Fast, Flexible and Making a Fortune
Able to fill an array of orders with efficiency, precision and a low overhead, Taiwan’s "express enterprises" are the new darlings of the stock market and, increasingly, the secret inside the world’s latest lightweight gadgets.
Fast, Flexible and Making a FortuneBy Ming-Chun Chen
From CommonWealth Magazine (vol. 367 )
Whatever the hottest new technology products are at the moment – the Apple iPhone, computer hardware built around Microsoft's Vista operating system, or game consoles such as the Sony PlayStation 3 or Nintendo Wii – there is one thing they all have in common: Taiwan Inside.
Working behind the scenes on the popular, eye-catching products of the day is a legion of Taiwanese ""Express Enterprises,"" with awe-inspiring potential for high profit and high growth. These companies are compact, fast, agile and flexible, and they are capable of generating considerable wealth with limited capital and resources. ""Those doing it big [system assembly] aren't making any money to speak of now. Only those doing it small [parts and components] are,"" says Topology Research Institute researcher Kelia Ho.
The existence of these small but beautiful enterprises has a great deal to do with Taiwan's leading position in the global technology industry. Taiwan is the world's largest contract manufacturer of notebook computers. It is at the top of the world for semiconductor wafer contract manufacturing as well. These two technology industries that have come to dominate the world have spawned a multitude of smaller number ones.
"We can certainly predict that Taiwan's parts and components will all be number one in the future, because the customers have their foundations in Taiwan," says WK Tech. Fund chairperson Wen C. Ko.
A detailed analysis of these sixty-seven express enterprises reveals that they are for the most part involved in the design of integrated circuits, the manufacture of parts and components for computer products, or the production of game consoles, the sector that shows the greatest potential for future development. These industries have created numerous high-profit enterprises and stock market leaders that have earned the right to call themselves "number one."
Analog IC Fortunes Rise
Of the twenty stock market-listed and over-the-counter companies posting the highest earnings per share in 2006, five are links in the semiconductor production chain. The ""Three Musketeers of Analog IC"" – Richtek Technology Corp., Global Media Technology and Advanced Analog Technology, Inc. – all have their names on this list. (See table)
These days, manufacturers require that their technology products be light and compact. It is the capacity for integrating in a single chip functions that in the past would have been carried out by multiple chips that accounts for the wide popularity of analog integrated circuits.
Taiwan's analog IC industry is forecast to achieve an annual production value of NT$38.1 billion in 2008. Lee Guan-hua, an analyst at the Industrial Technology Research Institute's Industrial Economics and Knowledge Center, points out that analog integrated circuits generated 7.4% of the total production value of the IC design industry in 2005 and that this sector's production value will continue to expand by fifty percent annually over the next three years.
Advanced Analog Technology is currently sailing smoothly along on the draft of this growing industry. However, when company general manager Liu Shaw-tsong went in search of venture capital after returning to Taiwan to start his business two or three years ago, he would draw laughter from investors when he informed them he was working on analog ICs. They would say, ""Why so low-end? It's already the Digital Age. Why are you guys still doing analog?"" No one expressed a willingness to invest.
Things are different now. There can hardly be a person in the venture capital industry that remains unaware of this analog IC company that can boast of a 42% profit ratio and posted earnings per share of NT$11.7 in 2006.
Three of the top-twenty companies on the stock market and over-the-counter market in Taiwan are makers of parts and components for computer systems.
This has a great deal to do with Taiwan's domination of the global computer contract manufacturing industry. According to International Data Corp., total output for the notebook computer market reached 37.56 million units in 2003, attaining an annual growth rate of 25%. Ever since, notebook computers have maintained high annual growth in excess of 25%. DRAMeXchange predicts that annual output is set to climb to 88 million units in 2007 and that Taiwanese enterprises will account for nearly 90% of this volume.
Taiwan's control of 98% of the global markets for both desktop computers and motherboards and its hold on almost 90% of the notebook computer market have allowed it to cultivate the production of related parts and components, and thereby create an integrated manufacturing environment for the computer industry. With each link in the chain interlocked directly with the next to form a complete chain, these quick and agile express enterprises have succeeded in grabbing orders away from major international competitors.
TXC Corp., which has been reported recently to have won orders from Apple, stands as one good example. In the past, Japan controlled over 60% of the global production of quartz components. However, over the last few years, demand for quarts in Taiwan has risen to 25% of the global market due to the high concentration of electronics manufacturers in Taiwan. It is this increase in demand that has allowed TXC to grab an increasingly larger share of the market. In 2006, TXC reported revenues of NT$4.84 billion and profits of NT$830 million. These values marked annual growth rates of 41% and 73%, respectively. Its earnings per share (EPS) rose to NT$4.1.
TXC Corp. president Peter Lin notes that initially Apple continued to insist on using Japanese parts and components, but now such major high-end electronics manufacturing service and original design manufacturing firms as Hon Hai Precision Industry and ASUS all have the opportunity to win orders from Apple.
Japanese parts and components makers lack the agility displayed by Taiwanese companies. While TXC possesses the flexibility to turn out products to meet the demands of customers, it goes a step farther by setting aside materials on its own before customers have even made their forecasts. ""If you want the Japanese to get the materials ready before you place an order, that's impossible,"" says Lin.
Unrivaled at Cost Control
The ability to control costs is another strength exhibited by Taiwanese manufacturers.
