For The Internet Age, Taiwan’s ICT Industry Needs A New Model

Taiwan needs to move from manufacturing to software in order to ride the internet wave, writes Andy Yee.

AsianScientist (Mar. 5, 2014) – Taiwan has long been a world leader in high-tech hardware manufacturing, with roots all the way back to the era of export-oriented industrialization in the 1960s. Its companies command huge market shares in critical ICT products, ranging from computer chips and smartphones to personal computers. Yet Taiwan’s ICT industry faces grim prospects as it remains stuck on the lower rungs of the value-added chain. The industry needs a new model that is suitable for the internet age.

Taiwan has never focused on establishing its own high-tech brands. With the possible exception of HTC, Taiwan boasts no Apple or Samsung of its own. Instead, it has carved out a distinctive niche as the world’s pre-eminent high-tech hardware manufacturing hub. Taiwan’s most prized technology companies, like Foxconn and TSMC, are original equipment manufacturers (OEMs) and original design manufacturers (ODMs) for global consumer electronic brands. Taiwanese firms account for more than 90 per cent of the world’s notebook and tablet production.

But today, this ‘global high-tech factory’ model is running out of steam. Taiwan is being squeezed between cheap competition from China and the strong brands of global leaders. More importantly, the model is incompatible with the age of the internet, which is driven by software and services while the value of hardware declines. The Taiwanese ICT industry is structurally stuck one level below the high-margin global brands in the hierarchical global production networks.

The key question for Taiwan is: how can its ICT industry transform itself from a cost-down, efficiency driven industry to a value-up, innovation driven industry?

A good way of conceptualizing the strengths and weaknesses of the Taiwanese ICT industry is the well-understood layered model. In this model, the ICT ecosystem can be thought of as a modularised, interconnected layered system consisting of four layers: networked element providers (Layer 1), network operators (Layer 2), content and application providers (Layer 3), and final consumers (Layer 4). They describe the internet’s vertical hierarchy from the physical devices, equipment that handle the flow of data, programs that use the internet, up to the end users. By looking at the intersection of these layers, Taiwan can capture future opportunities.

Thanks to the advent of the internet, Layers 3 and 4 constitute today’s most dynamic innovation platforms for content, applications and services providers. Although Taiwan’s networked element companies contribute much of the vital hardware (notably computers and semiconductors) that constitute Layer 1, they have little to do with the dynamic evolution that is happening in the upper layers.

In part, this is due to the fact that hardware companies have neither the competencies nor the business focus needed for the development of software-based products like e-commerce platforms and search engines. Their network position as specialized suppliers to global brands also precludes them from mass consumer interactions and hence the knowledge required to create successful internet services.

That being said, as we know from Schumpeterian evolutionary economics, innovation in the ICT ecosystem could emerge from any of the six symbiotic relationships — all possible two-way interactions — among the four layer players. In particular, networked element providers (Layer 1) are the platforms on which content and application providers serve final consumers. The presence of so many leading hardware manufacturers means that Taiwan is in the unique position of being able to foster industrial innovation from these symbiotic relationships, namely the integration of hardware and software. As the founder of Acer Stan Shih asserted, new Taiwanese high-tech startups must ride on the strengths of the island’s hardware industry if they are to create a unique internet-based ‘Taiwanese phenomenon’.

One strategy is to enhance the value of commodity hardware by adding software, services and applications to come up with a total solution, leading to higher value to customers and higher margins for Taiwanese vendors. Furthermore, the emerging ‘Internet of Things’ trend presents new opportunities for innovation. Information networks resulting from internet-linked everyday objects promise to stimulate new business models. Taiwan’s hardware know-how makes it well placed to ride this trend and become more directly involved in the content and application layer.

But for the internet to become a significant force in reviving Taiwan’s hardware-focused ICT industry, business, policy and legal challenges must be tackled before the opportunity can be seized. In Taiwan, there are large complementarities between the hardware and software sectors. But a culture of collaboration still needs to be fostered.

Another challenge is a lack of software talent. The built-to-specification mindset of hardware engineers is vastly different from that required in internet companies — the ability to pivot and innovate quickly. Outdated rules and mindsets in areas like online payment and consumer protection threaten to suppress the emergence of innovative online business models.

Today, Taiwan is at a crossroads. Decades of success in its hardware industry have created a serious deviation from the new global ICT trend fueled by internet-driven innovation. It is time for Taiwan to muster the ambition and determination of the previous generation that transformed the nation into a high-tech manufacturing superpower. The key to its reinvention depends on whether it can get plugged into the internet age.

Andy Yee is a policy analyst for Google in Asia Pacific. He has worked at the Political Section of the EU Delegation to China in Beijing.

A longer version of this article first appeared here in Global Asia.

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Source: East Asia Forum; Photo: Andrew Cavell/Flickr/CC
Disclaimer: This article does not necessarily reflect the views of AsianScientist or its staff.

Andy Yee is Policy Analyst for Google in Asia Pacific. His role entails a full range of internet policy issues including innovation, copyright, privacy, security and free expression. He is a former researcher at the Political Section of the European Union Delegation to China in Beijing, and a former investment banker at UBS and Crédit Agricole.

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