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The New Tech Paradigm

Why Taiwan Still Matters


Why Taiwan Still Matters


Taiwan’s OEM model took a hit last year as PC shipments plunged and former high-tech powerhouses struggled. But new tech kings Apple, Google, Facebook and Amazon are still finding Taiwan irresistible. Why?



Why Taiwan Still Matters

By Hsiao-Wen Wang and Shu-ren Koo
From CommonWealth Magazine (vol. 520 )

Silicon Valley, the front line of a fierce war.

At 1 Hacker Way, the sign with the thumbs-up “like” symbol has become the new landmark in the age of Internet prosperity. Behind it, 14 buildings gently unfold over a 57-acre campus, the blue sky, blazing sun and surrounding palm trees all giving it the look of a luxury resort. Instead, it is the headquarters of Facebook Inc., which in 10 short years has created a community of nearly 1 billion people, big enough to be the third most populous country in the world.

Not even a hint of smoke can be detected just days later, but it was clearly from here that Facebook fired its first salvo at Google when it made a high-profile entrance into the smartphone market on April 4.

Facebook founder Mark Zuckerberg invited HTC Corp. CEO Peter Chou to join him in introducing the Facebook Home software that runs on the HTC Sense 4.5 user interface. The software replaces Android home screens and lock screens with Facebook news feed updates, taking on Google Inc. in its core business.

Google decided to return the fire, joining with the world’s largest electronics manufacturing services provider Hon Hai Precision Industry Co., to develop Google Glass, a smart pair of glasses with a heads-up display that allows the user to take a picture or video, get directions, ask questions or send messages using oral commands. It essentially replaces the search functions of regular computers and smartphones.

So what does this war have to do with Taiwan?

Taiwan has always been the ideal partner for America’s high-tech giants. In the days when Wintel (Microsoft and Intel) dominated the landscape and Microsoft, Hewlett-Packard, Dell and Intel were the big four in the tech world, Taiwan served as their main arms merchant and mercenary.

In the mobile communications age, the new big four are Apple, Google, Facebook and Amazon, all of which regularly snipe at each other. Even with the entrance of new players such as Samsung and the Lenovo Group, the Goliaths still need the support of Taiwan’s tech operators.

In the increasingly fierce fight among the new tech elite, why is Taiwan indispensable?

CommonWealth Magazine reporters infiltrated their main base of operations – Silicon Valley – to find out.

Facebook: The Internet King with 1 Billion Fans

In February 2012, Facebook’s IPO turned the now 28-year-old Zuckerberg into one of the world’s richest individuals, with an estimated net worth of US$17.4 billion (or NT$522 billion). Before he died, Apple founder Steve Jobs described him as the most likely torch-bearer of Silicon Valley’s entrepreneurial spirit.

On a warm sunny February day in California, we crossed past with the man who gained fame as a teenager and is now an entrepreneurial hero to many. Wearing his usual black hoodie, blue jeans, and sneakers, he was showing a group of about a dozen junior high and high school students around the company’s new headquarters.

At that moment, he was full of smiles, seemingly as innocent as his young guests.

The small paved alley he was following stretched 500 meters, bordered on both sides by three-story buildings. On top of one of the office buildings hung a sign with white letters on a red background reading “The Hacker Company,” defining Facebook’s position in the industry.

“Facebook occupies an interesting space in mobile. We’re not an operating system, but we’re not just an app either,” Zuckerberg told Wired in a recent interview.

Smartphone users spend 23 percent of their time on Facebook, more than any other application. The next most popular apps are photo editing software Instagram (which Facebook bought) and Google Maps, both of which occupy about 3 percent of smartphone users’ time.

“I look at this mobile trend in light of the Law of Sharing, our equivalent of Moore’s law, which states that the average amount of information that a person shares doubles every year or so. Figuring out what the next big trend is tells us what we should focus on,” Zuckerberg told Wired.

Among the big offices on the campus and influx of visitors from around the world, nobody has stopped to think that all Facebook exchanges flow through a server made by Taiwan-based Quanta Computer Inc.

Quanta, described by its chairman Barry Lam as slow but steady like a turtle, cultivated the business for 10 years. It tossed aside Dell, which had provided the original connection to Facebook, to sell servers directly to the social networking giant and become its indispensable behind-the-scenes partner.

Does that mean that the original high-tech four led by Wintel no longer need Taiwan? In fact, it’s just the opposite.

HP: Fighting to Stay on Top

If Facebook is the new darling of the mobile communications era, Hewlett-Packard, just a 10-minute drive away, represents an aging aristocrat still struggling for relevance.

Addison Avenue in a quiet Palo Alto, California neighborhood. It was here, in a tiny garage with a wooden green door nearly hidden to the side of a two-story orange brick house that Bill Hewlett and Dave Packard started their company 74 years ago with US$538 to produce a new audio oscillator. Silicon Valley was born, and the undying tradition of the “garage entrepreneur” had begun.

The tech hub that emerged has been so influential that even Taiwan, thousands of miles away on the opposite coast of the Pacific Ocean, has moved in step with Silicon Valley’s every breath.

Today, HP remains the biggest foreign buyer of Taiwanese products, procuring NT$750 billion worth of goods from the country’s suppliers in 2012.

HP ships two computers and two printers every second, relying primarily on Taiwan’s supply chain and its manufacturing services that have taken root over the past 30 years.

