to more closely scrutinize the financial status of its clients.

In years past, the fourth quarter has commonly been the peak season for the molding and modeling industry as companies worked to develop the following year's models of notebook computers, mobile phones and other products. But within this bellwether for the IT industry, "some businesses had absolutely nothing to do in the fourth quarter this year – their clients didn't develop any new models," says Thomas Liu, who meets with more than 100 Taiwanese business clients in China monthly as CEO of the legal, accounting and investment consultancy Friendly Business Group.

"This is the most unpredictable financial crisis in history. With derivatives added on top of the subprime mortgage meltdown, it's snowballing, and economic forecasting is really a mess," says a worried Yancey Hai, vice chairman and CEO of Delta Electronics, who formerly worked on Wall Street for Citibank.

Tech Takes a Drubbing

It's been an economically disquieting year throughout the world, beginning with China's implementation of its Employment Contract Law at the beginning of the year, followed by the blizzards in that country, the Sichuan earthquake, the subprime mortgage meltdown in the U.S. and the September collapse of Lehman Brothers. Events have combined to create a financial tsunami that has now washed over major investment projects in Taiwan's tech industry.

Inotera Memories and Nanya Technology Corporation announced they were putting off an investment project to build three new 12-inch wafer foundries. And AU Optronics, Chi Mei Corp., Innolux Display Corp. and Chunghwa Picture Tubes, Ltd. have all announced they are putting plans to expand production capacity on hold.

Hsinchu Science-based Industrial Park, which last year generated nearly NT$1.2 trillion in operating revenue, is also beginning to feel the pinch, with companies based there opting not to replace departing staff, cutting shifts on production lines and adopting other measures designed to deal with the crisis.

Taking the biggest hit in Hsinchu are the computers and peripherals sector and communications, which saw operating revenue decline 14.7 percent and 16.3 percent, respectively, in August from the same month the previous year.

Lee Cheng-juan, general manager of the Taiwan branch of TNT Express, Europe's largest parcel delivery service, says her company is also feeling the effects of the current financial crisis. Deliveries of "3C goods" – a local Taiwanese acronym for computer, communication and consumer electronics products – normally account for about 60 percent of TNT's business. In the third quarter, traditionally peak shipping season for 3C companies, that figure slid to 40 percent.

"More than 90 percent of our 3C clients have actually seen shipments decline by 10 percent or remain flat," she says.

In preparation for peak cargo handling season in the second half of each year, major airlines habitually raise cargo fees in September.

"This year, the cargo's not shipping, rates are not rising, in fact there's been competitive rate slashing," Lee says.

Once the envy of all, the new royalty of the tech sector are beginning to tighten their belts as well. One software company president painfully relates how just one month ago he bought a new NT$5 million BMW. But "once the financial crisis hit and the banks started tightening credit, I had to sell it for NT$3.5 million to a used car dealer for cash to pay off loans," he says.

Raising Cash Positions to Meet the Challenge

As the financial freeze from the crisis spreads across the globe, businesses seem to be playing out a plot scenario from the movie "The Day After Tomorrow," with everybody keeping a close watch over the family firewood supply (i.e. cash) and nobody making hasty investments.

When times are good, everybody competes to see who is running the fastest. But "when times are bad, everybody competes to see who falls first, and who has the most cash on hand," says Wang Shun-sheng.

Foxconn Technology Group vice chairman Lu Songqing notes that group chairman Terry Gou has continually reminded company executives during high-level meetings to be "generally aggressive but financially conservative." Foxconn won't be able to see the high levels of expansion it has in years past and must exercise more precision with its liquidity, he says.

As regards client relations, Foxconn previously examined the operational and financial status of clients quarterly, but now it plans to conduct such evaluations at least monthly.

"At any given time Foxconn will be out in front of clients ready to apply the brakes," Lu says. "In all of our projections, we must be a little more conservative than our clients or our competitors."

Even computer graphics titan AverMedia, sporting a profit margin of better than 30 percent and capitalization of NT$2.2 billion, has raised its cash position this year to more than NT$2 billion to weather the storm.

The financial crisis has also gradually begun to erode the foundations of trust among companies, and that problem has gotten particularly serious in eastern and southern China, where everyone is worried that their outstanding accounts receivable will be forfeited.

As one printed circuit board entrepreneur in Suzhou put it: "Everyone is delaying payment. From the standard three-month period, they're now delaying until they get sued, and even intentionally delaying until the other guy's business folds."

In addition to anxieties about a lack of business, there are now anxieties about orders coming in and whether the client will be able to pay up.

'Winter Maneuvers' to Widen the Lead

Most observers are not optimistic about the economic prospect over the next several years. But some companies with exceptionally sound business operations will seek to turn crisis into opportunity and are quietly conducting "winter maneuvers" in the midst of the crisis to widen the gap with competitors.

"Tumultuous and adverse times are the best opportunity for companies to face the adversity and flex their muscles," Lu says emphatically.

Foxconn is in the midst of an organizational overhaul, evaluating technological development and managerial capabilities anew.

Despite being Taiwan's biggest OEM producer of digital cameras and the industry benchmark for production efficiency, Altek early this year instituted a Toyota-style program of streamlined management at its plant in Kunshan in China's Jiangsu Province. Overhauling all of its production lines and trimming its workforce from 7,000 to less than 5,000, it has successfully increased worker productivity by 60 percent.

At a time when most technology companies are pessimistic about future economic prospects, Altek's third quarter operating revenue this year was up 60 percent over the same period last year.

"Things will not necessarily improve over the next year, so the only way for companies to keep going is to get their own muscles into shape," says Altek investment director Martin Liu.

With tough days yet to come, "clearly we're aware we're facing a winter chill, and we should set our sights further afield to see what's coming after the winter," says the chairman of one major Hsinchu Science Park Internet communications company.

Whatever his anxieties may be over the economic future, he prefers to step back, pull in the nets, and store up his reserves for the day when the economy bounces back.

Translated from the Chinese by Brian Kennedy


Chinese Version: 疾風練勁旅 科技業迎戰不景氣

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