Looking at the example of auto electronics, automakers in Europe and North America have come under heavy pressure over the last two years and have consequently turned to Asia for parts and components. Costs in Taiwan are an average of fifteen percent lower than in Europe and North America.
Taiwan is at its best when customers are placing larger and larger orders, when the volume of orders is heavy and steady, and prices are stable. ""In Taiwan, as long as you let me take it to mass production, it's my own fault if I can't win the contract. But how could that happen? It's impossible,"" says Actron Technology Corp. president David Hsieh.
Actron is Taiwan's only domestic manufacturer of rectifier diodes for automobile alternators. Its 20 percent global market share trails only that of Germany's Bosch and Japan's Sanken.
The price of copper, the primary material used in the production of rectifier diodes, has climbed four to five times over the past three years. Nonetheless, in these same three years, Actron has continued to lower prices for its customers. At the same time the company's revenues have grown 89.7%, its operational expenses have decreased by half, from 20 percent to 10 percent.
While Actron's revenues reached NT$1.34 billion in 2006, a total of just eight people handle all its needs for personnel, procurement, warehousing, general administration, and management information systems. ""I'm sorry, now there are a few more. It has become twelve people,"" says Hsieh, who personally goes to Starbucks to buy coffee beans for the office.
One thing remains more important than cost. The quality of Taiwanese parts and components has become worthy of the label ""world class.""
Quality Now Also Number One
Because parts and components account for such a small fraction of overall costs, the more important issue for major international companies is quality control and whether their standards will be met. Take the example of driver integrated circuits for TFT-LCD. The total cost of making one flat panel is approximately US$200, but a single driver IC costs a mere US$2. If there is a problem with this IC, the entire US$200 product can be written off.
Advanced Analog Technology's first customer, AU Optronics, waited an entire year after receiving the sample chips before finally placing its order.
Advanced Analog Technology's Liu conducted his own research of the flat panel industry as a means of gaining the trust of AU Optronics. Based on the specifications required, Liu would make a trial model of the IC with which the engineers at AU Optronics could perform testing. After seemingly endless months of this type of give-and-take, Advanced Analog Technology finally cracked open the golden nugget of AU Optronics. ""AU is gold on the periodic table. We dug up a gold nugget. Slowly, but surely, God gave us a sign that our direction was correct,"" says Liu.
Game Consoles the Future Frontier
Joining the express enterprises of 2006, a new crop of stock market leaders will arise along with the emerging game console industry. This is yet another new and wide-open frontier for Taiwan to develop.
A report compiled by Topology Research Institute projects that Taiwan's contract manufacturing enterprises will account for no less than 10 percent, or US$1.7 billion, of the global production value for game consoles in 2007. The number of part and component suppliers for game consoles is expected to be limited, due to the small number of players that control the industry – namely, Microsoft, Sony and Nintendo. Just a few companies will be able to carve up a massive market amongst themselves. This is a situation beneficial to small- and medium-sized enterprises.
In the game console industry, as long as a supplier can make it through the endless battery of assessments, there is little chance it will face replacement. ""A generation lasts five years for a console. You get five years of business at once,"" says Topology Research Institute's Ho.
The game console sector has emerged as a new frontier for the electronics industry.
The wild popularity of Nintendo's Wii is due largely to its equally well-received motion sensor remote control, whose most important component is its signal processor. And it is due to this single IC component that PixArt Imaging, Inc. has held firmly to its position as the stock market leader among IC design companies. Last year this little company generated revenues of NT$3.89 billion and posted earnings per share of NT$12.92.
"The electronics industry changes quickly and technological breakthroughs will not pass Taiwan by. Taiwan will definitely participate in this," says PixArt Imaging general manager Huang Sen-huang.
PixArt Imaging's core value lies in its complementary metal oxide semiconductors and digital signal processors. It is not just any company that possesses and can develop both of these technologies. ""There have always been game consoles. But the difference is, what does your product have that is different from others? The important thing is basic skills,"" says Huang.
A company's basic skills must be firmly established for it to have a chance of breaking into Japan's exacting game console market.
At the Sony PS3 supplier selection show in Japan in 2006, contract manufacturers went all out in hopes of securing the prized limited orders for the popular game console. The list of candidates for the supplier for the console's Universal Serial Bus integrated circuits was eventually narrowed down to a field of three, including two major world-class firms from the United States, and Genesys Logic, Inc., which is based in Sindian on the edge of Taipei City. Competition was intense. Sony scrutinized the companies on performance, compatibility, and price. ""Of course, we're very competitive on price. I don't even need to mention that. What Sony cares more about is quality,"" says Genesys Logic chief operations officer Carlos Wang.
Before working with Sony, Genesys Logic was used to customers in its market accepting defect rates of around 1000 parts per million (PPM). Sony, however, holds the IC designer to much higher standards by insisting that the defect rate remain within 200 PPM.
As the PS3 was brought to production, Genesys Logic also saw its fortunes rise. For the fourth quarter of 2006, it reported revenues of NT$456 million, achieving a 25% growth rate on the quarter. The PS3 accounted for approximately 10 percent of that income.
The emergence of these new high-growth enterprises has brought new vitality for growth in Taiwan's technology industry. Moreover, it might turn out that the next world-leading Taiwanese industry could be revealed from within this group of express enterprises.
(Background research by Jonas Lee, Ching-Hsuan Huang, Elaine Huang and Victoria Sun)
Translated from the Chinese by Stan Blewett