“HP has been global PC champion since 2006 and we continue to win all categories partly because we work closely with our Taiwanese ODM partners,” says Tony Prophet, HP’s senior vice president of supply chain operations for the company’s Personal Systems Group. Under its light-touch supply chain model, HP only procures five key components: CPUs, panels, memory, batteries and hard disk drives. It depends on Taiwanese contractors for the rest of its purchasing, design, assembly and even delivery needs.

Kai Hsiao, the director of HP’s Asia Global Procurement Services, was recently standing on a mountain in northeastern Taiwan at night photographing the lit-up Lanyang Plain below. At 8 p.m., his phone bleeped, alerting him to the arrival of a text message. Japan had just been hit by another earthquake, and Hsiao immediately ordered his colleagues and suppliers to secure the supply of key materials and products.

Within four hours, before midnight, goods that needed to be obtained and the orders that had to be given were all taken care of.

“This is our supply chain – big and fast,” Hsiao chuckles. But Taiwan can also address smaller challenges, even if they are complex. He once placed a small order for computers with 10 different hardware configurations, and Taiwan was able to deliver it in two days.

But like many of the tech elite from the Wintel era, HP is no longer the powerhouse it once was. Though it shipped 11.7 million computers in the first quarter of this year, edging out Lenovo to remain the world’s leading PC vendor, the figure was down 24 percent from the same quarter a year earlier, an indication of how much its bottom line has been hurt by not keeping up with the mobile revolution.

Of the former big four, HP is the company that has seen its market value fall the most, while the market values of Microsoft, Intel and Dell have remained relatively flat.

The decline of these high-tech giants reflects the industry’s paradigm shift, and Taiwanese companies are not immune to its perils. What skills possessed by Taiwan’s high-tech operators are outdated? What new capabilities do they need in the new age of mobile communications?

Two Obsolete ‘Old Capabilities’

1. ODM (Original design manufacturer) capabilities no longer needed: The new mobile market turns over at an unprecedented speed, meaning the “design” skills Taiwanese manufacturers touted with so much pride are no longer valued.

“Original design manufacturers” are rapidly disappearing because the new players in mobile communications are Apple disciples, operating “ecologies” and emphasizing vertical integration. They are developing their own software and hardware design as they redefine products.

“Google pretty much does everything itself. From hardware design and human-machine interface to product ergonomics and commercial models, Google takes care of them all. Taiwan’s ODMs have less opportunity than ever. All that’s left is EMS (electronic manufacturing services),” explains BenQ Corp. chairman K.Y. Lee.

2. “Supply Chain Management” no longer enough: The supply chain management know-how that was the source of so much pride in the past remains a necessary advantage in the new age, but it is not a decisive competitive edge.

The tech product cycle used to be described as “6-3-3”: six months for development, three months for selling and three months to clear inventory. Today, that cycle follows an accelerated “3-2-1” path: three months for development, two months for selling and one month to clear inventory.

“When we talk about managing components, it’s like managing bananas, only components go bad even faster than bananas,” says the retired technology chief of an international computer company, describing the anxiety he felt on a daily basis.

In the past, the speed and flexibility of Taiwan’s enterprises were seen as key competitive strengths. As the value of hardware declines, however, supply chain management may still offer cost advantages but contributes little to the software and services so essential in the new game.

What Do the New Big Four Need?

For Taiwan’s contractors to re-engineer themselves, they need to develop a better feel for customers’ needs. Once the transition from the computer age to the mobile communications era is complete, the most obvious changes will be:

Technical transformation, with the emphasis moving from hardware to software and from computers to smart mobile devices

Storage transformation, from simple storage to smart cloud options

• Social networking transformation, giving access to diverse services rather than simply making friends

• Major advances in the Internet and mobile retailing

Both the old and new “big fours” are busy developing different strategic tools to attack new markets and promote new services.

Taiwan’s high-tech operators are also hard at work cultivating new capabilities that will make them indispensable to both groups of tech titans.

When global search engine leader Google decided to jump into the mobile device market, it was drawn to the innovative software and hardware capabilities of Taiwan-based Asustek Computer Inc. (Asus).

Even though Samsung is quickly ascending as Apple’s main supplier, there are still 90 Taiwanese companies in the Apple supply chain that are essentially joined at the waist with the American consumer electronics giant.

Hon Hai Precision Industry, for instance, does more than support Apple by stocking inventory and investing in factory capacity. It also strings together the Apple empire’s tangible flows of money and materials and its intangible strategic alliance, even staying on top of key materials upstream in the supply chain. The companies have become so interdependent, they are now mutually “too big to fail.”

Some believe, however, that in the new global high-tech war where the priority is on vertical integration, Taiwan has already lost momentum.

Asus chairman Jonney Shih, who previously led his company past Intel in the motherboard market and then turned it into one of the world’s three biggest notebook vendors, isn’t buying that assessment.

“Only now are we entering the ‘final showdown of the warring states,’” he says. “It’s an open and vertical era.”

“The foundation that Taiwan has built in the past has not been wasted. Everybody should feel some comfort. There is no need to be so lacking in confidence in facing the trend toward vertical integration. Instead, we should use our strengths, focus on people’s needs, and make our customers happy,” Shih said.

He believes that Taiwan’s existing capabilities result from transformations of past foundations, evolving, for example, from stressing a product’s “technical functions” in the past to concentrating today on giving users a “happy experience.”

The winds heralding change in the global technology elite are gusting from Silicon Valley all the way to Taiwan, the war being fought by Apple, Google, Facebook and Amazon intensifying on a battleground 11,000 kilometers away.

It will be up to Taiwan’s high-tech operators to come up with new tactics to make sure the new big four will continue to include them in their battle plans.

Translated from the Chinese by Luke Sabatier