Taiwan

1
Taiwans High-tech Industry at the Turn of the
Century

• Chi Schive
• President
• Taiwan Academy of Banking and Finance
• Advisor
• Council for Economic Planning and Development

Industrial Restructuring in Asia Thammasat
University September 18, 2000
2
High-tech Development in Taiwan

• Outline
• I. Introduction
• II. Status of Taiwans high-tech industry
• III. Development of high-tech industry in Taiwan
  - the case of semiconductor industry
• IV. Policy for developing high-tech development
  industry in Taiwan
• V. The foundation of the high-tech economy
• VI. Global logistics in Taiwans high-tech
  industries

3
Industrial Structure

Source Ministry of Economic Affairs, Promotion
Plan for Asia-Pacific Manufacturing Center, July
1998.
4
Worlds No. 1 Producers in Taiwan
Sources Cosmos Magazine, Oct., 1984 Ministry of
Economic Affairs, ITIS project.
5
High-Tech Share of Taiwans Exports

52.1
26.0
6
Policies Relevant to High-Tech Industry in Taiwan

• Preparation (1960-80) - Technology development
• Development of core-satellite industrial grouping
• Establishment of Industrial Technology Research
  Institute (ITRI ,1973), Institute for Information
  Industry (1979), Development Center for
  Biotechnology (1984)
• Seedling (1981-90)
• Establishment of Hsinchu Science Park (1981)
• Encouraging venture capital business and
  providing tax incentives to high-tech firms
  (1984)
• Foreign exchange and financial liberalization
• Environmental protection

7
Policies Relevant to High-Tech Industry in Taiwan

• Expansion (1991- )
• Promoting ten emerging industries - Statute for
  Industrial Upgrading (1991) providing tax
  holidays or tax credits
• Subsidy (1991) to product development up to 50
  of RD spending
• Subsidy (1997)to technology development
• Promoting NII (national information
  infrastructure) (1996)
• Setting up venture business incubator in
  universities and research institutions (1998)
• Granting property right of government-funded
  research output (1999) to research organizations

8
Then Rise of IT Industries in Taiwan

• As the market for black and white televisions
  shrank, Taiwans prosperous television industry
  switched to produce monitors, which was a readily
  available alternative.
• Local firms entered the industry in five ways
• People with first-hand experience, such as
  university professors and former game television
  manufacturers who lost business after the
  government closed television game playhouses
• Former marketers for foreign multinationals
• Local companies organized by large multinationals
• Start-ups with government contribution of funds
  and technology
• Local firms seeking to expand product lines

9
Then Rise of Semiconductor Industries in Taiwan

• Subsidiary established by General Instrument
  (1966), Texas Instrument, RCA, and Philips
  (1969-71)
• helped develop skilled labor and technicians and
  managers
• introduced packaging and resting technology, and
  quality control system
• Laboratories established within educational and
  research institutions
• Electronics Research and Service Organization
  (ERSO) established 1974 developed a technology
  with good market potential and competitive cost
• United Microelectronics Corporation (UMC) was
  jointly formed by the government, public bank and
  private enterprises.

10
The Foundation of the High-tech Economy
ICT
Labor
Capital
RD People
Venture Capital
Institutional Setting
11
Merits of Taiwans Financial Market
Indirect Finance
Finance
Venture Capital
Note Indirect finance refers to change in
lending and investment by financial institutions
direct finance refers to change issuance of
stocks, notes, and bonds. Source Central Bank of
China.
12
Industrial Structure of Selected Stock Markets
Sources Stock exchanges of Taiwan, Hong Kong,
Singapore, and Thailand.
13
What Financial System did For Taiwans ICT
Industry?

• Continuous, steady financial liberalization in
  appropriate sequence since the late 1970s
• Floating exchange rate regime was implemented in
  1979.
• Limits on interest rate change were abolished in
  1989.
• The ban on establishing new banks was lifted in
  1990.
• Stock and money markets have been steadily
  expanding and improving.
• Capital market was opened to foreigners in three
  phases since 1983.
• WTO-GATS commitments.

14
What Financial System did for Taiwans ICT
Industry?

• As a result
• Taiwan posted the least spreads between lending
  and deposit rates on the list of the IMD global
  competitiveness list. Capital adequacy ratio is
  far above the required 8 by BIS.
• Investment efficiency and quality rose due to
  increasing competition of the financial market.

