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BenQ move signals strategy change

On June 7, BenQ Corp, the nation's biggest mobile phone maker, became the focus of both domestic and international attention when it announced that it would acquire Siemens Mobile. As a result, media outlets and academics in Germany have been making phone calls to Taiwan to gather more information. There have been reports that this merger is a matter of survival for Siemens. The company will pay BenQ 250 million euros (US$302 million) in cash and services, and will also buy options on 2.5 percent of BenQ's shares. BenQ will use the merger to obtain the rights to Siemens' mobile phone brand and technology.

Although this kind of deal is not new in Taiwan, it is rare, and a milestone in the internationalization of Taiwan's industry. Without spending a cent, BenQ has obtained a global brand and technological team. But although this looks worthwhile on the surface, there are also certain risks to be considered. Acer, for example, in order to enter the European market, announced in 1998 that it was buying Siemens' PC unit, a deal that fell through five months later. With BenQ now acquiring Siemens' mobile phone unit, the first challenge is the unit's annual NT$6 billion deficit. Following that, there are the issues of differing corporate cultures and German trade unions and labor laws.

Taiwan's industry has been investing abroad and moving toward internationalization for the past 20 years. This has had some positive effects, but the mode of internationalization has been too lop-sided, and this has led to the current bottleneck in Taiwan's industrial development.

Generally, outward investment can be roughly divided into two types: aggressive and defensive. Aggressive investments are aimed at using foreign markets to develop value in the form of intangible assets, while defensive investments take advantage of low production costs abroad to protect existing export markets. On the whole, when compared to advanced countries, Taiwanese foreign investment is of the defensive kind.

What's more, because the main motive behind defensive foreign investment is the search for places with low production costs, it is quite likely that foreign production will (partially) replace existing domestic production, or even that the production of spare parts for supply overseas will be localized overseas.

As a result, a main characteristic of current cross-strait economic interactions is for Taiwanese firms to receive orders from abroad, and then manufacture and export them from China. This has turned many of these Taiwan-based firms into some of the biggest of China's exporters.

But this mode of industrial internationalization fails to develop new ways of adding value. One could even go so far as to say that because overseas production has tended to replace existing domestic production, it has had a negative impact on Taiwan's economic output connected to added value and industrial linkages.

Looking at China, a direction for strategic foreign investment was only given in the 10th five-year plan proposed in 2000. This means that China's foreign investment has only just begun, and is still quite unremarkable.

According to statistical data from the UN, China's foreign investment stands at US$33.54 billion (and this may be a low estimate), while the same figure for Taiwan is US$59.54 billion. In 2002, China's foreign investment made up 2.9 percent of its GDP, which was much lower than the global figure, which stood at 211.6 percent. However, that same year, the value of China's overseas acquisitions reached US$1.05 billion, or 40.6 percent of Chinese foreign investment in that year.

What's more, a high proportion of China's foreign investment is focused on obtaining international brands, technology and distribution channels, and even mineral resources. The most explosive cases are China's flagship enterprises, including Lenovo Group Ltd (IBM's computer unit), and TCL Corp (Schneider Electric China, Govideo, Alcatel, Thomson) which actively use acquisitions and mergers or joint investments to enter international brand and distribution markets. In addition, China's Beijing Orient Electronics Technology Group has bought Hyundai's STN-LCD and TFT-LCD companies in South Korea to get a hold of fairly advanced technology.

To sum up, although Taiwan's economic and industrial development must move toward internationalization, the important thing is that the internationalization of Taiwan's economy create value and use outward investment and international operations to sustain the strong development of Taiwan's GDP. It should not simply substitute domestic production with overseas production.

From this perspective, BenQ's take-over of Siemens Mobile is not only symbolic of the company's determination to enter international brand markets, but it also points to a new value creation strategy.

Chen Shin-horng is director of the International Division at the Chung Hua Institute for Economic Research.

Translated by Perry Svensson
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