Repositioning Taiwan’s Industry: A Service-Added Manufacturing Industry 產業重定位：服務加值型製造業 Tain-Jy Chen National Taiwan University August 3, 2006

Repositioning Taiwan’s Industry:A Service-Added Manufacturing Industry產業重定位：服務加值型製造業

Tain-Jy ChenNational Taiwan University

August 3, 2006

7-7-22

1. Strengths of Taiwan’s Manufacturing Industry

1) Double capabilities of cost reduction and flexible production.

2) These capabilities have been achieved by vertical disintegration and mass production, with the latter being supported by low labor costs.

7-7-33

2. Why were these capabilities lost?

1) Taiwan was no longer a low-wage country.

2) China provided a better environment for mass production.

7-7-44

3. What was left in Taiwan?

The middle-stream of the manufacturing industry was left with both up- and down-streams outside of Taiwan. (Two-ends out?)

7-7-55

Example: Notebook PC

The concentration of notebook PC production in Eastern China increased the pressure for LCD panels to relocate to China, starting from the late-stage assembly (LCM).R&D also moves.

Fabricated materialsFabricated materials (Japan)(Japan)

Glass substrate & Film productionGlass substrate & Film production (Japan & (Japan & US)US)

LCD panelsLCD panels (Taiwan)(Taiwan)

Notebook PCNotebook PC (China)(China)

7-7-66

4. The ways to maintain materials, components and

parts industry in Taiwan:

1) Possessing and maintaining tacit know-how in materials and processing technologies

2) Transforming cost-based manufacturing to service-added manufacturing

7-7-77

5. Service-added manufacturing

1) Cost-based manufacturing: Production to order in such a way that cost

is minimized, quality warranted, and time to market the shortest.

2) Service-added manufacturing: Adding a service component to conventional

concept of manufacturing so as to enhance the value of the manufactured goods, making the manufacturer indispensable.

7-7-88

6. B2B manufacturer

Possible services to be added:

1) Product development service (ODM)

2) Global logistics (inventory cost reduction)

3) IP service

4) Product design assistance

5) Creation of customer-specific product functions

6) Innovation-enabled components

7) Modularization (disintegrated product design and manufacturing)

8) Multi-function integrated services

7-7-99

7. B2C manufacturer

Be able to directly service the consumersrather than servicing them indirectly through the buyers – establishing a consumer brand.

7-7-1010

8. How will the new business model differ from the

past? Past:

Taking the order from the buyers without knowing the consumers

Future: Addressing the needs of consumers and

producers (called users hereafter)

7-7-1111

9. Key assets to be built

1) Relational assets – B2B & B2C brands and trust

2) Processing know-how, materials, and proprietary equipment

7-7-1212

10.Build a user-driven production chain

1) R&D:Invest in technologies that provide new services to users, or solve their existing problems.

Past pattern: R&D to catch up with leading technologies.

Result: Never possess key technologies.

7-7-1313


2) Production:Engage in first-batch production to test the water of the market.

Past pattern: Will not enter the market until mass

production is possible. Result:

The cost falls sharply when Taiwanese manufacturers embarks on mass production.

7-7-1414


3) Machinery and Equipment:Engage in the design and manufacturing of own machinery and equipment to protect proprietary processing technologies.

Past pattern: Purchase machinery and equipment from Japan,

Germany and USA whereupon to pursue high yield rates.

Result: Market entry is possible whenever machinery and

equipment is available, resulting in rapid increases in the volume of production, pushing down the prices fast, and unable to prevent cost competition.

7-7-1515


4) Materials:Develop new materials to enable new functions and services.

Past pattern: Purchase materials from foreign providers.

Result: Shift the rent to material providers when the

volume of production increases; always attempt to cut costs in the processing and assembly stages rather than materials.

7-7-1616


5) Inter-discipline integration:Integrate technologies from different fields to create new functions and services (knowledge combination).

Past pattern: Most companies are thinly specialized in their

knowledge base.

Result: Production chain and job division, so is the location

of production, are dictated by international buyers who perform the role of knowledge combination.

7-7-1717


6) Technology depth:Encourage technology accumulation within the company.

Past pattern: Shallow technology capability of individual

companies with high turnover rates of technological personnel.

Result: Quick dispersion of technology throughout the

industry, leading to fast increases in production volume, but unable to maintain the technological edge.

7-7-1818


7) Cross-country resources integration:Build a capability to integrate technology resources across countries.

Past pattern: Licensing technologies from foreign

countries to complement with a small assortment of indigenous technologies.

Result: Both the production and market ranges are

limited by the technology licensor, forbidding cross-country integration.

7-7-1919


8) Reaching out to consumers:Invest in consumer research to build a capacity for genuine product innovation.

Past pattern: Never understood the consumer needs.

Result: ODM-type innovation only (serving the

buyers, not the users).

7-7-2020


9) Responding to mega-trends of the global market:

Develop products and technologies in response to mega trends of the global market, such as energy saving, aging and environmental conservation.

Past pattern: Only responding to buyer demands and regulations

in the advanced markets.

Result: Defensive technological development strategies.

7-7-2121


10) Exploiting the idiosyncrasy of the local markets:

Develop products and technologies that address the special needs of the local markets.

Past pattern: Product and technology development were always

outward looking.

Result: Unable to develop a local-based competitive edge

in the world market.

7-7-2222

11.Strategies supporting a user-driven production chain

1) Tax incentive: Encourage innovation, not production or

capital investment; promote value rather than volume.

2) Benchmark for a good company: Most efficient company

→ Number one→ Only one

3) Aim of R&D policy: To enable low-cost production

→ To enable unique services

7-7-2323


4) The R&D team: Mostly engineers

→ A mix of engineers, scientists, and artists

5) The R&D theme: Top down approach

→ Bottoms up approach(The users dictate the R&D theme)

7-7-2424


6) The R&D personnel: Encourage long-term development of R&D

personnel; avoid short-term exploitation of R&D resources (such as R&D military service).

7) Research collaboration between colleges and enterprises:

Encourage R&D collaboration between colleges and local enterprises to support a locally centered industry cluster.

7-7-2525


8) The R&D stage:

9) R&D location: Relocate part of product development to

China and focus on technology research in Taiwan.

Basic R&D Technology development Product development

Basic R&D Technology development Product development

7-7-2626

12.The role of ChinaB2B B2C

Othermanufacturers

Taiwanesemanufacturers

in China


inChina & others


in Taiwan

OEM / ODMbrand marketers

Chinese consumers

World consumers

World consumers

Materials & Equipments

Documents

Repositioning Taiwan’s Industry: A Service-Added Manufacturing Industry 產業重定位：服務加值型製造業 Tain-Jy Chen National Taiwan University August 3, 2006