15
Increasing Number of Banks in the 1990s
New Banks
Reorganized form trusts
Reorganized form cooperatives
Reorganized from trusts
Source McKinseyCompany.
16
Growth in the Stock and OTC Markets
Source Securities, Exchange, and Futures
Commission, Ministry of Finance, June 1998.
17
Increasing Openness of Taiwans Financial Sector
Source Central Bank of China, Ministry of
Finance.
18
Knowledge
Capital Market Banks
Innovations
SMEs
V.C.
?
Large firms
Commercialization
TSMC, Winbond, and Micronix were established with
v.c.
19
An Alternative to Industrial Policy
Tax incentives (no more today)
Venture Capitalists
Investors
Innovators
High-tech industries
Good projects
Banks Insurance companies Institutional investors
20
Sectoral Distribution of Venture Investment
SourceTaipei Venture Capital Association,
Venture Capital Report, No. 19, 1998.
21
Performance of V.C. Firms
Earnings Per Share
NT
6.33
Top 10
1.81
0.12
Average
22
Growth of VC Firms in Taiwan
Source Taipei Venture Capital Association (June
2000).
23
What Fiscal Sector did for Taiwans ICT Industry?

• Income taxes were moderate.
• Fiscal surplus as a percent of GNP was 6.6 in
  average during 1974-81.

24
RD Indicators

Source National Science Council, Indicators of
Science and Technology, 1999.
25
RD Spendingas a percent of GDP
Source National Science Council, Indicators of
Science and Technology, 1999.
26
Researchers per 10,000 Population
Source National Science Council, Indicators of
Science and Technology, 1999.
27
No. of Patents Granted in the U.S.
Rank 7 7 7 7 7 5 4
Source U.S. Patent and Trademark Office, U.S.
Department of Commerce.
28
Employment by Level of Education

Source Directorate-General of Budget, Accounting
Statistics, Monthly Bulletin of Manpower
Statistics, 1999.
29
Higher Education Graduates by Discipline

Source Ministry of Education, Education
Indicators, 1999.
30
Behind the Emergence of Global Logistics

• Production fragmentation - Classic trade theory
• To push cost down, vertically integrated
  production processes are taking place across
  country borders around the world.
• New phenomenon
• Shortening product cycle is generating inventory
  pressure.
• New phenomenon
• Technology change improves the cost of
  information transmission and goods transportation.

31
Changes in Local Operations
Before the mid-1980s In the late 1980s and early
1990s After the mid-1990s
Local operations
32
Taiwans International Division of Labor
I Investment M Materials/Intermediates Q Finish
ed product/commodity S Strategic alliance
Japan
S
Q
IM
IM
Taiwan
U.S.
Q
Q
S
IM
Q
Before the mid-1980s Late 1980s and early
1990s After the mid-1990s
Q
M
ASEAN
China
33
Procurement Order Sharing by Taiwan Firms

Source Ministry of Economic Affairs, Statistics
Department, Survey on Manufacturing
Activities,July 1999.
34
Production Sharing of Taiwans Information
Industry

Estimates. Source Market Intelligence Center,
Institute for Information Industry.
35
Taiwan as a Global Logistics Center
1. DELL sends a request to Taiwan upon a
Singaporean client order 2. The U.S. firm sends
CPU to Taiwan 3. China sends cases and power
supplies to Taiwan 4. China sends semi-assembled
parts to Taiwan 5. Malaysia sends PCB to
Taiwan 6. Taiwan sends DRAM mainboard and
semi-asembled parts to Singapore 7.China send
monitors to Singapore 8. Singapore assembles and
sends the finished PC to the client 9. DELL sends
the payment to Taiwan
China
U.S.

DELL
2
CPU
MONITOR
4
7
Order
9
3
1
Taiwan
Singapore
6
DRAM main-board
PC
8
5
PCB
Malaysia
Steps 1 to 8 take 2 to 5 days to complete
Source Prepared by CEPD.
36
Building Global Logistics Capabilities
GLC
Cash
Information
Products
Logistics
Financial
Telecom
International funding and payment
Fast data transmission and management
Manufacturing
Sea/Air
Main supplier on the global market - tech and mfg
capability
Customs clearance and fast delivery
Macroeconomic
Free flows of 4 Is (industries, investment,
individual, information)