From Hardware
Manufacturing to
Value Creation
— Smart Phones, Taiwan and Korea
Peter T. L. Shih
Director, Commercial Division
Taipei Economic and Cultural Office in Boston
February 28, 2012
INNOVATION, GLOBAL COMPETITIVENESS, AND NATIONAL
ECONOMIC DEVELOPMENT
ADMINISTRATIVE SCIENCES DEPARTMENT
METROPOLITAN COLLEGE BOSTON UNIVERSITY
Outlines
 Revisit the Value Chain and Smile Curve
 Path of Taiwan’s economic development
 A story of the smart phones
 Analysis — Taiwan’s ICT industries and
value added
 Innovation paradigm change and the way
forward
2
Value Chain - concept from business management
first described by Michael Porter in 1985 (Competitive
Advantage: Creating and Sustaining Superior
Performance)
3
Smiling Curve – A supply chain value analysis
concept proposed by Stan Shih, founder of Acer, Inc.
4
Path of Taiwan’s Economic Development
Manufacture oriented
Labor intensive
Agricultu
re
Laborintensive
light
industries
aimed at
livelihood
need and
import
substitutio
n
1952
1960
Investment oriented
Capital Intensive
Improve
agricultura
l
technolog
y
Laborintensive
industries
aimed at
export
1970
Innovation Oriented
Technology Intensive
Largescale
infrastructu
re projects
Laborintensive to
capitalintensive
Lay
foundation
for hightech
industries
1980
Promote
high-tech
industries
developm
ent
ICT
industries
gradually
became
the
mainstrea
m
1990
Knowledge Intensive
Internati
onalization
and
technolog
y upgrade
ICT and
other
electronic
industries
well
mature
2000
The
burgeonin
g of FTAs
Regiona
l
competitio
n become
fierce
 R&D
and high
value
added are
focus
2010
5
The Story of The Smart Phones
Missed the
smartphone
market
Lost the
smartphone
market
Losing the
business
smartphone
market
Changed the
smartphone
market
Changing the
smartphone
market(?)
What made their success?
• Game changing capabilities or design innovations - differentiated their
products
• Products that matched customer needs
The lessons learned?
Why did they fail?
• Lost touch with customers - Failed to adapt to the changing world and
hold onto their market leading business for too long!
• stalled innovation – the original differentiators no longer matters in
the new environment
6
Dominance
by Apple
In terms of
profits
and added
value !
7
Dominance by Apple In terms of
profits and added value !
8
Retail Price: $499 for 16GB model

Design (R&D), Brand & Marketing: $228 (45.7%)
Apple (U.S.A), AT&T, Verizon…
 Component & Parts : $260 (52.1%)
Microprocessors, LCD, etc: $114 (22.9%) Korea
Bluetooth, audio chips, etc: $15 (3.0%) U.S.A
Driver, IC, connectors, etc: $130 (26.1%) Taiwan
 Assembly & Labor cost: $11 (2.2%) China
9
Implications for Taiwan’s ICT Industries:
Are OEMODM model sustainable?
iPhone Profit Breakdown
70
60
50
40
30
20
10
0
58.5
4.7
0.5
Apple
三 星 、 LG
鴻海
iPad Profit Breakdown
35
30
25
20
15
10
5
0
30
7
2
Apple
三 星 、 LG
鴻海
 The success of Apple casts doubts on Taiwan ICT’s business models and strategies
 Apple keeps the high value-added activities (design, software, brand management
& marketing) to itself while outsourcing manufacturing to others
 Apple’s strategy of ‘Brand + Manufacturing Outsourcing’ creates huge volumes of
revenue and high profit margin for its value chain. However, the place that Taiwan ‘s
ICT industries occupy in the chain may not be ideal
 The profit margin or share from OEM/ODM for Apples are not necessarily higher
than OEM/ODM for HP or DELL
10
Where should Taiwan’s ICT industries go?
