During the Taiwan Semiconductor Manufacturing Company’s (TSMC) quarterly earnings call, the buzz on analysts’ tongues directly reflected the current outcome and future prospects of the Taiwanese high tech industry’s transformation.

In 2017, High Performance Computing (HPC), utilized largely in cloud-based servers, accounted for just 20 percent of TSMC’s total revenues among its four major technology platforms. By last year, thanks to a surge in bitcoin mining rigs, it ballooned to 30-32 percent.

This year, although the bitcoin craze has now passed, numerous new AI processors installed in cloud computing data centers have incorporated TSMC’s latest 7nm process, helping generate 29 percent of revenues in the first quarter of 2019 for the company.

During the April earnings call, TSMC’s CEO, C.C. Wei, stressed that the HPC sector is expected to show double-digit growth once again this year. (Read: Closing in on Industry 4.0: Unveiling TSMC’s Secret Weapon)

This figure has come under considerable scrutiny, as TSMC founder Morris Chang has predicted that HPC, the hallmark cloud computing technology, will surpass smartphones in 2020 to become the driving force for TSMC’s growth going forward.

A similar trend is now sweeping the computer system industry.

Year of Transformation in Manufacturing - Hon Hai Profits Hit 5-year Low

Fast forward to this past March, when Wiwynn Technology, a cloud infrastructure provider funded by the Wistron Group, went from emerging over-the-counter to listed stock. Wiwynn’s shocking 15-fold revenue growth over four years set off a rare tidal wave on the Taiwan Stock Exchange, as public subscription funding reached nearly NT$70 billion to set a new TAIEX record.

Last year, cloud computing became the big buzzword for Taiwanese electronics industry transformation, outpacing even the Apple concept stocks that had been hot for so long.

Although Hon Hai Precision, the poster boy for Apple concept stocks and the main assembler of iPhones, continues to set new revenue records, after-tax net profits declined for the second consecutive year in 2018, hitting a five-year low. (Online resource: 2019 CommonWealth Taiwan Top 2000 database)

Hon Hai is not an isolated case either, as the biggest blow to the information and electronics industries last year was Apple’s fall from favor.

According to a survey by market research firm IDC, by the fourth quarter of last year, worldwide smartphone shipments declined for the fifth quarter in a row, with total shipment volume dropping all the way back to the level of five years ago.

In the first quarter of the 2019 fiscal year (30 September 2018 - 29 December), the traditional high season, Apple revenues from iPhone sales declined by 15 percent over the same period the previous year. In a letter to investors, Apple CEO Tim Cook admitted that Apple’s poor performance in the Greater China region and other emerging markets was the key reason.

With change in the wind, last year businesses responded by shifting deployment. “The top five electronics companies started out in notebook computers, then moved to smartphones in the post-PC era, and must now find new products in the post-smartphone era,” observes Stephen Su, director of the Industry, Science and Technology International Strategy Center at the Industrial Technology Research Institute (ITRI).

Last year, as the post-smartphone era was ushered in, information and communications companies entered a product mix adjustment phase, with cloud computing, servers, and the Internet of Things (IoT) the major topics of transformation.

The Post-smartphone Age is Here - In Search of the Next Golden Goose

Yang Jui-lin, research director at the ITRI Science and Technology International Strategy Center, says that, judging from the status of Taiwan’s electronics OEM giants last year, one can observe information and communications companies following three trends in the post-smartphone era: the development of cloud solutions integrating software and hardware, the entry into diverse end markets such as automobiles and IoT, and investment in upstream key parts and components.

Cloud servers at Quanta. Taiwan’s tech industry formally entered the post-smartphone era last year, scrambling to stake claims in cloud computing.

Wiwynn is one example of a company that has emerged fully formed. And many server vendors are quietly growing like crazy under the umbrellas of their corporate masters.

Take Ingrasys Technology, a member of the Hon Hai Group, for example. Although the company’s revenue reporting was incorporated under Foxconn Industrial Internet, industry insiders reveal that it achieved revenue exceeding NT$100 billion last year after reaching NT$95.5 billion the previous year. This was indeed astounding growth.

Statistics from research firm IDC show that data center demands will continue to grow through 2022. The worldwide cloud IT infrastructure market was worth around US$111.6 billion in 2017, and is expected to grow to US$148.1 billion by 2022.

