Taiwanese companies have to get rid of their “me too” mindset because many industries have entered a new era of cut-throat competition. This means an end to the business model adopted by many firms of competing with rivals by offering large discounts for near-identical products. They need to develop more winning strategies.
Boosting research-and-development efforts to keep pace with industry trends is one crucial measure. Although talk of increasing R&D spending and personnel is not new, only a few companies put it into practice as it is a long-term investment and takes time to see results.
Hon Hai Group, which owns the world’s biggest electronics manufacturing service provider, Hon Hai Precision Industry Co, understands this more than other local manufacturers. Hon Hai last week unveiled a plan to invest US$40 million in R&D facilities in the US and to develop high-end facilities for goods, including high-margin components for telecommunications equipment and Internet servers.
Hon Hai’s decision to build facilities in the US may initially seem unusual, as most Taiwanese manufacturers opt for low-wage countries when they move overseas. However, analysts consider Hon Hai’s move to be a smart decision as the investment will help the firm shift to high-margin products and break away from its previous business model of squeezing profits from making low-margin products in China.
Hon Hai Precision Industry, which makes iPhones and iPads for Apple, has seen early returns from its efforts to boost R&D, as the company posted impressive gross margins of 7.07 percent for the quarter ending Sept. 30. The figure far exceeded the 4.2 percent of local contract laptop-computer maker Compal Electronics and the 4.48 percent of contract notebook maker Quanta Computer.
The manufacturing sector will continue to exist in the post-PC era, but it needs to transform and move beyond hardware manufacturing to turn profits and continue to grow, as Hon Hai chairman Terry Gou (郭台銘) has said.
Strengthening R&D capabilities is the most basic step local companies can take. The most important is that they abandon the mindset of merely following the leading international companies.
MediaTek’s survival strategy — rolling out new chips earlier than rivals — may be a good reference for other firms. MediaTek launched the industry’s first 8-core handset chips. Despite its bigger rival Qualcomm saying more cores in a CPU did not guarantee better performance, MediaTek’s new chips are a good selling point and have been well-received by its clients, most of which are in China. With its new 8-core chip, MediaTek is forecast to seize half of China’s handset chip market next year.
Chinese power management chipmaker Silergy Corp is another good example. Silergy, which is only five years old, is selling its chips at prices three times higher than its competitors, as it has invested heavily in R&D to help it integrate three chips into one for enhanced performance. Its R&D capabilities have helped it win orders from big-name global companies such as GE and Oscram.
Silergy said its ambition is to supply customers with the world’s best-quality products and that it aims to be the first choice of its customers. That is totally different from the mindset of most Taiwanese companies, whose goal is to supply less advanced products at lower prices than their larger global competitors.
Silergy’s efforts have paid off, as it posted a stunning 50 percent gross margin for last year, even higher than the 43.9 percent MediaTek posted for last quarter. Silgergy is set to launch an initial public offering in Taipei at the end of the year.
As competition stiffens, Taiwanese companies have to step up their R&D efforts. A single slip could send less competitive companies out of the market.