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Heading off a China exodus

Monday, Jul 09, 2001, Page 18

Huang Ho-ming, chairman of the Institute for Information Industry, talks with the Taipei Times. PHOTO: CHEN CHENG-CHANG, TAIPEI TIMES

Taipei Times: Can you briefly describe what the Institute for Information Industry (III) is and what role it has played in helping develop Taiwan's information technology industry over the past 20 years?

Huang Ho-ming (黃河明): The institute was founded in 1979 as a non-profit organization under the sponsorship of the Ministry of Economic Affairs and the private sector. We aim to assist the government in formulating IT industry development policy and strategies, while providing the industry with the necessary information services and market intelligence analysis. Our areas of focus also include research and development, transference of advanced information technologies and training of IT professional. Currently, we have nearly one thousand employees, with more than half of that figure holding master's degrees or higher. I think the institute has been the most important resource pool for the country's IT industry.

TT: With Taiwan computer makers facing shrinking margins for desktop PCs, many have shifted operations to China to take advantage of cheaper labor. What's the current state of Taiwan companies opening factories in China?

"We still see relatively slow progress in financial deregulation -- [demonstrated by] the government's interference in the financial markets -- which in turn has had an impact on the science and technology sector's ability to acquire new capital."

Huang Ho-ming

Huang: Taiwan's information technology (IT) hardware production value amounted to US$47 billion last year, with nearly 50 percent, or US$23 billion, of that figure being generated by Taiwanese businesses' foreign factories. That means many Taiwanese computer manufacturers have relocated their production bases overseas. In addition, China became the world's third largest IT hardware maker last year, with its production value topping US$25.5 billion -- beating out Taiwan for the first time. Actually, Taiwanese firms based in China accounted for an estimated 70 percent of that figure, according to a report conducted by III's Market Intelligence Center. It's no doubt that much of Taiwan's IT hardware production ... is manufactured [in China] and such moves are definitely accelerating.

TT: Are you worried about Taiwan companies moving production to China?

Huang: You can look at the subject in various ways. On one hand, China is the most obvious destination within Asia for companies who are involved in labor-intensive and lower value-added production. For them, moving operations to China is not a choice but an imperative. On the other hand, many high-tech Taiwan companies -- such as notebook computer makers -- are not moving their manufacturing operations to China that fast, because they still need the support from local designers and key components makers here in Taiwan. Basically, we are in the middle of a structural transformation in our industry and companies certainly have to assess the risks of investing in China before [moving there].

But for companies that have already moved to China, you can also see the possibility of building a "Chinese" brand name on the mainland is increasingly taking shape. With its potential scale of economy, some Taiwan companies are likely to establish their brand names [in China] before making a global leap.

TT: Some have said labor costs are the biggest factor for luring Taiwan companies to China. Will it continue to be the key factor in terms of companies' overall production costs?

Huang: Much lower labor cost in China, about a fifth lower, certainly does help to improve some companies' profits. But for some companies, labor costs account for only a small part of their overall costs, about 10 percent. Therefore, it's only a two-percent difference across the Taiwan Strait in terms of labor costs. But that difference is often offset by a higher transportation cost for raw materials to move across the Strait, coupled with a time-consuming custom clearance process in the mainland. While the labor and land costs are important factors, you have to also take into consideration other factors; such as the support of key component suppliers, the quality of factory manpower in China, and the inefficiency existing in China's custom clearance practices. So doing business in China does have its share of headaches.

However, as major global brand names want to diversify risks in outsourcing worldwide, some Taiwan companies have recently moved operations to China as they want to be closer to their multinational customers there. Indeed, some companies have told me that the most important question their customers ask them is whether they have a plant in China. So, you can see moving operations to China is not a decision made purely on labor [cost] considerations.

TT: Faced with the problem of transforming the industrial structure at home, what do you think Taiwan companies should do to compete with foreign firms?

Huang: In view of the fact that we have possibly lost our manufacturing [lead] to China, Taiwan should focus on shaping itself into the service hub -- especially the Internet hub -- within the Greater China region, and Taiwan companies should learn to provide electronic manufacturing services for their foreign customers, not simply seek expansion of production capacity in China. To be sure, Taiwan companies should put more effort into strengthening their linkage with major customers through the Internet. I think it is important for Taiwan companies to further product innovation and customer relations management, in addition to improving the mass-production infrastructure. A few Taiwan companies have been moving in this direction, including Acer Inc (宏電) and Asustek Computer Inc (華碩電腦). They are not just going to China in the hopes of being closer to their customers, but also to strengthen their competitiveness in the global marketplace.

TT: What impact will Taiwan's WTO accession have on the government's industrial policies?

Huang: The policies have to adjust to the internationalization and liberalization brought by the country's entry into WTO. The telecom reform bills have really attracted a huge sum of direct foreign investment into Taiwan's telecom sector in recent years. The government has significantly reduced barriers for foreign investment here. But we still see relatively slow progress in financial deregulation -- [demonstrated by] the government's interference in the financial markets -- which in turn has had an impact on the science and technology sector's ability to acquire new capital. There's still room for further improvement in this area.

Meanwhile, following WTO entry, the government may not be able to rely on investment incentives or tax breaks to attract new investments. The government may need to think how to make Taiwan an important player in jointly developing the China market. For instance, our IT industry is quite mature and successful in Taiwan, but it will be a challenge for us to transplant that business model to China and, more importantly, be successful. In this respect, the government could assist companies in the development of skilled talent, legal framework and industry infrastructure.

TT: When did the institute first set foot in China and what have you accomplished thus far?

Huang: We first entered China in 1992 and set up a Market Intelligence Center office there. But due to the heightened tensions across the Strait, we terminated that office in 1994. In the past, we aimed to provide information services to Taiwan companies operating in China, in the future -- if we have a mainland office -- we would like to focus on cross-strait electronic commerce development, for example. Actually, we would like to re-enter China and to serve Taiwanese businesses there. But because we are a semi-government organization, we must have government approval.

TT: Before taking the chairmanship of the institute, you were at the helm of Hewlett-Packard Taiwan for 23 years. What do you want to bring to the government-funded organization?

Huang: Of course, the biggest distinction between a company and a government-funded organization is that the former is more goal-oriented and efficiency is a basic requirement. Because of my past experience in the private sector, I have introduced some business management measures into the institute with the aim of better serving our customers, be they in government agencies or the private sector, and have also applied some performance measures on our organization.

Meanwhile, one issue worth mentioning is we found our investment in application software development, including office automation software, is similar to what the private sector is doing now, so we decided to gradually pull out investments from this area. We don't want to overlap our R&D resources with the private sectors'. But since Taiwan companies are mostly of small and medium size, which restricted them from pouring a lot of money into R&D, we still can play a third-party role on selecting R&D subjects and turn them into technologies. Then we hope to transfer the technologies to the private sector for them to make marketable products.

TT: Despite the rising unemployment rate in recent months, the IT industry says it is facing a serious shortage of skilled workers on the island. What's your opinion on the situation?

Huang: Taiwan's IT industry still lacks about 50,000 people, according to the institute's estimate. While companies have placed ads in papers every day looking for people, people just don't show up. More seriously, the quality of Taiwan's human resources has become polarized -- on one hand we saw the quantity of talent grow, while we also saw the number of unqualified people still prevails. This will become a concern for us if private companies offer more incentives than we do. While a fat paycheck may seem the biggest factor in luring possible candidates away from joining us, I think for young people the problem is how to make their career worthwhile. I am confident in the institute.
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