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Service Innovation:

The New Engine of Growth


Taiwan's top 1000 enterprises are experiencing expanding revenues, but contracting profits. Yet many companies are beginning to turn heads by mining high added-value "service riches."



The New Engine of Growth

By Hsiao-Wen Wang
From CommonWealth Magazine (vol. 396 )

Linkou, Hua Ya Technology Park. "It's only this big," says Quanta Computer chairman Barry Lam, his voice rising as he forms a rectangular shape about the size of two name cards with his hands. Lam was showing the size of the motherboard that Quanta designed under contract for use in the world's most compact notebook computer. "We're a service company too. We have tremendous service capacity – design services and repair/maintenance services for clients," Lam, who made his bones in the manufacturing sector, says only half jokingly.

Aiming to Serve: TSMC, Quanta, MediaTek

With its vow to be "a service industry too," Quanta Computer's design capabilities have secured numerous orders, and last year the company posted impressive operating revenue figures of NT$777.4 billion, eclipsing Asus for possession of the number two ranking in the top 1000 manufacturers, just behind Hon Hai Precision Industry.

Taipei, International Trade Building. Taiwan Semiconductor Manufacturing Corp. (TSMC) chairman Morris Chang sets aside his pipe, picks up a pen and begins slowly sketching out TSMC's most recent registered trademark, the "open innovation platform." TSMC's open innovation platform provides free IC design support tools, silicon IP, and information on its latest manufacturing process technology.

With this open platform, TSMC and its clients can more closely cooperate from the initial stages of IC design right through the entire process to the finished product.

"If we didn't offer this type of service, there is no way TSMC would be doing this much manufacturing business," Chang says, softly explaining TSMC's latest competitive tool. "The price would also be different, and we would have no competitive advantage."

With "service" as its competitive differential, TSMC has erected a wall obstructing its rivals, earning after-tax profits of NT$110 billion last year, and retaining its title as the most profitable of Taiwan's top 1000 enterprises.

Hsinchu Science-based Industrial Park. If there's one thing that's always on the mind of MediaTek chairman Tsai Ming-kai, it's how to take his company's technological innovation and turn that into service innovation that can benefit clients.

"We provide comprehensive solutions, so clients can bring out a new [mobile phone] handset six months earlier," a low-key Tsai says, delicately elucidating MediaTek's winning formula.

Last year, MediaTek sold 150 million mobile phone chipsets and held a 50 percent share of China's 2G/2.5G handset market. Moreover, its operating revenue soared 43 percent last year to NT$80.67 billion, good for a rank of 37th on the list of top 1000 manufacturers.

TSMC, Quanta and MediaTek have earned their accolades and leading positions in different sectors, but they do have one thing in common – their massive earnings from high added-value "service innovation."   

Plant a Branded Flag, Take the Service Road

Once the "service innovation" credo began to percolate in the minds of Taiwanese CEOs, the lines between the manufacturing and service sectors became hazy.

Taiwanese manufacturers are increasingly relying on providing services to boost added-value and engage in differential competition. Taiwan's service industry has meanwhile continually refined and standardized its processes in hopes of setting forth into the world with the twin firm underpinnings of "branding" and "technology."

Tain-jy Chen, who is set to head the Cabinet's Council of Economic Planning and Development, is among those who argue that Taiwan's future industrial development will require "planting a branded flag and taking the ‘service road.' "

Acer would be the best exemplar in terms of this philosophy. In this year's CommonWealth Magazine survey of top Taiwanese enterprises, Acer's NT$462 billion in operating revenue landed it the title of Number 1 service company, as Acer vaulted ahead of Taiwan Power Co., which had claimed the top spot for 17 consecutive years. Following its painful departure from the manufacturing sector, Acer spent eight years focusing on its brand management to become Taiwan's top service enterprise.

So why does Taiwan now need service innovation to drive the next wave of growth?

To indulge a bit of history, over the past decade Taiwan's top 1,600 commercial enterprises have shown comfortable growth in total revenue but have seen the downward spiral of average profit margins from 7.3 percent a decade ago to 5.5 percent last year (See Table).

What happened?

"The reason is actually quite simple: Manufacturers have expanded in terms of scale, but not in terms of value," asserts National Taiwan University Graduate Institute associate dean Lee Ji-ren.

In other words, Taiwan is sinking into a bleak situation, with added-value in both the manufacturing and service sectors bottoming out.

Chintay Shih, dean of National Tsing Hua University's College of Technology Management, quite frankly finds no pride in "Taiwan Number One."

"Because ‘Taiwan Number One' does not really say anything about our value! Our added-value is on the decline – why would you want to be number one? How about settling for less than number one but making a bit more money?" Shih asks ruefully.

Service innovation is like the light at the end of a tunnel, the promise of a way out of miniscule profits.

"Taiwan will have continued economic growth only if it can come up with scalable services that can be exported to the world," says Dr. Eugene Wong, chair research fellow at Academia Sinica's Institute of Information Science and a former economic consultant to the U.S. White House. Taiwan's next step should be to transform from relentless technology chasers into pioneers in some new form of services, he says.

