From Hardware From Hardware Manufacturing to Manufacturing to

Value Creation Value Creation — — Smart Phones, Taiwan and KoreaSmart Phones, Taiwan and Korea

Peter T. L. ShihDirector, Commercial Division

Taipei Economic and Cultural Office in BostonFebruary 28, 2012

INNOVATION, GLOBAL COMPETITIVENESS, AND NATIONAL ECONOMIC DEVELOPMENT

ADMINISTRATIVE SCIENCES DEPARTMENT METROPOLITAN COLLEGE BOSTON UNIVERSITY

2

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

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Value Chain - concept from business management first described by Michael Porter in 1985 (Competitive Advantage: Creating and Sustaining Superior Performance)

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Smiling Curve – A supply chain value analysis concept proposed by Stan Shih, founder of Acer, Inc.

5

Path of Taiwan’s Economic DevelopmentPath of Taiwan’s Economic Development Manufacture oriented Investment oriented Innovation Oriented

Labor intensive Capital Intensive Technology Intensive Knowledge Intensive

AgricultureLabor-intensive light industries aimed at livelihood need and import substitution

Improve agricultural technologyLabor-intensive industries aimed at export

Large-scale infrastructure projectsLabor-intensive to capital-intensiveLay foundation for high-tech industries

Promote high-tech industries developmentICT industries gradually became the mainstream

Internationalization and technology upgradeICT and other electronic industries well mature

The burgeoning of FTAsRegional competition become fierce R&D and high value added are focus

1952 1960 1970 1980 1990 2000 2010

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The Story of The Smart Phones

Missed the smartphone

market

Lost the smartphonemarket

Losing the business smartphonemarket

Changed the smartphone

market

Changing the smartphonemarket(?)

• Game changing capabilities or design innovations - differentiated their products

• Products that matched customer needs

• 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

The lessons learned?Why did they fail?

What made their success?

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Dominance by AppleIn terms of profits and added value !

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Dominance by Apple In terms of profits and added value !

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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

Retail Price: $499 for 16GB model

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Implications for Taiwan’s ICT Industries: Are OEMODM model sustainable?

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2

30

05

1015

20253035

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 r

evenue 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

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 r

evenue 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

iPhone Profit BreakdowniPhone Profit Breakdown iPad Profit BreakdowniPad Profit Breakdown

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Where should Taiwan’s ICT industries go?

OEMODMOBMBranding High Value Services？

7930

9608

7431521

37 352238 2921738

2463

489 607

0

2000

4000

6000

8000

10000

12000

2010年 2014年

IT Service Public Cloud Services Spending 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

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

Unit: US$ 100 Million Source: Gartner, compiled by III, Taiwan

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Analysis of Taiwan’s ICT IndustriesAnalysis of Taiwan’s ICT Industries

Structure of Product

Origin of Development

Technology/

Brand

Production/

Market

ICTProducts

Highly modulized

Support from institutes for R&DOutsourcing/overseas manufacturing by multi-national brands (OEM/ODM)

High control of product system because of multi-national brands’ licensing/authorizationOnly few local brands (HTC, Acer, Asus, etc)

Most are overseas produced and sold for int’l marketsICs, LCDs and some major components are produced domestically

ICT Manufactur

ing Equipment

Medium to high modulization

Linkage to local-brand companies’ needs is not obviousSome are seeking up-grade

Lack technology for manufacturing critical components/parts

Only some equipment are utilized by local ICT manufacturers

Source: Chung Hua Institute of Economic Research, Ministry of Economic Affairs, Taiwan

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Percentage of Value Added by Taiwan’s Percentage of Value Added by Taiwan’s Manufacturing SectorsManufacturing Sectors

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

% of ValueAdded,Munufacturingsectors

% of ValueAdded, ExportsofManufacturing

Base Year: 2001 Source: Directorate-General of Budget, Accounting and Statistics, and Council for Economic Planning and Development, Taiwan

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Percentage of Value Added by ManufactuPercentage of Value Added by Manufacturing Sectors ring Sectors —— Taiwan Taiwan vs vs KoreaKorea

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%% of ValueAdded,Taiwan'sManufacturing

% of ValueAdded, KoreanManufacturingSectors

Base Year: 2001 Source: Directorate-General of Budget, Accounting and Statistics, Taiwan; OECD

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Percentage of Value Added by Electronic aPercentage of Value Added by Electronic and Optical Goods and Equipment nd Optical Goods and Equipment —— Taiwan Taiwan vs vs KoreaKorea

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2000

2001

2002

2003

2004

2005

2006

2007

2008

Taiwan

Korea

Source: Directorate-General of Budget, Accounting and Statistics, Taiwan; OECD

Base Year: 2001

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Percentage of Intermediate Goods of Percentage of Intermediate Goods of Taiwan’s Total ExportTaiwan’s Total Export

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%

IntermediateGoods,Category A

IntermediateGoods,Category B

TotalIntermediateGoods, A+B

Category A: intermediate goods need to be further processed for consumption or used as inputs in the production of final goodsCategory B: intermediate goods need not to be further processed for consumption or used as inputs in the production of final goodsSource: Taiwan’s export and import statistics, compiled by CEPD’s study

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Disadvantages (?) of Over-rely on Disadvantages (?) of Over-rely on Intermediate GoodsIntermediate 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

