Taiwanese electronics companies have finally learned their lesson from the failure of their peers during previous economic downturns. Facing a bleak outlook, they have decided to no longer skimp on investing in new technologies.
Good for them. If they are determined to keep a good market position, they will need to do so. Good also for the national economy. Private investment, one of the key factors to stimulate an economy, should not decline. If private investment fell, it would be another blow to Taiwan’s GDP, which is forecast to grow a meager 2 percent this year. This weak outlook comes after the rate of decline in exports accelerated to a 5.4 percent annual contraction last quarter.
With machine imports shrinking at an annual rate of 8.85 percent last quarter, the Ministry of Economic Affairs said it can now only pin its hopes on local chipmakers and technology firms to grow its machine imports and private investment. During previous downcycles, slashing spending on new technologies and handing out pink slips were considered effective approaches by local firms to weather the tough times. It was an easy strategy. However, easy strategies can only provide short-term safe havens as has been reflected in Taiwan’s struggling LCD and memory chip industries.
Although global macroeconomic fragility has cast a dark shadow over Taiwan’s business outlook, local firms are not planning on significantly slashing capital spending in exchange for a quick respite. In order to achieve sustainable growth, they have instead decided to invest strategically and selectively for their future.
Because the global competitive landscape is changing dramatically, the old trick of simply cutting spending does not work anymore. Old dogs need new tricks to safeguard their turf against ever bigger new rivals.
The situation facing firms is becoming reminiscent of a scorched earth game. Companies have fewer options. They may either invest in an effort to earn big or cut spending on everything and hope that luck saves them from elimination.
Companies with a global remit, such as contract chipmaker Taiwan Semiconductor Manufacturing (TSMC) and chip packager Advanced Semiconductor Engineering (ASE), feel the greatest pressure. This year, ASE plans to spend US$800 million buying more equipment to harness a new technology, which could substitute copper for gold in advanced chip packaging. Also betting on advanced technologies for future growth, TSMC retained its record-breaking level of capital spending at US$8.5 billion. This comes despite that fact that there are increasing signs that the global economy has made no significant progress since the 2008 and 2009 financial meltdown. Lackluster economic growth is weighing on consumer spending and bringing up inventory for TSMC’s clients.
Heavy investment in new technologies reversed a dramatic reduction in capital spending back in 2008. During that period, TSMC only budgeted US$1.8 billion for annual expenditure, down from US$2.8 billion in 2007.
Why is TSMC opting to adopt such a risky strategy during tough economic times? “The competitor landscape changed because our competitors changed,” TSMC chairman and CEO Morris Chang told investors last month.
Two, or three years ago, United Microelectronics and GlobalFoundries were the main competitors of TSMC, Chang said.