Emily Hong, President and Chief Executive Officer of Wiwynn Corporation, says that data centers’ demand for IT was robust last year, largely due to material shortages for solid state hard drives and memory in 2017, which in turn caused a server supply shortage. Not wanting to get caught short, clients stepped up their efforts to establish data centers in 2018.

Hong stresses that, under these conditions, the server industry reached its first pivoting phase this year (2019). Having performed sluggishly in the first half of this year, it will only regain momentum some time next year.

Against the backdrop of U.S.-China trade tensions and a slowing Chinese economy, Taiwan’s manufacturing industry performed slightly worse last year than in 2017, with total revenue growth of 8.26 coming just under the 8.44 percent mark of the previous year. This also indicates that cloud computing prospects, backed by strong growth momentum over the long term, will be the next clearly identified battlefield in the post-smartphone era.

Most Profitable Industry: Petrochemicals - On the Price Rollercoaster

Another of Taiwan’s key manufacturing industries, the petrochemical industry, continued its strong performance in the first three quarters of 2018 on the heels of favorable oil prices the previous year.

In spite of a steep decline in oil prices in October, overall it achieved an average annual revenue growth rate of 12.16 percent, a slight drop over the 14.05 percent mark of the previous year. On the other hand, it attained average profits of NT$13.7 billion, the highest among all industries.

The Formosa Plastics Group’s “Four Treasures” achieved revenue growth of 16.28 percent in 2018 compared to the previous year, the highest mark in four years. The Formosa Petrochemical Corporation (FPC) ranked third in CommonWealth’s Taiwan Top 2000 survey for profitability. Nevertheless, FPC chairman Chen Bao-lang described both last year’s operations and this year’s outlook as “cautious.”

The sudden collapse of oil prices in the fourth quarter of 2018 set the petrochemical industry on edge. International crude oil prices began climbing in the second half of 2017. Taking Dubai crude oil as an example, the price for a barrel climbed from just over US$50 to more than $80 in just a year, the highest mark in four years.

In the midst of the pricing surge, Patrick Pouyanne, chairman and CEO of French oil giant Total, predicted that the wave would continue to carry oil prices over the US$100 mark per gallon. Yet his words were still fresh as oil prices plummeted to US$48.8 within two months, a 40 percent drop. Prices fluctuated wildly in 2018, reminding observers of the painful precipitous fall of oil prices from triple digits in 2014 to just US$28 per barrel two years later.

Even though oil prices recovered over the first quarter of this year to the US$60 range, displaying upward pressure, Chen Bao-lang cautioned that the international situation is full of uncertainty this year, with the U.S.-China trade war presenting numerous unpredictable variables.

Worth noting is that several industries climbed from the back of the class to the front in CommonWealth Magazine's Taiwan Top 2000 survey this year.

Revenue Growth #5: Aerospace - Moving to the Front of the Pack

In our previous Taiwan Top 2000 survey, the aerospace industry occupied last place in manufacturing industry rankings due to negative growth. This time, on the strength of revenue growth at international aerospace giants Boeing and Airbus, it rocketed to fifth place at an 18.24 percent average revenue growth and average profitability of 9.26 percent, launching it to rank the seventh-highest in profitability. (Read: Taiwan Launches Its First Home-Grown Satellite)

Local industry leader Taiwan Aerospace (first in industry, 129th overall in the Top 2000) recorded all-time high revenues and profitability last year. Similarly, Magnate Technology and Chaheng Precision also achieved growth in both revenue and profits.

During the April earnings call, Taiwan Aerospace company president Wan-June Ma noted a growing demand for small- and medium-capacity airplanes and even jumbo jets in the future due to the development of second-tier cities worldwide. Ma predicted a demand of around 40,000 new airplanes for civil aviation over the next 20 years, worth around US$6 trillion, presenting excellent commercial prospects going forward.

The strong economy of 2017 endured through the beginning of 2018, until global upheaval surfaced in the second half of the year. Whether the manufacturing industry can weather the economic blows struck by the U.S.-China trade war, the road ahead will be bumpy and full of challenges.

Have you read?
♦ 2018 Top 2000 CEO Survey: Southeast Asia Replaces Longtime Favorite China
♦ 2017 Top 2000 CEO Survey: How the Economy is Turning Around
♦ 2016 Top 2000 CEO Survey: Majority of CEOs Dissatisfied with Tsai Administration

Translated by David Toman
Edited by Sharon Tseng