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Innovation Paradigm Change

Product Paradigm

• Technology• Productivity

• Price + Features

• Product niches

• Choices

• Go to market- E.g. Xerox vs

Microsoft- # of patents vs # of

products• Marketing

leadership

+ =

• Solutions + Services, Business

Innovation & Globally Integrated• Flexibility and

Values

• Value net ecosystem Transform innovations into delivered values

• Value net leadership

+ =

• Knowledge / Intellectual Property (operational models, insights, assets, etc.)• Value capture &

delivery

Business Value

Paradigm

Focuses Differentiators Through

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SWOT Analysis of Taiwan’s IndustriesSWOT Analysis of Taiwan’s Industries

Division of labor (upstream/downstream) and supply chain are quite completeGood technique/management/int’l marketingGood legal infrastructure and labor force

Export concentrations high on ‘China’ and ‘electronics’Value added are not high Efficiency of use of energy/resources need to be improvedLack of cross-sectors/industries human resources

S W

O T

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SWOT Analysis of Taiwan’s IndustriesSWOT Analysis of Taiwan’s Industries

The signing of ECFA helps attract FDI to TaiwanAsian emerging markets provide Taiwan excellent opportunityDemographic trend and living environment are conducive to new product development

Burgeoning FTAs/RTAs may marginalize TaiwanIncreasing competition from ‘Korea’ — technology, brand and market penetrationSome traditional industries need to be upgraded ASAP

S

O

W

T

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The Way Forward — The Way Forward — A strategic thinkingA strategic thinking

The overall strategy — ‘Technology Pull’ and The overall strategy — ‘Technology Pull’ and ‘Market Pull’‘Market Pull’

Technology PullTechnology Pull

Transfer of new technologyco-operation in R&D, brand/marketing management

Efficiency/capability in:OEM/ODM Quality mass production in short timeTailor-made production as wellSupply chain/global logistics management

Building Strength Building Strength on Your Own on Your Own Strength! Strength!

∥

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Market PullMarket Pull = = Building Strength on Others’ Building Strength on Others’ Strength! (e. g. China)Strength! (e. g. China)

Population: 1.3 Billion !

A market of huge potential/source of revenue/profits A ground to test/fine-tune your

technology/products/servicesA platform to build your own brandProvide you economy of scale! (lower costs)Geographic vicinity and cultural connection

Economic Cooperation Framework Economic Cooperation Framework Agreement (ECFA):Agreement (ECFA): Commodity and Service Trade LiberalizationInvestment Facilitation and Protection Industrial Co-operation (standards, R&D)

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Government’s Role In Fulfilling This Government’s Role In Fulfilling This StrategyStrategy

To lead and support large-scale, high-risk and innovative R&D

Industrial Technology

Research Institute(ITRI)

Founded in 1973

Commerce Development

Research Institute(CDRI)

Founded in 2007

Institute for Information

Industry(III)

Founded in 1979

Applied research in multiple Industrial technology fields Technology transfer and IP Business Open lab and incubator Industrial consultancy

services

R&D in network, multimedia,

Green ICT, ICT security, etc.

Industry think tank Science and

technology law Incubation Technology transfer

and Patents

Research in marketing,

consumer behavior

and lifestyle Promoting

innovative business models Business policy recommendations

Flexible Display Technology by ITRI

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Government’s Role … Government’s Role …

To help and facilitate, if it is necessary, the To help and facilitate, if it is necessary, the

collaboration (M&A) among businesses collaboration (M&A) among businesses

(DRAM, LCD panel)(DRAM, LCD panel)

To create an environment conducive to the To create an environment conducive to the

introduction of high quality human resources introduction of high quality human resources

(in particular R&D and global management (in particular R&D and global management

talents and skills, for example: talents and skills, for example: http://hirecruit.nat.gov.tw/english/index.asp )

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Government’s Role …Government’s Role …

Help diversify the markets by introducing the right Help diversify the markets by introducing the right productsproducts

2005

Population

2015

Population

Growth

%

200 300 50%

600 700 17%

1,200 2,200 83%

4,00 3,800 -5%

Unit: million

TOP

Markets Taiwan currently focuses on

New potential markets:

quality yet inexpensive products

Poor and least-developed markets

US$20,000

US$5,000

US$1,500

Source: ITRI(IEK) and III(MIC)

BRICs(Brazil, Russia, India, China, S. Africa, Indonesia, Middle East, etc.)

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Government’s Role …Government’s Role …

Level the playing fields for Taiwan’s businesses Level the playing fields for Taiwan’s businesses

by concluding FTAs with key trading partners (Uby concluding FTAs with key trading partners (U

S, EU, Japan, ASEAN, etc.)S, EU, Japan, ASEAN, etc.)

Promote and encourage the development of new Promote and encourage the development of new

industries (industries (to diversify in order not to over-rely on to diversify in order not to over-rely on

ICTICT): medical care, biotech, green energy (solar, ): medical care, biotech, green energy (solar,

wind power, electrical car, LED), tourism (incorpowind power, electrical car, LED), tourism (incorpo

rating medical care), cloud computing, etc. rating medical care), cloud computing, etc.

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Thank you!

Comments, Q&A

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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

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1960 – 1970 Policy goals: ‘export-oriented expansion’ to accumulate capital and tec

hnique for the next stage development Act of Encouragement of Investment (1960 – 1990 with various ame

ndments 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

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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

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1980 – 1990Policy goals: industrial upgrade and economic transformation by promotin

g 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 ex

penditures 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 coo

peration with RCA 2. 1980: establishment of Taiwan’s 1st semiconductor manufacturer, UM

C 3. 1987: world’s 1st dedicated semiconductor foundry manufacturer, TSM

C Science Parks: 1st of which established in Hsinchu in 1980, with support f

rom 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

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1990 – 2000Policy 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.

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2000 — presentMay 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)