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The Mobile Device Wars

Taiwan Takes a Shot at Apple


Taiwan Takes a Shot at Apple


In the huge battle shaping up between Google and Apple, Taiwan's high-tech heavyweights are on the front line. The anti-Apple camp must fight three fronts, and stay mindful of other rivals lurking on the sidelines.



Taiwan Takes a Shot at Apple

By Benjamin Chiang, Hsiao-Wen Wang
From CommonWealth Magazine (vol. 479 )

An epic struggle is shaping up between two titans of the mobile device sector: Apple and Google. This contest for dominance will have huge implications for Taiwan, putting the futures of 50 Taiwan-based publicly listed companies, 3.6 million shareholders and 1.5 million employees on the line.

A look at a map of the battlefield reveals two major camps. One is composed of Taiwanese contract manufacturers who are quietly operating offshore in support of Apple – the most prominent member being Hon Hai Precision Industry. The second camp is the Taiwanese supply chain for a growing number of mobile electronic devices that make use of Android – Google's open-source mobile operating system. This camp is led by HTC. (Table 1)

The battle will decide the fate of Taiwan's biggest export industry – the high-tech sector – and its ups and downs will influence everything from employment and equity investments to the lifestyles of the country's citizens.

The showdown was set off on August 15 when global search giant Google Inc. announced it would acquire Motorola Mobility Holdings Inc. for US$12.5 billion, a move that smacked of a declaration of war against Apple and a call for its partners to rise up.

Up and down the Android supply chain can be found Taiwanese players who are ready, like a modern-day version of Robin Hood's band of merry men, to respond to Google's call, and let loose their arrows at a common target – Apple.

In fact, the battle was inevitable. Since Apple filed a complaint against Taiwan-based smartphone maker HTC Corp. for patent infringement last year, the country's Android supply chain has been mired in intellectual property trench warfare.

"Everybody is terrified of being sued by Apple. Jobs will go straight for the kill," says a fund manager with a foreign brokerage, who believes that Taiwan's aggressive push into Android phones has left Apple feeling intense competitive heat.

In 2007, Google announced that it would enter the smartphone market using the Android platform, leaving it poised to emerge along with Apple as the biggest smartphone players, leaving Microsoft and Nokia in their wakes.

The wisdom of that strategy became especially apparent in the past year. In the second quarter of 2011, the Android platform had a 43.4 percent share of the global smartphone market, more than double the 17.2 percent share it had in the same quarter last year, according to market research specialist Gartner Inc. (Table 2)

Apple, on the other hand, saw only limited growth over the same period, going from a 14.1 percent share in Q2 2010 to an 18.2 percent share from April to June in 2011. Over the past year, sales of Android-system handsets have demonstrably outstripped those of iPhone. (Table 3)

The battle now being waged revolves not only around which operating system will emerge as the dominant force, but also over control of a huge market in which 470 million smartphones are sold every year.

A Chance to Release Pent-up Anger

Over the past three years, Google has built a huge Android phone empire by corralling handset vendors in Taiwan, South Korea and China with a free licensing model.

"Google has been acting like a shadow warrior, never insisting on being out front, so Apple's only option has been to sue Samsung and HTC," says a general manager of a foreign handset brand.

The Android proxy war was transformed, however, with Google's acquisition of Motorola Mobility, setting the stage for a direct confrontation between the two titans. The "anti-Apple" camp had finally gained a general.

By buying Motorola, Google "gave this gang of Taiwanese brothers the chance to release pent-up frustration by finally setting up a showdown with the enemy (Apple)," a general manager of a major handset contractor says with emphasis.

The vice president of a contractor that makes phones using the Android platform puts the patent rights battle with Apple in even starker terms.

"Google is standing on the front line and will definitely not settle with Apple. The battle will be fiercer than World War II," the executive says.

From Silicon Valley in the United States to Taipei, from the Hsinchu Science Park to the major electronics center of Huaqiangbei in Shenzhen, voices crying "Get Apple" are growing increasingly loud.

In recent days, Google's U.S. headquarters has begun dispatching people on secret visits to Taiwan-based handset suppliers to consolidate the alliance and jointly plot a strategy on fighting the patent war.

With Google as the field commander, HTC as the general, and dozens of Android phone and tablet makers following behind, the "anti-Apple" forces have raised a rebel army whose main priority is to knock off Apple, forming three fronts in the bloody battle for control of the 470 million smartphone and 56 million tablet computer markets.

Front No. 1: The Patent War

When Apple, Microsoft, RIM, and three other companies joined together to outbid Google and buy Nortel's portfolio of 6,000 wireless patents for US$4.5 billion, a panicked Google rushed to grab Motorola Mobility and its 17,000 patents for US$12.5 billion.

In terms of quantity, it appears Google came out the winner, but those in the industry know that the key to a patent battle is the strength of one's patents rather than how many you have.