OEMODMOBMBranding  High Value
Services？
Source: Gartner, compiled
by III, Taiwan
Unit: US$ 100 Million
12000
10000
8000
9608
7930
6000
4000
2000
743
1738
37
238
489
2463
1521
352
292
607
0
2010年
IT Service
Public Cloud Services Spending
2014年
Moblie Application Store
PC
Smart phone
Server
 Small growth for PCs，Almost no growth for Servers, Continue rapid
expansion for Smart phones
 IHS Screen Digest: 2010 Apple Apps revenue (~$1.8B) is less than 3% of
Apple’s revenue of $65B, and less than 1% of its profit
 Gartner: 2010 worldwide IT Service revenue is about $800B, it will be
$961B by 2014
11
Analysis of Taiwan’s ICT Industries
Structure of
Product
ICT
Products
ICT
Manufactur
ing
Equipment
Highly
modulized
Medium to
high
modulizatio
n
Origin of
Development
Technology/
Brand
Production/
Market
Support from
High control of
Most are
institutes for R&D
Outsourcing/ove
rseas
manufacturing by
multi-national
brands
(OEM/ODM)
product system
because of multinational brands’
licensing/authori
zation
Only few local
brands (HTC,
Acer, Asus, etc)
Linkage to local-
Lack
overseas
produced and
sold for int’l
markets
ICs, LCDs
and some
major
components
are produced
domestically
Only some
equipment are
utilized by
local ICT
manufacturers
brand companies’
needs is not
obvious
Some are
seeking up-grade
technology for
manufacturing
critical
components/part
s
Source: Chung Hua Institute of Economic Research, Ministry of
Economic Affairs, Taiwan
12
Percentage of Value Added by Taiwan’s
Manufacturing Sectors
30.00%
% of Value
Added,
Munufacturing
sectors
25.00%
20.00%
15.00%
10.00%
5.00%
08
20
07
20
06
20
05
20
04
20
03
20
02
20
20
01
0.00%
% of Value
Added, Exports
of
Manufacturing
Base Year: 2001
Source: Directorate-General of Budget, Accounting and Statistics, and Council for Economic
Planning and Development, Taiwan
13
Percentage of Value Added by
Manufacturing Sectors — Taiwan vs Korea
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
% of Value
Added, Korean
Manufacturing
Sectors
20
0
20 0
01
20
02
20
03
20
0
20 4
05
20
06
20
07
20
08
0.00%
% of Value
Added,
Taiwan's
Manufacturing
Base Year: 2001
Source: Directorate-General of Budget, Accounting and Statistics, Taiwan; OECD
14
Percentage of Value Added by Electronic
and Optical Goods and Equipment —
Taiwan vs Korea
30.00%
25.00%
20.00%
Taiwan
15.00%
Korea
10.00%
5.00%
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
20
00
0.00%
Base Year: 2001
Source: Directorate-General of Budget, Accounting and Statistics, Taiwan; OECD
15
Percentage of Intermediate Goods of
Taiwan’s Total Export
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Interm ediate
Goods ,
Category A
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
20
01
Interm ediate
Goods ,
Category B
Total
Interm ediate
Goods , A+B
Category A: intermediate goods need to be further processed for consumption or used as inputs in the
production of final goods
Category B: intermediate goods need not to be further processed for consumption or used as inputs in
the production of final goods
Source: Taiwan’s export and import statistics, compiled by CEPD’s study
16
Disadvantages (?) of Over-rely on
Intermediate Goods
 Lack of the ability/technology for system
integration and development of
software/services
 Lack of control/understanding of the markets,
trends and consumers’ preference
 Without own brand, difficult to
diversify/expand markets
 Intend to be capital-intensive, and high in
energy/resources consumption
Source: Chung Hua Institute of Economic Research, Ministry of Economic
Affairs, Taiwan
17
Innovation Paradigm Change
Focuses
Product
Paradigm
Business
Value
Paradigm
• Technology
• Productivity
• Knowledge /
Intellectual Property
(operational models,
insights, assets, etc.)
