It has a population that is half that of Spain’s crammed into a land mass one-fiftieth the size of Mexico. Yet Taiwan still manages to make nine out of 10 of the world’s laptop computers. So surely its economic prospects must be rosy?
In fact, profits are down in the island’s tech sector, competition is growing and consumers increasingly want devices that are being made elsewhere. It is facing an urgent need to reinvent itself. But with a tradition of making things to order for foreign companies and a hierarchical corporate culture, a new generation of start-up innovators is facing an uphill battle.
“It’s very much to do with innovation,” says Huang Deray, former director of Hsinchu Science Park, home to 400 hi-tech companies and a world leader in semiconductor manufacturing. “To keep doing well, you must think of what’s the next product you should make to help you earn money three to four years from now, even if you have a product that’s selling well right now.”
Taiwan first transformed itself from a labour-intensive economy to a hi-tech powerhouse during the 1980s. You may not have heard of the companies Quanta Computer, Compal Electronics, Pegatron, Wistron and Inventec, but together they make more than 90% of the laptops sold worldwide, including those sold by top brands such as Apple and Dell.
Yet making devices at low cost for others has become less profitable than it was, and neighbouring manufacturing centres such as China and Vietnam are increasingly competitive. Profit margins for the above five companies have halved compared to a decade ago. Revenues for Taiwan’s hi-tech sector more broadly are largely flat, compared to double-digit growth a decade ago, according to Helen Chiang, a Taipei-based market researcher at tech consultancy IDC. “It’s a real crisis situation,” she says.
PC shipments worldwide fell from 363 million in 2011 to 352 million last year, with further declines in the first half of this year. Taiwanese PC makers have shifted their attentions to tablets; however, they do not enjoy the same dominance of this market as they do for laptops.
Meanwhile smart phone sales are growing rapidly. HTC, Taiwan’s only manufacturer and its best-known brand, was once the number two vendor in the US. It is now struggling with dwindling market share and lacklustre sales. Its handsets do not have the features to compete with the likes of Apple and Samsung in advanced economies. Neither are they cheap enough to compete with increasingly popular low-cost Chinese brands, such as Huawei and Xiaomi.
There is a growing realisation in Taiwan that the future success of its technology export-dependent economy will depend on its ability to innovate. Pointing to a number of significant obstacles, some industry insiders are pessimistic about its prospects.
With a population of a little over 23 million, the island has a relatively small domestic market, and its companies tend to be small and medium in size, rather than the government-backed giants of some of its neighbours. Even if products sell well domestically, companies may not make money if they do not do well overseas. This can lead to an unwillingness to take risks.
As a result Taiwan puts less into on R&D and marketing than some of its rivals. Its spending on R&D has risen steadily over the last decade to $26bn (£16.3n) in 2011, but that’s only about half that of South Korea, which is also focused on exporting tech products. On top of this, Taiwan’s traditional focus on designing and manufacturing hardware means it lacks expertise in software development, which generates a growing proportion of tech industry revenues.