"Google's patents are mostly related to software rather than to the communications standards that are so highly critical to the handset sector. In buying Motorola Mobility, Google will come out about even with Apple's Nortel patents in terms of basic communications patents. But it can't compete with Apple's haul of hardware, firmware, human machine interface, and touch patents," says Y.P. Jou, a lawyer at Wispro Technology Consulting Corp. & Law Offices and former general counsel at Hon Hai Precision Industry.

In Jou's eyes, Apple's patent portfolio and the efficacy of its offensive assaults are far superior to those of the Android camp, meaning that Google's band of forest outlaws are only brandishing big wooden swords against Apple's golden shields.

To Taiwanese suppliers, the effectiveness of Google's protective patent umbrella is even more limited.

"Taiwan is weak in basic patent areas such as baseband, radio frequency, and communication protocols. In the mobile communications industry, local suppliers will still have to bite the bullet and face a patent war that has only become more intense," Jou says.

He believes that if Taiwan's companies lack the determination to pursue technological autonomy and simply wait to be sued for patent infringement before paying big settlements, they will continue to be attacked in court and continue to cede ground and lose money.

Numbers tell the story. Although Taiwan has gained fame for its technology around the world and has the fourth largest number of patents of any country across the globe, trailing only the United States, Japan and Germany, its companies still pay NT$150 billion a year in royalties and legal settlements.

U.S.-based 3G mobile communications leader Qualcomm, on the other hand, relies on two basic patents for mobile telecommunication technologies CDMA to collect 5-6.5 percent of the sales price of every handset in royalties from its Taiwanese customers.

One of the raging patent conflicts is over baseband technologies. Among the players caught in this skirmish, HTC is being pursued vigorously by Apple on intellectual property issues and may be in the most precarious position.

In March 2010, Apple filed a lawsuit against HTC with the U.S. International Trade Commission and in the U.S. District Court in Delaware for infringing on many patents related to the smartphone's user interface and its underlying hardware and architecture. Industry insiders guessed that Apple had no interest in a financial settlement but rather wanted to block HTC from selling its products in the North American market, from which it derives half its revenue.

"Apple has two different strategies. In suing Samsung, it was simply over a patent for the iPad tablet's appearance, something that a judge could easily verify. It was simply a lightning strike to gain time," says a legal specialist, citing a decision by the Dusseldorf District Court on Aug. 9 to grant Apple a preliminary injunction and block the sale of Samsung's Galaxy Tab 10.1 in Europe, except for the Netherlands.

That injunction was partially lifted on Aug. 16, and a formal hearing will be held on Aug. 25 to determine whether the full injunction should be reinstated.

"Even though Samsung's tablets can't be sold in Europe, all Samsung has to do is cut a new mold, and in three months, it's back in business," the legal specialist says.

"But Apple's suit against HTC is based on patents covering core internal technologies. It's a deadly, time-consuming war of attrition."

To overcome this patent firewall, the anti-Apple camp will need incredible determination and be willing to fight to the death.

Front No. 2: The Business Model Battle

Even more than competition over products and standards, the two camps are locked in a battle over their respective business models.

Apple's strategy resembles a beautiful garden where high prices are charged for admission, and only those who can afford it can gain entry. Once customers are in, they can only appreciate the "flora" (iTunes, App Store) cultivated by Apple and are unable to scale the garden's high walls to get a look outside.

At present, Apple's "garden" has attracted 80,000 gardeners (software developers) who have cultivated 500,000 plants (applications).

Google's strategy, in contrast, resembles an open and free city, where anybody can walk the streets and build stores and tall buildings along main roads.

At present, Google's city has attracted 20,000 architects (software developers) who have built 250,000 new structures (applications).

Running cities and gardens both have strengths and weaknesses.

Horace Dediu, a handset analyst and former student of management guru Clayton Christensen, who coined the concept of "disruptive innovation," characterized Apple's iPhone as having an "interdependent" architecture, where software and hardware are mutually dependent. Interdependent systems, he argues, seek to optimize product performance.

Google's Android phones and tablet PCs, on the other hand, have to be compatible with hundreds of different types of hardware and operating systems, different-sized screens, and different levels of computing capability.

As a result, this "modular architecture," where the core platform is given to others to run, is more flexible, more quickly accepted in the market, and more responsive to the market's needs, but comes at the sacrifice of performance.

Over the past 30 years, the story of the PC industry has chronicled the tensions between these two dominant competitive models.

In his book The Innovator's Solution, Christensen wrote that when customers are satisfied with a product's functions, the product tends to evolve from an interdependent architecture toward a modular structure. He also contended that such a shift alters the competitive foundations of markets. Using the computer industry as an example, he explained that profit in the value chain migrated from the end product (computer OEMs) to subsystems (Intel's processors and Microsoft's operating system) and sales and distribution (Hewlett-Packard and Acer).

But the success of the iPhone and iPad opened a new round of competition, swinging the profit pendulum back to interdependent systems that put a premium on product innovation.

"In the post-PC era, you can see that product innovation has again become the hot leading actress and sales and distribution have reverted back to filling the role of supporting actress," observes the chairman of a high-tech vendor with annual revenues over NT$100 billion.