• Value capture &
delivery
Differentiators
+
+
• Price +
Features
• Product
niches
• Choices
Through
=
• Solutions +
Services,
Business
=
Innovation &
Globally Integrated
• Flexibility and
Values
• Go to market
- E.g. Xerox vs
Microsoft
- # of patents vs # of
products
• Marketing leadership
• Value net ecosystem
 Transform
innovations into
delivered values
• Value net leadership
18
SWOT Analysis of Taiwan’s Industries
Division of labor
(upstream/downstream) and
supply chain are quite
complete
Good
technique/management/int’l
marketing
Good legal infrastructure
and labor force
S
W
O
T
Export concentrations high
on ‘China’ and ‘electronics’
Value added are not high
Efficiency of use of
energy/resources need to be
improved
Lack of crosssectors/industries human
resources
19
SWOT Analysis of Taiwan’s Industries
The signing of ECFA helps
attract FDI to Taiwan
Asian emerging markets
provide Taiwan excellent
opportunity
Demographic trend and
living environment are
conducive to new product
development
S
W
O
T
Burgeoning FTAs/RTAs
may marginalize Taiwan
Increasing competition
from ‘Korea’ — technology,
brand and market
penetration
Some traditional industries
need to be upgraded ASAP
20
The Way Forward — A strategic thinking
 The overall strategy — ‘Technology Pull’ and
‘Market Pull’
Technology Pull
∥
Building Strength
on Your Own
Strength!
Transfer
of new
technology
cooperation in
R&D,
brand/mark
eting
Efficiency/capability in: manageme
OEM/ODM
nt
Quality mass production
in short time
Tailor-made production
as well
Supply chain/global
logistics management
21
Market Pull = Building Strength on Others’
Strength! (e. g. China)
Population: 1.3 Billion !
Economic Cooperation Framework
Agreement (ECFA):
Commodity and Service Trade
Liberalization
Investment Facilitation and
Protection
Industrial Co-operation (standards,
R&D)
A market of huge potential/source of
revenue/profits
A ground to test/fine-tune your
technology/products/services
A platform to build your own brand
Provide you economy of scale! (lower costs)
Geographic vicinity and cultural connection
22
Government’s Role In Fulfilling This
Strategy
 To lead and support large-scale, high-risk and innovative R&D
Flexible Display Technology
by ITRI
 Research in
marketing,
consumer
behavior
and lifestyle
 Promoting
innovative
business models
 Business policy
recommendations
Industrial
Technology
Research Institute
(ITRI)
Founded in 1973
Commerce
Development
Research Institute
(CDRI)
Founded in 2007
 Applied research in multiple
 Industrial technology fields
 Technology transfer and IP
 Business
 Open lab and incubator
 Industrial consultancy
services
Institute for
Information
Industry
(III)
Founded in 1979
 R&D in network,
multimedia,
 Green ICT, ICT
security, etc.
 Industry think tank
 Science and
technology law
 Incubation
 Technology transfer
and Patents
23
Government’s Role …
 To help and facilitate, if it is necessary, the
collaboration (M&A) among businesses
(DRAM, LCD panel)
 To create an environment conducive to the
introduction of high quality human resources
(in particular R&D and global management
talents and skills, for example:
http://hirecruit.nat.gov.tw/english/index.asp )
24
Government’s Role …
 Help diversify the markets by introducing the right
products
Unit: million
BRICs
US$20,000
US$5,000
US$1,500
TOP
Markets
Taiwan
currently
focuses on
(Brazil,
Russia, India,
China, S.
Africa,
Indonesia,
Middle East,
etc.)
New potential
markets:
quality yet
inexpensive products
Poor and least-developed
markets
2005
Population
2015
Population
Growth
%
200
300
50%
600
700
17%
1,200
2,200
83%
4,00
3,800
-5%
25
Source: ITRI(IEK) and III(MIC)
Government’s Role …
 Level the playing fields for Taiwan’s businesses
by concluding FTAs with key trading partners (US,
EU, Japan, ASEAN, etc.)
