Fri, Apr 01, 2011 - Page 8 News List

The ‘smile curve’ and the import of quality

By Huang Tien-lin 黃天麟

Last Friday, Taiwan Semiconductor Manufacturing Company (TSMC) chairman Morris Chang (張忠謀) revealed how to improve corporate added value in a lecture at the Chinese National Association of Industry and Commerce, Taiwan (CNAIC). Chang said TSMC’s greatest innovation was that it had bought wholesale into the “smile curve” concept (this idea, proposed by Acer founder Stan Shih [施振榮], focuses on a curve that illustrates the value-adding potential of different components in the value chain, from concept and R&D at the top left via manufacturing at the center bottom to after-sales services at the top right).

In other words, TSMC focuses on the high value-added elements at the right and the left extremes of the curve as well as manufacturing at the bottom of the curve. Value-added services made up 51 percent of TSMC’s operating income last year, much higher than the 16 percent in traditional manufacturing. High value-added services mean that employees can be given better benefits.

The secret behind TSMC’s success is that it combines low value-added manufacturing at the bottom of the smile curve with constant innovation, R&D and services. This idea runs counter to the view, dominant in years past, that Taiwanese businesses need to move their low value-added manufacturing to China and focus on high value-added brand management, services, intellectual property and R&D at the two extremes of the smile curve.

On reflection, we are bound to ask how could there be R&D, innovation and brand management without basic manufacturing? TSMC has been successful because Chang understands this logic.

The government has either misunderstood the smile curve concept, or been taken in by academics who say Taiwanese businesses should move to China. This is the only way to explain why it has been complicit in encouraging the exodus to China, which has undermined Taiwanese industry and contributed to a shortage of domestic investment, slow economic growth, falling real incomes and a growing wealth gap. This has made it difficult for many people to make ends meet.

In the past, many Taiwanese businesspeople have moved to China to take advantage of China’s lower salaries. This has indeed given temporary relief from falling added value, but it has also delayed investment in innovation, R&D and industrial upgrading. This trend has been reinforced by the all-out opening up toward China adopted by the Chinese Nationalist Party (KMT) government after it came to power in 2008 and the signing of the Economic Cooperation Framework Agreement (ECFA) last year, in practice implementing a one China market.

Last year, Taiwanese investment in China reached US$12.23 billion, a 102 percent increase, while overseas Chinese investments in Taiwan fell by 20 percent to a US$3.81 billion. This is the “outstanding” fruits of government policy over the past three years. It is also a warning, telling us that the ECFA will only undermine Taiwanese industry at an even faster rate. It also speeds up the widening of the wealth gap and helps create an economic atmosphere conducive to eventual unification. If this development is not halted, the continued weakening of Taiwan’s economy will make it difficult for Taiwan not to fall behind other Asian countries.

This fate can be avoided by nurturing more companies that buy wholesale into the smile curve concept and create more added value for the country’s working people.

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