The "disruptive innovation" mechanism has been reawakened, giving Taiwanese companies a new opportunity to extricate themselves from Apple's dominance and the Wintel (Windows and Intel) straitjacket.   

Asustek Computer Inc.'s introduction of an Android tablet PC that was converted into the Eee Pad Transformer is just one example.

In July, the Washington Post even ran a review called "How Asus triumphed over Apple" in which it said the Asus Transformer – a combination tablet PC and keyboard – beat the iPad on both price and functions. The product helped Asustek post record monthly revenues in July in a down market and led the company to adjust its shipment forecast for 2011 upward from its original estimate of 2 million tablets.

In the past, Taiwanese vendors have had trouble becoming real players in the game, hampered by high chip prices, the excessive dispersion of suppliers, and the need to acquiesce to the conditions of telecom operators who enjoyed advantageous bargaining positions. But Android software has lowered the communications sector's entry threshold, allowing second-tier vendors to jump into the competition.

Aside from Gigabyte Technology Co. Ltd. and Shuttle Inc., even IC design leaders MediaTek Inc. and MStar Semiconductor Inc. are eyeing China's low-cost smartphone market, looking to promote Android handset chip solutions to Chinese vendors. 

"From IC design, components, systems, and software to distribution and services, how much Taiwan will be able to earn from this Android value chain depends on how much we can contribute," says Gigabyte Technology senior vice president Richard Ma.

Front No. 3: The Price War

Veterans in the industry have come to realize that "free" is actually the most expensive model.

Topology Research Institute researcher Herbert Ho observes that free access to Android has benefited end-user manufacturers with in-house capabilities, which quickly used the platform to create differentiation by designing their own user interfaces. But for companies with insufficient resources, the free Android platform has rekindled fierce price competition, with Chinese vendors among the most vigorous and strongest participants.

The free licensing of Android has begun to attract a number of Chinese "bandit" mobile phone makers who formerly specialized in cheap knockoffs. For example, ZTE Corporation and Huawei Technologies Co. have become the world's No. 5 and No. 9 mobile brands, respectively, on the strength of their low-price offerings, a strategy they are carrying over to Android-system phones.

Both companies have already slashed the average price of their smartphones to under US$150.

"Taiwanese companies say they aren't worried, but in fact they're waiting in fear," says Andy Song, market director of Shenzhen Headsun Technology Co., Ltd.

"Over the next year, low-cost smartphones will fall under US$100, as vendors cut prices in a fight to the bottom. Taiwan won't be able to escape the trend," predicts Gigabyte's Ma. The biggest threat to Taiwan's supply chain, he says, is China's low-cost supply chain headed by ZTE and Huawei.

Enter the Outsider: Microsoft Vows to Rise Again

The Android camp is not the only army that has targeted Apple in the smartphone war. Currently a bystander in the Apple vs. Google showdown, another major power is carefully rebuilding its arsenal while vigilantly observing the battle between the two main antagonists.    

At the end of June, Microsoft unveiled a new-generation operating system for smartphones called "Mango," hoping to use a fruit to bear fruit and regain some of its past glory.

"We are not an unknown face in the smartphone market, but in the past few years we did not foresee the changes in consumer behavior," admits Cathy Yeh, group director of Microsoft Taiwan's Business Marketing Organization. She says that not only is Microsoft full of confidence because of the Mango OS's promise, but the company also expects to capitalize on its new partnership with Nokia to attack the market.

Market researcher IDC has expressed optimism over Microsoft's teaming up with Nokia, predicting that the Windows Phone will have a global market share of 20 percent in 2015, the second highest in the sector.

The reason for such optimism is that Microsoft's smartphones are expected to break from their focus on commercial needs and pay more attention to social networks, interpersonal communication, and sharing functions. Simply put, Microsoft wants its phones to be more fun, instead of being strictly dedicated to taking care of business.

A number of Taiwanese vendors have begun to enlist in Microsoft's anti-Apple brigade.

Taiwan Fully Exposed on the Front Line

Over the past 30 years, Taiwan's high-tech sector has hidden behind big European and American customers, concentrating almost exclusively on efficiency and costs while remaining unwilling to delve into basic technology or software development.

"When soldiers (patents) have been needed, they haven't been available," says Vincent Shih, senior attorney of Microsoft Taiwan. He stresses that companies in Taiwan must make the protection of intellectual property rights a higher priority and elevate its management to the board-of-director level.

In the battle that could decide the future of the 21st-century communications industry, Taiwan's companies are standing on the front lines for the first time, playing key roles in each side's army.

At the same time, Korean vendors to the north and Chinese operators to the west are waiting to opportunistically cash in on the spoils of the battle, and if members of Taiwan's supply chain make even the slightest mistake, they could be obliterated by their foreign rivals.

On the eve of the battle, Taiwanese companies not only need to spend time choosing sides. They must also size up what weapons they have at their command.

Otherwise, simply relying on their manufacturing prowess will be tantamount to wasting this "disruptive innovation" opportunity to reshape standards and platforms, consigning them to the eternal role of secondary contractors.

Translated from the Chinese by Luke Sabatier