 Promote and encourage the development of new
industries (to diversify in order not to over-rely on
ICT): medical care, biotech, green energy (solar,
wind power, electrical car, LED), tourism
(incorporating medical care), cloud computing,
etc.
26
Thank you!
Comments, Q&A
27
Aide-memoire to P. 5: Path of Taiwan’s
Economic Development
 1949 - 1960
 Policy goals: stabilize the agricultural sector, increase agricultural
outputs and ‘import substitution’
 Agriculture: land reform
— rent reduction to 37.5% (1949), sale of
public land (1951) and land to the tillers (1953)
 Import substitution:
1. Encourage labor-intensive industries, textiles, food processing,
cement, glass, etc., to satisfy domestic demand
2. Impose import restriction measures to discourage import
3. Two-tiered exchange rate system disadvantaged to import
4. Preferential loans to targeted industries, e. g. textiles
 US official aide (1950-1965): staple foods and raw materials
28
 1960 – 1970
 Policy goals: ‘export-oriented expansion’ to accumulate capital and
technique for the next stage development
 Act of Encouragement of Investment (1960 – 1990 with various
amendments at different stages): tax and duties deduction, tax
deductibles for investment, accelerated depreciation of equipment,
government fund support or investment in targeted industries,
preferential loans, development of industrial parks, etc., with emphases
on local contents of manufactured products and export.
 Exchange rate reform: uniform pegged exchange rate and
depreciation of NT dollars to encourage export.
 Establishment of Export Processing Zones (EPZs, first of which
established in 1966) — preferential treatments and incentives for
investors inside the zones to export
29
 1970 – 1980
 Policy goals: government investment and expenditure to
counter economic impact by the 1970s oil crisis and ‘2nd Import
Substitution’
 10 Major Construction Projects: 6 of transportation, 3 of heavy
and petrochemical industries, and 1 of energy supply (nuclear
power plant). The results of these investment-led Projects are
immediate improvement of Taiwan’s infrastructure and
transformation to capital- or technology-intensive industries
 2nd Import Substitution: encouraging petrochemical and steel
mill industries to meet domestic demand of raw materials
30
 1980 – 1990
Policy goals: industrial upgrade and economic transformation by
promoting development of targeted ‘strategic industries’
Strategic industries: high value-added, high technology-intensive, low in
pollution level, low energy-intensive
R&D support by ITRI, III, etc. : 25% of non-military governmental R&D
expenditures were by ITRI between 1983 to 1994, and more than 165
spin-off start-ups
Semiconductor industry development:
1. Initiated by MOEA in 1974 with initial funding of US$ 12 millions, in
cooperation with RCA
2. 1980: establishment of Taiwan’s 1st semiconductor manufacturer, UMC
3. 1987: world’s 1st dedicated semiconductor foundry manufacturer,
TSMC
Science Parks: 1st of which established in Hsinchu in 1980, with support
from the government development fund, state-run banks and venture
capitals for investors inside (the 2010 total revenue of Hsinchu Science
Park accounted for 10% of that of Taiwan’s manufacturing sectors)
Statute for Upgrading Industries enacted in 1989
31
 1990 – 2000
Policy goals: deregulation and liberalization to prepare Taiwan’s
businesses for internalization and foreign competition
1987: deregulate foreign exchange market
1989: amend the Banking Law to release control of interest rates
and approve establishment of 15 new banks in 1991
1989: allow indirect import from China
1990: allow indirect Taiwanese investment in China
1990-2002: GATT/WTO accession to align Taiwan’s trade and
investment regimes with international norms and get equal
treatment in other WTO members’ markets
Privatization of state-owned enterprises: still mill, shipyard,
petrochemicals, fertilizer, civil construction, etc.
32
 2000 — present
May 2010: Act of Industrial Innovation — retain tax
incentives for R&D, human resource development,
regional operation centre and int’l logistic centre in
Taiwan
(For the rest, please refer to P. 21 to P. 26)
33