New Strategic Value: Manufacturing Embraces Service

The nose of the businessman in the trenches is often keener than the minds of economists. Many enterprises that began life as manufacturing concerns have been quietly engaging in service businesses.

The Quanta Research Institute in Linkou is also Quanta's global operations center and the starting point for Quanta's service transformation.

It was here that Quanta amassed its capability to grasp the needs of corporate information systems through its enormous operations experience in manufacturing – in effect, an intangible service asset.

Last year, Quanta assisted industrial computer subsidiary Kontron Asia and WiMax subsidiary Quanta Microsystems Inc. in developing a number of their own applications for Microsoft's enterprise resource planning (ERP) systems, picking up a modest NT$8 million profit.

Indeed, its 100-strong Information Department seems to have transformed into a miniature software firm, making the leap from a center of cost to a center of profit.

“Any link in a manufacturing value chain with rich knowledge content can become a service," notes Chintay Shih, a big promoter of the science of service.

Quanta even has future plans to cooperate with Microsoft and Chunghwa Telecom in opening the wallets of small and medium-sized enterprises on both sides of the strait with high quality, low cost business software. Quanta chief information officer T.J. Fang reckons that if all parties agree, Quanta could expect to gain operating revenues of NT$500 million annually.

But the information management and global planning capabilities of Taiwan's manufacturing sector are certainly not limited to a paltry NT$500 million.

"Of greater strategic value than NT$500 million is expanding and solidifying the global supply chain of Taiwan's technology industry based on ERP sales," Fang says while sketching out a blueprint for "new manufacturing exports" on the whiteboard.

With its leading position, Quanta, for example, could sell turnkey assembly lines for SMEs in emerging economies to set up plants, and then provide them with the software. This would also provide another client base for Taiwanese component suppliers and stave off merciless price slashing among international brands.

Whole plant exports to emerging economies for small-scale, low-end technology assembly plants not only pose no threat to a high-tech goliath like Quanta, but also ensure gross profit along the entire chain of production, from upstream component suppliers on down to the assembly plants.

“How ‘Made in Taiwan' can win over ‘Made in China' or ‘Made in Korea' will depend on supply chain management," Fang says gravely.

Just as Quanta has played its information management expertise into a new service model, Formosa Plastics Group (FPG) has forged a new capacity for service from its procurement experience.

Long known for slashing procurement costs, FPG spun off its internal procurement and construction contracting systems as the independent “Formosa Technologies Corp." to serve as an online trading platform between enterprises.

Formosa Technologies' chief characteristics are economy of scale and automated invoice management, so contracting companies needn't dispatch personnel to make price inquiries or track invoices, thus greatly increasing efficiency. Even Foxconn in China solicits bids on all its contract work through “Formosa Net," seeking to utilize its low-cost, high-efficiency advantages.

Currently, electronic transactions on Formosa Net stand at more than NT$200 billion in the past year, making it Asia's biggest.

Service Revolution: Exporting Know-how

As the manufacturing sector has begun crossing over into the service sector, Taiwan's service sector has quickened the pace of its own innovation.

With nearly 6,000 retail outlets and daily serving six million customers, President Chain Store Corp. is the bellwether of Taiwan's service innovation. The company's 7-Eleven convenience stores have already moved from high-efficiency service (serving many at once) to high-density service (providing the individual with a variety of services), from a change in volume to a change in substance.

7-Elevens are increasingly becoming more like community service centers. It's hard to imagine, but last year, the average Taiwanese paid seven utility bills, credit card bills or other bills at a 7-Eleven store. Walking into a 7-Eleven you can use the online i-bon system to purchase reserved cinema tickets or high-speed rail tickets. You can even buy an NT$1 million transport insurance policy while purchasing a motorcycle helmet. There are a variety of needs that the corner 7-Eleven can fulfill.

For future international expansion, President Chain Store won't be opening its own stores, but instead will even more ambitiously export its business model.

"Just as 7-Eleven intends to sell its business model and collect royalties, it seems the future of Taiwan lies in exporting lifestyle," says President Chain Store president Hsu Chung-jen, deeply confident in the competitiveness of Taiwan's lifestyle.

Even Stan Shih, the godfather of Taiwan branding, says: "I'm upbeat on Taiwan's service sector!"

That's because Taiwan's more than US$15,000 in per-capita gross domestic product and discerning middle-class consumers have already helped Taiwan's service industry to forge a capability for affordable and fashionable operations.

"In new markets in China, India, Southeast Asia and elsewhere, Taiwan's experience will be more effective than that of America," Acer founder Stan Shih says with a chuckle. "We're all like a big, cheap bowl of food! Taiwan's service-industry operating know-how is best suited to developing nations. That is the competitive edge of Taiwan's service industry."

Just as the end of the road for growth of "Made in Taiwan" has come into view, it seems that service innovation has appeared in the nick of time, like a signpost guiding businesses to turn off, boldly transform and fearlessly forge ahead.

Translated from the Chinese by Brian Kennedy

Chinese Version: 1000服務創新 進攻新市場